LHC Group Annual Report 2011

← All annual reports

FY2011 Annual Report · LHC Group

Loading PDF…

A Strong
Foundation

2011 Annual Report

A Strong FoundationA Strong
Foundation

People
Ours is a business of
people helping people.

Service
We are here to serve
patients, families and
communities.

Firmly rooted in the culture of service that defines us and squarely focused on the

future we are defining, LHC Group stands strong. We are more than a provider

of healthcare services in communities across the nation. Today, we are a source

of healthcare solutions nationwide. Our proven post-acute care delivery model is

keeping costs down, reducing avoidable hospitalizations and, most importantly,

helping thousands of frail, elderly men and women remain where they most want

to be — in the comfort of home.

LHC GroupEthics
We will never place
prosperity above integrity.

Growth
It is our obligation to care
for as many as we can.

Quality
In all we do, our focus is
quality above all else.

Finance
We operate with discipline and
efficiency to remain strong.

We believe patients, families,

physicians and hospitals are

our partners in the delivery of

excellent care.

A Strong FoundationGrowing upward

From our home health and hospice agencies to our

long-term acute care hospitals, LHC Group has emerged

as an integral part of the new healthcare continuum.

LHC GroupOur Mission
We provide exceptional care

Our Vision
We will improve the quality

and unparalleled service to

of life in the United States by

patients and families who

transforming the delivery of

have placed their trust in us.

healthcare services.

To Our Valued Stakeholders

All across our nation, health care is coming home.

Now as never before, there is growing recognition among federal regulators, insurers

and our elected representatives that home-based care is a proven antidote to the ails

of a fragmented delivery system and rising healthcare costs. I believe today, just as I

did when my wife and I founded this company in 1994, that post-acute care is a critical

component of a streamlined and efficient care continuum.

As we look to 2012 and beyond, our LHC Group family is uniquely positioned to thrive as

a new era of integration and accountability dawns. With more than 300 locations in 19

states, we are an established leader in the delivery of home health, hospice, long-term

acute care and private duty services. Our nearly 8,000 employees provide high-quality

and compassionate care to nearly 90,000 patients annually. And we are the preferred

post-acute care partner for leading hospitals and health systems around the country —

operating more than 100 joint venture locations nationwide.

Our foundation is strong, and we are prepared to expand our proven care model to

new communities and states around the country. We are also actively developing new

partnerships as an ever-increasing number of hospitals seek our expertise to reduce

acute-care hospitalization rates and foster integration.

Most importantly, we stand ready to meet the growing

healthcare needs of an aging population that

Keith G. Myers

Chairman and
Chief Executive Officer

Average Daily Census

values the independence and dignity home-based care provides. We have never been

33,400

34,422

29,646

more focused on our vision to transform the delivery of healthcare services in our

country — improving quality of life for every patient we serve.

22,120

Anchored by our roots, branching out for the future

As we chart our course, all of us at LHC Group are firmly grounded in the culture of

service that has propelled us to where we are today. From our company’s beginning, we

found clarity of purpose in one simple phrase — It’s all about helping people. Those

five words define us still. Everything we do begins with people — the employees we hire,

2008

2009

2010

2011

the patients we help, the families we comfort, the communities we serve. Simply put,

Net Service Revenue ( $ in millions)

we are in the PEOPLE business.

$ 631.6

$ 633.9

We understand our success is predicated on a talented, engaged work force. Employee

engagement fuels employee satisfaction, which, in turn, drives patient satisfaction and

organizational success.

$529.2

$381.3

To that end, we strive to hire the most competent person available for every open

position in our company, utilizing both objective and subjective measures to ensure a fit

with our values-based culture. Then, through initiatives such as internal credentialing

programs, we support our employees’ professional development to foster engagement

and retention. In 2012, we are allocating a quarter-million dollars to the acquisition of a

new learning management system to further support employee development.

We also invest in the maturation of our leadership. Since 2009, nearly 1,000 LHC Group

leaders have completed a combined 14,000 hours of leadership development training. We

partner with the Studer Group for leadership coaching, as well.

By hiring and retaining the right employees, we fulfill our commitment to SERVICE.

The customers we serve are many — from our patients and their families to our hospital

partners, referral sources, payers and communities. We aspire to be the

post-acute provider of choice for each of these customer groups.

Service to our patients is centered on the quality of health care we deliver and the

compassion with which we deliver it. We regularly solicit feedback from our patients

through Press Ganey patient satisfaction surveys, and we conduct two post-discharge

2008

2009

2010

2011

Nearly 40 percent of LHC
Group’s home health
providers achieved
HomeCare Elite status in
2011. This independent
ranking recognizes the
nation’s top home health
agencies based on quality
of care, process measure
implementation and
financial performance.

LHC Groupfollow-up calls with each of our home health patients to

ensure their needs have been met.

We serve our communities as responsible corporate

citizens. At both the national and local level, we provide

financial and volunteer support for those organizations

and causes devoted to community health and wellness.

In 2011, we were proud to provide financial support

for the Meals On Wheels Association of America, the

American Heart Association and the American Cancer

Society to name just a few.

Finally, we serve our physician, payer and hospital partners by helping prevent avoidable

readmissions as mandated by the Patient Protection and Affordable Care Act. Through

our evidence-based care transition program and aggressive patient monitoring, LHC

Group has achieved a 30-day readmission rate of 16 percent — significantly better than

the national average of 20 percent. And in 2011, we launched our groundbreaking T3

initiative — an industry-leading program that leverages care transitions, patient triage

and training to break the cycle of chronic readmission.

We remain committed to

Joint Commission accreditation

as a measure of quality. Ninety

percent of our home health

and hospice locations have

earned accreditation, and we

expect to achieve 100 percent

accreditation in 2012.

We recognize physicians and hospitals are the backbone of the American healthcare

system, and we seek to serve as an extension of their healing mission through the

Admissions

delivery of high-quality post-acute care.

In each of our service lines, we employ objective criteria to measure the quality of care

we provide. We understand QUALITY is defined by patient outcomes. Outcomes are the

yardstick by which we measure our clinical performance.

80,883

57,186

108,937

98,024

In 2011, nearly 40 percent of our home health providers achieved HomeCare Elite

recognition. This independent ranking recognizes the top 25 percent of home health

providers nationwide based on quality of care, process measure implementation and

2008

2009

2010

2011

financial performance.

We also remain steadfast in our commitment to Joint Commission accreditation. Whereas

just seven percent of home health agencies nationwide have achieved Joint Commission

A Strong FoundationLocations

accreditation, our home health and hospice locations will have achieved 100 percent

310

301

277

250

accreditation by the end of 2012. Our long-term acute care hospitals have also been

recognized as clinical leaders, with more than half of our nine LTAC hospitals earning

Quality Respiratory Care Recognition from the American Association for Respiratory Care

for 2012.

We understand our company exists to improve the well-being of the

patients in our care. For our home health patients and private duty clients,

that means living independently and in the comfort of home as long as

2008

2009

2010

2011

possible. For those in our long-term acute care hospitals, it means recovery from

Employees

5,431

7,973

7,571

6,998

2008

2009

2010

2011

devastating and complex medical conditions. And for those in hospice

care, it means living the best life possible and dying with dignity. When we

do those things well, we have fulfilled our mission.

We FINANCE our mission through responsible management and stewardship. Since our

company’s founding, we have proven our ability to not only achieve short-term financial

success but also deliver long-term value.

We will never focus on short-term return at the expense of long-term viability. Rather,

through the appropriate management of risk and the continuous evaluation of strategic

opportunities, we create value for our shareholders while also positioning our company

for the future. In 2011, we weathered reimbursement cuts, as well as increased

regulatory oversight in the form of new therapy

requirements and the face-to-face encounter

rule. Despite these challenges, our company’s

net service revenue increased to $633.9 million,

and our number of total patient visits climbed to

nearly 3.5 million.

Going forward, we are following a strategic plan that

positions us to withstand additional reimbursement

reductions and achieve year-over-year organic volume

growth of 5 to 7 percent.

In 2011, LHC Group professionals

delivered superior patient care at

more than 300 locations in 19 states.

LHC GroupBranching out

Our foundation is strong, and we are prepared to

expand our proven care model to new communities

and states around the country. We are also actively

developing new partnerships as an ever-increasing

number of hospitals seek our expertise to reduce

acute-care hospitalization rates and foster integration.

A Strong FoundationWe are also aggressively moving forward with our

companywide conversion to point-of-care technology.

More than 60 locations had transitioned to point-of-

care at year’s end, and we expect to have successfully

converted 100 percent of our home health, hospice

and private duty locations by the end of 2013. This

significant capital investment is already resulting in

efficiency and margin improvements, and we anticipate

this positive impact will continue to grow as the

conversion progresses.

Because of the infrastructure we have built, because

of the foundation we have laid, our company is prepared to embark on a period of

significant GROWTH. Whatever the future may hold for post-acute care — from the

advent of accountable care organizations to the rise of bundled payment initiatives —

LHC Group is uniquely poised to thrive in new healthcare delivery models.

We are the preeminent post-acute care partner for hospitals and health systems

nationwide, and, through our joint venture relationships, we can effectively and

efficiently participate in ACOs, bundling and other innovative approaches to care

delivery. Going forward, our proven operating model, sophisticated infrastructure and

technology investments, coupled with our focus on clinical outcomes and commitment to

compliance, will enable us to grow even as our industry faces additional reimbursement

cuts and increasingly complex regulatory requirements.

We willingly accept our obligation as a post-acute care leader to expand our sphere

of influence, bringing our innovative model of hospital and post-acute care alignment

to communities across the country. We believe in the power of partnership and

collaboration to transform healthcare delivery nationwide.

In everything we do, we are guided by an unwavering commitment to ETHICS. We

measure our success not only in what we accomplish but also in how we accomplish it.

At LHC Group, achievement without integrity is failure.

For the fifth consecutive year,

LHC Group was named one

of “America’s 100 Best Small

Companies” by Forbes magazine

in 2011. In addition, we were

recognized as one of the nation’s

“100 Fastest-Growing Companies”

by Fortune magazine for the

second consecutive year.

LHC GroupOur company’s robust compliance program continues to be a model for the industry,

and we invest more than $2 million annually in compliance efforts. Key initiatives include

our comprehensive training and education program through which all LHC Group

employees complete intensive compliance training annually — and all new employees

undergo detailed compliance training within the first 60 days of employment.

We also conduct rigorous auditing and monitoring in each of our agencies on an

ongoing basis, and every employee is encouraged to report compliance concerns via

our “Integrity Line” compliance hotline.

Within LHC Group, from the boardroom to the bedside, we always strive to do that which

is right, that which is ethical and that which is in the best interest of the patients and

communities we serve. It has been that way since our beginning as a single home health

agency in rural Louisiana, and so it will be as we go forward as a national leader in post-

acute care.

Even as we grow, we hold tight to our roots — branching out, yes, but always drawing

strength from the ideals and values that have shaped us into the vibrant, successful

company we are today.

Sincerely,

Keith G. Myers
Chairman and Chief Executive Officer

In alignment with our
mission of service, LHC
Group in 2011 provided
financial support to
national charitable
organizations, including
the Meals On Wheels
Association of America,
the American Heart
Association and the
American Cancer Society,
as well as numerous
local charities in the
communities we serve.

A Strong FoundationFinancial Highlights

(in thousands, except for per share data)

2011

2010

Year Ended December 31,

Net service revenue
Cost of service revenue

Gross margin
Provision for bad debts
Settlement with government agencies
General and administrative expenses

Operating income (loss)
Interest expense
Gain (loss) on the sale of assets and entities
Non-operating (loss) income

Income (loss) from continuing operations before income taxes
and noncontrolling interest
Income tax expense (benefit)

Income (loss) from continuing operations
Loss from discontinued operations (net of income tax benefit of $55)

Net income (loss)

Less net income attributable to noncontrolling interest

Net income (loss) attributable to LHC Group Inc.

Redeemable noncontrolling interests

$ 633,872
352,346

281,526
12,320
65,000
210,588

(6,382 )
(1,018 )
59
1,722

(5,619 )
(1,968 )

(3,651 )
—

(3,651 )
9,593

(13,244 )

—

$ 631,567
326,521

305,046
,7,607
—
201,837

95,602
(134 )
(7)
812

96,273
31,727

64,546
—

64,546
15,787

48,759

Net income (loss) available to LHC Group Inc.’s common stockholders

$ (13,244 )

$ 48,800

Earnings per share — basic:

Income (loss) from continuing operations attributable to LHC Group Inc.
Loss from discontinued operations attributable to LHC Group Inc.

Net income (loss) attributable to LHC Group Inc.
Redeemable noncontrolling interest

(0.73 )
—

2.69
—

Net income (loss) attributable to LHC Group Inc.’s common stockholders

(0.73 )

2.69

Earnings per share — diluted:

Income (loss) from continuing operations attributable to LHC Group Inc.
Loss from discontinued operations attributable to LHC Group Inc.

Net income (loss) attributable to LHC Group Inc.
Redeemable noncontrolling interest

Net income (loss) attributable to LHC Group Inc.’s common stockholders

Weighted average shares outstanding:

Basic
Diluted

(0.73 )
—

(0.73 )

2.68
—

2.68

18,265,118
18,265,118

18,119,183
18,226,091

LHC Group

2011 Form 10-K

A Strong
Foundation

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K
3 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
l
For the fiscal year ended December 31, 2011
or
l 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
(State or other jurisdiction of incorporation or organization)

71-0918189
(I.R.S. Employer Identification No.)

420 West Pinhook Rd, Suite A
Lafayette, Louisiana 70503
(Address of principal executive offices)

(337) 233-1307
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Exchange Act:

Common Stock, par value $.01 per share
(Title of each class)

NASDAQ Global Select Market
(Name of each exchange on which registered)

Securities registered pursuant to Section 12(g) of the Exchange Act:
None
3
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes l No l
3
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes l No l
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
3
reports), and (2) has been subject to such filing requirements for the past 90 days. Yes l
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, in any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405) during the
3
No l
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes l
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405) is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
3
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. l
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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in
Rule 12b-2 of the Exchange Act.

No l

3
Large accelerated filer l Accelerated filer l
3
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes l No l
As of June 30, 2011, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant
was $374.6 million based on the closing sale price as reported on the NASDAQ Global Select Market. For purposes of this
determination shares beneficially owned by officers, directors and ten percent stockholders have been excluded, which does
not constitute a determination that such persons are affiliates.

Non-accelerated filer l Smaller reporting company l

There were 18,820,380 shares of common stock, $0.01 par value, issued and outstanding as of March 8, 2012.

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Annual Report to stockholders for the fiscal year ended December 31, 2011 are incorporated by
reference in Part II of this Annual Report on Form 10-K. Portions of the Registrant’s Proxy Statement for its 2012 Annual Meeting
of Stockholders are incorporated by reference in Part III of this Annual Report on Form 10-K.

LHC GROUP, INC.

Table of Contents

PART I.

Cautionary Statement Regarding Forward-Looking Statements .

Business .

Risk Factors .

Unresolved Staff Comments .

Properties .

Legal Proceedings .

Mine Safety Disclosures .

Item 1.

Item 1A.

Item 1B.

Item 2.

Item 3.

Item 4.

PART II.

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer

Purchases of Equity Securities .

Selected Financial Data .

Management’s Discussion and Analysis of Financial Condition and Results of Operations .

Quantitative and Qualitative Disclosures About Market Risk .

Financial Statements and Supplementary Data .

Changes In and Disagreements with Accountants on Accounting and Financial Disclosure .

Controls and Procedures .

Other Information .

Directors, Executive Officers and Corporate Governance .

Executive Compensation .

Security Ownership of Certain Beneficial Owners and Management and

Related Stockholder Matters .

Certain Relationships and Related Transactions, and Director Independence .

Principal Accounting Fees and Services .

Exhibits, and Financial Statement Schedules .

Page

Item 6.

Item 7.

Item 7A.

Item 8.

Item 9.

Item 9A.

Item 9B.

PART III.

Item 10.

Item 11.

Item 12.

Item 13.

Item 14.

PART IV.

Item 15.

Signatures

Exhibit Index

F or m 10 -K

A Strong Foundation

PART I

Cautionary Statement Regarding Forward-Looking Statements

This Annual Report on Form 10-K and the information incorporated by reference herein, contain certain statements and

information that may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of

1933 and Section 21E of the Securities Exchange Act of 1934 (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,” “anticipate,” “believe,” “foresee,” “estimate,” “predict,” “potential,” “intend” and similar

expressions are intended to identify forward-looking statements. Specifically, this Annual Report on Form 10-K contains,

among others, forward-looking statements about:

• our expectations regarding financial condition or results of operations for periods after December 31, 2011;

• 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 changes in market rates on our operating and cash flows;

• our ability to obtain financing;

• our ability to make payments as they become due;

• the outcomes of various routine and non-routine governmental reviews, audits and investigations;

• our expansion strategy, the successful integration of recent acquisitions and, if necessary, the ability to relocate or

restructure our current facilities;

• the value of our proprietary technology;

• the impact of legal proceedings;

• our insurance coverage;

• the costs of medical supplies;

• our competitors and our competitive advantages;

• our ability to attract and retain valuable employees;

• the price of our stock;

• our compliance with environmental, health and safety laws and regulations;

• our compliance with health care laws and regulations;

• our compliance with Securities and Exchange Commission laws and regulations and Sarbanes-Oxley requirements;

• the impact of federal and state government regulation on our business; and

• the impact of changes in or future interpretations of fraud, anti-kickback or other laws.

The forward-looking statements included in this report reflect our current views and assumptions only as of the date this

report is filed with the Securities and Exchange Commission. Except as required by law, we assume no responsibility and

do not intend to release updates or revisions to forward-looking statements after the date they are made, whether as a

result of new information, future events or otherwise. The occurrence of any of the events described in Part I, Item 1A. Risk

Factors in this Annual Report on Form 10-K or incorporated by reference into this Annual Report on Form 10-K, and other

events that we have not predicted or assessed could have a material adverse effect on our earnings, financial condition

and business, and any such forward-looking statements should not be relied on as a prediction of future events.

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.

For m 1 0-K Pa r t I

LH C Group

You should read this Annual Report on Form 10-K, the information incorporated by reference into this Annual Report on

Form 10-K and the documents filed as exhibits to this Annual Report on Form 10-K completely and with the understanding

that our actual future results or achievements may differ materially from what we expect or anticipate.

Unless otherwise indicated, “LHC Group,” “we,” “us,” “our” and “the Company” refer to LHC Group, Inc. and its

consolidated subsidiaries.

Item 1. Business.

Overview

We provide post-acute health care services to patients through our home nursing agencies, hospices and long-term acute

care hospitals (“LTACHs”). Through our wholly and majority owned subsidiaries, equity joint ventures and controlled

affiliates, we currently operate in Alabama, Arkansas, Florida, Georgia, Idaho, Kentucky, Louisiana, Maryland, Mississippi,

Missouri, North Carolina, Ohio, Oklahoma, Oregon, Tennessee, Texas, Virginia, West Virginia and Washington. We operate

in two segments: home-based services and facility-based services. As of December 31, 2011, we owned and operated

290 home-based service locations, with 247 home nursing agency locations, 32 hospices, three specialty agencies and

four private duty agencies. As of December 31, 2011, we also managed the operations of four home nursing agencies in

which we do not have an ownership interest. Our facility-based services included six long-term acute care hospitals with

nine locations, a pharmacy, and a family health center.

We provide home-based post-acute health care services through our home nursing agencies and hospices. Our home

nursing locations offer a wide range of services, including skilled nursing, medically-oriented social services and physical,

occupational and speech therapy. The nurses, home health aides and therapists in our home nursing agencies work

closely with patients and their families to design and implement individualized treatments in accordance with a physician-

prescribed plan of care. Our hospices provide end-of-life care to patients with terminal illnesses through interdisciplinary

teams of physicians, nurses, home health aides, counselors and volunteers. Of the 290 home-based services locations,

151 are wholly-owned by us, 125 are majority-owned or controlled by us through joint ventures, 10 are operated through

license lease arrangements, and we manage the operations of four home nursing agencies in which we have no

ownership interest.

Our LTACH locations provide services primarily to patients with complex medical conditions who have transitioned out

of a hospital intensive care unit but whose conditions remain too severe for treatment in a non-acute setting. As of

December 31, 2011, our hospitals had 220 licensed beds. Of our 11 facility-based services locations, six are wholly-owned

by us and five are majority-owned or controlled by us through joint ventures.

Our net service revenue by segment for the years ended December 31, 2011, 2010 and 2009 was as follows (amounts

in thousands):

Year Ended December 31, 2011

Home-Based Services
Facility-Based Services

Consolidated Net Service Revenue

2011

2010

2009

$ 557,901
75,971

$ 555,110
76,457

$ 466,736
62,510

$ 633,872

$ 631,567

$ 529,246

A reclassification has been made to the December 31, 2010 and 2009 Home-Based Services Net Service Revenue to

conform to the 2011 presentation. Net service revenue has been decreased by $3.5 million and $2.7 million for the twelve

months ended December 31, 2010 and 2009, respectively, related to fees the Company collects and subsequently pays

to nursing homes primarily for room and board services provided to our hospice patients.

Our founders began operations in September 1994 as St. Landry Home Health, Inc. in Palmetto, Louisiana. After several

years of expansion, our founders reorganized their business and began operating as Louisiana Healthcare Group, Inc.

in June 2000. In March 2001, Louisiana Healthcare Group, Inc. reorganized and became a wholly owned subsidiary of

The Healthcare Group, Inc., a Louisiana business corporation. In December 2002, The Healthcare Group, Inc. merged into

LHC Group, LLC, a Louisiana limited liability company, with LHC Group, LLC being the surviving entity. In January 2005,

Fo r m 1 0-K Par t I

A Strong Foundation

LHC Group, LLC established a wholly owned Delaware subsidiary, LHC Group, Inc. and on February 9, 2005, LHC Group,

LLC merged into LHC Group, Inc., a Delaware corporation. Our principal executive offices are located at 420 West Pinhook

Road, Suite A, Lafayette, Louisiana 70503. Our telephone number is (337) 233-1307. Our website is www.lhcgroup.com.

Information contained on our website is not part of or incorporated by reference into this Annual Report on Form 10-K.

Business Strategy

Our objective is to become the leading provider of post-acute services to Medicare beneficiaries in the United States.

To achieve this objective, we intend to:

Drive internal growth in existing markets. We intend to drive internal growth in our current markets by increasing the

number of health care providers in each market from whom we receive referrals and by expanding the breadth of our

services. We intend to achieve this growth by: (1) continuing to educate health care providers about the benefits of our

services; (2) reinforcing the position of our agencies and facilities as community assets; (3) maintaining our emphasis

on high-quality medical care for our patients; (4) identifying related products and services needed by our patients and

their communities; and (5) providing a superior work environment for our employees.

Achieve margin improvement through the active management of costs. The majority of our net service revenue is

generated under Medicare prospective payment systems (“PPS”) through which we are paid pre-determined rates based

upon the clinical condition and severity of the patients in our care. Because our profitability in a fixed payment system

depends upon our ability to manage the costs of providing care, we continue to pursue initiatives to improve our margins

and net income.

Expand into new markets. We intend to continue expanding into new markets by developing de novo locations and by

acquiring existing Medicare-certified home nursing agencies in attractive markets throughout the United States. We will

continue our unique strategy of partnering with non-profit hospitals in home health services, as these ventures provide

significant return on investment. We also plan to acquire larger freestanding agencies that can serve as growth platforms

in markets we do not currently serve in order to support our growth into new states.

Pursue strategic acquisitions and develop joint ventures. We will continue to identify and evaluate opportunities for

strategic acquisitions in new and existing markets that will enhance our market position, increase our referral base and

expand the breadth of services we offer. We endeavor to joint venture with hospitals to provide post-acute services,

such as home health and hospice services in communities served by hospitals already operating Medicare-certified

home health agencies.

Services

We provide post-acute care services in the United States by providing quality cost-effective health care services to

patients within the comfort and privacy of their home or place of residence. Our services can be broadly classified into two

principal categories: (1) home-based services offered through our home nursing agencies and hospices; and (2) facility-

based services offered through our long-term acute care hospitals.

Home-Based Services

Home Nursing. Our registered and licensed practical nurses provide a variety of medically necessary services to

homebound patients who are suffering from acute or chronic illness, recovering from injury or surgery, or who otherwise

require care, teaching or monitoring. These services include:

• wound care and dressing changes;

• cardiac rehabilitation;

• infusion therapy;

• pain management;

• pharmaceutical administration;

• skilled observation and assessment; and

• patient education.

For m 1 0-K Pa r t I

LH C Group

We have also designed guidelines to treat chronic diseases and conditions, including diabetes, hypertension, arthritis,

Alzheimer’s disease, low vision, spinal stenosis, Parkinson’s disease, osteoporosis, complex wound care and

chronic pain. Our home health aides provide assistance with daily living activities such as light housekeeping, simple

meal preparation, medication management, bathing and walking. Through our medical social workers, we counsel

patients and their families with regard to financial, personal and social concerns that arise from a patient’s health-related

problems. We provide skilled nursing, ventilator and tracheotomy services, extended care specialties, medication

administration and management, and patient and family assistance and education. We also provide management services

to third-party home nursing agencies, often as an interim solution until proper state and regulatory approvals for an

acquisition can be obtained.

Our physical, occupational and speech therapists provide therapy services to patients in their home. Our therapists

coordinate multi-disciplinary treatment plans with physicians, nurses and social workers to restore basic mobility skills

such as getting out of bed and walking safely with crutches or a walker. As part of the treatment and rehabilitation process,

a therapist will stretch and strengthen muscles, test balance and coordination abilities and teach home exercise

programs. Our therapists assist patients and their families with improving and maintaining a patient’s ability to perform

functional activities of daily living, such as the ability to dress, cook, clean and manage other activities safely in the

home environment. Our speech and language therapists provide corrective and rehabilitative treatment to patients who

suffer from physical or cognitive deficits or disorders that create difficulty with verbal communication or swallowing.

All of our home nursing agencies offer 24-hour personal emergency response and support services through Philips

Lifeline (“Lifeline”) for qualified patients who require close medical monitoring but who want to maintain an independent

lifestyle. These services consist principally of a communicator that connects to the telephone line in the subscriber’s

home and a personal help button that is worn or carried by the individual subscriber which, when activated, initiates a

telephone call from the subscriber’s communicator to Lifeline’s central monitoring facilities. Lifeline’s trained personnel

identify the nature and extent of the subscriber’s particular need and notify the subscriber’s family members, neighbors

and/or emergency personnel, as needed. We believe our use of the Lifeline system increases patient satisfaction and

loyalty by providing our patients a point of contact between scheduled nursing visits. As a result, we provide a more

complete regimen of care management than our competitors in the markets in which we operate by offering this service to

qualified patients as part of their home health plan of care.

Hospice. Our Medicare-certified hospice operations provide a full range of hospice services designed to meet the

individual physical, spiritual and psychosocial needs of terminally ill patients and their families. Our hospice services are

primarily provided in a patient’s home but can also be provided in a nursing home, assisted living facility or hospital.

Key services provided include pain and symptom management accompanied by palliative medication, emotional and

spiritual support, spiritual counseling and family bereavement counseling, inpatient and respite care, homemaker

services, dietary counseling and social worker visits for up to 13 months after a patient’s death.

Facility-Based Services

Long-term Acute Care Hospitals. Our LTACHs treat patients with severe medical conditions who require a high-level of

care and frequent monitoring by physicians and other clinical personnel. Patients who receive our services in an LTACH

are too medically unstable to be treated in a non-acute setting. Examples of these medical conditions include respiratory

failure, neuromuscular disorders, cardiac disorders, non-healing wounds, renal disorders, cancer, head and neck injuries

and mental disorders. We also treat patients diagnosed with musculoskeletal impairments that restrict their ability to

perform normal activities of daily living. As part of our facility-based services, we operate an institutional pharmacy, which

focuses on providing a full array of services to our long-term acute care hospitals.

Operations

Financial information relating to the home- and facility-based operating segments of our business including their

contributions to our total net service revenue, operating income and total assets for each of the three years in the period

ended December 31, 2011, 2010 and 2009, respectively, is found in Note 11 to the Consolidated Financial Statements

included in this Annual Report on Form 10-K.

Fo r m 1 0-K Par t I

A Strong Foundation

Home-Based Services

Our home nursing agencies are operated in one division that is separated into five geographical regions and further

separated into individual operating areas. Each agency is staffed with experienced clinical home health and administrative

professionals who provide a wide range of patient care services. Each of our home nursing agencies is licensed and

certified by the state and federal governments, and 252 of our 290 agencies are accredited by the Joint Commission, a

nationwide commission that establishes standards relating to the physical plant, administration, quality of patient care

and operation of medical staffs of hospitals. Those not yet accredited are working towards achieving this accreditation,

a process which can take up to six months. As we acquire companies, we apply for accreditation 12 to 18 months

after acquisition.

Our home nursing agencies use our Service Value Point system, a proprietary clinical resource allocation model and

cost management system. The system is a quantitative tool that assigns a target level of resource units to a group of

patients based upon their initial assessment and estimated skilled nursing and therapy needs. The Service Value Point

system allows the Director of Nursing or Branch Manager to allocate adequate resources throughout the group of patients

assigned to his or her care, rather than focusing on the profitability of an individual patient.

Patient care is handled at the home nursing agency level. Functions that are centralized into the home office include

payroll, accounting, financial reporting, billing, collections, regulatory and legal compliance, risk management, pharmacy,

information technology and general clinical oversight accomplished by periodic on-site surveys.

Facility-Based Services

Our long-term acute care hospitals are operated in one division within one geographic region. Our facility-based services

follow a clinical approach under which each patient is discussed in weekly, multidisciplinary team meetings. In these

meetings, patient progress is assessed, compared to goals and future goals are set. We believe that this model results in

higher quality care, predictable discharge patterns and the avoidance of unnecessary delays.

All coding, medical records, case management, utilization review and medical staff credentialing are provided at the

hospital level. Centralized functions that are provided by the home office include payroll, accounting, financial reporting,

billing, collections, regulatory and legal compliance, risk management, pharmacy, information technology and general

clinical oversight accomplished by periodic on-site surveys.

Joint Ventures

As of December 31, 2011, we had 70 equity joint ventures including 62 with hospitals, five with physicians, and three with

other parties. We also operate four agency license leasing agreements.

Equity Joint Ventures

A majority of our equity joint ventures are structured as limited liability companies in which we own a majority equity interest

and our partners own a minority equity interest. At the time of formation, we and our partners each contribute capital to the

equity joint venture in the form of cash or property. We believe that the amount contributed by each party to the equity joint

venture represents their pro rata portion of the fair market value of the equity joint venture. None of our partners are

required to make or influence referrals to our equity joint ventures. In fact, each of our hospital joint venture partners must

follow the same Medicare discharge planning regulations, which, among other things, requires them to offer each

Medicare patient a list of available Medicare-certified home nursing agency options and to allow the patient to choose his

or her own provider.

We serve as the manager for our equity joint ventures and oversee their day-to-day operations. From a governance

perspective, our equity joint ventures are either manager-managed or board managed. In our manager-managed joint

ventures, we are designated as the manager, and, in our board managed joint ventures, we hold a majority of the votes

required to take action. We possess a majority of the total votes available to be cast by the members of the management

committee. However, in three of these joint ventures where we have partnered with not-for-profit hospitals, the hospital

controls a majority of the total management committee votes. In such instances we possess the right to withdraw from the

For m 1 0-K Pa r t I

LH C Group

equity joint venture at any time upon notice to our partner in exchange for the receipt of a payment in an amount

calculated in accordance with a predetermined formula. The members of our equity joint ventures participate in profits

and losses in proportion to their equity interests. Distributions from our equity joint ventures are made pro-rata based on

percentage ownership interests and are not based on referrals made to the equity joint venture by any of the members.

The 70 equity joint ventures individually contribute between 0.01% and 4.23% of our consolidated net service revenue

with only one of the equity joint ventures accounting for greater than 4% of our total net service revenue for the 12 months

ended December 31, 2011. Mississippi HomeCare of Jackson, LLC, in which we have a 66.67% ownership interest,

contributed 4.23% to our consolidated net service revenue for the year ended December 31, 2011.

Most of our equity joint ventures include a buy/sell option that grants to us and our 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 interests, 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 under

these buy/sell provisions is based on a multiple of the historical or future earnings before income taxes, 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 but will be subject to a fair market valuation process.

License Leasing Agreements

As of December 31, 2011, we have four agreements to lease, through our wholly-owned subsidiaries, the right to use the

home health licenses necessary to operate our home nursing agencies and hospice agencies. These leases are entered

into in instances when state law would otherwise prohibit the alienation and sale of home nursing agencies. The table

below details the monthly fees and termination dates of the leasing agreements. Two of the agreements are based on net

quarterly projections with a cap of $160,000 per year.

2011 Current Monthly Fee

Increase in Monthly Fee

Initial Term Dates

Based on net quarterly projections
with a cap of $160,000

None

2010 with a 5 year automatic renewal

$16,000

$5,000

5% increase every three years

2017 with a 2 year automatic renewal

Renegotiated after five years (2013)

2017 with a 5 year automatic renewal

In all four leasing arrangements, we have a right of first refusal in the event that the lessor intends to sell the leased agency

to a third party.

Management Services Agreements

As of December 31, 2011, we have three management services agreements under which we manage the operations of

home nursing agencies. We currently have no ownership interest in the agencies subject to these management services

agreements. As described in the agreements, we provide billing, management and other consulting services suited to and

designed for the efficient operation of the applicable home nursing agency. We are responsible for the costs associated

with the locations and personnel required for the provision of services. We are compensated based on a percentage of

cash collections and reimbursed for operating expenses for one agreement and on a percentage of operating net income

for the remaining two agreements. The term of these arrangements is typically five years, with an option to renew for an

additional five-year term. All management services agreements will automatically renew annually unless either parties give

written notice of termination.

We record management services revenue as services are provided in accordance with the various management

services agreements.

Fo r m 1 0-K Par t I

A Strong Foundation

Competition

The home health care market is highly fragmented. According to MedPac, there were approximately 11,400 Medicare-

certified home nursing agencies in the United States in 2010. In 2009 MedPac estimated that approximately 32% of

Medicare certified home health agencies were hospital-based or not-for-profit, freestanding agencies and 19% of home

nursing agencies are located in rural markets. We believe we are well positioned to build and maintain long-term

relationships with local hospitals, physicians and other health care providers and to become the highest quality post-acute

provider in our markets. In our experience, because most rural areas have the population size to support only one or

two general acute care hospitals, the local hospital often plays a significant role in rural market health care delivery systems.

Rural patients who require home nursing frequently receive care from a small home care agency or an agency that,

while owned and run by the hospital, is not an area of focus for that hospital. Similarly, patients in these markets who require

services typically offered by long-term acute care hospitals are more likely to remain in the community hospital because

it is often the only local facility equipped to deal with severe, complex medical conditions. By entering these markets through

affiliations with local hospitals, competition for the services we provide is minimal.

As we expand into new markets, we may encounter public companies that have greater resources or greater access to

capital. Competition in our markets comes primarily from small local and regional providers. These providers include

facility- and hospital-based providers, visiting nurse associations and nurse registries. We are unaware of any competitor

offering our breadth of services and focusing on the needs of rural markets.

We have also entered into various joint ventures with nonprofit hospitals for the ownership and management of home

nursing agencies and LTACHs. We are unaware of any competitor with this type of ownership mix.

Although several public and private national and regional companies own or manage long-term acute care hospitals, they

generally do not operate in the rural markets that we serve. Generally, the competition in our markets comes from local

health care providers. We believe our principal competitive advantages over these local providers are our diverse service

offerings, our collaborative approach to working with health care providers, our focus on rural markets and our patient-

oriented operating model.

Quality Control

In March 2008, we established the LHC Group Quality Council (“The Council”). The Council is responsible for formulating

quality of care indicators, identifying performance improvement priorities, and facilitating best-practices for quality care.

As part of this council, we adopted the Plan, Do, Check, Act methodology. We also set forth a quality platform for home

care that reviews the following:

• performance improvement audits;

• Joint Commission accreditation;

• state and regulatory surveys;

• Home Health Compare scores; and

• patient perception of care.

The Council also has the responsibility to ensure that the infrastructure of the quality initiatives throughout the Company

is appropriate, to oversee and evaluate the effectiveness of the quality plans and initiatives and to recommend appropriate

quality and performance improvement initiatives.

In 2009, we established the Clinical Quality Committee of the Board of Directors (“The Committee”). The Committee is

responsible for advising the Company’s clinical leadership, monitoring the performance of our locations based on internal

and external benchmarks, overseeing and evaluating the effectiveness of the performance improvement and quality

plans, facilitating best-practices based on internal and external comparisons and fostering enhanced awareness of clinical

performance by the Board of Directors.

For m 1 0-K Pa r t I

LH C Group

As part of our ongoing quality control, internal auditing and monitoring programs, we conduct internal regulatory audits

and mock surveys at each of our agencies and facilities at least once a year. If an agency or facility does not achieve a

satisfactory rating, we require that it prepare and implement a plan of correction. We then follow-up to verify that all

deficiencies identified in the initial audit and survey have been corrected.

As required under the Medicare conditions of participation, we have a continuous quality improvement program,

which involves:

• ongoing education of staff and quarterly continuous quality improvement meetings at each of our agencies and facilities

and at our home office;

• monthly comprehensive audits of patient charts performed at each of our agencies and facilities;

• at least annually, a comprehensive audit of patient charts performed on each of our agencies and facilities by our home

office staff;

• review of Home Health Compare scores;

• assessment of patient’s and/or family member’s perception of care using Press Ganey, Deyton or Thomson Reuters; and

• assessment of infection control practices and risk events.

We continually expand and refine our quality improvement programs. Specific written policies, procedures, training and

educational materials and programs, as well as auditing and monitoring activities, have been prepared and implemented

to address the functional and operational aspects of our business. Our programs also address specific problem areas

identified through regulatory interpretation and enforcement activities. We believe our consistent focus on continuous

quality improvement programs provide us with a competitive advantage in the market.

Compliance

We have established and maintain a comprehensive compliance and ethics program that is designed to assist all of our

employees to meet or exceed applicable standards established by federal and state laws and regulations and industry

practice. Although we first established our compliance and ethics program in 1996, in 2009 we redesigned and enhanced

several aspects of the program. Our redesign and enhancement of the program involved several initiatives to further

our goal of fostering and maintaining the highest standards of compliance, ethics, integrity and professionalism in every

aspect of our business dealings.

The purpose of our compliance and ethics program is to focus on compliance with applicable legal and regulatory

requirements; the requirements of the Medicare and Medicaid programs and other government healthcare programs;

industry standards; our Code of Conduct and Ethics; and our policies and procedures that support and enhance

overall compliance within our company. The primary focus of our compliance and ethics program is on regulations related

to the federal False Claims Act, Stark Law, Anti-Kickback Law, billing and overall adherence to health care regulations.

To ensure the independence of our compliance department staff, the following measures have been implemented:

• our Chief Compliance Officer reports to and has direct oversight by the Audit Committee of our Board of Directors;

• the compliance depsartment has its own operating budget; and

• the compliance department has the authority to independently investigate any compliance or ethical concerns,

including, when deemed necessary, the authority to interview any company personnel, access any company property

(including electronic communications) and engage counsel to assist in any investigation.

Among other activities, our compliance department staff is responsible for the following activities:

• drafting and revising company policies and procedures related to compliance and ethics issues;

• reviewing, making recommended revisions to, disseminating and tracking attestations to our Code of Conduct

and Ethics;

• measuring compliance with our policies and procedures, Code of Conduct and Ethics and legal and regulatory

requirements related to the Medicare and Medicaid programs and other government healthcare programs, laws

and regulations;

Fo r m 1 0-K Par t I

A Strong Foundation

• developing and providing compliance-related training and education to all of our employees and, as appropriate,

directors, contractors and other representatives and agents, including, new-hire compliance training for all new

employees, annual compliance training for all employees, sales compliance training to all members of our sales team,

billing compliance training to all members of our billing and revenue cycle team and other job-specific and role-based

compliance training of certain employees;

• performing an annual company-wide risk assessment;

• implementing an annual compliance auditing and monitoring work plan and performing and following up on various

risk-based auditing and monitoring activities, including both clinical and non-clinical auditing and monitoring activities

at the corporate level and at the local agency/facility level;

• developing, implementing and overseeing our Health Insurance Portability and Accountability Act of 1996 (“HIPAA”)

privacy and security compliance program;

• monitoring, responding to and overseeing the resolution of issues and concerns raised through our anonymous

compliance hotline;

• monitoring, responding to and resolving all compliance and ethics-related issues and concerns raised through any

other form of communication; and

• ensuring that we take appropriate corrective and disciplinary action when noncompliant or improper conduct is identified.

All employees are required to report incidents, issues or other concerns that they believe in good faith may be in violation

of our Code of Conduct and Ethics, our policies and procedures, applicable legal and regulatory requirements or the

requirements of the Medicare and Medicaid programs and other government healthcare programs. All employees are

encouraged to either contact our Chief Compliance Officer directly or to contact our 24-hour toll-free compliance hotline

when they have questions or concerns about any compliance or ethics issues. All reports to our compliance hotline are

kept confidential to the extent allowed by law, and employees have the option to remain anonymous. In cases reported to

our compliance hotline that involve a compliance or ethics issue or any possible violation of law or regulation, the matter

is referred to the compliance department for investigation. Retaliation against employees in connection with reporting

compliance or ethical concerns is considered a serious violation of our Code of Conduct and Ethics, and, if it occurs,

it will result in discipline, up to and including termination of employment.

We continually expand and refine our compliance and ethics programs. We promote a culture of compliance, ethics,

integrity and professionalism within our company through persistent messages from our senior leadership concerning

the necessity of strict compliance with legal requirements and company policies and procedures. We believe our

consistent focus on our compliance and ethics programs provides us with a competitive advantage in the markets we serve.

Technology and Intellectual Property

Our Service Value Point system is a proprietary information system that assists us in, among other things, monitoring

use and other cost factors, supporting our health care management techniques, internal benchmarking, clinical analysis,

outcomes monitoring and claims generation, revenue cycle management and revenue reporting.

Our patent for our Service Value Point system was finalized during 2009 by the U.S. Patent and Trademark Office. This

proprietary home nursing clinical resource and cost management system is a quantitative tool that assigns a target level of

resource units to each patient based upon his or her initial assessment and estimated skilled nursing and therapy needs.

We designed this system to empower our direct care employees to make appropriate day-to-day clinical care decisions

while also allowing us to manage the quality and delivery of care across our system and to monitor the cost of providing

that care both on a patient-specific and agency-specific basis.

In addition to our Service Value Point system, our business is substantially dependent on non-proprietary software.

We utilize a third-party software information system for billing and maintaining patient claim receivables for our LTACHs.

As of December 31, 2011, our home nursing agencies primarily utilize two billing and patient claim systems.

For m 1 0-K Pa r t I

LH C Group

We continue to implement, evaluate and refine our point of care (“POC”) roll out strategy. POC allows a visiting clinician

access to records and other information from the patient’s home or at the point of care. This access also allows the

clinician to complete required documentation at the point of care and submit it electronically into our patient record. We

currently have 73 locations (home health and hospice) on POC and plan to continue adding locations on POC over the

next several years.

Technology plays a key role in our organization’s ability to expand operations and maintain effective managerial control.

The software we use is based on client-server technology and is highly scalable. We believe our software and systems are

flexible, easy-to-use and allow us to accommodate growth without difficulty. We believe that building and enhancing our

information and software systems provides us with a competitive advantage that allows us to grow our business in a more

cost-efficient manner and results in better patient care.

Reimbursement

Medicare

The federal government’s Medicare program, governed by the Social Security Act of 1965, reimburses health care

providers for services furnished to Medicare beneficiaries. These beneficiaries generally include persons age 65 and

older and those who are chronically disabled. The program is primarily administered by the Department of Health and

Human Services (“HHS”) and the Centers for Medicare & Medicaid Services (“CMS”). Medicare payments accounted for

79.7%, 80.5% and 82.2% of our net service revenue for the years ended December 31, 2011, 2010 and 2009, respectively.

Medicare reimburses us based upon the setting in which we provide our services or the Medicare category in which those

services fall.

Home Nursing. The Medicare home nursing benefit is available to patients who need care following discharge from a

hospital, as well as patients who suffer from chronic conditions that require ongoing but intermittent care. The services

received need not be rehabilitative or of a finite duration; however, patients who require full-time skilled nursing for an

extended period of time generally do not qualify for Medicare home nursing benefits. As a condition of coverage under

Medicare, beneficiaries must: (1) be homebound in that they are unable to leave their home without considerable effort;

(2) require intermittent skilled nursing, physical therapy, or speech therapy services that are covered by Medicare; and

(3) receive treatment under a plan of care that is established and periodically reviewed by a physician. Qualifying patients

also may receive reimbursement for occupational therapy, medical social services and home health aide services if

these additional services are part of a plan of care prescribed by a physician.

We receive a standard prospective Medicare payment for delivering care over a base 60-day period, referred to as an

episode of care. There is no limit to the number of episodes a beneficiary may receive as long as he or she remains

eligible. Most patients complete treatment within one payment episode. The base episode payment, established through

federal legislation, is a flat rate that is adjusted upward or downward based upon differences in the expected resource

needs of individual patients as indicated by clinical severity, functional severity and service utilization. The magnitude of

the adjustment is determined by each patient’s categorization into one of 153 payment groups, known as Home Health

Resource Groups and the costliness of care for patients in each group relative to the average patient. Our payment is

further adjusted for differences in local labor costs using the hospital wage index. We bill and are reimbursed for services

in two stages: an initial request for advance payment when the episode commences and a final claim when it is

completed. We submit all Medicare claims through the Medicare Administrative Contractors for the federal government.

We receive 60% of the estimated payment for a patient’s initial episode up-front (after the initial assessment is completed

and upon initial billing) and the remaining 40% upon completion of the episode and after all final treatment orders are

signed by the physician. In the event of subsequent episodes, reimbursement timing is 50% up front and 50% upon

completion of the episode. Final payments may reflect one of four retroactive adjustments to ensure the adequacy and

effectiveness of the total reimbursement: (1) an outlier payment if the patient’s care was unusually costly; (2) a low

utilization adjustment if the number of visits was fewer than five; (3) a partial payment if the patient transferred to another

Fo r m 1 0-K Par t I

A Strong Foundation

provider before completing the episode; or (4) a payment adjustment based upon the level of therapy services required

in the population base. Because such adjustments are determined upon the completion date of the episode, retroactive

adjustments could impact our financial results.

CMS finalized two provisions of the Affordable Care Act: (1) a face-to-face encounter requirement for home health and

hospice; and (2) changes in the therapy assessment schedule. As a condition for Medicare payment, the Affordable Care

Act mandates that prior to certifying a patient’s eligibility for home health services, the certifying physician must document

that he or she, or a non-physician practitioner that meets the requirements of the rule, has had a face-to-face encounter

with the patient that relates to the condition for which the patient receives home health services. The encounter must occur

within 90 days prior to the start of care or 30 days after the start of care. Documentation regarding these encounters must

be present on certifications.

In addition to the face-to-face encounter requirements, CMS made important changes to therapy assessment requirements.

A professional qualified therapist assessment must take place at least once every 30 days during a therapy patient’s

course of treatment. For those eligible patients needing 13 or 19 therapy visits, a qualified therapist must perform the

therapy service required, assess the patient, and measure and document effectiveness of the 13th visit and the 19th

visit for all therapy disciplines caring for the patient.

We verify a patient’s eligibility for home health benefits at the time of admission. Through the verification process

we are able to determine the payor source and eligibility for reimbursement of each patient. Accordingly, we do not

have any material reimbursement amounts that are pending approval based on the eligibility of a patient to receive

reimbursement from the applicable payor program. Further, we provide only limited services to patients who are ineligible

for reimbursement from a third party payor. Therefore, we do not have any material reimbursement from patients who

are self-pay.

The base payment rate for Medicare home nursing was $2,192.07, $2,312.94 and $2,271.92 per 60 day episode for

the calendar years of 2011, 2010 and 2009 respectively. In 2012, the base payment rate for Medicare home nursing per

60 day episode is $2,138.52.

The standard federal rate is increased or decreased based on each Medicare patient’s case mix index which measures

the severity of the patient’s condition. Since the inception of the prospective payment system in October 2000, the base

episode payment rate has varied due to both the impact of annual market-basket based increases and Medicare-related

legislation. Home health payment rates are updated annually by either the full home health market basket percentage,

or by the home health market basket percentage as adjusted by Congress. CMS establishes the home health market

basket index, which measures inflation in the prices of an appropriate mix of goods and services included in home

health services.

The Office of Inspector General (“OIG”) of HHS has a responsibility to report both to the Secretary of HHS and to

Congress any program or management problems related to programs such as Medicare. The OIG’s duties are carried out

through a nationwide network of audits, investigations and inspections. The OIG has recently undertaken a study with

respect to Medicare reimbursement for home health services. No estimate can be made at this time regarding the impact,

if any, of the OIG’s findings.

Hospice. In order for a Medicare beneficiary to qualify for the Medicare hospice benefit, two physicians must certify that,

in the best judgment of the physician or medical director, the beneficiary has less than six months to live, assuming the

beneficiary’s disease runs its normal course. In addition, the Medicare beneficiary must affirmatively elect hospice care

and waive any rights to other Medicare benefits related to his or her terminal illness. For each benefit period, a physician

must recertify that the Medicare beneficiary’s life expectancy is six months or less in order for the beneficiary to continue

to qualify for and to receive the Medicare hospice benefit. The first two benefit periods are measured at 90-day intervals

and subsequent benefit periods are measured at 60-day intervals. A Medicare beneficiary may revoke his or her election

at any time and resume receiving traditional Medicare benefits. There is no limit on how long a Medicare beneficiary can

receive hospice benefits and services, provided that the beneficiary continues to meet Medicare hospice eligibility criteria.

For m 1 0-K Pa r t I

LH C Group

Medicare reimburses for hospice care using a prospective payment system. Under that system, we receive one of four

predetermined daily or hourly rates based upon the level of care we furnish to the beneficiary. These rates are subject

to annual adjustments based on inflation and geographic wage considerations. Our base Medicare rates depend upon

which of the following four levels of care we provide:

• Routine Care. This level of care includes care that is not classified under any of the other levels of care, such as the

work of social workers or home health aides.

• General Inpatient Care. This level of care is available for pain control or acute or chronic symptom management that

cannot be managed in a setting other than an inpatient Medicare certified facility, such as a hospital, skilled nursing

facility or hospice inpatient facility.

• Continuous Home Care. This level of care is provided when a patient is experiencing a medical crisis and requires

nursing services to achieve palliation and symptom control. For services to qualify for this level of care, the agency must

provide a minimum of eight hours of care within a 24-hour period.

• Respite Care. This level of care is provided on a short-term, inpatient basis to give temporary relief to the person who

regularly provides care to the patient.

Medicare limits the reimbursement we may receive for inpatient care services of hospice patients. Under the “80-20 rule,”

if the number of inpatient care days furnished by us to Medicare beneficiaries exceeds 20% of the total days of hospice

care furnished by us to Medicare beneficiaries, Medicare payments to us for inpatient care days exceeding the inpatient

cap will be reduced to the routine home care rate. This determination is made annually based on the 12-month period

beginning on November 1st each year. This limit is computed on a program-by-program basis. Our hospices did not exceed

the cap on inpatient care services during 2010 or 2009. We have not received notification that any of our hospices have

exceeded the cap on inpatient care services during 2011.

Our Medicare hospice reimbursement is also subject to a cap amount calculated by the Medicare fiscal intermediary at

the end of the hospice cap period, which runs from November 1st through October 31st of the following year. We have not

received notification that any of our hospices have exceeded the cap on per beneficiary limits during 2011.

The two caps include an inpatient cap and overall payment cap, detailed below:

• Inpatient Cap. This cap limits the number of days of inpatient care (both respite and general) under a provider number

to 20% of the total number of days of hospice care (both inpatient and in-home) furnished to all patients served.

The daily payment rate for any inpatient days of service in excess of the cap amount is calculated at the routine home

care rate, with excess amounts due back to Medicare; and

• Overall Payment Cap. This cap is calculated by the Medicare fiscal intermediary at the end of each hospice cap period

to determine the maximum allowable payments per provider number. On a monthly and quarterly basis, we estimate our

potential cap exposure using information available for both inpatient day limits as well as per beneficiary cap amounts.

The total cap amount for each provider is calculated by multiplying the number of beneficiaries electing hospice care from

September 28, 2010 to September 27, 2011 by a statutory amount that is indexed for inflation. The per beneficiary

cap amount was $24,528 for the twelve-month period ended October 31, 2011 and $23,875 for the twelve-month period

ended October 31, 2010. There will be a cap liability if actual payments per the Provider Statistical and Reimbursement

report for the period of November 1, 2010 to October 31, 2011 exceed the beneficiary cap amount.

CMS finalized a face-to-face encounter requirement applicable to hospice. This requirement mandated that a physician

or nurse practitioner must have a face-to-face encounter with the patient no later than the 30 day period prior to the

180th-day recertification (third benefit period) and each subsequent recertification in order to gather clinical findings that

support continued hospice care, and that the certifying hospice physician must attest that such a visit took place.

Long-Term Acute Care Hospitals. All Medicare payments to our LTACHs are made in accordance with a prospective

payment system specifically applicable to long-term acute care hospitals, referred to as “LTACH-PPS.” Proposed rules

specifically related to LTACHs are generally published in January, finalized in May and effective on July 1st of each

year. Additionally, LTACHs are subject to annual updates to the rules related to the inpatient prospective payment system,

Fo r m 1 0-K Par t I

A Strong Foundation

or “IPPS,” that are typically proposed in May, finalized in August and effective on October 1st of each year. In the annual

payment rate update for the 2010 fiscal year, CMS consolidated the two historical annual updates into one annual update.

The final rule adopted a 15-month rate update for fiscal year 2009 and moves the LTACH-PPS from a July-June update

cycle to an October-September cycle. Beginning fiscal year 2010 the LTACH rate year will begin October 1, coinciding

with the start of the federal fiscal year.

In 2004, CMS published a final regulation applicable to LTACHs that are operated as “hospital within hospitals” or as

“satellites.” We collectively refer to hospital within hospitals and satellites as “HwHs,” and we refer to the CMS final

regulations as the “final regulations.” HwHs are separate hospitals located in space leased from, and located in or on the

same campus of another hospital. We refer to such other hospitals as “host” hospitals. Effective for hospital cost

reporting periods beginning on or after October 1, 2004, subject to certain exceptions, the final regulations provided lower

rates of reimbursement to HwHs for those Medicare patients admitted from their host hospitals that are in excess

of a specified percentage threshold. For HwHs opened after October 1, 2004, the Medicare admissions threshold was

established at 25% except for HwHs located in rural areas or co-located with “MSA dominant” hospitals or single urban

hospitals where the percentage is no more than 50%, nor less than 25%.

May 2007 Final Rule. On May 11, 2007, CMS published its annual payment rate update for the 2008 LTACH-PPS

rate year, or “RY 2008” (affecting discharges and cost reporting periods beginning on or after July 1, 2007 and before

July 1, 2008). The May 2007 final rule made several changes to LTACH-PPS payment methodologies and amounts

during RY 2008 although, as described below, many of these changes have been postponed for a three year period

by the SCHIP Extension Act.

For cost reporting periods beginning on or after July 1, 2007, the May 2007 final rule expanded the Medicare HwH

admissions threshold to apply to Medicare patients admitted from any individual hospital. Previously, the admissions

threshold was applicable only to Medicare HwH admissions from hospitals co-located with an LTACH or satellite

of an LTACH. Under the May 2007 final rule, free-standing LTACHs and grandfathered HwHs would be subject to the

Medicare admission thresholds, as well as HwHs and satellites that admit Medicare patients from non-co-located

hospitals. To the extent that any LTACH’s or LTACH satellite facility’s discharges that are admitted from an individual

hospital (regardless of whether the referring hospital is co-located with the LTACH or LTACH satellite) exceed the

applicable percentage threshold during a particular cost reporting period, the payment rate for those discharges would

be subject to a downward payment adjustment. Cases admitted in excess of the applicable threshold would be

reimbursed at a rate comparable to that under general acute care IPPS, which is generally lower than LTACH-PPS rates.

Cases that reach outlier status in the discharging hospital would not count toward the limit and would be paid under

LTACH-PPS. CMS estimated the impact of the expansion of the Medicare admission thresholds would result in a reduction

of 2.2% of the aggregate payments to all LTACHs in RY 2008.

The applicable percentage threshold is generally 25% after the completion of the phase-in period described below.

The percentage threshold for LTACH discharges from a referring hospital that is an MSA dominant hospital or a single

urban hospital is the percentage of total Medicare discharges in the MSA that are from the referring hospital, but no less

than 25% nor more than 50%. For Medicare discharges from LTACHs or LTACH satellites located in rural areas, as defined

by the Office of Management and Budget, the percentage threshold is 50% from any individual referring hospital. The

expanded 25% rule is being phased in over a three year period. The three year transition period starts with cost reporting

periods beginning on or after July 1, 2007 and before July 1, 2008, when the threshold is the lesser of 75% or the

percentage of the LTACH’s or LTACH satellite’s admissions discharged from the referring hospital during its cost reporting

period beginning on or after July 1, 2004 and before July 1, 2005, or “RY 2005.” For cost reporting periods beginning

on or after July 1, 2008 and before July 1, 2009, the threshold is the lesser of 50% or the percentage of the LTACH’s or

LTACH satellite’s admissions from the referring hospital, during its RY 2005 cost reporting period. For cost reporting

periods beginning on or after July 1, 2009, all LTACHs will be subject to the 25% threshold (or applicable threshold for

rural, urban-single, or MSA dominant hospitals). The SCHIP Extension Act, as amended by the ARRA, postponed the

application of the percentage threshold to all free-standing and grandfathered HwHs for a three year period commencing

on an LTACH’s first cost reporting period on or after July 1, 2007. However, the SCHIP Extension Act did not postpone the

For m 1 0-K Pa r t I

LH C Group

application of the percentage threshold, or the transition period stated above, to those Medicare patients discharged

from an LTACH HwH or HwH satellite that were admitted from a non-co-located hospital. The SCHIP Extension Act only

postpones the expansion of the admission threshold in the May 2007 final rule to free-standing LTACHs and

grandfathered HwHs.

The May 2007 final rule further revised the payment adjustment formula for short stay outlier, or “SSO” cases. Beginning

with discharges on or after July 1, 2007, for cases with a length of stay that is less than the average length of stay plus one

standard deviation for the same DRG under IPPS, referred to as the so-called “IPPS comparable threshold,” the rule

effectively lowers the LTACH payment to a rate based on the general acute care hospital IPPS. SSO cases with covered

lengths of stay that exceed the IPPS comparable threshold would continue to be paid under the SSO payment policy

described above under the May 2006 final rule. Cases with a covered length of stay less than or equal to the IPPS

comparable threshold and less than five-sixths of the geometric average length of stay for that LTC-DRG would be paid at

an amount comparable to the IPPS per diem. The SCHIP Extension Act also postponed, for the three year period

beginning on December 29, 2007, the SSO policy changes made in the May 2007 final rule.

The May 2007 final rule increased the standard federal rate by 0.71% for RY 2008. As a result, the federal rate for RY 2008

is equal to $38,356.45, compared to $38,086.04 for RY 2007. Subsequently, the SCHIP Extension Act eliminated the

update to the standard federal rate that occurred for RY 2008 effective April 1, 2008. This adjustment to the standard

federal rate was applied prospectively on April 1, 2008 and reduced the federal rate back to $38,086.04. In a technical

correction to the May 2007 final rule, CMS increased the fixed-loss amount for high cost outlier in RY 2008 to $20,738,

compared to $14,887 in RY 2007. CMS projected an estimated 0.4% decrease in LTACH payments in RY 2008

due to this change in the fixed-loss amount and the overall impact of the May 2007 final rule to be a 1.2% decrease in

total estimated LTACH-PPS payments for RY 2008.

The May 2007 final rule provided that beginning with the annual payment rate updates to the LTC-DRG classifications

and relative weights for the fiscal year 2008, or “FY 2008” (affecting discharges beginning on or after October 1, 2007 and

before September 30, 2008), annual updates to the LTC-DRG classification and relative weights are to have a budget

neutral impact. Under the May 2007 final rule, future LTC-DRG reclassification and recalibrations, by themselves, should

neither increase nor decrease the estimated aggregated LTACH-PPS payments.

The May 2007 final rule is complex and the SCHIP Extension Act postponed the implementation of certain portions of the

May 2007 final rule. While we cannot predict the ultimate long-term impact of LTACH-PPS because the payment system

remains subject to significant change, if the May 2007 final rule becomes effective as currently written, after the expiration

of the applicable provisions of the SCHIP Extension Act, our future net operating revenues and profitability could be

adversely affected.

August 2007 Final Rule. On August 22, 2007, CMS published the IPPS final rule for FY 2008, which created a new patient

classification system with categories referred to as MS-DRGs and MS-LTC-DRGs, respectively, for hospitals reimbursed

under IPPS and LTACH-PPS. Beginning with discharges on or after October 1, 2007, the new classification categories take

into account the severity of the patient’s condition. CMS assigned proposed relative weights to each MS-DRG and

MS-LTC-DRG to reflect their relative use of medical care resources.

The August 2007 final rule published a budget neutral update to the MS-LTC-DRG classification and relative weights.

In the preamble to the IPPS final rule for FY 2008 CMS restated that it intends to continue to update the LTC-DRG weights

annually in the IPPS rulemaking and those weights would be modified by a budget neutrality adjustment factor to ensure

that estimated aggregate LTACH payments after reweighting are equal to estimated aggregate LTACH payments before

reweighting.

Medicare, Medicaid, and SCHIP Extension Act of 2007. On December 29, 2007, President Bush signed into law the

SCHIP Extension Act. Among other changes in the federal health care programs, the SCHIP Extension Act makes

significant changes to Medicare policy for LTACHs including a new statutory definition of an LTACH, a report to Congress

on new LTACH patient criteria, relief from certain LTACH-PPS payment policies for three years, a three year moratorium

Fo r m 1 0-K Par t I

A Strong Foundation

on the establishment and classification of new LTACHs and LTACH beds, elimination of the payment update for the last

quarter of RY 2008 and new medical necessity reviews by Medicare contractors through at least October 1, 2010.

The SCHIP Extension Act precludes the Secretary from implementing, during the three year moratorium period, the

provisions added by the May 2007 final rule that extended the 25% rule to free-standing LTACHs and grandfathered HwHs.

The SCHIP Extension Act also modifies, during the moratorium, the effect of the 25% rule for non-grandfathered

LTACH HwHs, non-grandfathered satellites and grandfathered LTACH HwHs, as it applies to admissions from co-located

hospitals. For HwHs and satellite facilities, the applicable percentage threshold is set at 50% and not phased in

to the 25% level. For those HwHs and satellite facilities located in rural areas and those which receive referrals from MSA

dominant hospitals or single urban hospitals, the percentage threshold is set at no more than 75%. The ARRA, as

discussed below further revises the SCHIP Extension Act to postpone the percentage limitations established in the

SCHIP Extension Act to the three cost reporting periods beginning on or after July 1, 2007 for freestanding LTACHs,

grandfathered HwHs and grandfathered satellites and on or after October 1, 2007 for non-grandfathered LTACH HwHs

and non-grandfathered satellites.

The SCHIP Extension Act also precludes the Secretary from implementing, for the three year period beginning on

December 29, 2007, a one-time adjustment to the LTACH standard federal rate. This rule, established in the original

LTACH-PPS regulations, permits CMS to restate the standard federal rate to reflect the effect of changes in coding

since the LTACH-PPS base year. In the preamble to the May 2007 final rule, CMS discussed making a one-time prospective

adjustment to the LTACH-PPS rates for the 2009 rate year. In addition, the SCHIP Extension Act reduced the Medicare

payment update for the portion of RY 2008 from April 1, 2008 to June 30, 2008 to the same base rate applied to LTACH

discharges during RY 2007.

For the three calendar years following December 29, 2007, the Secretary must impose a moratorium on the establishment

and classification of new LTACHs, LTACH satellite facilities, and LTACH beds in existing LTACH or satellite facilities.

This moratorium does not apply to LTACHs that, before the date of enactment, (1) began the qualifying period for payment

under the LTACH-PPS, (2) have a written agreement with an unrelated party for the construction, renovation, lease or

demolition for a LTACH and have expended at least 10% of the estimated cost of the project or $2,500,000, or (3) have

obtained an approved certificate of need.

May 6, 2008 Interim Final Rule. On May 6, 2008, CMS published an interim final rule with comment period, which

implemented portions of the SCHIP Extension Act. The May 6, 2008 interim final rule addressed: (1) the payment

adjustment for very short-stay outliers, (2) the standard federal rate for the last three months of RY 2008, (3) adjustment

of the high cost outlier fixed-loss amount for the last three months of RY 2008, and (4) made references to the SCHIP

Extension Act in the discussion of the basis and scope of the LTACH-PPS rules.

May 9, 2008 Final Rule. On May 9, 2008, CMS published its annual payment rate update for the 2009 LTACH-PPS rate

year, or “RY 2009” (affecting discharges and cost reporting periods beginning on or after July 1, 2008). The final rule

adopts a 15-month rate update, from July 1, 2008 through September 30, 2009 and moves LTACH-PPS from a July-June

update cycle to the same update cycle as the general acute care hospital inpatient rule (October – September). For RY

2009, the rule establishes a 2.7% update to the standard federal rate. The rule increases the fixed-loss amount for high

cost outlier cases to $22,960, which is $2,222 higher than the 2008 LTACH-PPS rate year. The final rule provides that

CMS may make a one-time reduction in the LTACH-PPS rates to reflect a budget neutrality adjustment no earlier

than December 29, 2010 and no later than October 1, 2012. CMS estimated this reduction will be approximately 3.75%.

May 22, 2008 Interim Final Rule. On May 22, 2008, CMS published an interim final rule with comment period, which

implements portions of the SCHIP Extension Act not addressed in the May 6, 2008 interim final rule. Among other things,

the May 22, 2008 interim final rule establishes a definition for “free-standing” LTACHs as a hospital that: (1) has a Medicare

provider agreement, (2) has an average length of stay of greater than 25 days, (3) does not occupy space in a building

used by another hospital, (4) does not occupy space in one or more separate or entire buildings located on the same

campus as buildings used by another hospital and (5) is not part of a hospital that provides inpatient services in a building

also used by another hospital.

For m 1 0-K Pa r t I

LH C Group

August 2008 Final Rule. On August 19, 2008, CMS published the IPPS final rule for FY 2009 (affecting discharges

and cost reports beginning on or after October 1, 2008 and before October 1, 2009), which made limited revisions to the

classifications of cases in MS-LTC-DRGs. The final rule also includes a number of hospital ownership and physician

referral provisions, including expansion of a hospital’s disclosure obligations by requiring physician-owned hospitals to

disclose ownership or investment interests held by immediate family members of a referring physician. The final rule

requires physician-owned hospitals to furnish to patients, on request, a list of physicians or immediate family members

who own or invest in the hospital. Moreover, a physician-owned hospital must require all physician owners or investors

who are also active members of the hospital’s medical staff to disclose in writing their ownership or investment interests in

the hospital to all patients they refer to the hospital. CMS can terminate the Medicare provider agreement of a physician-

owned hospital if it fails to comply with these disclosure provisions or with the requirement that a hospital disclose in

writing to all patients whether there is a physician on-site at the hospital 24 hours per day, 7 days per week.

The American Recovery and Reinvestment Act of 2009. On February 17, 2009, President Obama signed into law the

American Recovery and Reinvestment Act of 2009, the “ARRA.” The ARRA makes several technical corrections to the

SCHIP Extension Act, including a clarification that, during the moratorium period established by the SCHIP Extension

Act, the percentage threshold for grandfathered satellites is set at 50% and not phased in to the 25% level for admissions

from a co-located hospital. In addition, the ARRA clarifies that the application of the percentage threshold is postponed

for a LTACH HwH or satellite that was co-located with a provider-based, off-campus location of an IPPS hospital that did

not deliver services payable under IPPS. The ARRA also provides that the postponement of the percentage threshold

established in the SCHIP Extension Act will be effective for cost reporting periods beginning on or after July 1, 2007 for

freestanding LTACHs and grandfathered HwHs and satellites and on or after October 1, 2007 for other LTACH HwHs

and satellites.

June 3, 2009 Interim Final Rule. On June 3, 2009, CMS published an interim final rule in which CMS adopted a new table

of MS-LTC-DRG relative weights that will apply to the remainder of fiscal year 2009 (through September 30, 2009). This

interim final rule revises the MS-LTC-DRG relative weights for payment under the LTACH-PPS for FY 2009 due to CMS’s

misapplication of its established methodology in the calculation of the budget neutrality factor. This error resulted in

relative weights that are higher, by approximately 3.9% for all of FY 2009 (October 1, 2008 through September 30, 2009)

which has the effect of reducing reimbursement by approximately 3.9%. However, CMS is only applying the corrected

weights to the remainder of fiscal year 2009 (that is, from June 3, 2009 through September 30, 2009).

July 31, 2009 Final Rule. On July 31, 2009, CMS released its annual payment rate update for the LTACH PPS for “FY

2010” (affecting discharges and cost reporting periods beginning on or after October 1, 2009 and before September 30,

2010). For FY 2010 CMS adopted a 2.5% increase in payments under the LTACH PPS. As a result, the standard federal

rate for FY 2010 is set at $39,896.65, an increase from $39,114.36 in FY 2009. The increase in the standard federal rate

uses a 2.0% update factor based on the market basket update of 2.5% less an adjustment of 0.5% to account for changes

in documentation and coding practices. The fixed loss amount for high cost outlier cases is set at $18,425. This is a

decrease from the fixed loss amount in the 2009 rate year of $22,960.

The July 31, 2009 annual payment rate update also included an interim final rule with comment period implementing

provisions of the ARRA discussed above, including amendments to provisions of the SCHIP Extension Act relating to

payments to LTACHs and LTACH satellite facilities and increases in beds in existing LTACHs and LTACH satellite facilities

under the LTACH PPS.

In the same federal register, CMS finalized three interim final rules with comment period that it previously published but

had yet to respond to public comment. First, CMS finalized the June 3, 2009 interim final rule that adopted a new

table of MS-LTC-DRG relative weights for the period between June 3, 2009 and September 30, 2009. Second, CMS

finalized the May 6, 2008 interim final rule that implemented changes to LTACH PPS mandated by the SCHIP Extension

Act addressing: (1) payment adjustments for certain short-stay outliers, (2) the federal standard rate for the last three

months of rate year 2008, and (3) adjustment of the high cost outlier fixed-loss amount. Finally, CMS finalized the May 22,

Fo r m 1 0-K Par t I

A Strong Foundation

2008 interim final rule that implemented changes to LTACH PPS mandated by the SCHIP Extension Act modifying the

percentage threshold policy for certain LTACHs and addressing the three-year moratorium on the establishment of new

LTACHs and bed increases at existing LTACHs and LTACH satellites.

We currently have a total of nine LTACH facilities, with 220 licensed beds. Eight of our LTACH facilities are classified as

HwHs and one as freestanding. Of the eight HwH facilities, five are located in rural or non-MSAs. Three of our eight HwH

facilities are located in MSA or urban areas. Of these eight locations classified as HwHs, one facility is a satellite location

of a parent hospital located in an MSA and one facility is a satellite location of a parent hospital located in a non-MSA.

We also have one location that is a freestanding remote site of a parent located in an MSA. Based on our discussions

with CMS, we believe each of our satellite and remote locations will be viewed as being located in a non-MSA regardless

of the location of its parent hospital and will be treated independently from its parent for purposes of calculating its

compliance with the admissions limitations. If the “25% rule” is extended, as planned, to freestanding LTACHs after the

three-year delay (established in the MMSEA), our current freestanding facility would not likely be affected because we

currently do not receive more than 25% of our Medicare admissions from any single referring hospital.

For the 12 months ended December 31, 2011, on an individual basis, the admission of our LTACHs were under the proper

threshold as of the current cost report year date of August 31, 2011. Our new LTACHs acquired in 2010 and 2009 were

grandfathered LTACHs and, therefore, have no limitations under MMSEA with respect to the number of patients that can

be admitted from the host hospital. Our remaining LTACH is not an HwH; therefore, it is not subject to these limits on

host hospital referrals, but maintains compliance with non-co-located hospital referral thresholds.

Medicaid

Medicaid is a joint federal and state funded health insurance program for certain low-income individuals. Medicaid

reimburses health care providers using a number of different systems, including cost-based, prospective payment

and negotiated rate systems. Rates are also subject to adjustment based on statutory and regulatory changes, administrative

rulings, government funding limitations and interpretations of policy by individual state agencies.

Non-Governmental Payors

Payments from non-governmental payor sources are based on episodic-based rates or per visit basis depending upon

the terms and conditions of the payor. Examples of non-governmental payor sources are insurance companies, workers’

compensation programs, health maintenance organizations, preferred provider organizations, other managed care

companies and employers, as well as patients directly.

Patients are generally not responsible for any difference between customary charges for our services and amounts paid

by Medicare and Medicaid programs and the non-governmental payors, but are responsible for services not covered by

these programs or plans, as well as for deductibles and co-insurance obligations of their coverage. The amount of

these deductibles and co-insurance obligations on patients has increased in recent years. Collection of amounts due from

individuals is typically more difficult than collection of amounts due from government or business payors. Because the

majority of our billed services are paid in full by Medicare, Medicaid or private insurance, co-payments from patients do

not represent a material portion of our billed revenue and corresponding accounts receivable. To further reduce their

health care costs, most insurance companies, health maintenance organizations, preferred provider organizations and

other managed care companies have negotiated discounted fee structures or fixed amounts for services performed,

rather than paying health care providers the amounts billed.

In response to the challenges associated with collecting from commercial payors we began negotiating higher

reimbursement rates with a majority of our commercial payors. Our Managed Care contracts include 80 different payors

between all our divisions, 5 of those are national contracts, 10 are regional contracts and 65 are state and local

contracts/standing letters of agreement. However, if we are unable to continue negotiating higher reimbursement rates

with commercial payors or if commercial payors continue to reduce health care costs through reduction in home health

reimbursement, it could have a material adverse impact on our financial results.

For m 1 0-K Pa r t I

LH C Group

Government Regulations

General

The health care industry is highly regulated and we are required to comply with federal, state and local laws which

significantly affect our business. These laws and regulations are extremely complex and, in many instances, the industry

does not have the benefit of significant regulatory or judicial interpretation. Regulations and policies frequently change,

and we monitor these changes through trade and governmental publications and associations. The significant areas of

federal and state regulatory laws that could affect our ability to conduct our business include the following:

• Medicare and Medicaid participation and reimbursement;

• the federal Anti-Kickback Statute and similar state laws;

• the federal Stark Law and similar state laws;

• false and other improper claims;

• the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”);

• civil monetary penalties;

• environmental health and safety laws;

• licensing; and

• certificates of need and permits of approval.

If we fail to comply with these applicable laws and regulations, we could suffer civil or criminal penalties, including the loss

of our licenses to operate and our ability to participate in federal and state health care programs, which would materially

adversely affect our financial condition and results of operations. Although we believe we are in material compliance

with all applicable laws, these laws are complex and a review of our practices by a court or law enforcement or regulatory

authority could result in an adverse determination that could harm our business. Furthermore, the laws applicable to

us are subject to change, interpretation and amendment, which could adversely affect our ability to conduct our business.

Office of Inspector General

The Department of Health and Human Services OIG has a responsibility to report any program or management problems

related to programs such as Medicare to the Secretary of HHS and Congress. The OIG’s duties are carried out through

a nationwide network of audits, investigations and inspections. Each year, the OIG outlines areas it intends to study relating

to a wide range of providers. In fiscal year 2011, the OIG indicated its intent to study topics relating to, among others,

home health, hospice and long-term care hospitals. No estimate can be made at this time regarding the impact, if any, of

the OIG’s findings.

Medicare Participation

During the years ended December 31, 2011, 2010 and 2009, we received 79.7%, 80.5% and 82.2%, respectively, of our

consolidated net service revenue from Medicare. We expect to continue to receive the majority of our consolidated net

service revenue from serving Medicare beneficiaries. Medicare is a federally funded and administered health insurance

program, primarily for individuals who are 65 or older or who are disabled. To participate in the Medicare program and

receive Medicare payments, our agencies and facilities must comply with regulations promulgated by CMS. Among other

things, these requirements, known as “conditions of participation,” relate to the type of facility, its personnel and its

standards of medical care. Although we intend to continue to participate in the Medicare reimbursement programs, we

cannot guarantee that our agencies, facilities and programs will continue to qualify for participation.

Under Medicare rules, the designation “provider-based” refers to circumstances in which a subordinate facility (e.g.,

a separately-certified Medicare provider, a department of a provider or a satellite facility) is treated as part of another

provider, called the “main” provider, for Medicare payment purposes. In these cases, the services of the subordinate facility

are included in the “main” provider’s cost report and overhead costs of the main provider can be allocated to the

subordinate facility, to the extent that such costs are shared. We operate LTACHs that are treated as provider-based satellites

of certain of our other facilities. We also provide contract rehabilitation and management services to hospital rehabilitation

departments that may be treated as provider-based. These facilities are required to satisfy certain operational standards in

order to retain their provider-based status. Although we intend to continue to operate these facilities as provider-based,

we cannot guarantee that they will continue to qualify as provider-based entities.

Fo r m 1 0-K Par t I

A Strong Foundation

Anti-Kickback Statute

Provisions of the Social Security Act of 1965, commonly referred to as the Anti-Kickback Statute, prohibit the payment or

receipt of anything of value in return for the referral of patients or arranging for the referral of patients, or in return for

the recommendation, arrangement, purchase, lease or order of items or services that are covered by a federal health care

program such as Medicare and Medicaid. Violation of the Anti-Kickback Statute is a felony and sanctions include

imprisonment of up to five years, criminal fines of up to $25,000, civil monetary penalties of up to $50,000 per act plus

three times the amount claimed or three times the remuneration offered and exclusion from federal health care programs

(including the Medicare and Medicaid programs). Many states have adopted similar prohibitions against payments

intended to induce referrals of Medicaid and other third-party payor patients.

The OIG has published numerous “safe harbors” that exempt some practices from enforcement action under the federal

Anti-Kickback Statute. These safe harbors exempt specified activities, including bona-fide employment relationships,

contracts for the rental of space or equipment, personal service arrangements and management contracts, so long as

all of the requirements of the safe harbor are met. The OIG has recognized that the failure of an arrangement to

satisfy all of the requirements of a particular safe harbor does not necessarily mean that the arrangement violates the

Anti-Kickback Statute. Instead, each arrangement is analyzed on a case-by-case basis, which is very fact specific.

We cannot guarantee that all our arrangements will satisfy a safe harbor or will ultimately be viewed as being compliant

with the Anti-Kickback Statute.

We are required under the Medicare conditions of participation and some state licensing laws to contract with numerous

health care providers and practitioners, including physicians, hospitals and nursing homes and to arrange for these

individuals or entities to provide services to our patients. In addition, we have contracts with other suppliers, including

pharmacies, ambulance services and medical equipment companies. We have also entered into various joint ventures

with hospitals and physicians for the ownership and management of home nursing agencies and LTACHs. Some of these

individuals or entities may refer, or be in a position to refer, patients to us and we may refer, or be in a position to refer,

patients to these individuals or entities. We attempt to structure these arrangements in a manner that meets the requirements

of a safe harbor. However, some of these arrangements may not meet all of the requirements of a safe harbor.

We believe that our contracts and arrangements with providers, practitioners and suppliers do not violate the Anti-Kickback

Statute or similar state laws. We cannot guarantee, however, that governmental agencies and bodies will interpret these

laws in the same manner as we do.

From time to time, various federal and state agencies, such as HHS and CMS, issue pronouncements, including fraud

alerts, that identify practices that may be subject to heightened scrutiny. For example, the OIG’s FY 2009 Work Plan

describes, among other things, the government’s intention to examine Medicare Part B payments for therapy services,

accuracy of claims coding for Medicare home health resources groups, examining trends in utilization patterns and

Medicare reimbursement for services ordered by referring physicians, the incidence of Medicare home health services

outlier payments for insulin injections, and analysis of Home Health Agency claims under CMS’ Comprehensive Error

Rate Testing Program to determine whether payments for services and items were adequately documented, medically

necessary and coded correctly.

In June 1995, the OIG issued a special fraud alert that focused on the home nursing industry and identified some of

the illegal practices the OIG has uncovered. In March 1998, the OIG issued a special fraud alert titled, Fraud and Abuse in

Nursing Home Arrangements with Hospices. This special fraud alert focused on payments received by nursing homes

from hospices. We believe, but cannot assure you, that our operations comply with the principles expressed by the OIG in

these special fraud alerts.

We endeavor to conduct our operations in compliance with federal and state health care fraud and abuse laws, including

the Anti-Kickback Statute and similar state laws. However, our practices may be challenged in the future and the fraud and

abuse laws may be interpreted in a way that finds us in violation of these laws. If we are found to be in violation of the

Anti-Kickback Statute, we could be subject to civil and criminal penalties and we could be excluded from participating in

federal health care programs such as Medicare and Medicaid. The occurrence of any of these events could significantly

harm our business and financial condition.

For m 1 0-K Pa r t I

LH C Group

Stark Law

Congress has passed significant prohibitions against physician referrals of patients for certain health care services.

These prohibitions are commonly known as the Stark Law. The Stark Law prohibits a physician from making referrals for

particular health care services (called designated health services) to entities with which the physician, or an immediate

family member of the physician, has a financial relationship.

The term “financial relationship” is defined very broadly to include most types of ownership or compensation relationships.

The Stark Law also prohibits the entity receiving the referral from seeking payment under the Medicare and Medicaid

programs for services rendered pursuant to a prohibited referral. If an entity is paid for services rendered pursuant to a

prohibited referral, it may incur civil penalties and could be excluded from participating in the Medicare or Medicaid

programs. If an arrangement is covered by the Stark Law, the requirements of a Stark Law exception must be met for the

physician to be able to make referrals to the entity for designated health services and for the entity to be able to bill for

these services.

“Designated health services” under the Stark Law is defined to include clinical laboratory services; physical therapy

services; occupational therapy services; radiology services, including magnetic resonance imaging, computerized axial

tomography scans and ultrasound services; radiation therapy services and supplies; durable medical equipment

and supplies; parenteral and enteral nutrients, equipment and supplies; prosthetics, orthotics and prosthetic devices and

supplies; home health services; outpatient prescription drugs; and inpatient and outpatient hospital services. The Stark

Law defines a financial relationship to include: (1) a physician’s ownership or investment interest in an entity and

(2) a compensation relationship between a physician and an entity. Under the Stark Law, financial relationships include

both direct and indirect relationships.

Physicians refer patients to us for several Stark Law designated health services, including home health services, inpatient

and outpatient hospital services and physical therapy services. We have compensation arrangements with some of

these physicians or their professional practices in the form of medical director and consulting agreements. We also have

operations owned by joint ventures in which physicians have an investment interest. In addition, other physicians who

refer patients to our agencies and facilities may own our stock. As a result of these relationships, we could be deemed to

have a financial relationship with physicians who refer patients to our facilities and agencies for designated health

services. If so, the Stark Law would prohibit the physicians from making those referrals and would prohibit us from billing

for the services unless a Stark Law exception applies.

The Stark Law contains exceptions for certain physician ownership or investment interests in and certain physician

compensation arrangements with entities. If a compensation arrangement or investment relationship between a physician,

or a physician’s immediate family member, and an entity satisfies all requirements for a Stark Law exception, the

Stark Law will not prohibit the physician from referring patients to the entity for designated health services. The exceptions

for compensation arrangements cover employment relationships, personal services contracts and space and

equipment leases, among others. The exceptions for a physician investment relationship include ownership in an entire

hospital and ownership in rural providers. We believe our compensation arrangements with referring physicians and

our physician investment relationships meet the requirements for an exception under the Stark Law and that our operations

comply with the Stark Law.

The Stark Law also includes an exception for a physician’s ownership or investment interest in certain entities through the

ownership of stock. If a physician owns stock in an entity and the stock is listed on a national exchange or is quoted

on NASDAQ and the ownership meets certain other requirements, the Stark Law will not apply to prohibit the physician

from referring to the entity for designated health services. The requirements for this Stark Law exception include a

requirement that the entity issuing the stock have at least $75.0 million in stockholders’ equity at the end of its most recent

fiscal year or on average during the previous three fiscal years. As of December 31, 2011, 2010 and 2009, we have

exceeded $75.0 million in stockholders’ equity.

Fo r m 1 0-K Par t I

A Strong Foundation

If an entity violates the Stark Law, it could be subject to civil penalties of up to $15,000 per prohibited claim and up to

$100,000 for knowingly entering into certain prohibited referral schemes. The entity also may be excluded from

participating in federal health care programs (including Medicare and Medicaid). There are no criminal penalties for

violations of Stark Law. If the Stark Law was found to apply to our relationships with referring physicians and those

relationships did not meet the requirement of an exception under the Stark Law, we would be required to restructure these

relationships or refuse to accept referrals for designated health services from these physicians. If we were found to

have submitted claims to Medicare or Medicaid for services provided pursuant to a referral prohibited by the Stark Law,

we would be required to repay any amounts we received from Medicare for those services and could be subject to civil

monetary penalties. Further, we could be excluded from participating in Medicare and Medicaid. If we were required to repay

any amounts to Medicare, subjected to fines, or excluded from the Medicare and Medicaid Programs, our business and

financial condition would be harmed significantly.

Many states have physician relationship and referral statutes that are similar to the Stark Law. Some of these laws

generally apply regardless of payor. We believe that our operations are structured to comply with applicable state laws

with respect to physician relationships and referrals. However, any finding that we are not in compliance with these

state laws could require us to change our operations or could subject us to penalties. This, in turn, could have a negative

impact on our operations.

False and Improper Claims

The submission of claims to a federal or state health care program for items and services that are “not provided as

claimed” may lead to the imposition of civil monetary penalties, criminal fines and imprisonment and/or exclusion from

participation in state and federally funded health care programs, including the Medicare and Medicaid programs.

These false claims statutes include the Federal False Claims Act. Under the Federal False Claims Act, actions against a

provider can be initiated by the federal government or by a private party on behalf of the federal government. These

private parties are often referred to as qui tam relators, and relators are entitled to share in any amounts recovered by the

government. Both direct enforcement activity by the government and qui tam actions have increased significantly in

recent years. This development has increased the risk that a health care company like us will have to defend a false claims

action, pay fines or be excluded from the Medicare and Medicaid programs as a result of an investigation arising out

of false claims laws. Many states have enacted similar laws providing for the imposition of civil and criminal penalties for

the filing of fraudulent claims. Because of the complexity of the government regulations applicable to our industry, we

cannot assure that we will not be the subject of an action under the Federal False Claims Act or similar state law.

Anti-fraud Provisions of the HIPAA

In an effort to combat health care fraud, Congress included several anti-fraud measures in HIPAA. Among other things,

HIPAA broadened the scope of certain fraud and abuse laws, extended criminal penalties for Medicare and Medicaid

fraud to other federal health care programs and expanded the authority of the OIG to exclude persons and entities from

participating in the Medicare and Medicaid programs. HIPAA also extended the Medicare and Medicaid civil

monetary penalty provisions to other federal health care programs, increased the amounts of civil monetary penalties and

established a criminal health care fraud statute.

Federal health care offenses under HIPAA include health care fraud and making false statements relating to health care

matters. Under HIPAA, among other things, any person or entity that knowingly and willfully defrauds or attempts to

defraud a health care benefit program is subject to a fine, imprisonment or both. Also under HIPAA, any person or entity

that knowingly and willfully falsifies or conceals or covers up a material fact or makes any materially false or fraudulent

statements in connection with the delivery of or payment of health care services by a health care benefit plan is subject to

a fine, imprisonment or both. HIPAA applies not only to governmental plans but also to private payors.

For m 1 0-K Pa r t I

LH C Group

Administrative Simplification Provisions of HIPAA

HHS’s final regulations governing electronic transactions involving health information are part of the administrative

simplification provisions of HIPAA, commonly referred to as the Transaction Standards rule. The rule establishes standards

for eight of the most common health care transactions by reference to technical standards promulgated by recognized

standards publishing organizations. Under the standards, any party transmitting or receiving health transactions electronically

must send and receive data in a single format, rather than the large number of different data formats currently used.

This rule applies to us in connection with submitting and processing health claims. The Transaction Standards rule also

applies to many of our payors and to our relationships with those payors. Because many of our payors might not have

been able to accept transactions in the format required by the Transaction Standards rule by the original compliance date,

we filed a timely compliance extension plan with HHS. We believe that our operations materially comply with the

Transaction Standards rule.

HHS also has final regulations implementing HIPAA that set forth standards for the privacy of individually-identifiable

health information, referred to as protected health information. These regulations cover health care providers, health care

clearinghouses and health plans. The privacy regulations require companies covered by the regulations to use and

disclose protected health information only as allowed by the privacy regulations. Specifically, the privacy regulations

require companies, including us, to do the following, among other things:

• obtain patient authorization prior to certain uses or disclosures of protected health information;

• provide notice of privacy practices to patients and obtain an acknowledgement that the patient has received the notice;

• respond to requests from patients for access to or to obtain a copy of their protected health information;

• respond to patient requests for amendments of their protected health information;

• provide an accounting to patients of certain disclosure of their protected health information;

• enter into agreements with the companies’ business associates through which the business associates agree to use

and disclose protected health information only as permitted by the agreement and the requirements of the privacy

regulations;

• train the companies’ workforce in privacy compliance;

• designate a privacy officer;

• use and disclose only the minimum necessary information to accomplish a particular purpose; and

• establish policies and procedures with respect to uses and disclosures of protected health information.

These regulatory requirements impose significant administrative and financial obligations on companies that use or

disclose individually identifiable health information relating to the health of a patient. We have implemented policies and

procedures to maintain patient privacy and comply with HIPAA’s privacy regulations. However, the privacy regulations

are extensive, and we may need to change some of our practices to comply with them as they are interpreted.

In February 2003, HHS published the final security regulations implementing HIPAA that govern the security of health

information. The compliance date for the security regulations was April 21, 2005. The security regulations require the

implementation of policies and procedures that establish administrative, physical and technical safeguards for electronic

protected health information. Companies covered by the security regulations are required to ensure the confidentiality,

integrity and availability of electronic protected health information. Specifically, among others things, companies subject to

the security regulations, including us, are required to:

• conduct a thorough assessment of the potential risks and vulnerabilities to confidentiality, integrity and availability of

electronic protected health information and to reduce the risks and vulnerabilities to a reasonable and appropriate level

as required by the security regulations;

• designate a security officer;

• establish policies relating to access by the companies’ workforce to electronic protected health information;

• enter into agreements with the companies’ business associates whereby business associates agree to establish

administrative, physical and technical safeguards for electronic protected health information received from or on

behalf of the companies;

• create a disaster and contingency plan to ensure the availability of electronic protected health information;

• train the companies’ workforce in security compliance;

Fo r m 1 0-K Par t I

A Strong Foundation

• establish physical controls for electronic devices and media containing or transmitting electronic protected

health information;

• establish policies and procedures regarding the use of workstations with access to electronic protected health

information; and

• establish technical controls for the information systems maintaining or transmitting electronic protected health

information.

In addition, in 2009, the American Reinvestment and Recovery Act of 2009 expanded some of our obligations under the

existing HIPAA privacy and security provisions, including:

• requirements to notify individuals and governmental agencies when security breaches occur with respect to

unsecured information;

• limitations on our ability to use or disclose protected health information for marketing or soliciting charitable contributions;

• expansion of certain privacy and security requirements to our vendors and business associates; and

• requirements for providing an accounting of disclosures of electronic health records.

These regulatory requirements impose significant administrative and financial obligations on companies like us that use or

disclose electronic health information. We have implemented policies and procedures to comply with the security regulations.

Civil Monetary Penalties

The Secretary of HHS may impose civil monetary penalties on any person or entity that presents, or causes to be presented,

certain ineligible claims for medical items or services. The amount of penalties varies depending on the offense, from

$2,000 to $50,000 per violation, plus treble damages for the amount at issue and may include exclusion from federal health

care programs (including Medicare and Medicaid).

HHS also can impose penalties on a person or entity who offers inducements to beneficiaries for program services,

who violates rules regarding the assignment of payments, or who knowingly gives false or misleading information that could

reasonably influence the discharge of patients from a hospital. Persons who have been excluded from a federal

health care program and who retain ownership in a participating entity and persons who contract with excluded persons

may be penalized.

HHS also can impose penalties for false or fraudulent claims and those that include services not provided as claimed.

In addition, HHS may impose penalties on claims:

• for physician services that the person or entity knew or should have known were rendered by a person who was

unlicensed, or by a person who misrepresented either (1) his or her qualifications in obtaining his or her license or

(2) his or her certification in a medical specialty;

• for services furnished by a person who was, at the time the claim was made, excluded from the program to which the

claim was made; or

• that show a pattern of medically unnecessary items or services.

Penalties also are applicable in certain other cases, including violations of the federal Anti-Kickback Statute, payments to

limit certain patient services and improper execution of statements of medical necessity.

Environmental Health and Safety Laws

We are subject to federal, state and local regulations governing the storage, use and disposal of materials and waste

products. Although we believe that our safety procedures for storing, handling and disposing of these hazardous materials

comply with the standards prescribed by law and regulation, we cannot completely eliminate the risk of accidental

contamination or injury from those hazardous materials. In the event of an accident, we could be held liable for any damages

that result and any liability could exceed the limits or fall outside the coverage of our insurance. We may not be able to

maintain insurance on acceptable terms, or at all. We could incur significant costs and the diversion of our management’s

attention to comply with current or future environmental laws and regulations. We do not have any violations related to

compliance with environmental, health and safety laws through 2011.

For m 1 0-K Pa r t I

LH C Group

Licensing

Our agencies and facilities are subject to state and local licensing regulations ranging from the adequacy of medical care

to compliance with building codes and environmental protection laws. To assure continued compliance with these

various regulations, governmental and other authorities periodically inspect our agencies and facilities. Additionally, health

care professionals at our agencies and facilities are required to be individually licensed or certified under applicable

state law. We take steps to ensure that our employees and agents possess all necessary licenses and certifications.

The institutional pharmacy operations within our facility-based services segment are also subject to regulation by the various

states in which we conduct the pharmacy business, as well as by the federal government. The pharmacies are regulated

under the Food, Drug and Cosmetic Act and the Prescription Drug Marketing Act, which are administered by the United

States Food and Drug Administration. Under the Comprehensive Drug Abuse Prevention and Control Act of 1970,

administered by the United States Drug Enforcement Administration, dispensers of controlled substances must register

with the Drug Enforcement Administration, file reports of inventories and transactions and provide adequate security

measures. Failure to comply with such requirements could result in civil or criminal penalties. We do not have any violations

related to the Comprehensive Drug Abuse Prevention and Control Act of 1970 through 2011.

Accreditation

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 December 31, 2011, the

Joint Commission had accredited 252 of our 290 agencies. Those not yet accredited are working towards achieving this

accreditation. As we acquire companies we apply for accreditation 12 to 18 months after acquisition.

Certificate of Need and Permit of Approval Laws

In addition to state licensing laws, some states require a provider to obtain a certificate of need or permit of approval prior

to establishing or expanding certain health services or facilities. States with certificate of need or permit of approval laws

place limits on both the construction and acquisition of health care facilities and operations and the expansion of existing

facilities and services. In these states, approvals are required for capital expenditures exceeding certain amounts that

involve certain facilities or services, including home nursing agencies. The certificate of need or permit of approval issued

by the state determines the service areas for the applicable agency or program. The following states issue certificates

of need or permits of approval: Alabama, Alaska, Arkansas, Georgia, Hawaii, Kentucky, Maryland, Mississippi, Montana,

New Jersey, New York, North Carolina, South Carolina, Tennessee, Vermont, Washington, West Virginia and the

District of Columbia. In addition, the state of Louisiana has imposed a moratorium on the issuance of new licenses for

home nursing agencies that we expect to remain in effect for 2012.

State certificate of need and permit of approval laws generally provide that, prior to the addition of new capacity, the

construction of new facilities or the introduction of new services, a designated state health planning agency must

determine that a need exists for those beds, facilities or services. The process is intended to promote comprehensive

health care planning, assist in providing high-quality health care at the lowest possible cost and avoid unnecessary

duplication by ensuring that only needed health care facilities and operations will be built and opened.

Employees

As of December 31, 2011 we had 7,571 employees, of which 5,130 were full-time. None of our employees are subject

to a collective bargaining agreement. We consider our relationships with our employees and independent contractors

to be good.

Fo r m 1 0-K Par t I

A Strong Foundation

Insurance

We are subject to claims and legal actions in the ordinary course of our business. To cover claims that may arise, we

maintain professional malpractice liability insurance, general liability insurance, automobile liability insurance and workers’

compensation/employer’s liability insurance in amounts that we believe are appropriate and sufficient for our operations.

We maintain professional malpractice and general liability insurance that provide primary coverage on a claims-made basis

of $1.0 million per incident and $3.0 million in annual aggregate amounts. We maintain workers’ compensation insurance

that meets state statutory requirements with a primary employer liability limit of $1.0 million for Louisiana, Mississippi,

Alabama, Arkansas, Texas, Tennessee, Georgia, Florida, Kentucky, Missouri, Oklahoma, Virginia, West Virginia, Oregon,

North Carolina, Maryland and Idaho. There are no limits to employer liability in Ohio and Washington. The Company

is self-insured for the first $350,000 in workers compensation liability. We maintain automobile liability insurance for all

owned, hired and non-owned autos with a primary limit of $1.0 million. In addition, we currently maintain multiple

layers of umbrella coverage in the aggregate amount of $25.0 million that provides excess coverage for professional

malpractice, general liability, automobile liability and employer’s liability. We maintain directors and officers liability

insurance in the aggregate amount of $25.0 million, with an additional $5.0 million of Side A coverage. The cost and

availability of insurance coverage has varied widely in recent years. While we believe that our insurance policies

and coverage are adequate for a business enterprise of our type, we cannot guarantee that our insurance coverage is

sufficient to cover all future claims or that it will continue to be available in adequate amounts or at a reasonable cost.

Available Information

Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements

and amendments to those reports are available free of charge on our internet website at www.lhcgroup.com as

soon as reasonably practicable after such reports are electronically filed with or furnished to the Securities and Exchange

Commission (“SEC”). The SEC also maintains an internet site at www.sec.gov that contains such reports, proxy and

information statements and other information regarding issuers that file electronically with the SEC. These reports may also

be obtained at the SEC’s Public Reference Room at 100 F Street NE, Washington, D.C. 20549. Information on the

operation of the Public Reference Room is available by calling the SEC at (800) SEC-0330.

Item 1A. Risk Factors.

The risks and uncertainties described below and elsewhere in this Annual Report on Form 10-K could cause our actual results

to differ materially from past or expected results and are not the only ones we face. Other risks and uncertainties that we have

not predicted or assessed may also adversely affect us.

If any of the following risks occur, our earnings, financial condition or business could be materially harmed and the trading price

of our common stock could decline, resulting in the loss of all or part of stockholders’ investments.

Risk Factors Related to Reimbursement and Government Regulation

We cannot predict the effect that health care reform and other changes in government programs may have on our business,

financial condition or results of operations.

The Patient Protection and Affordable Care Act and the Health Care Education Reconciliation Act of 2010 (collectively, the

“Acts”) were signed into law by President Obama on March 23, 2010, and March 30, 2010, respectively. The Acts

dramatically alter the United States health care system and are intended to decrease the number of uninsured Americans

and reduce overall health care costs. The Acts attempt to achieve these goals by, among other things, requiring most

Americans to obtain health insurance, expanding Medicare and Medicaid eligibility, reducing Medicare and Medicaid

payments, and tying reimbursement to the satisfaction of certain quality criteria. The Acts also contain a number of

measures that are intended to reduce fraud and abuse in the Medicare and Medicaid programs. Because a majority of the

measures contained in the Acts have not yet taken effect, it is difficult to predict the impact the Acts will have on our

operations. However, depending on how they are ultimately interpreted and implemented, the Acts could have an adverse

effect on our business and its financial condition and results of operations.

For m 1 0-K Pa r t I

LH C Group

We derive more than 75% of our consolidated net service revenue from Medicare. If there are changes in Medicare rates or

methods governing Medicare payments for our services, or if we are unable to control our costs, our results of operations and

cash flows could decline materially.

For the years ended December 31, 2011, 2010 and 2009, we received 79.7%, 80.5% and 82.2%, respectively, of our

net service revenue from Medicare. Reductions in Medicare rates or changes in the way Medicare pays for services could

cause our net service revenue and net income to decline, perhaps materially. Reductions in Medicare reimbursement

could be caused by many factors, including:

• administrative or legislative changes to the base rates under the applicable prospective payment systems;

• the reduction or elimination of annual rate increases;

• the imposition or increase by Medicare of mechanisms, such as co-payments, shifting more responsibility for a portion

of payment to beneficiaries;

• adjustments to the relative components of the wage index used in determining reimbursement rates;

• changes to case mix or therapy thresholds;

• the reclassification of home health resource groups or long-term care diagnosis-related groups; or

• further limitations on referrals to long-term acute care hospitals from host hospitals.

We receive fixed payments from Medicare for our services based on the level of care provided to our patients.

Consequently, our profitability largely depends upon our ability to manage the cost of providing these services. Medicare

currently provides for an annual adjustment of the various payment rates, such as the base episode rate for our home

nursing services, based upon the increase or decrease of the medical care expenditure category of the Consumer Price

Index, which may be less than actual inflation. This adjustment could be eliminated or reduced in any given year.

In 2011 we experienced an approximate 5.22% cut in home health reimbursement for our Medicare patients and expect

an additional 2.4% cut in 2012. Further, Medicare routinely reclassifies home health resource groups and long-term

care diagnosis-related groups. As a result of those reclassifications, we could receive lower reimbursement rates

depending on the case mix of the patients we service. If our cost of providing services increases by more than the annual

Medicare price adjustment, or if these reclassifications result in lower reimbursement rates, our results of operations, net

income and cash flows could be adversely impacted.

We are subject to extensive government regulation. Any changes in the laws and regulations governing our business, or the

interpretation and enforcement of those laws or regulations, could require us to modify our operations and could negatively

impact our operating results and cash flows.

As a provider of health care services, we are subject to extensive regulation on the federal, state and local levels, including

with regard to:

• licensure and certificates of need and permits of approval;

• coding and billing for services;

• conduct of operations, including financial relationships among health care providers, Medicare fraud and abuse and

physician self-referral;

• maintenance and protection of records, including HIPAA;

• environmental protection, health and safety;

• certification of additional agencies or facilities by the Medicare program; and

• payment for services.

The laws and regulations governing our operations, along with the terms of participation in various government

programs, regulate how we do business, the services we offer and our interactions with patients and other providers.

These laws and regulations, and their interpretations, are subject to frequent change. Changes in existing laws,

regulations, their interpretations or the enactment of new laws or regulations could increase our costs of doing business

and cause our net income to decline. If we fail to comply with these applicable laws and regulations, we could suffer

civil or criminal penalties, including the loss of our licenses to operate and our ability to participate in federal and state

reimbursement programs.

Fo r m 1 0-K Par t I

A Strong Foundation

We are also subject to various routine and non-routine governmental reviews, audits and investigations. These audits

include those conducted through the recovery audit contractor program, in which third party firms engaged by CMS

conduct extensive reviews of claims data and non-medical and other records to identify potential improper payments

under the Medicare Program. 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 with respect to referral

practices, cost reporting, billing practices, joint ventures and other financial relationships among health care providers.

Although we have invested substantial time and effort in implementing policies and procedures to comply with laws and

regulations, we could be subject to liabilities arising from violations. A violation of the laws governing our operations, or

changes in the interpretation of those laws, could result in the imposition of fines, civil or criminal penalties, the termination

of our rights to participate in federal and state-sponsored programs or the suspension or revocation of our licenses to

operate. If we become subject to material fines or if other sanctions or other corrective actions are imposed upon us, we

may suffer a substantial reduction in net income.

Current economic conditions and continued decline in spending by the Federal and State governments could adversely affect

our results of operations and cash flows.

Worldwide economic conditions have significantly declined and will likely remain depressed for the foreseeable future.

While our services are not typically sensitive to general declines in the federal and state economies, the erosion in the tax

base caused by the general economic downturn has caused, and will likely continue to cause, restrictions on the federal

and state governments’ ability to obtain financing and a decline in spending. As a result, we may face reimbursement rate

cuts or reimbursement delays from Medicare and Medicaid and other governmental payors, which could adversely

impact our results of operations and cash flows.

If any of our agencies or facilities fail to comply with the conditions of participation in the Medicare program, that agency or

facility could be terminated from Medicare, which could adversely affect our consolidated net service revenue and net income.

Our agencies and facilities must comply with the extensive conditions of participation in the Medicare program.

These conditions of participation vary depending on the type of agency or facility, but, in general, require our agencies

and facilities to meet specified standards relating to personnel, patient rights, patient care, patient records, administrative

reporting and legal compliance. If an agency or facility fails to meet any of the Medicare conditions of participation,

that agency or facility may receive a notice of deficiency from the applicable state surveyor. If that agency or facility then

fails to institute and comply with a plan of correction to correct the deficiency within the time period provided by the

state surveyor, that agency or facility could be terminated from the Medicare program. We respond in the ordinary course

to deficiency notices issued by state surveyors and none of our facilities or agencies have ever been terminated from the

Medicare program for failure to comply with the conditions of participation. Any termination of one or more of our agencies

or facilities from the Medicare program for failure to satisfy the Medicare conditions of participation could adversely

affect our net service revenue and net income.

The inability of our long-term acute care hospitals to maintain their certification as long-term acute care hospitals could have

an adverse affect on our results of operations and cash flows.

If our LTACHs fail to meet or maintain the standards for Medicare certification as LTACHs, such as for average minimum

length of patient stay, they will receive reimbursement under the prospective payment system applicable to general

acute care hospitals rather than the system applicable to long-term acute care hospitals. Payments at rates applicable

to general acute care hospitals would likely result in our long-term acute care hospitals receiving less Medicare

reimbursement than they currently receive for their patient services. Moreover, all but one of our LTACHs are subject to

additional Medicare criteria because they operate as separate hospitals located in space leased from and located

in a general acute care hospital, known as a host hospital. This is known as a “hospital within a hospital” model. These

additional criteria include requirements concerning financial and operational separateness from the host hospital.

If any of our LTACHs were subject to payment as general acute care hospitals or failed to comply with the separateness

requirements, our net service revenue and net income would decline.

For m 1 0-K Pa r t I

LH C Group

CMS has adopted regulations that could materially and adversely affect the results of operations and cash flows of our

long-term acute care hospitals.

In a final rule released on May 1, 2007, CMS expanded the Medicare admissions threshold to apply not only to long-term

acute care HwHs and satellites but also to freestanding LTACHs and grandfathered LTACHs. The policy also applies to

HwHs and satellites that admit Medicare patients from non-co-located hospitals. While this policy change was supposed

to take effect for cost reporting periods beginning on or after July 1, 2007, the MMSEA delayed the implementation of the

policy initially for three years and then for an additional two years with respect to freestanding LTACHs and grandfathered

LTACHs. MMSEA delays the implementation until cost report periods beginning on or after July 1, 2012. Further, the

MMSEA set the percentage threshold at 50% for three years for HwHs and satellites located in urban areas that would

otherwise be subject to a transition period and it established a 75% ceiling for HwHs and satellite facilities located in

rural areas and those that receive referrals from MSA dominant hospitals or urban single hospitals.

We currently have a total of nine LTACHs. Eight of our LTACHs are classified as HwHs and one as freestanding. Of the

eight HwH facilities, five are located in rural or non-MSAs and are, therefore, subject to a final admission percentage of

50% at the end of the phase-in period. Three of our HwH facilities are located in MSA or urban areas and will be subject

to a final admission percentage of 25% at the end of the phase-in period. Of the eight locations classified as HwHs, one

facility is a satellite location of a parent hospital located in an MSA and one is a satellite location of a parent hospital

located in a non-MSA. Based on our discussions with CMS, we believe each of these satellite locations will be viewed as

being located in a non-MSA regardless of the location of its parent hospital and will be treated independently from its

parent for purposes of calculating its compliance with the admissions limitations. If the “25 percent rule” is extended, as

planned, to freestanding LTACHs after the implementation delay established in the MMSEA, our current freestanding

facility would not likely be affected because we currently do not receive more than 25% of our Medicare admissions from

any single referring hospital.

For the 12 months ended December 31, 2011, on an individual basis, all of our LTACHs that are classified as HwHs

admitted between 59% and 93% of their patients from their host hospitals. These hospitals came under the proper

thresholds as of their respective cost report year end date in 2011. Our new LTACHs acquired in 2010 and 2009 are

grandfathered and, consequently, have no limitations under MMSEA with respect to the number of patients that can

be admitted from the host hospital. Our remaining LTACH is not an HwH; therefore, it is not subject to these limits on host

hospital referrals.

Our ability to quantify the potential reduction in our reimbursement rates resulting from the implementation of these new

regulations is contingent upon a variety of factors, such as our ability to reduce the percentage of admissions that

are derived from our host hospitals and, if necessary, our ability to relocate our existing long-term acute care hospitals to

freestanding locations. We may not be able to successfully restructure or relocate these operations without incurring

significant expense or in a manner that avoids reimbursement reductions. If these new regulations result in lower

reimbursement rates, our net service revenue and net income could decline. As a result of these new rules, we do not

intend to expand the number of HwH long-term acute care hospitals that we operate.

We are reimbursed by Medicare for services we provide in our long-term acute care hospitals based on the long-term care

diagnosis-related group assigned to each patient. CMS establishes these long-term care diagnosis-related groups by

grouping diseases by diagnosis to reflect the amount of resources needed to treat a given disease. The May 2007 CMS

final rules reclassifies certain long-term care diagnosis-related groups, which could result in a decrease in reimbursement

rates. Further, the rule kept in place the financial penalties associated with the failure to limit the total number of

Medicare patients discharged from a host hospital and subsequently readmitted to a long-term acute care hospital located

within the host hospital to no greater than 5.0%. If we fail to comply with these readmission rates or if our reimbursement

rates decline due to the reclassification of certain long-term care diagnosis-related groups, our net service revenue and

net income could decline.

Fo r m 1 0-K Par t I

A Strong Foundation

If the structures or operations of our joint ventures are found to violate the law, it could have a material adverse impact on our

financial condition and consolidated results of operations.

Several of our joint ventures are with hospitals and physicians, which are governed by the Anti-Kickback Statute and

similar state laws. These anti-kickback statutes prohibit the payment or receipt of anything of value in return for referrals

of patients or services covered by governmental health care programs, such as Medicare. The OIG has published

numerous safe harbors that exempt qualifying arrangements from enforcement under the Anti-Kickback Statute. We have

sought to satisfy as many safe harbor requirements as possible in structuring our joint ventures. For example, each

of our equity joint ventures with hospitals and physicians is structured in accordance with the following principles:

• the investment interest offered is not based upon actual or expected referrals by the hospital or physician;

• our joint venture partners are not required to make or influence referrals to the joint venture;

• at the time the joint venture is formed, each hospital or physician joint venture partner is required to make an actual

capital contribution to the joint venture equal to the fair market value of his or her investment interest and is at risk to lose

its investment;

• neither we nor the joint venture entity lends funds to or guarantees a loan to acquire interests in the joint venture for a

hospital or physician; and

• distributions to our joint venture partners are based solely on their equity interests and are not affected by referrals from

the hospital or physician.

Despite our efforts to meet the safe harbor requirements where possible, our joint ventures may not satisfy all elements of

the safe harbor requirements.

If any of our joint ventures were found to be in violation of federal or state anti-kickback or physician referral laws, we

could be required to restructure them or refuse to accept referrals from the physicians or hospitals with which we have

entered into a joint venture. We also could be required to repay to Medicare amounts we have received pursuant to

any prohibited referrals, and we could suffer civil or criminal penalties, including the loss of our licenses to operate and our

ability to participate in federal and state health care programs. If any of our joint ventures were subject to any of these

penalties, our business could be materially adversely affected. If the structure of any of our joint ventures were found to

violate federal or state anti-kickback statutes or physician referral laws, we may be unable to implement our growth

strategy, which could have an adverse impact on our future net income and consolidated results of operations.

The application of state certificate of need and permit of approval regulations and compliance with federal and state licensing

requirements could substantially limit our ability to operate and grow our business.

Our ability to expand operations in a state will depend on our ability to obtain a state license to operate. States may have a

limit on the number of licenses they issue. For example, Louisiana currently has a moratorium on the issuance of new

home nursing agency licenses. We cannot predict whether this moratorium will be extended beyond this date or whether

any other states in which we currently operate, or may wish to operate in the future, may adopt a similar moratorium.

We currently operate in 10 states that require health care providers to obtain prior approval, known as a certificate of need

or a permit of approval, for the purchase, construction or expansion of health care facilities, to make certain capital

expenditures or to make changes in services or bed capacity. The states that currently issue certificates of need or permits

of approval are: Alabama, Alaska, Arkansas, Georgia, Hawaii, Kentucky, Maryland, Mississippi, Montana, New Jersey,

New York, North Carolina, South Carolina, Tennessee, Vermont, Washington, West Virginia and the District of Columbia. In

granting approval, these states consider the need in the service area for additional or expanded health care facilities or

services. The failure to obtain any requested certificate of need, permit of approval or other license could impair our ability

to operate or expand our business.

For m 1 0-K Pa r t I

LH C Group

Risk Factors Related to Capital and Liquidity

The condition of the financial markets, including volatility and weakness in the equity, capital and credit markets could limit the

availability and terms of debt and equity financing courses to fund the capital and liquidity requirements of our business.

Financial markets experienced significant disruptions over the past few years. These disruptions have impacted liquidity in

the debt markets, making financing terms for borrowers less attractive and, in certain cases, significantly reducing the

availability of certain types of debt financing. Despite the instability over the past few years within the financial markets

nationally and globally, we have not experienced any individual lender limitations to extend credit under our revolving

credit facility. However, the obligations of each of the lending institutions in our revolving credit facility are separate and the

availability of future borrowings under our revolving credit facility could be impacted by further volatility and disruptions

in the financial credit markets or other events. Our inability to access our revolving credit facility or refinance the revolving

credit facility would have a material adverse effect on our business, financial positions, results of operations and liquidity.

Based on our current plan of operations, including acquisitions, we believe our existing cash balance, when combined

with expected cash flows from operations and amounts available under our revolving line of credit, will be sufficient to

fund our growth strategy and to meet our anticipated operating expenses, capital expenditures and debt service obligations

for at least the next 12 months. If our future net service revenue or cash flow from operations is less than we currently

anticipate, we may not have sufficient funds to implement our growth strategy. Further, we cannot readily predict the timing,

size and success of our acquisition and internal development efforts and the associated capital commitments.

If we do not have sufficient cash resources, our growth could be limited unless we are able to obtain additional equity

or debt financing.

The agreement governing our credit facility contains, and future debt agreements may contain, various covenants that limit our

discretion in the operation of our business.

The agreement and instruments governing our outstanding credit facility, and the agreements and instruments governing

future debt agreements may contain various restrictive covenants that, among other things, require us to comply with or

maintain certain financial tests and ratios that may restrict our ability to:

• incur more debt;

• redeem or repurchase stock, pay dividends or make other distributions;

• make certain investments;

• create liens;

• enter into transactions with affiliates;

• make unapproved acquisitions;

• merge or consolidate;

• transfer or sell assets; and

• make fundamental changes in our corporate existence and principal business.

In addition, events beyond our control could affect our ability to comply with and maintain such financial tests and ratios.

Any failure by us to comply with or maintain all applicable financial tests and ratios and to comply with all applicable

covenants could result in an event of default with respect to our credit facility or any other future debt agreements. An

event of default could lead to the acceleration of the maturity of any outstanding loans and the termination of the

commitments to make further extensions of credit. Even if we are able to comply with all applicable covenants, the

restrictions on our ability to operate our business at our sole discretion could harm our business by, among other things,

limiting our ability to take advantage of financing, mergers, acquisitions and other corporate opportunities.

Fo r m 1 0-K Par t I

A Strong Foundation

Our net service revenue is concentrated in a small number of states, which makes us sensitive to regulatory and economic

changes in those states.

The Company’s facilities in Louisiana, Alabama, Mississippi, Tennessee, and Kentucky accounted for approximately

67.5% of consolidated net service revenue in the current year. Accordingly, any changes in the current demographic,

economic, competitive, or regulatory conditions in these states could have an adverse effect on our business, financial

condition, results of operations and cash flows. Medicaid changes in these states could also have a material adverse

effect on our results of operations or cash flows.

Hurricanes or other adverse weather events could negatively affect the local economies in which we operate or disrupt our

operations, which could have an adverse effect on our business or results of operations.

Our operations along coastal areas in the southern United States are particularly susceptible to hurricanes. Such weather

events can disrupt our operations, result in damage to our properties and negatively affect the local economies in which

we operate. Future hurricanes could affect our operations or the economies in those market areas and result in damage to

certain of our facilities, the equipment located at such facilities or equipment rented to patients in those areas. Our

business or results of operations may be adversely affected by these and other negative effects of future hurricanes. Although

we maintain insurance coverage, we cannot guarantee that our insurance coverage will be adequate to cover any

losses or that we will be able to maintain insurance at a reasonable cost in the future. If our losses from business

interruption or property damage exceed the amount for which we are insured, our results of operations and financial

condition would be adversely affected.

Delays in reimbursement may cause liquidity problems.

Our business is characterized by delays in reimbursement from the time we request payment for our services to the time

we receive reimbursement or payment. A portion of our estimated reimbursement (60.0% for an initial episode of care and

50.0% for subsequent episodes of care) for each Medicare episode is billed at the commencement of the episode and,

we typically receive payment within approximately 12 days. The remaining reimbursement is billed upon completion of the

episode and is typically paid within 14 to 17 days from the billing date. If we have information system problems or issues

arise with Medicare or other payors, we may encounter further delays in our payment cycle. For example, in the past we

have experienced delays resulting from problems arising out of the implementation by Medicare of new or modified

reimbursement methodologies or as a result of natural disasters, such as hurricanes. We have also experienced delays in

reimbursement resulting from our implementation of new information systems related to our accounts receivable and

billing functions. Any future timing delay may cause working capital shortages. As a result, working capital management,

including prompt and diligent billing and collection, is an important factor in our consolidated results of operations and

liquidity. Our working capital management procedures may not successfully negate this risk. Significant delays in payment

or reimbursement could have an adverse impact on our liquidity and financial condition.

Risk Factors Related to Operations and our Growth Strategy

We could be required to record a material non-cash charge to income if our recorded goodwill or intangible assets are impaired.

Goodwill and other intangibles represent a significant portion of the assets on our balance sheet and are assessed for

impairment annually for each of our reporting units. The assessment includes comparing the fair value of each reporting

unit to the carrying value of the assets assigned to the reporting unit. If the carrying value of the reporting unit were

to exceed our estimate of fair value of the reporting unit, we would be required to estimate the fair value of the individual

assets and liabilities within the reporting unit to ascertain the fair value of goodwill. If we determine that the fair value is

less than our book value, we could be required to record a non-cash impairment charge to our consolidated statements of

income, which could have a material adverse effect on our earnings.

For m 1 0-K Pa r t I

LH C Group

Our allowance for contractual adjustments and doubtful accounts may not be sufficient to cover uncollectible amounts.

On an ongoing basis, we estimate the amount of Medicare, Medicaid and private insurance receivables that we will not be

able to collect. This allows us to calculate the expected loss on our receivables for the period we are reporting. Our

allowance for contractual adjustments and doubtful accounts may underestimate actual unpaid receivables for various

reasons, including:

• adverse changes in our estimates as a result of changes in payor mix and related collection rates;

• inability to collect funds due to missed filing deadlines or inability to prove that timely filings were made;

• adverse changes in the economy generally exceeding our expectations; or

• unanticipated changes in reimbursement from Medicare, Medicaid and private insurance companies.

If our allowance for contractual adjustments and doubtful accounts is insufficient to cover losses on our receivables, our

business, financial position and results of operations could be materially adversely affected.

Changes in the case mix of patients, as well as payor mix and payment methodologies, may have a material adverse effect on

our results of operations and cash flows.

The sources and amounts of our patient revenue are determined by a number of factors, including the mix of patients and

the rates of reimbursement among payors. Generally, we receive higher reimbursement for Medicare. Changes in the case

mix of the patients, payment methodologies or payor mix among private pay, Medicare and Medicaid may significantly

affect our results of operations and cash flows.

Shortages in qualified nurses and other health care professionals could increase our operating costs significantly or constrain

our ability to grow.

We rely on our ability to attract and retain qualified nurses and other health care professionals. The availability of qualified

nurses nationwide has declined in recent years and competition for these and other health care professionals has

increased, while salary and benefit costs have risen accordingly. Our ability to attract and retain nurses and other health

care professionals depends on several factors, including our ability to provide desirable assignments and competitive

benefits and salaries. We may not be able to attract and retain qualified nurses or other health care professionals in the

future. In addition, the cost of attracting and retaining these professionals and providing them with attractive benefit

packages may be higher than anticipated which could cause our net income to decline. Moreover, if we are unable to

attract and retain qualified professionals, the quality of services offered to our patients may decline or our ability to

grow may be constrained.

If we are required to either repurchase or sell a substantial portion of the equity interests in our joint ventures, our capital

resources and financial condition could be materially adversely impacted.

Upon the occurrence of fundamental changes to the laws and regulations applicable to our joint ventures, or if a

substantial number of our joint venture partners were to exercise the buy/sell provisions contained in many of our joint

venture agreements, we may be obligated to purchase or sell the equity interests held by us or our joint venture partners.

In some instances, the purchase price under these buy/sell provisions is based on a multiple of the historical or future

earnings before income taxes, 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 but will be subject to a fair

market valuation process. In the event the buy/sell provisions are exercised and we lack sufficient capital to purchase the

interest of our joint venture partners, we may be obligated to sell our equity interest in these joint ventures. If we are

forced to sell our equity interest, we will lose the benefit of those particular joint venture operations. If these buy/sell

provisions are exercised and we choose to purchase the interest of our joint venture partners, we may be obligated to

expend significant capital in order to complete such acquisitions. If either of these events occurs, our net service

revenue and net income could decline or we may not have sufficient capital necessary to implement our growth strategy.

Fo r m 1 0-K Par t I

A Strong Foundation

If we are unable to maintain relationships with existing referral sources or establish new referral sources, our growth and net

income could be adversely affected.

Our success depends significantly on referrals from physicians, hospitals and other health care providers in the

communities in which we deliver our services. Our referral sources are not obligated to refer business to us and may refer

business to other health care providers. We believe many of our referral sources refer business to us as a result of the

quality of patient care provided by our local employees in the communities in which our agencies and facilities are located.

If we are unable to retain these employees, our referral sources may refer business to other health care providers.

Our loss of, or failure to maintain, existing relationships or our failure to develop new relationships could affect adversely

our ability to expand our operations and operate profitably.

We face competition, including from competitors with greater resources, which may make it difficult for us to compete effectively

as a provider of post-acute health care services.

We compete with local and regional home nursing and hospice companies, hospitals and other businesses that provide

post-acute health care services, some of which are large established companies that have significantly greater resources

than we do. Our primary competition comes from local operators in each of our markets. We expect our competitors to

develop joint ventures with providers, referral sources and payors, which could result in increased competition. The

introduction by our competitors of new and enhanced service offerings, in combination with industry consolidation and the

development of competitive joint ventures, could cause a decline in net service revenue, loss of market acceptance of our

services or make our services less attractive. Future increases in competition from existing competitors or new entrants

may limit our ability to maintain or increase our market share. We may not be able to compete successfully against current

or future competitors and competitive pressures may have a material adverse impact on our business, financial condition

and results of operations.

Future acquisitions may be unsuccessful and could expose us to unforeseen liabilities. Further, our acquisition and internal

development activity may impose strains on our existing resources.

Our growth strategy involves the acquisition of home nursing agencies and facilities throughout the United States.

These acquisitions involve significant risks and uncertainties, including difficulties integrating acquired personnel and

other corporate cultures into our business, the potential loss of key employees or patients of acquired agencies and

the assumption of liabilities and exposure to unforeseen liabilities of acquired agencies. We may not be able to fully

integrate the operations of the acquired businesses with our current business structure in an efficient and cost-effective

manner. The failure to effectively integrate any of these businesses could have a material adverse effect on our operations.

We generally structure our acquisitions as asset purchase transactions in which we expressly state that we are not

assuming any pre-existing liabilities of the seller and obtain indemnification rights from the previous owners for acts or

omissions arising prior to the date of such acquisitions. However, the allocation of liability arising from such acts

or omissions between the parties could involve the expenditure of a significant amount of time, manpower and capital.

Further, the former owners of the agencies and facilities we acquire may not have the financial resources necessary

to satisfy our indemnification claims relating to pre-existing liabilities. If we were unsuccessful in a claim for indemnification

from a seller, the liability imposed could materially adversely affect our operations.

In addition, as we continue to expand our markets, our growth could strain our resources, including management,

information and accounting systems, regulatory compliance, logistics and other internal controls. Our resources may not

keep pace with our anticipated growth. If we do not manage our expected growth effectively, our future prospects

could be affected adversely.

We may face increased competition for attractive acquisition and joint venture candidates.

We intend to continue growing through the acquisition of additional home nursing agencies and the formation of joint

ventures with hospitals for the operation of home nursing agencies. We face competition for acquisition and joint venture

candidates, which may limit the number of acquisition and joint venture opportunities available to us or lead to the

For m 1 0-K Pa r t I

LH C Group

payment of higher prices for our acquisitions and joint ventures. We cannot guarantee that we will be able to identify suitable

acquisition or joint venture opportunities in the future or that any such opportunities, if identified, will be consummated on

favorable terms, if at all. Without successful acquisitions or joint ventures, our future growth rate could decline. In addition, we

cannot guarantee that any future acquisitions or joint ventures, if consummated, will result in further growth.

Federal regulation may impair our ability to consummate acquisitions or open new agencies.

Changes in Federal laws or regulations may materially adversely impact our ability to acquire agencies or open new

start-up agencies. For example, CMS recently adopted a regulation known as the “36 Month Rule” that is applicable to

home health agency acquisitions. The 36 Month Rule prohibits buyers of certain home health agencies — those that either

enrolled in Medicare or underwent a change in ownership fewer than 36 months prior to the acquisitions — from assuming

the Medicare billing privileges of the acquired agency. Instead, the acquired agencies must enroll as new providers with

Medicare. As a result, the 36 Month Rule may further increase competition for acquisition targets that are not subject to the

rule, and may cause significant Medicare billing delays for the purchases of agencies that are subject to the rule.

We are the subject of a number of inquiries by the federal government, any of which could have an adverse impact on our

financial condition and operations.

We operate in a highly regulated industry and are the subject of a number of inquiries by the federal government. We are

cooperating with the applicable government agencies with respect to each of the inquiries and producing the requested

records. Any negative findings could have a material adverse impact on our operations and financial condition. Although

we cannot predict when these matters may be resolved, it is not unusual for investigations such as these to continue for

a considerable period of time. Responding to these inquiries will continue to require management’s attention and significant

legal expense. See Part I. Item 3. Legal Proceedings in this Form 10-K for additional information regarding these inquiries.

We are subject to a corporate integrity agreement and could be subject to substantial monetary penalties or suspension in

participation of Federal health care programs for noncompliance.

On September 29, 2011, we entered into a corporate integrity agreement (“CIA”) with the Office of Inspector General of the

Department of Health and Human Services. The CIA imposes certain auditing, self-reporting and training requirements

that we must comply with. Failure to comply with certain obligations may lead to the imposition of monetary penalties and/

or exclusion from participation in the Federal health care programs. The imposition of monetary penalties would adversely

affect our profitability. An exclusion from participation the Federal health care programs would have a material adverse

affect on our financial condition as substantially all of our net patient revenue is attributable to payments received under

the Medicare and Medicaid programs.

If we are subject to substantial malpractice or other similar claims, it could materially adversely impact our results of operations

and financial condition flows.

The services we offer have an inherent risk of professional liability and substantial damage awards. We, and the nurses

and other health care professionals who provide services on our behalf, may be the subject of medical malpractice claims.

These nurses and other health care professionals could be considered our agents and, as a result, we could be held

liable for their medical negligence. We cannot predict the effect that any claims of this nature, regardless of their ultimate

outcome, could have on our business or reputation or on our ability to attract and retain patients and employees. We

maintain malpractice liability insurance that provides primary coverage on a claims-made basis of $1.0 million per incident

and $3.0 million in annual aggregate amounts. In addition, we maintain multiple layers of umbrella coverage in the

aggregate amount of $25.0 million that provide excess coverage for professional malpractice and other liabilities. We are

responsible for deductibles and amounts in excess of the limits of our coverage. Claims that could be made in the future

in excess of the limits of such insurance, if successful, could materially adversely affect our financial condition. In addition,

our insurance coverage may not continue to be available to us at commercially reasonable rates, in adequate amounts

or on satisfactory terms.

Fo r m 1 0-K Par t I

A Strong Foundation

Failure of, or problems with, our critical software or information systems could harm our business and operating results.

In addition to our Service Value Point system, our business is also substantially dependent on non-proprietary software.

We utilize a third-party software information system for billing and maintaining patient claim receivables for our LTACHs.

Our various home nursing agency databases are fully consolidated into an enterprise-wide system. Problems with, or the

failure of, these systems could negatively impact our clinical performance and our management and reporting

capabilities. Any such problems or failure could materially and adversely affect our operations and reputation, result in

significant costs to us, cause delays in our ability to bill Medicare or other payors for our services, or impair our ability

to provide our services in the future. The costs incurred in correcting any errors or problems with regard to our proprietary

and non-proprietary software may be substantial and could adversely affect our net income.

Our information systems are networked via public network infrastructure and standards based encryption tools that meet

regulatory requirements for transmission of protected health care information over such networks. However, threats from

computer viruses, instability of the public network on which our data transit relies, or other instances that might render those

networks unstable or disabled would create operational difficulties for us, including difficulties effectively transmitting

claims and maintaining efficient clinical oversight of our patients, as well as disrupting revenue reporting and billing and

collections management, which could adversely affect our business or operations. If personal or protected information

of our patients, employees or others with whom we do business is tampered with, stolen or otherwise improperly accessed,

we may incur additional fines and penalties associated with the breach of security or take other action with respect

to judicial or regulatory actions arising out of the incident, including under HIPPA or other judicial acts, as applicable.

Risk Factors Related to our Ownership and Management

Start-up agencies can be delayed from opening in a timely manner due to processing or regulatory approvals.

There can be delays associated with opening a de novo agency. These delays are the result of processing delays with the

state regulatory bodies as well as processing delays by the associated fiscal intermediaries that serve as billing liaisons

between the agency and CMS. To initiate operations at a de novo agency, we must submit the necessary applications

along with the required documentation to the appropriate state and Federal regulatory bodies. However, CMS has issued a

memorandum which prioritizes the initial surveys for new Medicare providers as lowest priority for the state regulatory

bodies. Moreover, depending on state requirements, the fiscal intermediary may need to receive the state license before

the approval process can move forward. Once the necessary application and documentation has been submitted to the

state and Federal regulatory bodies, there is a testing period of transmitting data from the applicant to CMS. Once

complete, the agency receives a provider agreement and corresponding number and can begin billing. If we are unable to

obtain regulatory approval for our de novo agencies in a timely manner, such delays could have a material adverse effect

on our business and our consolidated financial condition, results of operations and cash flows.

As a holding company, we have no material assets or operations of our own.

We are a holding company with no material assets or operations of our own. Accordingly, our ability to service our debt

and pay dividends, if any, is dependent upon the earnings from the business conducted by our subsidiaries. The

distributions of those earnings or advances or other distributions of funds by these subsidiaries to us are contingent upon

the subsidiaries’ earnings and are subject to various business considerations. In addition, distributions by subsidiaries

could be subject to statutory restrictions, including state laws requiring that the subsidiary be solvent, or contractual

restrictions. If our subsidiaries are unable to make sufficient distributions or advances to us, we may not have the cash

resources necessary to service our debt or pay dividends.

The loss of certain senior management could have a material adverse effect on our operations and financial performance.

Our success depends upon the continued employment of certain members of our senior management, including our

co-founder and Chief Executive Officer, Keith G. Myers, our President and Chief Operating Officer, Donald D. Stelly and

our Executive Vice President and Chief Financial Officer, Peter J. Roman. We have entered into an employment

agreement with each of these officers in an effort to further secure their employment. The loss of service of any of these

officers could have a material adverse effect on our operations if we were unable to find a suitable replacement.

For m 1 0-K Pa r t I

LH C Group

Our executive officers and directors and their affiliates hold a substantial portion of our stock and could exercise significant

influence over matters requiring stockholder approval, regardless of the wishes of other stockholders.

Our executive officers and directors and individuals or entities affiliated with them, beneficially own an aggregate of

approximately 16.2% of our outstanding common stock as of December 31, 2011. The interests of these stockholders

may differ from other stockholders’ interests. If they were to act together, these affiliated stockholders would be

able to significantly influence all matters that our stockholders vote upon, including the election of directors, business

combinations, the amendment of our certificate of incorporation and other significant corporate actions.

Certain provisions of our charter, bylaws, and Delaware law may delay or prevent a change in control of the Company.

Delaware law and our corporate documents contain provisions that may enable our board of directors to resist a change

in control of the Company. These provisions include:

• a staggered board of directors;

• limitations on persons authorized to call a special meeting of stockholders;

• the authorization of undesignated preferred stock, the terms of which may be established and shares of which may be

issued without stockholder approval; and

• advance notice procedures required for stockholders to nominate candidates for election as directors or to bring

matters before an annual meeting of stockholders.

These anti-takeover defenses could discourage, delay or prevent a transaction involving a change in control of the

Company. These provisions could also discourage proxy contests and make it more difficult for stockholders to elect

directors or cause us to take other corporate actions.

We have implemented other anti-takeover provisions or provisions that could have an anti-takeover effect. These provisions

and others that our Board of Directors may adopt hereafter, may discourage offers to acquire us and may permit our board

of directors to choose not to entertain offers to purchase us, even if such offers include a substantial premium to the market

price of our common stock. Therefore, our stockholders may be deprived of opportunities to profit from a sale of control.

Our common stock is thinly traded, which may cause volatility in our stock price, including a decline in value.

We have a relatively low volume of daily trades in our common stock on the Nasdaq Global Select Market. For example,

the average daily trading volume of our common stock on NASDAQ over the three-month trading period ending March 8,

2012 was approximately 180,455 shares per day. Because our common stock is traded infrequently, the price per share

of our common stock can fluctuate more significantly from day-to-day than a widely held stock that is actively traded on a

daily basis. For example, trading of a large volume of our common stock may have a significant impact on the trading

price of our stock. In addition, future issuances of our common stock, including the exercise of any options or the vesting

of any restricted stock that we may grant to directors, executive officers and other employees in the future and the

issuance of common stock in connection with acquisitions, could have an adverse effect on the market price of our

common stock.

If we identify deficiencies in our internal control over financial reporting, our business and our stock price could be

adversely affected.

We are required to report on the effectiveness of our internal control over financial reporting as required by Section 404

of Sarbanes-Oxley. Under Section 404, we are required to assess the effectiveness of our internal control over financial

reporting and report our conclusion in our annual report. Our independent registered public accounting firm is also

required to report its conclusion regarding the effectiveness of our internal control over financial reporting. The existence

of one or more material weaknesses would require us and our auditor to conclude that our internal control over financial

reporting is not effective. If material weaknesses in our internal control over financial reporting are identified, we could be

subject to regulatory scrutiny and a loss of public confidence in our financial reporting, which could have an adverse

effect on our business and our stock price.

Fo r m 1 0-K Par t I

A Strong Foundation

Item 1B. Unresolved Staff Comments.

We have no unresolved written comments from the staff of the SEC regarding our periodic or current reports filed under

the Exchange Act.

Item 2. Properties.

Our home office facilities are located in two properties in Lafayette, Louisiana. One property is 22,571 square feet of leased

office space under a lease that commenced on March 1, 2004 and expires on December 31, 2021. The second

property is 25,849 square feet of leased office space under a lease that commenced on December 27, 2008 and expires

on February 28, 2014.

Our 290 owned home-based service locations are located in leased facilities. Generally, the leases for our home-based

service locations have initial terms of one year, but range from one to five years. Most of the leases either contain multiple

options to extend the lease period in one-year increments or convert to a month-to-month lease upon the expiration

of the initial term. Eight of our LTACHs are hospitals within a hospital, meaning we have a lease or sublease for space with

the host hospital. Generally, our leases or subleases for LTACHs have initial terms of five years, but range from three

to ten years. Most of our leases and subleases for our LTACHs contain multiple options to extend the term in one-year

increments. The following table shows our locations of our home based and facility based facilities:

Home-Based Services Facility-Based Services

Louisiana. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Alabama . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tennessee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Kentucky . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mississippi . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Arkansas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
West Virginia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Washington . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Missouri . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Idaho . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maryland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Georgia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Florida . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Oregon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Virginia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ohio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
North Carolina . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Oklahoma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

50
33
33
30
28
21
18
12
10
10
9
9
7
5
5
4
3
2
1

290

Item 3. Legal Proceedings.

11
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—

On May 12, 2010, the Company received a letter from the United States Senate Finance Committee in response to an

April 26, 2010 article in The Wall Street Journal entitled “Home Care Yields Medicare Bounty.” The letter from the Senate

Finance Committee asked the Company to provide documents and data related to the issues referenced in The Wall Street

Journal article. On June 25, 2010, the Company completed its response to the Senate Finance Committee’s letter.

On October 3, 2011, the Senate Finance Committee issued a report with its findings. At this time, the Company is unable

to predict whether any further actions will result from this matter.

For m 1 0-K Pa r t I

LH C Group

On July 16, 2010, the Company received a subpoena from the Securities and Exchange Commission (“SEC”) that included

a request for documents related to the Company’s participation in the Medicare Home Health Prospective Payment

System, as well as the documents and information produced in response to the Senate Finance Committee’s investigation

set forth above. The Company produced the documents requested by the initial subpoena, produced additional

documents requested by the SEC as part of its review, and continues to cooperate with the SEC’s review. The Company

cannot predict the outcome or effect of this investigation, if any, on the Company’s business.

On October 17, 2011, the Company received a subpoena from the Department of Health and Human Services Office of

Inspector General (the “OIG”). The subpoena requests documents related to patients who received service from two of our

locations in the State of Oregon and some additional documents related to our agencies in Oregon, Washington and

Idaho. The Company will produce the requested documents and will cooperate with the OIG’s review in this matter. The

Company cannot predict the outcome or effect of this review, if any, on the Company’s business.

Except as discussed above, the Company is not aware of any pending or threatened investigations involving allegations of

potential wrongdoing.

Settlement Agreement with the United States of America

On September 30, 2011, the Company announced that it had entered into a settlement agreement with the United States

government to resolve an investigation the Company first announced on July 13, 2009. The investigation resulted from

a qui tam complaint filed by a relator against the Company under the whistleblower provisions of the False Claims Act,

31 U.S.C. sections 3729-3733. Pursuant to the settlement agreement, the Company paid the United States $65 million

(“settlement amount”) in a single lump sum payment. In exchange for the payment of the settlement amount, the United

States and the relator released the Company from any civil or administrative monetary claim under the False Claim Act for

the covered conduct. The released covered conduct includes claims involving home-health services rendered by the

Company from 2006 to 2008 with regard to whether such home health services were either not medically necessary or

were delivered to patients who were not homebound. The OIG also agreed to release and refrain from instituting, directing

or maintaining any administrative action seeking to exclude the Company from Medicare, Medicaid and other federal

health care programs with respect to the covered conduct described above.

The government did not find that all aspects of the relator’s complaint deserved intervention, including homebound

and medical necessity claims for 2005 and coding related claims for 2005 through 2008. The Company reached an

agreement in principle to settle these non-intervened claims for $1.0 million with the relator and the government.

Upon final approval of the agreement in principle, the Company expects to enter into a settlement agreement with regard

to these non-intervened claims. In connection with this settlement, the Company recorded an accrual of $1.0 million

in the current quarter.

Effective September 29, 2011, the Company entered into a five year Corporate Integrity Agreement (“CIA”) with

the OIG. The CIA formalizes various aspects of the Company’s already existing ethics and compliance programs and

contains other requirements designed to help ensure the Company’s ongoing compliance with federal health care

program requirements.

Item 4. Mine Safety Disclosures.

Not applicable.

Fo r m 1 0-K Par t I

A Strong Foundation

PART I I

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and

Issuer Purchases of Equity Securities.

Sales of Unregistered Common Stock

None.

Market Information and Holders

Our common stock trades on the NASDAQ Global Select Market (“NASDAQ”) under the symbol “LHCG.” As of March 8,

2012, there were approximately 175 registered holders of record of our common stock.

Dividend Policy

We have not paid any dividends on our common stock since our initial public offering in 2005 and do not anticipate paying

dividends in the foreseeable future. We currently intend to retain future earnings, if any, to support the development and

growth of our business. Payment of future dividends, if any, will be at the discretion of our board of directors and subject to

any requirements under our Credit Facility or any future credit facility.

Price Range of Common Stock

The following table provides the high and low prices of our common stock during 2011 and 2010 as quoted by NASDAQ.

2011
Fourth Quarter
Third Quarter
Second Quarter
First Quarter

2010
Fourth Quarter
Third Quarter
Second Quarter
First Quarter

High

Low

$ 18.84
23.90
30.39
31.52

$ 30.28
25.05
37.36
35.08

$ 12.35
16.15
22.48
26.33

$ 22.79
19.99
27.75
28.94

The closing price of our common stock as reported by NASDAQ on March 9, 2012 was $18.15.

Performance Graph

This item is incorporated by reference from our annual report to stockholders for the fiscal year ended December 31, 2011.

Issuer Purchases of Equity Securities

In October 2010, our board of directors authorized a program to repurchase shares of our common stock, par value

$0.01 per share, from time to time, in an amount not to exceed $50.0 million (“Stock Repurchase Program”). We anticipate

that we will finance the Stock Repurchase Program with cash from general corporate funds, or draws under our Credit

Facility. We may repurchase shares of our common stock in open market purchases or in privately negotiated transactions

in accordance with applicable securities laws, rules and regulations. The timing and extent to which we repurchase our

shares will depend upon market conditions and other corporate considerations.

We account for the repurchase of our common stock under the cost method. We use the average cost method upon the

subsequent reissuance of treasury shares. During the twelve months ended December 31, 2011, we repurchased

24,159 shares of common stock at an aggregate cost of $577,000, including commissions, or an average cost per share of

$23.93. The remaining dollar value of shares authorized to be purchased under the share repurchase program is

$49.4 million at December 31, 2011.

Man age ment’s Discussion and Analysis of Fin a ncia l Co nd ition and Results of Operations

For m 1 0-K Pa r t II

LH C Group

The following table summarizes the Company’s repurchase activity during the three-month period ended December 31,

2011:

(a)

(b)

Total Number
of Shares
(or Units Purchased)

Average Price
Paid per Share
(or Unit)

(d)
Maximum Number
(or Approximate Dollar Value)
of Shares (or Units) that
May Yet Be Purchased
Under the Plans or Programs

October 1 – October 31
November 1 – November 30
December 1 – December 31
Total fourth quarter ended

—
—
—
—

$ 49,423,000
$ 49,423,000
$ 49,423,000
$ 49,423,000

Item 6. Selected Financial Data.

The selected consolidated financial data presented below is derived from our audited consolidated financial statements

included in this Annual Report on Form 10-K as of and for each of the years ended December 31, 2011, 2010 and 2009.

The selected consolidated financial data presented below as of and for each of the years ended December 31, 2008 and

2007 is derived from our audited consolidated financial statements not included in this Annual Report on Form 10-K.

The financial data for the years ended December 31, 2011, 2010 and 2009 should be read together with our consolidated

financial statements and related notes included in Part II, Item 7. Management’s Discussion and Analysis of

Financial Condition and Consolidated Results of Operations and Item 8. Financial Statements and Supplementary Data

included herein.

Year Ended December 31,

2011

2010

2009

2008

2007

(In thousands, except share and per share data)

Consolidated Statements of Operations Data:
Net service revenue
Gross margin
Operating income (loss)
Income (loss) from continuing operations
Net income (loss) attributable to LHC Group, Inc.
Change in the redemption value of redeemable
noncontrolling interests

$ 633,872
281,526
(6,382)
(3,651)
(13,244)

$ 631,567 (1)
305,046
95,602
64,546
48,759

$ 529,246 (1)
261,465
85,046
57,900
43,841

$ 381,278 (1)
196,337
60,492
42,654
30,202

$ 295,954 (1)
146,979
38,781
27,286
19,589

—

193

Net income (loss) available to LHC Group, Inc.’s common
stockholders

Net income (loss) attributable to LHC Group Inc.’s common
stockholders per basic share:

Net income (loss) attributable to LHC Group Inc.’s common
stockholders per diluted share:

(13,244)

$ 48,800

$ 43,886

$ 30,233

$ 19,782

(0.73)

2.69

(0.73)

2.68

2.44

2.43

1.69

1.11

1.69

1.11

Weighted average shares outstanding:
Basic
Diluted

18,265,118
18,265,118

18,119,183
18,226,091

17,960,376
18,069,897

17,855,634
17,899,087

17,760,432
17,827,444

Year Ended December 31,

2011

2010

2009

2008

2007

(In thousands)

Consolidated Balance Sheet Data:
Cash
Total assets
Total debt
Total LHC Group, Inc. stockholders’equity

256
$
396,376
34,820
$ 263,683

$
288
357,305
—
$ 273,741

$
394
307,615
11,802
$ 221,172

$ 3,511
243,400
5,116
$ 176,821

$ 1,155
174,985
3,431
$ 143,371

(1) We have recorded a reclassification to the December 31, 2010, 2009, 2008 and 2007 net service revenue amounts in the consolidated statements of operations data
table to conform to the 2011 presentation. Net service revenue and cost of service revenue have been decreased by $3.5 million, $2.1 million, $1.3 million and
$1.0 million for the twelve months ended December 31, 2010, 2009, 2008 and 2007, respectively, related to fees we collected and subsequently paid to nursing homes
primarily for room and board services provided to our hospice patients.

Fo r m 1 0-K Par t II

Management’s Discussion and A naly sis of Fin a ncia l Co nd ition and Results of Opera ti on s

A Strong Foundation

Item 7. Management’s Discussion and Analysis of Financial Condition

and Results of Operations.

The following discussion and analysis contains forward-looking statements about our future revenues, operating results,
plans and expectations. Forward-looking statements are based on a number of assumptions and estimates that are
inherently subject to significant risks and uncertainties and our results could differ materially from the results anticipated by
our forward-looking statements as a result of many known or unknown factors, including, but not limited to, those
factors discussed in Part I, Item 1A. Risk Factors. Also, please read the “Cautionary Statements Regarding Forward-

Looking Statements” set forth at the beginning of this Annual Report on Form 10-K.

Please read the following discussion in conjunction with Part 1 of this Annual Report on Form 10-K as well as our

Consolidated Financial Statements and the related notes contained elsewhere in this Annual Report on Form 10-K.

Overview

We provide post-acute health care services primarily to Medicare beneficiaries throughout the United States, through our

home nursing agencies, hospices and LTACHs. Our net service revenue increased $2.3 million to $633.9 million for

the year ending December 31, 2011 from $631.6 million for the year ending December 31, 2010. During 2011, we acquired

five home nursing agencies and eight hospice agencies. We also initiated the operations of five home health agencies.

We currently operate 301 locations in the following 19 states: Alabama, Arkansas, Florida, Georgia, Idaho, Kentucky,

Louisiana, Maryland, Mississippi, Missouri, North Carolina, Ohio, Oklahoma, Oregon, Tennessee, Texas, Virginia,

West Virginia and Washington.

Segments

We operate in two segments for financial reporting purposes: home-based services and facility-based services. We

derived 88.0%, 87.9% and 88.2% of our net service revenue during the years ended December 31, 2011, 2010 and 2009,

respectively, from our home-based services segment and derived the balance of our net service revenue from our

facility-based services segment.

Through our home-based services segment we offer a wide range of services, including skilled nursing, private duty

nursing, physical, occupational and speech therapy, medically-oriented social services and hospice care. As of December 31,

2011, the home-based services segment comprised the following locations:

Type of Service

Home Health . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 247
Hospice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
32
Private Duty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4
Specialty Services . . . . . . . . . . . . . . . . . . . . . . . . . .
3
Management Companies . . . . . . . . . . . . . . . . . . . .
4

290

Of our 290 home-based services locations, 151 are wholly-owned by us, 125 are majority-owned or controlled by us

through joint ventures, 10 are controlled by us through license lease arrangements and the remaining four are

management companies in which we have no ownership interest. We intend to increase the number of home nursing

agencies that we operate through continued acquisitions and organic development. As we acquire and develop

home nursing agencies, we anticipate the percentage of our net service revenue and operating income derived from our

home-based services segment will continue to increase.

We provide facility-based services principally through our LTACHs. As of December 31, 2011, we owned and operated six

LTACHs with nine locations, of which all but one are located within host hospitals. We also owned and operated a

pharmacy and a health and fitness center. Of these 11 facility-based services locations, six are wholly-owned by us and

five are majority-owned or controlled by us through joint ventures.

Man age ment’s Discussion and Analysis of Fin a ncia l Co nd ition and Results of Operations

For m 1 0-K Pa r t II

LH C Group

Development Activities

The following table provides a summary of our acquisitions, divestitures and internal development activities from January

1, 2009 through December 31, 2011. This table does not include the four management services agreements under which

we manage the operations of four home nursing agencies, through our home-based services segment.

Home-Based Services

Facility-Based Services

Home Nursing
Agencies

Hospice
Agencies

Specialty and Long-Term Acute
Private Duty

Care Hospitals Specialty

206
13
13
(2)
230
12
20
(5)
257
6
5
(21)

247

19
—
2
—
21
—
6
(1)
26
—
8
(2)

9
—
—
—
9
—
1
—
10
—
—
(3)

7
—
1
—
8
—
1
—
9
—
—
—

4
—
—
(1)
3
—
—
—
3
—
—
—

Year
Total at January 1, 2009
Developed
Acquired
Divested/Merged
Total at January 1, 2010
Developed
Acquired
Divested/Merged
Total at January 1, 2011
Developed
Acquired
Divested/Merged
Total at December 31, 2011

Recent Developments

Home-Based Services

Home Nursing. In March 2010, the Patient Protection and Affordable Care Act was enacted and was amended shortly

afterwards by the Health Care and Education Affordability Reconciliation Act of 2010 (collectively referred to as the

“Affordable Care Act”). The Affordable Care Act makes a number of changes to Medicare payment rates, including the

reinstatement of the 3% home health rural add-on, which began on April 1, 2010 (expiring January 1, 2016). Other

changes from the Affordable Care Act that began on or after January 1, 2011 are:

• a reduction in the market basket adjustment to be determined by the Centers for Medicare & Medicaid Services

(“CMS”) for the calendar years 2011, 2012 and 2013 by 1%;

• a full productivity adjustment beginning in 2015; and

• rebasing of the base payment rate for Medicare beginning in 2014 and phasing in over a four year period — the amount

of the rebasing is uncertain at this time.

On November 2, 2010, CMS issued the final rule covering payment rates for home health services in calendar year (“CY”)

2011. CMS set the base payment rate for Medicare home nursing at $2,192.07 per 60-day episode for CY 2011, a

decrease of 5.2% from the CY 2010 base payment rate of $2,312.94. The decrease for CY 2011 includes the following

adjustments to the base rate, as compared to the CY 2010 base rate, in accordance with the Affordable Care Act:

(1) a reduction of 1% to the 2.1% inflation update increase to the market basket; (2) a 3.79% case-mix weight adjustment

decrease; and (3) a shift of the outlier payment allowance beginning in 2011 that will result in a one-time 2.5% reduction

to the base payment rate. These changes are effective for all episodes completed during 2011. Accordingly, all episodes

in progress at December 31, 2010 were impacted.

The CMS final rule also finalized two provisions of the Affordable Care Act: (1) a face-to-face encounter requirement for home

health and hospice; and (2) changes in the therapy assessment schedule. As a condition for Medicare payment, the

Affordable Care Act mandates that prior to certifying a patient’s eligibility for home health services, the certifying physician

must document that he or she, or a non-physician practitioner that meets the requirements of the rule, has had a face-

to-face encounter with the patient that relates to the condition for which the patient receives home health services. The

encounter must occur within 90 days prior to the start of care or 30 days after the start of care. Documentation regarding

Fo r m 1 0-K Par t II

Management’s Discussion and A naly sis of Fin a ncia l Co nd ition and Results of Opera ti on s

A Strong Foundation

these encounters must be present on certifications. The face-to-face encounter requirement for home health providers

was to become effective January 1, 2011. However, due to concerns that some providers may need additional time to

establish operational protocols necessary to comply with these requirements, CMS delayed full enforcement of the

requirements until April 1, 2011. Beginning on April 1, CMS expected home health agencies to have fully established such

internal processes and have appropriate documentation of the required face-to-face encounters. See below for a

description of the hospice face-to-face encounter requirements.

In addition to the face-to-face encounter requirements, the CMS final rule made important changes to therapy assessment

requirements. A professional qualified therapist assessment must take place at least once every 30 days during a therapy

patient’s course of treatment. For those eligible patients needing 13 or 19 therapy visits, a qualified therapist must perform

the therapy service required, assess the patient, and measure and document effectiveness of the 13th visit and the 19th

visit for all therapy disciplines caring for the patient. As with the face-to-face requirements, CMS delayed the effective date

for all therapy provisions until April 1, 2011 to allow time for home health agencies to take necessary steps to comply.

On October 31, 2011, CMS issued the final rule covering payment rates for home health services in CY 2012. CMS set the

base payment rate for Medicare home nursing at $2,138.52 per 60-day episode for CY 2012, a decrease of 2.4% from

the CY 2011 base payment rate of $2,192.07. The decrease for CY 2012 includes the following adjustments to the base rate,

as compared to the CY 2011 base rate, in accordance with the Affordable Care Act: a reduction of 1% to the 2.4% inflation

update increase to the market basket; and a 3.79% case-mix weight adjustment decrease. These changes are effective for

all episodes completed during 2012, including any episodes in progress at December 31, 2011.

The case-mix coding adjustment reduced home health (“HH”) PPS rates 3.79% for CY 2012 and an additional 1.32%

reduction for CY 2013.

This rule also finalizes structural changes to the HH PPS by removing two hypertension codes from the case-mix system,

lowering payments for high therapy episodes, and recalibrating the HH PPS case-mix weights to ensure that these

changes result in the same amount of total aggregate payments.

Under current Medicare policy, a certifying physician or an allowed non-physician practitioner must see a patient prior to

certifying a patient as eligible for the home health benefit. The rule also finalizes added flexibility to allow physicians who

cared for the patient in an acute or post-acute facility to inform the certifying physician of their encounters with the patient

in order to satisfy the requirement.

Hospice. The following table shows the hospice Medicare payment rates for Fiscal Year (“FY”) 2011, which began on

October 1, 2010 and ended September 30, 2011:

Description

Routine Home Care
Continuous Home Care
Full Rate = 24 hours of care
$35.66 = hourly rate
Inpatient Respite Care
General Inpatient Care

Rate Per Patient Day

$ 146.63
$ 855.79

$ 151.67
$ 652.27

As mentioned above, the CMS final rule, published on November 2, 2010, also finalized a face-to-face encounter

requirement applicable to hospice. This requirement mandated that a physician or nurse practitioner must have a face-to-

face encounter with the patient no later than the 30 day period prior to the 180th-day recertification (third benefit period)

and each subsequent recertification in order to gather clinical findings that support continued hospice care, and that the

certifying hospice physician must attest that such a visit took place. As with the home health face-to-face encounter

requirement, CMS delayed full enforcement of the hospice face-to-face requirements until April 1, 2011.

Man age ment’s Discussion and Analysis of Fin a ncia l Co nd ition and Results of Operations

For m 1 0-K Pa r t II

LH C Group

On July 29, 2011, CMS issued its final rule for hospice for FY 2012 which increases Medicare reimbursement payments

by 2.5%. The 2.5% increase consists of a 3.0% inflationary market basket update offset by a 0.5% reduction for the third

year of CMS’ seven-year phase-out of its wage index budget neutrality adjustment factor. The final rule also will:

• Change the way CMS counts hospice patients for the 2012 cap accounting year and beyond. The final policy for

counting the number of Medicare hospice beneficiaries in care for a given cap year calculates the cap based on the

number of days of care the patient received in that cap year for each hospice. This rule also finalized that the new

counting method be applied to past cap years in certain instances.

• Allow hospice providers who do not want a change in their patient counting method to elect to continue using the

current method.

• Allow any hospice physician to perform the face-to-face encounter regardless of whether that same physician recertifies

the patient’s terminal illness and composes the recertification narrative.

• Implement a hospice quality reporting program, which includes a timeframe for reporting, as required by section

3004 of the Affordable Care Act. The measures that are being adopted in this final rule for the FY 2014 program are one

measure endorsed by the National Quality Forum related to pain management and one structural measure that

assesses whether a hospice administers a Quality Assessment and Performance Improvement (QAPI) program that

contains at least three indicators related to patient care.

The final rule began on October 1, 2011.

Facility-Based Services

LTACHs. On July 30, 2010, CMS issued a final rule establishing FY 2011 policies and payment rates for inpatient services

furnished to Medicare beneficiaries by acute care and long term care hospitals (LTACHs). The federal standard rate

for 2011 LTACH-PPS rate year (“RY”), which began October 1, 2010 and ended September 30, 2011, was $39,600 per

Medicare discharge and the high cost outlier threshold was $18,785. This is a decrease of 0.8% from the RY 2010

standard rate of $39,896 and an increase of 1.9% from the RY 2010 high cost outlier threshold of $18,425. Pursuant to the

final rule, CMS also updated LTACH rates by increasing the market basket by 2.5%, but reducing the inflation update by

0.5% as required by the Affordable Care Act. Further, CMS applied an adjustment of negative 2.5% to the LTACH standard

payment rate to account for the estimated increase in spending in FYs 2008 and 2009 due to documentation and coding

that did not reflect increases in patients’ severity of illness. CMS estimated that aggregate payments to LTACHs would

increase by approximately 0.5%, taking into account all provisions in the final rule that would affect spending.

On August 1, 2011, CMS released its rule for LTACH Medicare reimbursement for FY 2012, which spans from October 1,

2011 through September 30, 2012. In aggregate, payments for FY 2012 will increase 2.5% from FY 2011. Included in the

final regulations is (1) a 2.9% market basket increase to the standard payment rate; (2) an aggregate reduction in the

standard payment rate of 1.1% mandated by the Affordable Care Act; and (3) a reduction in the high cost outlier threshold

per discharge from $18,785 in FY 2011 to $17,931 in FY 2012. The final rule would result in a 1.8% increase in average

Medicare payments to LTACHs. Some of the other changes in the final rule include:

• Three quality measures to begin reporting October 1, 2012 and will affect payment in FY 2014.

• Clarification that the 25-day average length of stay (“ALOS”) calculation includes both traditional Medicare Fee-For-

Service and Medicare Advantage stays but this calculation began January 1, 2012.

The final rule was effective beginning on October 1, 2011.

Fo r m 1 0-K Par t II

Management’s Discussion and A naly sis of Fin a ncia l Co nd ition and Results of Opera ti on s

2011 and 2010 Operational Data

The following table sets forth, for the period indicated, data regarding aggregate admissions and Medicare admissions

to our home health agencies and patient days for our LTACHs. Certain historical data has been included in order to present

a more comparative analysis of the statistical data.

A Strong Foundation

Home Health Agencies:
Average census
Average Medicare census
Admissions
Medicare admissions

LTACHs:
Patient days

Home Health Agencies:
Average census
Average Medicare census
Admissions
Medicare admissions

LTACHs:
Patient days

Three Months
Ended March 31,
2011

Three Months
Ended June 30,
2011

Three Months
Ended Sept. 30,
2011

Three Months
Ended Dec. 31,
2011

34,466
26,570
26,194
18,589

33,937
26,192
24,935
17,423

31,311
24,076
25,787
18,445

31,692
24,301
25,410
17,803

15,333

15,268

15,385

15,953

Three Months
Ended March 31,
2010

Three Months
Ended June 30,
2010

Three Months
Ended Sept. 30,
2010

Three Months
Ended Dec. 31,
2010

30,721
24,640
21,805
16,152

31,345
24,951
22,540
16,374

33,402
26,236
23,807
17,100

34,030
26,336
24,612
17,200

13,872

14,071

16,736

16,979

Consolidated Results of Operations

The following table sets forth, for the periods indicated, the consolidated results of our Company (amounts in thousands):

Year Ended December 31,

Consolidated Services Data:
Net service revenue
Cost of service revenue

Gross margin
Provision for bad debts
Settlement with government agencies
General and administrative expenses

Operating income (loss)

Interest expense

Non-operating income (loss), including gain on sales of entities and assets

Income tax expense (benefit)
Income attributable to noncontrolling interests

Loss from discontinued operations
Redeemable noncontrolling interests

2011

2010

2009

$ 633,872
352,346

281,526
12,320
65,000
210,588

$ (6,382)
(1,018)
1,781
(1,968)
9,593
—
—

$ 631,567
326,521

305,046
7,607
—
201,837

$ 95,602
(134)
805
31,727
15,787
—
41

$ 529,246
267,781

261,465
4,724
—
171,695

$ 85,046
(142)
(261)
26,743
13,973
(86)
45

Net income (loss) attributable to LHC Group, Inc.’s common stockholders

$ (13,244)

$ 48,800

$ 43,886

Man age ment’s Discussion and Analysis of Fin a ncia l Co nd ition and Results of Operations

For m 1 0-K Pa r t II

LH C Group

The following table sets forth the consolidated results of our Company as a percentage of net service revenue, except

Income tax expense (benefit), which is presented as a percentage of income from continuing operations.

Year Ended December 31,

2011

2010

2009

Consolidated Services Data:
Cost of service revenue
Gross margin
Provision for bad debts
Settlement with government agencies
General and administrative expenses
Operating income (loss)
Interest expense
Non-operating income (loss), including gain on sales of entities and assets
Income tax expense (benefit)
Income attributable to noncontrolling interests
Net income (loss) attributable to LHC Group, Inc.’s common stockholders

55.6%
44.4%
1.9%
10.3%
33.2%
(1.0)%
0.2%
0.3%
(12.9)%
1.5%
(2.1)%

51.7%
48.3%
1.2%
—
32.0%
15.1%
0.0%
0.1%
39.4%
2.5%
7.7%

50.6%
49.4%
0.9%
—
32.4%
16.1%
0.0%
0.0%
37.9%
2.6%
8.3%

Year Ended December 31, 2011 Compared to Year Ended December 31, 2010

Net Service Revenue

Consolidated net service revenue for the year ended December 31, 2011 was $633.9 million compared to $631.6 million in

2010. Net service revenue growth in 2011 was primarily due to an increase in census, increase in admits, and additions of

2010 acquisitions that occurred late in the year. This increase was offset by the effect of the CMS rule for 2011 that

reduced home health Medicare rates by 5.2%. Net service revenue was comprised of the following for the periods ending

December 31:

Home-Based Services
Facility-Based Services

2011

2010

88.0%
12.0

87.9%
12.1

100.0%

Revenue derived from Medicare represented 79.7% and 80.5% of consolidated net service revenue for the years ended

December 31, 2011 and 2010, respectively.

Cost of Service Revenue

Consolidated cost of service revenue for the year ended December 31, 2011 was $352.3 million compared to $326.5 million

in 2010. The increase in cost of service revenue was related to the following factors:

• an increase of costs related to 2010 acquisitions that were acquired during the latter part of 2010;

• an increase of costs related to 2011 acquisitions;

• cost of living increases;

• an increase in insurance, retirement and employee benefits; and

• additional field staff included in our existing home based agencies.

Provision for Bad Debt

Consolidated provision for bad debt for the year ended December 31, 2011 was $12.3 million compared to $7.6 million in

2010. The increase in provision for bad debt was due to the increase in commercial receivables both in dollars and as a

percentage of total receivables. Commercial claims are not collected as efficiently as Medicare or Medicaid claims, and as

our commercial payor revenue increases, these claims will continue to increase in significance in the aging of accounts

receivable. In addition, bad debt reserves for Medicare have increased due to the changes in the timely filing regulations.

Beginning January 1, 2011, the period allowed to file Medicare claims was reduced to twelve months from the end of

episode date. Previously, episodes ending on or before September 30 of any year could be filed through December 31 of

the following year.

Fo r m 1 0-K Par t II

Management’s Discussion and A naly sis of Fin a ncia l Co nd ition and Results of Opera ti on s

A Strong Foundation

Settlement with Government Agencies

On September 29, 2011, we entered into a settlement agreement which resolved the issue with the United States of

America. Pursuant to the settlement agreement, we paid the United States of America $65 million (“settlement amount”)

in a single lump sum payment. For additional information see Part I, Item 3. Legal Proceedings of this Annual Report

on Form 10-K.

General and Administrative Expenses

Consolidated general and administrative expenses for the year ended December 31, 2011 was $210.6 million compared

to $201.8 million in 2010. The increase was primarily driven by additional costs incurred in 2011 such as:

• $2.1 million for our legal expenses and those of the relator associated with our settlement with the United States

of America;

• $1 million for settlement of non-intervened claims with the relator;

• $1.1 million of expenses due to our conversion to point of care technology; and

• overall increase in costs related to acquisitions.

General and administrative expenses consist primarily of the following expenses incurred by our home office and

administrative field personnel:

• home office and field administration:

• salaries and related benefits;

•

insurance;

• costs associated with advertising and other marketing activities; and

• rent and utilities.

• supplies and services:

• accounting, legal and other professional services; and

• office supplies.

• depreciation;

• other:

• advertising and marketing expenses;

• recruitment;

• operating locations rent; and

•

taxes.

Non-Operating Income

Consolidated non-operating income for the year ended December 31, 2011 was $1.8 million compared to $805,000 in

2010. In both years, non-operating income was primarily due to the Medicare Home Health Pay for Performance program.

A two year demonstration was done in 2008-2009 to initiate improvement in the quality and efficiency of care furnished

to Medicare beneficiaries. Agencies were measured using seven home health quality measures. For each measure, the

agencies that ranked by performance in the top 20% of their state, were eligible to receive a share in the Medicare

savings generated in their region. We received $1.2 million and $437,000 in 2011 and 2010, respectively.

Interest Expense

Consolidated interest expense for the year ended December 31, 2011 was $1.0 million compared to $134,000 in 2010 and

related to balances outstanding on our credit facility in each year.

Income Tax Expense

Consolidated income tax expense (benefit) for the year ended December 31, 2011 was $(1.9) million compared

to $31.7 million in 2010. We recognized a tax benefit on our settlement with the United States of America, reduced by

$3.4 million to recognize the uncertainty of deducting the full settlement.

Man age ment’s Discussion and Analysis of Fin a ncia l Co nd ition and Results of Operations

For m 1 0-K Pa r t II

LH C Group

Net Income Attributable to Noncontrolling Interest

Consolidated net income attributable to noncontrolling interest for the year ended December 31, 2011 was $9.6 million

compared to $15.8 million in 2010. The overall decrease was due to the company purchasing the outstanding membership

interest of four joint venture partners, a decrease in noncontrolling interest ownership in 2011 acquisitions and an overall

decrease of operating results of the joint ventures themselves.

Home-Based Services Segment Results of Operations

Year Ended December 31,

Home-Based Services Data:
Net service revenue
Cost of service revenue
Gross margin
Provision for bad debts
Settlement with government agencies
General and administrative expenses

Operating income (loss)

Average census
Average Medicare census
Total admissions
Total Medicare admissions

2011

2010

2009

(amounts in thousands, except for statistical data)

$ 557,901
307,744
250,157
11,680
65,000
190,264

$ 555,110
281,013
274,097
7,078
—
182,750

$ 466,736
231,397
235,339
4,199
—
155,670

$ (16,787)

$ 84,269

$ 75,470

33,062
25,713
106,323
75,890

32,997
26,107
95,688
69,490

29,221
23,441
78,834
58,017

Net service revenue from home-based services for the year ended December 31, 2011 was $557.9 million compared to

$555.1 million in 2010. Total admissions increased 11.1% to 106,323 during the year ended December 31, 2011,

compared to 95,688 for the same period ended December 31, 2010. Average home-based patient census for the year

ended December 31, 2011 increased 0.2% to 33,062 patients as compared with 32,997 patients for the year ended

December 31, 2010.

As detailed in the tables below, the increase in revenue in 2011 resulted from both organic growth and the growth from our

acquisitions during the year ended December 31, 2011.

Organic growth includes growth in “same store” locations, or those locations owned for greater than 12 months, and

growth from “de novo” locations. We calculate organic growth by dividing organic growth generated in a period by total

revenue generated in the same period of the prior year. Revenue from acquired agencies contributes to organic growth

beginning with the thirteenth month after acquisition.

The following tables detail the home-based services revenue growth and home health agencies percentages for organic

and total growth (amounts in thousands, except statistical data):

Year Ending December 31, 2011

Same Store (1)

De Novo (2)

Organic (3)

Revenue
Revenue Medicare
Average Census
Average Medicare Census
Admissions
Medicare Admissions
Episodes

$ 538,135
$ 431,101
31,514
24,383
99,434
70,195
166,100

$ 3,191
$ 2,793
129
106
310
238
518

$ 541,326
$ 433,894
31,643
24,489
99,744
70,433
166,618

Organic
Growth %

(2.5)%
(4.3)%
(2.3)%
(4.1)%
7.5%
5.4%
(0.1)%

Acquired (4)

Total

Total
Growth %

$ 16,575
$ 14,120
522
410
2,582
1,827
2,571

$ 557,901
$ 448,014
32,165
24,899
102,326
72,260
169,189

0.5%
(1.2)%
(0.6)%
(2.5)%
10.3%
8.1%
1.4%

(1) Same store – location that has been in service with the Company for greater than 12 months.

(2) De Novo – internally developed location that has been in service with the Company for 12 months or less.

(3) Organic – combination of same store and de novo.

(4) Acquired – purchased location that has been in service with the Company for 12 months or less.

Fo r m 1 0-K Par t II

Management’s Discussion and A naly sis of Fin a ncia l Co nd ition and Results of Opera ti on s

A Strong Foundation

Year Ending December 31, 2010

Same Store (1)

De Novo (2)

Organic (3)

Revenue
Revenue Medicare
Average Census
Average Medicare Census
Admissions
Medicare Admissions
Episodes

$ 524,022
$ 431,296
29,797
23,883
85,961
63,146
159,618

$ 1,372
$ 1,090
205
171
355
265
371

$ 525,394
$ 432,386
30,002
24,054
86,316
63,411
159,989

Organic
Growth %

12.6%
11.4%
4.5%
4.6%
13.1%
13.5%
8.6%

Acquired (4)

Total

Total
Growth %

$ 29,716
$ 20,941
2,373
1,487
6,448
3,415
6,814

$ 555,110
$ 453,327
32,375
25,541
92,764
66,826
166,803

18.9%
16.8%
12.7%
11.1%
21.6%
19.6%
13.2%

(1) Same store – location that has been in service with the Company for greater than 12 months.

(2) De Novo – internally developed location that has been in service with the Company for 12 months or less.

(3) Organic – combination of same store and de novo.

(4) Acquired – purchased location that has been in service with the Company for 12 months or less.

Organic growth for total new admissions was 7.5% in 2011 compared to 13.1% in 2010. 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, in the second full year of operation after acquisition.

The primary strategies to increase organic growth include differentiating ourselves from our competitors through our care

services and quality outcomes, focusing our sales efforts on our agencies, in particular agencies acquired in the last three

years, which have not fully developed their coverage in secondary markets and developing “Greenfield” opportunities.

Greenfield opportunities exist in secondary markets with three service delivery alternatives:

1. Traditional branch or denovo locations;

2. Drop site or virtual office; or

3. Utilizing Point of Care Technology.

Cost of service revenue

Cost of service revenue from home-based services for the year ended December 31, 2011 was $307.7 million compared

to $281.0 million in 2010. As a percentage of home-based net service revenue, cost of service revenue increased to 55.2%

for the year ending December 31, 2011 compared to 50.6% for the year ending December 31, 2010. The factors

associated with the change in cost of service revenue were primarily driven by:

• increase in salaries, wages and benefits associated with an increase in admissions and episodes;

• increase in mileage reimbursement due to the rise in fuel prices;

• increase in overall costs associated with acquisitions; and

• decrease in supplies and services due to a contract renegotiation associated with the Lifeline product.

The following table summarizes cost of service revenue (amounts in thousands).

Year Ended December 31,

2011

2010

Salaries, wages and benefits
Transportation, primarily mileage reimbursement
Supplies and services

Total

(1) Percentage of home-based net service revenue.

$ 265,372
24,221
18,151

47.6% (1)
4.3
3.3

$ 240,281
20,118
20,614

43.3% (1)
3.6
3.7

$ 307,744

55.2%

$ 281,013

50.6%

Man age ment’s Discussion and Analysis of Fin a ncia l Co nd ition and Results of Operations

For m 1 0-K Pa r t II

LH C Group

Facility-Based Services Segment Results of Operations

Year Ended December 31,

Facility-Based Services Data:
Net service revenue
Cost of service revenue
Gross margin
Provision for bad debts
General and administrative expenses

Operating income

Patient days

2011

2010

2009

(amounts in thousands, except for statistical data)

$ 75,971
44,602
31,369
640
20,324

$ 10,405

$ 76,457
45,508
30,949
529
19,087

$ 11,333

$ 62,510
36,384
26,126
525
16,025

$ 9,576

61,939

61,658

51,235

Net service revenue from facility-based services for the year ended December 31, 2011 was $76.0 million compared with

$76.5 million in 2010.

Cost of service revenue from facility-based services for the year ended December 31, 2011 was $44.6 million compared to

$45.5 million in 2010, as detailed in the following table (amounts in thousands).

Year Ended December 31,

Salaries, wages and benefits
Transportation
Supplies and services
Total

(1) Percentage of facility-based net service revenue.

2011

2010

$ 26,926
189
17,487
$ 44,602

35.4% (1)
0.3
23.0
58.7%

$ 27,084
146
18,278
$ 45,508

35.4% (1)
0.2
23.9
59.5%

Year Ended December 31, 2010 Compared to Year Ended December 31, 2009

Net Service Revenue

Consolidated net service revenue for the year ended December 31, 2010 was $631.6 million compared to $529.2 million in

2009. The growth in home-based services net service revenue contributed $88.4 million of the increase in consolidated

net service revenue between the fiscal years ended December 31, 2010 and 2009. Net service revenue was comprised of

the following for the periods ending December 31:

Home-Based Services
Facility-Based Services

2010

2009

87.9%
12.1

100.0%

88.2%
11.8

100.0%

Revenue derived from Medicare represented 80.5% and 82.2% of consolidated net service revenue for the years ended

December 31, 2010 and 2009, respectively.

Cost of Service Revenue

Our cost of service revenue consists of expenses incurred by our clinical and clerical personnel in our agencies and

facilities. Cost of service revenue for the year ended December 31, 2010 was $326.5 million compared to $267.8 million in

2009. Cost of service revenue represented approximately 51.7% and 50.6% of our net service revenue for the years

ended December 31, 2010 and 2009, respectively.

Provision for Bad Debts

Provision for bad debts for the year ended December 31, 2010 was $7.6 million compared to $4.7 million for the year

ended December 31, 2009. For the years ended December 31, 2010 and 2009, the provision for bad debts was

approximately 1.2% and 0.9% of net service revenue, respectively.

Fo r m 1 0-K Par t II

Management’s Discussion and A naly sis of Fin a ncia l Co nd ition and Results of Opera ti on s

A Strong Foundation

In July 2007, we sold our critical access hospital. The recorded receivables were not sold in the transaction. Over the

following twelve months, after the sale, certain payors, including Medicare and Medicaid, paid the claims to the buyer,

who failed to remit those collections to us as called for under the terms of the sale agreement. We filed a lawsuit to recover

those amounts paid to the buyer. Over the same period, we fully reserved those claims. In September 2010, we were

successful in our lawsuit and recovered the amounts in full. As a result of the collection of the settlement, we recorded a

$477,000 reduction to the provision for bad debts for the year ending December 31, 2010.

General and Administrative Expenses

General and administrative expenses consist primarily of the following expenses incurred by our home office and

administrative field personnel:

• home office and field administration:

• salaries and related benefits;

•

insurance;

• costs associated with advertising and other marketing activities; and

• rent and utilities.

• supplies and services:

• accounting, legal and other professional services; and

• office supplies.

• depreciation;

• other:

• advertising and marketing expenses;

• recruitment;

• operating locations rent; and

•

taxes.

General and administrative expenses for the year ended December 31, 2010 were $201.8 million compared to

$171.7 million in 2009. General and administrative expenses represented approximately 32.0% and 32.4% of our net

service revenue for the years ended December 31, 2010 and 2009, respectively.

Gain (Loss) on the Sale of Assets and Entities and Non-operating Income

For the year ended December 31, 2010, non-operating income was $805,000 compared to a non-operating loss of

$261,000 for the year ended December 31, 2009. Non-operating income for the year ending December 31, 2010 relates to

bonus payments to our various home health agencies from CMS for participating in its “Pay for Performance” Initiative.

The non-operating loss for the year ended December 31, 2009 primarily relates to a $542,000 impairment expense

on two provider numbers which were purchased in 2008. In February 2009, CMS denied our change of ownership for the

provider numbers because the agency locations had been moved outside of the allowed service area. We have since

received new provider numbers for these home health agencies. However, the purchased provider numbers no longer

have value and were written off in 2009.

Income Tax Expense

The effective tax rates for the years ended December 31, 2010 and December 31, 2009 were 39.4% and 37.8%,

respectively, of income from continuing operations attributable to LHC Group, Inc.

The Work Opportunity Tax Credit expired during 2010 causing the tax rate to increase for the year ending December 31,

2010. The Company also realized a tax benefit during 2009 by utilizing the net operating loss, on one of the Company’s joint

ventures, which had previously been fully reserved. The tax benefit caused the effective tax rate to be lower during 2009.

Net Income Attributable to Noncontrolling Interest

Net income attributable to noncontrolling interest was $15.8 million and $14.0 million for the years ended December 31,

2010 and 2009, respectively. Net income attributable to noncontrolling interest consistently represented 2.5% and 2.6% of

net service revenue for the years ended December 31, 2010 and 2009, respectively.

Man age ment’s Discussion and Analysis of Fin a ncia l Co nd ition and Results of Operations

For m 1 0-K Pa r t II

LH C Group

Home-Based Services Segment Results of Operations

Net service revenue from home-based services for the year ended December 31, 2010 was $555.1 million compared to

$466.7 million in 2009. Total admissions increased 21.4% to 95,688 during the year ended December 31, 2010, compared

to 78,834 for the same period in 2009. Average home-based patient census for the year ended December 31, 2010

increased 12.9% to 32,997 patients as compared with 29,221 patients for the year ended December 31, 2009.

As detailed in the tables below, the increase in revenue in 2010 resulted from both organic growth and the growth from

our acquisitions during the year ended December 31, 2010.

Organic growth includes growth in “same store” locations, or those locations owned for greater than 12 months, and

growth from “de novo” locations. We calculate organic growth by dividing organic growth generated in a period by total

revenue generated in the same period of the prior year. Revenue from acquired agencies contributes to organic growth

beginning with the thirteenth month after acquisition.

The following tables detail the home-based services revenue growth and home health agencies percentages for organic

and total growth (amounts in thousands, except statistical data):

Year Ending December 31, 2010

Same Store (1)

De Novo (2)

Organic (3)

Revenue
Revenue Medicare
Average Census
Average Medicare Census
Admissions
Medicare Admissions
Episodes

$ 524,022
$ 431,296
29,797
23,883
85,961
63,146
159,618

$ 1,372
$ 1,090
205
171
355
265
371

$ 525,394
$ 432,386
30,002
24,054
86,316
63,411
159,989

Organic
Growth %

12.6%
11.4%
4.5%
4.6%
13.1%
13.5%
8.6%

Acquired (4)

Total

Total
Growth %

$ 29,716
$ 20,941
2,373
1,487
6,448
3,415
6,814

$ 555,110
$ 453,327
32,375
25,541
92,764
66,826
166,803

18.9%
16.8%
12.7%
11.1%
21.6%
19.6%
13.2%

(1) Same store – location that has been in service with the Company for greater than 12 months.

(2) De Novo – internally developed location that has been in service with the Company for 12 months or less.

(3) Organic – combination of same store and de novo.

(4) Acquired – purchased location that has been in service with the Company for 12 months or less.

Year Ending December 31, 2009

Same Store (1)

De Novo (2)

Organic (3)

Revenue
Revenue Medicare
Average Census
Average Medicare Census
Admissions
Medicare Admissions
Episodes

$ 410,467
$ 345,610
24,357
19,924
61,583
46,156
134,819

$ 2,579
$ 2,245
496
426
188
145
810

$ 413,046
$ 347,855
24,853
20,350
61,771
46,301
135,629

Organic
Growth %

26.7%
27.2%
15.5%
17.3%
14.5%
12.4%
25.2%

Acquired (4)

Total

Total
Growth %

$ 53,690
$ 40,307
3,868
2,644
14,515
9,562
11,670

$ 466,736
$ 388,162
28,721
22,994
76,286
55,863
147,299

43.2%
42.0%
33.5%
32.5%
41.3%
35.7%
36.0%

(1) Same store – location that has been in service with the Company for greater than 12 months.

(2) De Novo – internally developed location that has been in service with the Company for 12 months or less.

(3) Organic – combination of same store and de novo.

(4) Acquired – purchased location that has been in service with the Company for 12 months or less.

Organic growth for total new admissions was 13.1% in 2010 compared to 14.5% in 2009. Organic growth is 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, in the second full year of operation after acquisition.

Fo r m 1 0-K Par t II

Management’s Discussion and A naly sis of Fin a ncia l Co nd ition and Results of Opera ti on s

The primary strategies to increase organic growth include differentiating ourselves from our competitors through our care

services and quality outcomes, focusing our sales efforts on our agencies, in particular agencies acquired in the last three

years, which have not fully developed their coverage in secondary markets and developing “Greenfield” opportunities.

Greenfield opportunities exist in secondary markets with three service delivery alternatives:

A Strong Foundation

1. Traditional branch or denovo locations;

2. Drop site or virtual office; or

3. Utilizing Point of Care Technology.

Cost of Service Revenue

Cost of service revenue from home-based services for the year ended December 31, 2010 was $281.0 million compared

to $231.4 million in 2009. As a percentage of home-based net service revenue cost of service revenue remained

consistent at 50.6% for the year ending December 31, 2010 compared to 49.6% for the year ending December 31, 2009.

The following table summarizes cost of service revenue (amounts in thousands).

Year Ended December 31,

2010

2009

Salaries, wages and benefits
Transportation, primarily mileage reimbursement
Supplies and services

Total

(1) Percentage of home-based net service revenue.

General and Administrative Expenses

$ 240,281
20,118
20,614

43.3% (1)
3.6
3.7

$ 197,667
16,441
17,289

42.4% (1)
3.5
3.7

$ 281,013

50.6%

$ 231,397

49.6%

General and administrative expenses from the home-based services for the year ended December 31, 2010 were $182.8

million compared to $155.7 million in 2009. General and administrative expenses remained relatively consistent at 33.0%

and 33.4% of our net service revenue during the years ended December 31, 2010 and 2009, respectively.

Facility-Based Services Segment Results of Operations

Net service revenue from facility-based services for the year ended December 31, 2010 was $76.5 million compared to

$62.5 million in 2009. The increase in net service revenue primarily relates to the additional revenue from our LTACH

acquired during the second quarter of 2009 and the LTACH acquired in 2010.

Cost of Service Revenue

Cost of service revenue from facility-based services for the year ended December 31, 2010 was $45.5 million compared to

$36.4 million in 2009, as detailed in the following table (amounts in thousands).

Year Ended December 31,

Salaries, wages and benefits
Transportation
Supplies and services

Total

(1) Percentage of facility-based net service revenue.

General and Administrative Expenses

2010

2009

$ 27,084
146
18,278

35.4% (1)
0.2
23.9

$ 22,488
150
13,746

35.9% (1)
0.2
22.1

$ 45,508

59.5%

$ 36,384

58.2%

General and administrative expenses from facility-based services for the year ended December 31, 2010 were

$19.1 million compared to$16.0 million in 2009. General and administrative expenses in the facility-based segment

remained consistent as 25.0% and 25.6% of net service revenue for the years ended December 31, 2010 and

December 31, 2009, respectively.

Man age ment’s Discussion and Analysis of Fin a ncia l Co nd ition and Results of Operations

For m 1 0-K Pa r t II

LH C Group

Liquidity and Capital Resources

Cash at December 31, 2011 was $256,000 compared to $288,000 at December 31, 2010. Based on our current plan

of operations, including acquisitions, we believe this amount, when combined with expected cash flows from operations

and amounts available under our revolving line of credit will be sufficient to fund our growth strategy and to meet

our anticipated operating expenses, capital expenditures and debt service obligations for at least the next 12 months.

Liquidity

Our principal source of liquidity for our operating activities is the collection of our accounts receivable, most of which

are collected from governmental and third-party commercial payors. Our reported cash flows from operating activities are

impacted by various external and internal factors, including the following:

• Operating Results – Our net income has a significant impact on our operating cash flows. Any significant increase or

decrease in our net income could have a material impact on our operating cash flows.

• Timing of Acquisitions – We use our operating cash flows to purchase home health agencies, hospice agencies and

LTACHs. When the acquisitions occur at or near the end of a period, our cash outflows significantly increase.

• Timing of Payroll – Our employees are paid bi-weekly on Fridays; therefore, operating cash flows decline in reporting

periods that end on a Friday. Conversely, for those reporting periods ending on a day other than Friday, our cash flows

are higher because we have not yet paid our payroll.

• Medical Insurance Plan Funding – We are self-funded for medical insurance purposes. Any significant changes in the

amount of insurance claims submitted could have a direct impact on our operating cash flows.

• Medical Supplies – A significant expense associated with our business is the cost of medical supplies. Any increase in

the cost of medical supplies, or in the use of medical supplies by our patients, could have a material impact on our

operating cash flows.

Cash used in investing activities is primarily for acquisitions of home nursing and hospice agencies, while cash

used by financing activities relates to payments on outstanding debt agreements and payments to our noncontrolling

interest partners.

The following table summarizes changes in cash flows (amounts in thousands):

Year Ended December 31,

Cash provided (used) by operating activities
Cash used in investing activities
Cash provided (used) in financing activities

Change in cash
Cash and cash equivalents at beginning of period

Cash and cash equivalents at end of period

2011

2010

$ (3,376)
(19,625)
22,969

$ 71,937
(43,333)
(28,710)

(32)
288

(106)
394

256

288

Operating activities during the year ended December 31, 2011 used $3.4 million in cash compared to $71.9 million

provided by operating activities during the year ended December 31, 2010. Net loss of $3.7 million, including the $65 million

settlement with the United States of America, significantly reduced operating cash flow in 2011 compared to net income of

$64.5 million in 2010. At December 31, 2011, working capital was $80.7 million compared to $55.7 million at December 31,

2010, an increase of $25 million. The increase in working capital was primarily due to an increase in patient accounts

receivable and prepaid income taxes.

Investing activities used $19.6 million and $43.3 million in cash for the years ended December 31, 2011 and 2010,

respectively. Cash outflows for the year ended December 31, 2011 included $8.0 million for purchases of property,

building and equipment compared to $11.6 million for the year ended December 31, 2010. Cash outflows for the year

ending December 31, 2011 included $11.7 million for acquisitions, compared to $31.7 million for acquisitions for the year

ending December 31, 2010.

Fo r m 1 0-K Par t II

Management’s Discussion and A naly sis of Fin a ncia l Co nd ition and Results of Opera ti on s

A Strong Foundation

Financing activities provided $23.0 million in the year ended December 31, 2011 compared to $28.7 million used in the

year ended December 31, 2010. The increase was partially due to the line of credit proceeds drawn to pay the settlement

with the United State of America. In 2010, we paid all payment on debt and payment of contingent consideration. Cash

distributions to noncontrolling interests decreased $3.8 million during the year ending December 31, 2011 compared to the

year ending December 31, 2010.

Days sales outstanding (“DSO”) for the year ended December 31, 2011 was 53 days compared to 46 days for the same

period in 2010.

Credit Facility

On September 28, 2011, the Company entered into a Second Amendment To Second Amended and Restated Credit

Agreement (the “Second Amendment”). The Second Amendment permits the Company to borrow up to $1.5 million

pursuant to a real estate construction loan extended by American First Bank in Opelousas, Louisiana. The loan proceeds

are to be used by Borrower to construct a building for Borrower’s business in Opelousas, Louisiana.

On September 28, 2011, the Company entered into a Third Amendment To Second Amended and Restated Credit

Agreement (the “Third Amendment”). The Third Amendment permits the Company to fund the settlement with the United

States of America entered into on September 27, 2011, and more fully described in Note 10. Commitments and

Contingencies. The Third Amendment revises the Minimum Fixed Charge Coverage and Leverage Ratio covenant

requirements in order to remove the settlement amount from the calculation of such covenants.

On December 8, 2011, the Company entered into a Fourth Amendment to Second Amended and Restated Credit

Agreement (the “Fourth Amendment”). The Fourth Amendment permits the Company to increase the sublimit for letters

of credit to $7.5 million and to include provisions for a prospective increase to the total line of credit commitment from

$75 million to a maximum aggregate principal amount of up to $100 million.

The Company paid $578,000 of credit fees on the Credit Facility during 2011. At December 31, 2011 and 2010,

outstanding letters of credit were $3.8 million and $2.9 million, respectively, which are issued as collateral on our workers’

compensation insurance.

The interest rate for borrowings under the Credit Facility is a function of the prime rate (Base Rate) or the Eurodollar rate

(Eurodollar), as elected by the Company, plus the applicable margin as set forth below:

Leverage Ration

< 1.00:1.00
≥ 1.00:1.00 < 1.50:100
≥ 1.50:1.00 < 2.00:1.00

Eurodollar Margin Base Rate Margin

2.25%
2.50%
2.75%

1.00%
1.25%
1.50%

The Company’s Credit Facility contains customary affirmative, negative and financial covenants. For example, the

Company is restricted in incurring additional debt, disposing of assets, making investments, allowing fundamental

changes to the Company’s business or organization, and making certain payments in respect of stock or other ownership

interests, such as dividends and stock repurchases. Under the Credit Facility, the Company is also required to meet

certain financial covenants with respect to minimum fixed charge coverage, consolidated net worth, leverage and

minimum asset coverage ratios. At December 31, 2011, the Company was in compliance with all covenants and we expect

to be in compliance with all covenants throughout 2012.

The Company’s Credit Facility also contains customary events of default, including bankruptcy and other insolvency

events, cross-defaults to other debt agreements, a change in control involving the Company or any subsidiary guarantor,

and the failure to comply with covenants.

Man age ment’s Discussion and Analysis of Fin a ncia l Co nd ition and Results of Operations

For m 1 0-K Pa r t II

LH C Group

Commitments

The following table discloses aggregate information about our contractual obligations and the periods in which payments

are due as of December 31, 2011:

Contractual Cash Obligation

Total

Less Than 1 Year

1-3 Years

3-5 Years

More Than
5 Years

Payment Due by Period

Long-term debt
Operating leases

Total contractual cash obligations

Off-Balance Sheet Arrangements

$ 34,820
33,708

$ 68,528

—
12,400

$ 12,400

(In thousands)

$ 34,820
14,626

$ 49,446

—
4,882

$ 4,882

—
1,800

$ 1,800

We do not currently have any off-balance sheet arrangements with unconsolidated entities, financial partnerships or

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

The following discussions describe our critical accounting policies, which we believe require the most significant judgments

and estimates used in the preparation of our consolidated financial statements.

The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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 reported period. Actual results could differ from those estimates. Changes in the accounting estimates are reasonably

likely to occur from period to period. Accordingly, actual results could differ materially from our estimates. To the

extent that there are material differences between these estimates and actual results, our financial condition or results of

operations will be affected. We base our estimates on past experience and other assumptions that we believe are

reasonable under the circumstances and we evaluate these estimates on an ongoing basis.

Principles of Consolidation

The consolidated financial statements include all subsidiaries and entities controlled by us. We define control as ownership

of a majority of the voting interest of an entity. The consolidated financial statements include entities in which we have

the obligation to absorb losses of the entities or the right to receive benefits from the entities and have voting control over

the entities or both, as a result of ownership, contractual or other financial interests in the entities.

The following table summarizes the percentage of net service revenue earned by type of ownership or relationship we had

with the operating entity:

Wholly owned subsidiaries
Equity joint ventures
License leasing arrangements
Management services

2011

2010

2009

49.5%
47.1
2.4
1.0

49.5%
47.4
1.7
1.4

47.5%
49.2
1.8
1.5

100.0%

Fo r m 1 0-K Par t II

Management’s Discussion and A naly sis of Fin a ncia l Co nd ition and Results of Opera ti on s

A Strong Foundation

All significant inter-company accounts and transactions have been eliminated in consolidation. Business combinations

accounted for as purchases have been included in the consolidated financial statements from the respective dates

of acquisition.

The following describes the Company’s consolidation policy with respect to its various ventures excluding wholly

owned subsidiaries:

Equity Joint Ventures

Our joint ventures are structured as limited liability companies in which we typically own a majority equity interest ranging

from 51% to 90%. Each member of all but one of our equity joint ventures participates in profits and losses in proportion

to their equity interests. We have one joint venture partner whose participation in losses is limited. We consolidate these

entities as we have the obligation to absorb losses of the entities and the right to receive benefits from the entities and

have voting control over the entities.

License Leasing Arrangements

We, through wholly owned subsidiaries, lease home health licenses necessary to operate certain of our home nursing

agencies. As with wholly owned subsidiaries, we own 100% of the equity of these entities and consolidate them based on

such ownership, as well as our obligation to absorb losses of the entities and the right to receive benefits from the entities.

Management Services

We have various management services agreements under which we manage certain operations of agencies and facilities.

We do not consolidate these agencies or facilities, as we do not have an ownership interest and do not have an obligation

to absorb losses of the entities or the right to receive the benefits from the entities.

Revenue Recognition

We report net service revenue at the estimated net realizable amount due from Medicare, Medicaid, commercial

insurance, managed care payors, patients and others for services rendered. All payors contribute to both the home-based

services and facility-based services.

The following table sets forth the percentage of net service revenue earned by category of payor for the years ending

December 31:

Payor:
Medicare
Medicaid
Other

2011

2010

2009

79.7%
2.3
18.0

80.5%
2.7
16.8

82.2%
2.9
14.9

100.0%

The percentage of net service revenue contributed from each reporting segment was as follows for the years ending

December 31:

Home-Based Services
Facility-Based Services

2011

2010

2009

88.0%
12.0

87.9%
12.1

100.0%

88.2%
11.8

100.0%

Man age ment’s Discussion and Analysis of Fin a ncia l Co nd ition and Results of Operations

For m 1 0-K Pa r t II

LH C Group

Medicare

Home-Based Services

Home Nursing Services. Our home nursing Medicare patients are classified into one of 153 home health resource groups

prior to receiving services. Based on this home health resource group, we are entitled to receive a standard prospective

Medicare payment for delivering care over a 60-day period referred to as an episode. We recognize revenue based on the

number of days elapsed during an episode of care within the reporting period.

Final payments from Medicare may reflect one of four retroactive adjustments to ensure the adequacy and effectiveness

of the total reimbursement: (a) an outlier payment if the patient’s care was unusually costly; (b) a low utilization adjustment

if the number of visits was fewer than five; (c) a partial payment if the patient transferred to another provider before

completing the episode; or (d) a payment adjustment based upon the level of therapy services required in the population

base. Management estimates the impact of these payment adjustments based on historical experience and records

this estimate during the period the services are rendered. Our payment is also adjusted for geographic wage differences.

In calculating our reported net service revenue from home nursing services, we adjust the prospective Medicare payments

by an estimate of the adjustments. The adjustments are calculated using a historical average of prior adjustments.

Hospice Services. We are paid by Medicare under a per diem payment system. We receive one of four predetermined

daily or hourly rates based upon the level of care we furnished. We record net service revenue from hospice services based

on the daily or hourly rate and recognize revenue as hospice services are provided.

Hospice payments are also subject to an inpatient cap and an overall payment cap. Inpatient cap relates to individual

programs receiving more than 20% of its total Medicare reimbursement from inpatient care services and the overall

payment cap relates to individual programs 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. We monitor our limits on a

provider-by-provider basis and record a liability when program payments exceed the cap. To date we have not received

notification that any of our hospices have exceeded the cap on inpatient care services or overall payments during 2010

or 2011 to date.

Facility-Based Services

Long-Term Acute Care Services. We are reimbursed by Medicare for services provided under the LTACH prospective

payment system, which was implemented on October 1, 2002. Each patient is assigned a long-term care diagnosis-

related group. We are 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. We calculate 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 our LTACHs as services are provided.

Medicaid, managed care and other payors

Our 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. Our managed

care payors and other payors reimburse us in a manner similar to either Medicare or Medicaid. Accordingly, we recognize

revenue from managed care payors and other payors in the same manner as we recognize revenue from Medicare

or Medicaid.

Fo r m 1 0-K Par t II

Management’s Discussion and A naly sis of Fin a ncia l Co nd ition and Results of Opera ti on s

A Strong Foundation

Management Services

We record management services revenue as services are provided in accordance with the various management services

agreements to which we are a party. As described in the agreements, we provide billing, management and other

consulting services suited to and designed for the efficient operation of the applicable home nursing agency or inpatient

rehabilitation facility. We are responsible for the costs associated with the locations and personnel required for the

provision of services. We are compensated based on a percentage of cash collections, a flat fee or are reimbursed for

operating expenses and compensated based on a percentage of operating net income.

Income Tax

We operate in several tax jurisdictions and recognize income tax expense based on the revenue and income earned in

those jurisdictions which requires us to make estimates on the appropriations of revenue and income in those jurisdictions.

During 2011, we entered into a settlement with the United States of America which we believe is fully deductible for

income tax purposes. In compliance with the provisions of FIN 48 and based on our assessment of probable outcomes

we recorded an unrecognized tax position which increased income tax expense by $3.2 million.

Accounts Receivable and Allowances for Uncollectible Accounts

We report accounts receivable net of estimated allowances for uncollectible accounts and adjustments. Accounts

receivable are uncollateralized and primarily consist of amounts due from Medicare, other third-party payors, and patients.

To provide for accounts receivable that could become uncollectible in the future, we establish an allowance for

uncollectible accounts to reduce the carrying amount of such receivables to their estimated net realizable value. 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 66% of our patient accounts receivable

at December 31, 2011 and 2010, 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. Uncollectible accounts are written off after

exhausting collection efforts and we have concluded 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”). We submit 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

RAPs received for that episode will be recouped by Medicare from any other Medicare claims in process for that

particular provider. The RAP and final claim must then be resubmitted. For subsequent episodes of care contiguous with

the first episode for a particular patient, we submit a RAP for 50% instead of 60% of the estimated reimbursement.

Our Medicare population is paid at a prospectively set amount that can be determined at the time services are rendered.

Our Medicaid reimbursement is based on a predetermined fee schedule applied to each individual service we provide.

Our managed care contracts are structured similar to either the Medicare or Medicaid payment methodologies. Because

of our payor mix, we are able to calculate our 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.

At December 31, 2011, our allowance for uncollectible accounts, as a percentage of patient accounts receivable, was

approximately 10.5%, or $10.7 million, compared to 10.9%, or $9.8 million, at December 31, 2010.

Man age ment’s Discussion and Analysis of Fin a ncia l Co nd ition and Results of Operations

For m 1 0-K Pa r t II

LH C Group

The following table sets forth, as of December 31, 2011, the aging of accounts receivable (based on the billing date)

and the total allowance for uncollectible accounts, expressed as a percentage of the related aged accounts receivable

(amounts in thousands):

Payor

Medicare
Medicaid
Other

Total

0-90

91-180

181-365

Over 365

Total

$ 48,656
2,609
18,346

$ 69,611

$ 10,358
770
5,425

$ 16,553

$ 6,732
642
5,860

$ 1,110
160
1,240

$ 66,856
4,181
30,871

$ 13,234

$ 2,510

$ 101,908

Allowance as a percentage of receivables

3.7%

9.9%

30.0%

98.8%

10.5%

For home-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 a result,

the allowance percentages presented in the table above vary between the aging categories because of the mix of claims

in each category.

The following table sets forth, as of December 31, 2010, the aging of accounts receivable (based on the billing date)

and the total allowance for uncollectible accounts, expressed as a percentage of the related aged accounts receivable

(amounts in thousands):

Payor

Medicare
Medicaid
Other

Total

0-90

91-180

181-365

Over 365

Total

$ 47,864
2,615
14,712

$ 65,191

$ 6,247
714
5,220

$ 12,181

$ 3,174
811
3,724

$ 7,709

$ 1,853
1,358
1,532

$ 4,743

$ 59,138
5,498
25,188

$ 89,824

Allowance as a percentage of receivables

3.4%

10.7%

27.2%

87.0%

10.9%

The following table summarizes the activity and ending balances in the allowance for uncollectible accounts (amounts

in thousands):

Year ended December 31:
2011
2010
2009

Goodwill and Intangible Assets

Beginning of Additions and
Year Balance

Expenses

Deductions

End of
Year Balance

$ 9,769
8,262
9,976

$ 12,320
7,607
4,724

$ 11,397
6,100
6,438

$ 10,692
9,769
8,262

We have a significant amount of goodwill on our balance sheet from the numerous business acquisitions we have made

each year. We review goodwill and other intangible assets with indefinite lives annually for impairment or more frequently if

circumstances indicate impairment may have occurred. We evaluate impairment by comparing the current fair value of

each of our reporting units to their carrying value, including goodwill. To the extent the carrying value of a reporting unit

exceeds the fair value of the reporting unit; the Company would be required to perform the second step of the impairment

test. Components of our home-based services operating segment are generally represented by individual subsidiaries

or joint ventures with individual licenses to conduct homecare or hospice operations within geographic markets as limited

by the terms of each license. Our segment managers review discreet financial information for our homecare and hospice

businesses and we believe that they represent two reporting units for the purposes of evaluating impairment. Components

of our facility-based services operating segment are represented by individual operating entities. For the purposes of

evaluating impairment, we believe it is appropriate to aggregate these operating components. Our impairment analysis is

performed on September 30th of each year.

Fo r m 1 0-K Par t II

Management’s Discussion and A naly sis of Fin a ncia l Co nd ition and Results of Opera ti on s

A Strong Foundation

We estimate the fair value of our identified reporting units using the discounted cash flow method and the market multiple

analysis method. These valuations require us to make estimates and assumptions regarding industry economic factors

and the profitability of future business strategies. We consider historical experience and all available information at the time

the fair values of its reporting units are estimated. For each of the reporting units, the estimated fair value is determined

based on a formula that considers 50% of the estimated value based on a multiple of earnings before interest, taxes,

depreciation and amortization plus 50% of the estimated value using discounted cash flow method.

The fair value of goodwill exceeded the carrying value by 5.6% for the homecare reporting unit, 19.5% for the hospice

reporting unit and 55.5% for the facility based services reporting unit.

Although these test results do not indicate impairment they do result in the fair value of the homecare reporting unit, which

has recorded goodwill of $103.4 million, being less than substantially in excess of the carrying value. The discount

rate and projected revenue and earnings before interest, tax, depreciation and amortization (EBITDA) growth rates are

significant assumptions utilized when applying the discounted cash flow method. We applied a discount rate of 10.7%,

which is derived from our weighted average cost of capital. The future cash flows of the homecare reporting unit is based

on six percent annual organic census growth, known reimbursement changes, an estimate of normal annual cost

increases and our ability to control costs. In developing our forecast assumptions, we considered our historical performance

and the current reimbursement and utilization trends, and market share assumptions in the markets where we operate.

These assumptions could be adversely impacted by unanticipated changes in risks or other economic factors including

deterioration of general economic and industry conditions.

We also compared our equity book value to our market capitalization as of September 30, 2011. Our stock price on

September 30, 2011 was $17.06. Our stock price was affected by external factors such as the economic downturn and the

overall decline in the stock market. Factors in our industry and particular to our company, such as significant reimbursement

cuts, additional physician documentation, and the announcement of the settlement with the United States government

and the related financial loss affected our stock price. The implied fair value of our Company based on the market

capitalization exceeded the carrying value as of September 30, 2011, although that does not individually validate the fair

value of each reporting unit discussed above. Our stock price did decline as of December 31, 2011 to a value that

indicated a market capitalization below book value. However, we believe the calculations of fair value discussed above are

reasonable in relation to the overall market capitalization of our Company.

A change in the weight assigned to each methodology would not have changed the conclusion that no impairment charge

is necessary during the year ending December 31, 2011. We have not recognized goodwill impairment charges in 2011,

2010 or 2009.

Included in intangible assets, net are definite-lived assets subject to amortization such as software licenses and

non-compete agreements. Amortization of the definite-lived intangible assets is calculated on a straight-line basis over the

estimated useful lives of the related assets. Software licenses are amortized over a three year period and non-compete

agreements are amortized over the life of the agreement, usually ranging from three to five years.

We also have indefinite-lived assets that are not subject to amortization expense such as trade names, certificates of need

and licenses to conduct specific operations within geographic markets. Trade names, certificates of need and licenses

have indefinite lives because there are no legal, regulatory, contractual, economic or other factors that would limit the

useful life of these intangible assets and we intend to renew and operate the certificates of need, licenses and use these

trade names indefinitely. We perform an annual impairment test on the trade names using the relief-from royalty

method. Under this method, the fair value of the intangible asset is determined by calculating the present value of the

after-tax cost savings associated with owning the trade names and, therefore, not having to pay royalties for its use for

the remainder of its estimated useful lives. The certificates of need and licenses are tested annually for impairment

using the cost approach. Under this method, assumptions are made about the cost to replace the certificates of need.

Man age ment’s Discussion and Analysis of Fin a ncia l Co nd ition and Results of Operations

For m 1 0-K Pa r t II

LH C Group

Recent Accounting Pronouncements

In August 2010, the FASB issued new accounting guidance which changes the presentation of insurance claims and

related insurance recoveries. The guidance clarifies that insurance recoveries on medical malpractice claims and other

similar contingent liabilities should not be presented net of the related claim liability. The new guidance was effective

for us on January 1, 2011 and is applied on a prospective basis. Included in other current assets as of December 31, 2011

is $1.0 million for expected insurance recoveries.

In December 2010, the FASB issued new accounting guidance related to the Disclosure of Supplementary Pro Forma

Information for Business Combinations. The guidance specifies that if a public entity presents comparative financial

statements, the entity should disclose revenue and earnings of the combined entity as though the business combinations

that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period

only. The guidance also expands the supplemental pro forma disclosures to include a description of the nature and

amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the

reported pro forma revenue and earnings. The guidance was effective for us January 1, 2011 and did not have a

material effect on our financial statements.

In July 2011, FASB issued new accounting guidance that requires certain health care entities to change the presentation

of their statement of operations by reclassifying the provision for bad debts associated with patient service revenue from

an operating expense to a separate line as a deduction from patient service revenue. The guidance also requires

enhanced disclosure about our policies for recognizing revenue and assessing bad debts. The guidance further requires

qualitative and quantitative disclosures about changes in the allowance for doubtful accounts. We will adopt the new

guidance prospectively in the first quarter of 2012. While the adoption is prospective, disclosure requirements will be applied

retrospectively for the periods presented in our filings subsequent to adoption. We do not expect the adoption of the

new guidance to have a material effect on our financial condition, results of operations, or cash flows.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

As of December 31, 2011, we had $256,000 in cash. Cash in excess of requirements are deposited in highly liquid money

market instruments with maturities less than 90 days. Because of the short maturities of these instruments, we would

not expect our operating results or cash flows to be materially affected by the effect of a sudden change in market interest

rates on our portfolio. The FDIC reinstated coverage on all non interest bearing checking accounts through December 31,

2012. All non interest bearing accounts are fully insured, regardless of the balance on the account.

Our exposure to market risk relates to changes in interest rates for borrowings under the credit facility we

amended and restated on October 13, 2010, and subsequently amended on October 29, 2010, September 28, 2011,

September 28, 2011 and December 8, 2011. 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 $91,000 for the year

ended December 31, 2011.

Item 8. Financial Statements and Supplementary Data.

The consolidated financial statements and financial statement schedules in Part IV, Item 15 of this Annual Report on

Form 10-K are incorporated by reference into this Item 8.

Fo r m 1 0-K Par t II

Management’s Discussion and A naly sis of Fin a ncia l Co nd ition and Results of Opera ti on s

A Strong Foundation

Item 9. Changes In and Disagreements with Accountants on Accounting

and Financial Disclosure.

None.

Item 9A. Controls and Procedures.

Evaluation of Disclosure Control and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be

disclosed by the company in the reports it files or submits under the Exchange Act of 1934 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 the Company’s management, including its Chief Executive Officer and Chief

Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and

Chief Financial Officer, management evaluated the effectiveness of the Company’s disclosure controls and procedures

as of December 31, 2011. Based on that evaluation, the Company’s Chief Executive Officer and its Chief Financial Officer

concluded that the Company’s disclosure controls and procedures (as such term is defined under Rule 13a-15(e)

promulgated under the Securities Exchange Act of 1934, as amended) were effective as of December 31, 2011.

Management’s Report on Internal Control Over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial

reporting, as that term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of the

Company’s management, including the Chief Executive Officer and Chief Financial Officer, the Company conducted

an evaluation of its internal control over financial reporting based on the framework in Internal Control – Integrated Framework

issued by the Committee of Sponsoring Organizations of the Treadway Commission. Because of its inherent limitations,

internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of

effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in

conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Based on management’s testing and evaluation under the framework in Internal Control – Integrated Framework,

management concluded that our internal control over financial reporting was effective as of December 31, 2011.

The attestation report of KPMG LLP, the independent registered public accounting firm, is included herein.

Changes in Internal Control Over Financial Reporting

There have not been any changes in the Company’s internal control over financial reporting, as such term is defined in

Rule 13a-15(f) under the Exchange Act, during the Company’s fiscal quarter ended December 31, 2011 that have

materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Man age ment’s Discussion and Analysis of Fin a ncia l Co nd ition and Results of Operations

For m 1 0-K Pa r t II

LH C Group

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

LHC Group, Inc.

We have audited LHC Group, Inc.’s internal control over financial reporting as of December 31, 2011, based on criteria

established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the

Treadway Commission (COSO). LHC Group, Inc.’s (the Company) management is responsible for maintaining effective

internal control over financial reporting and for its assessment of the effectiveness of internal control over financial

reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility

is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United

States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether

effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an

understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing

and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also

included performing such other procedures as we considered necessary in the circumstances. We believe that our audit

provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the

reliability of financial reporting and the preparation of financial statements for external purposes in accordance with

U.S. generally accepted accounting principles. A company’s internal control over financial reporting includes those policies

and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect

the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are

recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted

accounting principles, and that receipts and expenditures of the company are being made only in accordance with

authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention

or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material

effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,

projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate

because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, LHC Group, Inc. maintained, in all material respects, effective internal control over financial reporting as

of December 31, 2011, based on criteria established in Internal Control – Integrated Framework issued by the Committee of

Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United

States), the consolidated balance sheets of LHC Group, Inc. and subsidiaries as of December 31, 2011 and 2010, and

the related consolidated statements of operations, changes in equity, and cash flows for each of the years in the three

year period ended December 31, 2011, and our report dated March 15, 2012 expressed an unqualified opinion on those

consolidated financial statements.

/s/ KPMG LLP

Baton Rouge, Louisiana

March 15, 2012

Fo r m 1 0-K Par t II

Repor t of Inde pendent Registe red P ub lic Ac cou n ti n g F i r m

A Strong Foundation

Item 9B. Other Information.

On December 8, 2011, the Company entered into a Fourth Amendment to the Second Amended and Restated Credit

Facility (the “Fourth Amendment”), by and among LHC Group, Inc., a Delaware corporation (the “Borrower”), the lenders

set forth on the signature page to the Fourth Amendment (the “lenders”) and Capital One, National Association, a

national banking association, individually as a lender and as administrative agent, sole book runner and sole lead arranger.

The Fourth Amendment permits Borrower to increase the sublimit for letters of credit to $7.5 million and provides for

a prospective increase to the total line of credit commitment from $75 million to a maximum aggregate principal of up to

$100 million. The foregoing description of the Fourth Amendment is not complete and is qualified in its entirety by the

full text thereof, which is filed as Exhibit 10.20 hereto and is incorporated herein by reference.

PART III

Item 10. Directors, Executive Officers and Corporate Governance.

The information required by this Item with respect to directors and executive officers is incorporated by reference from the

information contained under the headings “Directors and Executive Officers” and “Corporate Governance” in the definitive

Proxy Statement relating to the Company’s 2012 Annual Meeting of Stockholders.

The information required by this Item regarding compliance with Section 16(a) of the Exchange Act is incorporated by

reference from the information contained under the heading “Directors and Executive Officers” in the definitive Proxy

Statement relating to the Company’s 2012 Annual Meeting of Stockholders.

The information required by this Item with respect to corporate governance is incorporated by reference from the

information contained under the heading “The Board of Directors and Corporate Governance” in the definitive Proxy

Statement relating to the Company’s 2012 Annual Meeting of Stockholders.

Code of Conduct and Ethics

We have adopted a code of ethics that applies to all of our directors, officers and employees. This code is publicly

available in the investor relations area of our website at www.lhcgroup.com. This code of ethics is not incorporated in this

report by reference. Copies of our code of ethics may also be requested in print by writing to Investor Relations at

LHC Group, Inc., 420 West Pinhook Road, Suite A, Lafayette, Louisiana 70503.

Item 11. Executive Compensation.

The information required by this Item is incorporated by reference from the information contained under the heading

“Executive Compensation” in the definitive Proxy Statement relating to the Company’s 2012 Annual Meeting of Stockholders.

Item 12. Security Ownership of Certain Beneficial Owners and Management

and Related Stockholder Matters.

The information required by this Item is incorporated by reference to the information contained under the headings

“Security Ownership of Certain Beneficial Owners and Management” in the definitive Proxy Statement relating to the

Company’s 2012 Annual Meeting of Stockholders.

Equity Compensation Plan Information

Plan Category

Equity compensation plans approved by Stockholders:
Equity compensation plans not approved by Stockholders:

Total

(a)

(b)

Number of Shares to be
Issued Upon Exercise
of Outstanding Options,
Warrants, and Rights

Weighted-Average
Exercise Price of
Outstanding Price of
Outstanding Rights

(c)
Number of Shares Remaining
Available for Future Issuance
Under Equity Compensation
Plans (Excluding Securities
Reflected in Column a)

15,000
—

15,000

$ 16.88
—

$ 16.88

1,325,330
—

1,325,330

For m 1 0-K Pa r t III

LH C Group

Item 13. Certain Relationships and Related Transactions, and Director Independence.

The information required by this Item is incorporated by reference from the information contained under the heading

“Certain Relationships and Related Transactions” in the definitive Proxy Statement relating to the Company’s 2012 Annual

Meeting of Stockholders.

Item 14. Principal Accounting Fees and Services.

The information required by this Item is incorporated by reference from the information contained under the heading

“Principal Accounting Fees and Services” in the definitive Proxy Statement relating to the Company’s 2012 Annual Meeting

of Stockholders.

PART IV

Item 15. Exhibits, Financial Statement Schedules.

(a) Documents to be filed with Form 10-K:

(1) Financial Statements

Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated Balance Sheets as of December 31, 2011 and 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

For each of the years in the three-year period ended December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated Statements of Changes in Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Notes to the Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F-1

F-2

F-3

F-4

F-5

F-6

(2) Financial Statement Schedules

There are no financial statement schedules included in this report.

(3) Exhibits

The Exhibits are listed in the Index of Exhibits required by Item 601 of Regulation S-K included herewith, which is

incorporated by reference.

Fo r m 1 0-K Par t IV

A Strong Foundation

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

LHC Group, Inc.

We have audited the accompanying consolidated balance sheets of LHC Group, Inc. and subsidiaries (the Company) as

of December 31, 2011 and 2010, and the related consolidated statements of operations, changes in equity, and cash flows

for each of the years in three year period ended December 31, 2011. These consolidated financial statements are the

responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial

statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United

States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the

financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting

the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles

used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial

position of LHC Group, Inc. and subsidiaries as of December 31, 2011 and 2010, and the results of their operations

and their cash flows for each of the years in three year period ended December 31, 2011, in conformity with U.S. generally

accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board

(United States), LHC Group, Inc.’s internal control over financial reporting as of December 31, 2011, based on criteria

established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of

the Treadway Commission (COSO), and our report dated March 15, 2012 expressed an unqualified opinion on the

effectiveness of the LHC Group, Inc.’s internal control over financial reporting.

/s/ KPMG LLP

Baton Rouge, Louisiana

March 15, 2012

Repor t of In dependent Regist ered Public Ac cou n ting Fir m

For m 1 0-K Pa r t IV

F-1

LH C Group

LHC GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share data)

As of December 31,

ASSETS
Current assets:
Cash
Receivables:

Patient accounts receivable, less allowance for uncollectible accounts of $10,692

and $9,769, respectively

Other receivables
Amounts due from governmental entities

Total receivables, net

Deferred income taxes
Prepaid income taxes
Prepaid expenses
Other current assets

Total current assets

Property, building and equipment, net of accumulated depreciation of $28,073 and $21,693
Goodwill
Intangible assets, net of accumulated amortization of $2,325 and $1,499
Advance payment on acquisitions
Other assets

2011

2010

256

288

91,183
1,636
315
93,134
7,269
26,667
6,576
4,363
138,265
28,182
164,731
59,389
—
5,809

79,939
5,210
429
85,578
5,941
5,326
6,573
3,442
107,148
26,862
157,338
54,051
6,947
4,959

Total assets

$ 396,376

$ 357,305

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and other accrued liabilities
Salaries, wages and benefits payable
Self insurance payable
Amounts due to governmental entities

Total current liabilities

Deferred income taxes
Income tax payable
Revolving credit facility
Total liabilities

Noncontrolling interest-redeemable
Stockholders’ equity:
Common stock – $0.01 par value: 40,000,000 shares authorized; 21,374,264 and 21,180,286 shares

issued and 18,298,659 and 18,172,022 shares outstanding, respectively

Treasury stock – 3,075,605 and 3,008,264 shares at cost, respectively
Additional paid-in capital
Retained earnings

Total LHC Group, Inc. stockholders’ equity

Noncontrolling interest – non-redeemable

Total equity

Total liabilities and stockholders’ equity

See accompanying Notes to the Consolidated Financial Statements

$ 23,119
25,571
5,612
3,234
57,536
22,523
3,415
34,820
118,294
11,348

183
(6,216)
95,964
173,752
263,683
3,051
266,734

$ 21,017
23,112
4,177
3,159
51,465
16,817
—
—
68,282
13,535

181
(4,453)
91,017
186,996
273,741
1,747
275,488

$ 396,376

$ 357,305

F-2

F or m 10 -K Par t IV

Consolida ted Balance Sh ee ts

LHC GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except share and per share data)

For the Year Ended December 31,

2011

2010

2009

A Strong Foundation

Net service revenue
Cost of service revenue
Gross margin
Provision for bad debts
Settlement with government agencies
General and administrative expenses
Operating income (loss)
Interest expense
Gain (loss) on the sale of assets and entities
Non-operating (loss) income
Income (loss) from continuing operations before income taxes and noncontrolling interests
Income tax expense (benefit)
Income (loss) from continuing operations
Loss from discontinued operations (net of income tax benefit of $55)
Net income (loss)
Less net income attributable to noncontrolling interest
Net income (loss) attributable to LHC Group, Inc.
Redeemable noncontrolling interests

$ 633,872 $ 631,567 $ 529,246
267,781
261,465
4,724
—
171,695
85,046
(142)
(22)
(239)
84,643
26,743
57,900
(86)
57,814
13,973
43,841
45

352,346
281,526
12,320
65,000
210,588
(6,382)
(1,018)
59
1,722
(5,619)
(1,968)
(3,651)
—
(3,651)
9,593
(13,244)
—

812
96,273
31,727
64,546
—
64,546
15,787
48,759
41

326,521
305,046
7,607
—
201,837
95,602

(134)
(7)

Net income (loss) available to LHC Group, Inc.’s common stockholders

(13,244) $

48,800 $

43,886

Earnings per share – basic:

Income (loss) from continuing operations attributable to LHC Group, Inc.

Loss from discontinued operations attributable to LHC Group, Inc.
Net income (loss) attributable to LHC Group, Inc.
Redeemable noncontrolling interest

(0.73) $
—
(0.73)
—

Net income (loss) attributable to LHC Group, Inc.’s common stockholders

(0.73) $

Earnings per share – diluted:

Income (loss) from continuing operations attributable to LHC Group, Inc.

Loss from discontinued operations attributable to LHC Group, Inc.
Net income (loss) attributable to LHC Group, Inc.
Redeemable noncontrolling interest

(0.73) $
—
(0.73)
—

Net income (loss) attributable to LHC Group, Inc.’s common stockholders

(0.73) $

2.69 $
—
2.69
—

2.69 $

2.68 $
—
2.68
—

2.68 $

2.44
—
2.44
—

2.44

2.43
—
2.43
—

2.43

Weighted average shares outstanding:
Basic
Diluted

See accompanying Notes to the Consolidated Financial Statements

18,265,118
18,265,118

18,119,183
18,226,091

17,960,376
18,069,897

Con so li dated Statements of O perations

For m 1 0-K Pa r t IV

F-3

LH C Group

LHC GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Amounts in thousands, except share data)

LHC Group, Inc.

Common Stock

Issued

Treasury

Amount

Additional
Paid-In
Capital

Non-Controlling
Interest –

Retained
Earnings Non-redeemable Equity Redeemable

Interest –

Total

Income
(Loss)

Non-Controlling Net

Balances at December 31, 2008
Net income

$ 179 20,853,463
—
—

$ (3,072)
—

2,957,631
—

$ 85,404
—

$ 94,310
43,841

$ 441
1,554

$ 177,262 $ 6,682
12,419

45,395

57,814

—

Transfer of noncontrolling interest
Purchase of additional
—
controlling interest
Acquired noncontrolling interest
—
Noncontrolling interest distributions —
Nonvested stock compensation
—
Issuance of vested restricted stock —
Treasury shares redeemed to pay

—

181

—

181

1,228

—
—
—
—
89,163

—
—
—
—
—

(2,286)
—
—
2,393
—

—
—
—
—
—

—
—
(1,607)
—
—

(2,286)
—
(1,607)
2,393
—

—
5,858
(12,364)
—
—

income tax

—

(441)

19,102

—

(441)

Issuance of common stock under
Employee Stock Purchase Plan
Recording noncontrolling interest in
joint venture at redemption value

—

24,792

—

618

—

618

—

Balances at December 31, 2009

$ 179 20,967,418

$ (3,513)

2,976,733

$ 86,310

$ 138,196

$ 388

$ 221,560 $ 13,823

Net income
Transfer of noncontrolling interest
Purchase of additional controlling

—
—

interest

—
Acquired noncontrolling interest
—
Noncontrolling interest distributions —
2
Stock issued for acquisitions
—
Stock option exercise
Nonvested stock compensation
—
Issuance of vested restricted stock —
Treasury shares redeemed to pay

—
—

—
—
—
50,150
4,000
—
130,211

—
—
—
—
—
—
—

—
—

—
—
—
—
—
—
—

—
—

48,759
—

1,824
684

50,583
684

13,963
(684)

64,546

(1,914)
—
—
1,548
91
3,742
—

—
—
Income
—
—
—
—
—

—
612
(1,761)
—
—
—
—

(1,914)
612
(1,761)
1,550
91
3,742
—

—
338
(13,905)
—
—
—
—

income tax

—

(940)

31,531

—

(940)

Excess tax benefits-vesting
nonvested stock
Issuance of common stock under
Employee Stock Purchase Plan
Recording noncontrolling interest in
joint venture at redemption value

—

459

—

28,508

—

781

—

459

781

—

Balances at December 31, 2010

$ 181 21,180,286

$ (4,453)

3,008,264

$ 91,017

$ 186,996

$ 1,747

$ 275,488 $ 13,535

—
Net income (loss)
—
Transfer of noncontrolling interest
Acquired noncontrolling interest
—
Noncontrolling interest distributions —
Purchase of additional controlling

interest

—
—
Sale of noncontrolling interest
Nonvested stock compensation
—
Issuance of vested restricted stock —
Treasury shares redeemed to pay

—
—
—
—

—
—
—
155,687

—
—
—
—

—
205
—
—

(641)
212
4,092
—

income tax

Repurchase of common stock
Excess tax benefits-vesting
nonvested stock
Issuance of common stock under
Employee Stock Purchase Plan

—
—

(1,186)
(577)

43,182
24,159

—
—

—

38,291

—

221

858

(13,244)
—
—
—

1,075
163
1,372
(1,402)

(12,169)
368
1,372
(1,402)

8,518
—
—
(10,455)

(3,651)

—
—
—
—

—
—

—
96
—
—

—
—

—

(641)
308
4,092
—

(1,186)
(577)

221

860

(250)
—
—
—

—
—

—

Balances at December 31, 2011

$ 183 21,374,264

$ (6,216)

3,075,605

$ 95,964

$ 173,752

$ 3,051

$ 266,734 $ 11,348

See accompanying Notes to the Consolidated Financial Statements

F-4

F or m 10 -K Par t IV

Consolida ted Statements of Ch ang es in E qu i ty

LHC GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

For the Year Ended December 31,

2011

2010

2009

A Strong Foundation

Operating activities
Net income (loss)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense
Provision for bad debts
Stock based compensation expense
Deferred income taxes
Loss on impairment of intangible assets
Changes in operating assets and liabilities, net of acquisitions:

Receivables
Prepaid expenses, other assets
Prepaid taxes
Accounts payable and accrued expenses
Net amounts due from governmental entities
Net cash provided by (used in) operating activities

Investing activities
Cash paid for acquisitions, primarily goodwill, intangible assets and advance payment
on acquisitions
Purchases of property, building and equipment
Net cash used in investing activities

Financing activities
Proceeds from line of credit
Payments on line of credit
Principal payments on debt
Payments on capital leases
Payment of contingent consideration
Excess tax benefits from vesting of restricted stock
Proceeds from issuance of common stock under ESPP
Proceeds from exercise of stock options
Noncontrolling interest distributions
Purchase of additional controlling interest
Sale of noncontrolling interest
Payment of deferred financing fees
Payments on repurchasing common stock

Net cash provided by (used in) financing activities
Change in cash
Cash at beginning of period

Cash at end of period

Supplemental disclosures of cash flow information
Interest paid

Income taxes paid

(3,651)

$ 64,546

$ 57,814

7,521
12,320
4,092
4,378
—

(21,024)
6,247
(17,926)
4,478
189
(3,376)

7,496
7,607
3,742
2,771
—

4,831
4,724
2,393
4,646
542

(16,195)
(2,319)
(2,194)
5,777
706
71,937

(19,278)
(1,617)
(3,130)
(168)
(1,565)
49,192

(11,680)
(7,945)
(19,625)

(31,747)
(11,586)
(43,333)

(33,427)
(8,236)
(41,663)

142,995
(108,175)
—
(14)
—
320
860
—
(11,857)
(891)
308
—
(577)

22,969
(32)
288

9,023
(14,746)
(4,483)
(31)
(1,726)
476
781
74
(15,666)
(1,914)
—
(498)
—

(28,710)
(106)
394

69,206
(63,483)
(508)
(80)
—
121
618
—
(13,971)
(2,286)
—
(263)
—

(10,646)
(3,117)
3,511

256

288

394

$ 1,018

134

142

$ 11,363

$ 30,605

$ 35,869

Supplemental disclosure of non-cash transactions:
2011 non-cash transactions. Consideration for one of the Company’s acquisitions during 2011 was a transfer of a 26.32% ownership interest in one of the Company’s
wholly owned home health agencies. The transfer of the noncontrolling interest in the Company’s existing home health agency was accounted for as an equity
transaction, resulting in the Company recognizing additional paid in capital of $206,000 and additional noncontrolling interest of $294,000. Additionally, the Company
acquired a majority ownership in four entities and recorded $1.3 million of noncontrolling interest related to the acquisitions.

In conjunction with the vesting of non-vested shares of stock, recipients incur personal income tax obligations. The Company allows the recipients to turn in shares of
common stock to satisfy those personal tax obligations. During 2011, the Company obtained $1.2 million of treasury shares for tax payments on stock vesting.

The Company recorded $3.4 million as an unrecognized tax benefit during 2011.

2010 non-cash transactions. During 2010, the Company acquired a majority ownership in six entities and recorded $950,000 of noncontrolling interest related to the
acquisitions.

During 2010, the Company issued 29,988 shares of the Company’s common stock, valued at $950,000, as settlement of contingent consideration on one of
he Company’s 2008 acquisitions. The shares were contingent upon the acquired company achieving certain financial measurements in the year after acquisition.
The acquired company achieved the financial measurements and, therefore, the Company remitted the remaining contingent consideration to the seller.

The Company also issued 20,162 shares, valued at $600,000, during 2010 as consideration for one of the Company’s 2010 acquisitions.

During 2010, the Company obtained $940,000 of treasury shares for tax payments on stock vesting.

2009 non-cash transactions. In February 2009, the Company acquired a 75% interest in Southeast Louisiana HomeCare, LLC in exchange for $7.5 million of cash and
a noncontrolling interest in three of the Company’s home health agencies. Also, during 2009, the Company acquired a majority ownership in 11 entities and recorded
$7.1 million of noncontrolling interest related to the acquisitions.

During 2009, the Company obtained $441,000 of treasury shares for tax payments on stock vesting.

See accompanying Notes to the Consolidated Financial Statements

Con so li dated Statements of Cash Flow

For m 1 0-K Pa r t IV

F-5

LH C Group

LHC GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization

LHC Group, Inc. (the “Company”) is a health care provider specializing in the post-acute continuum of care primarily for

Medicare beneficiaries. The Company provides home-based services, primarily through home nursing agencies and

hospices, and facility-based services, primarily through long-term acute care hospitals. The Company, through its wholly

and majority-owned subsidiaries, equity joint ventures and controlled affiliates, currently operates in Alabama, Arkansas,

Florida, Georgia, Idaho, Kentucky, Louisiana, Maryland, Mississippi, Missouri, North Carolina, Ohio, Oklahoma, Oregon,

Tennessee, Texas, Virginia, West Virginia and Washington.

2. Summary of Significant Accounting Policies

Reclassifications

A reclassification has been made to the December 31, 2010 and 2009 condensed consolidated statement of operations to

conform to the 2011 presentation. Net service revenue and cost of service revenue have been decreased by $3.5 million

and $2.7 million for the year ended December 31, 2010 and 2009, respectively, related to fees the Company collects and

subsequently pays to nursing homes primarily for room and board services provided to the Company’s hospice patients.

A reclassification has been made to the December 31, 2010 condensed consolidated balance sheets to reclassify

$116,000 into other receivables. The amount was previously recorded in patients accounts receivable; however, the

transactions are not specifically related to patient claims. This reclassification had no affect on the condensed

consolidated statements of cash flows.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“US 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 reported period. Actual results could differ from those estimates.

Principles of Consolidation

The consolidated financial statements include all subsidiaries and entities controlled by the Company. Control is defined

by the Company as ownership of a majority of the voting interest of an entity. The consolidated financial statements include

entities in which the Company has the obligation to absorb losses of the entities or the right to receive benefits from

the entities and generally has voting control over the entities or both, as a result of ownership, contractual or other financial

interests in the entities. Third party equity interests in the consolidated joint ventures are reflected as noncontrolling

interests in the Company’s consolidated financial statements.

The following table summarizes the percentage of net service revenue earned by type of ownership or relationship the

Company had with the operating entity for the periods presented:

Wholly owned subsidiaries
Equity joint ventures
License leasing arrangements
Management services

2011

49.5%
47.1%
2.4
1.0

2010

49.5%
47.4
1.7
1.4

2009

47.5%
49.2
1.8
1.5

100.0%

F-6

F or m 10 -K Par t IV

Notes to Co nsolidated F inanc ial S tate m en ts

A Strong Foundation

All significant inter-company accounts and transactions have been eliminated in consolidation. Business combinations

accounted for as purchases have been included in the consolidated financial statements from the respective dates

of acquisition.

The following discussion describes the Company’s consolidation policy with respect to its various ventures excluding

wholly owned subsidiaries:

Equity Joint Ventures

The Company’s joint ventures are structured as limited liability companies in which the Company typically owns a majority

equity interest ranging from 51% to 90%. Each member of all but one of the Company’s equity joint ventures participates

in profits and losses in proportion to their equity interests. The Company has one joint venture partner whose participation

in losses is limited. The Company consolidates these entities as the Company has the obligation to absorb losses of the

entities and the right to receive benefits from the entities and generally has voting control over the entities.

License Leasing Arrangements

The Company, through wholly owned subsidiaries, leases home health licenses necessary to operate certain of its home

nursing agencies. As with wholly owned subsidiaries, the Company owns 100% of the equity of these entities and

consolidates them based on such ownership, as well as the Company’s obligation to absorb losses of the entities and the

right to receive benefits from the entities.

Management Services

The Company has various management services agreements under which the Company manages certain operations of

agencies and facilities. The Company does not consolidate these agencies or facilities, as the Company does not have

an ownership interest and does not have an obligation to absorb losses of the entities or the right to receive the benefits

from the entities.

Revenue Recognition

The Company reports net service revenue at the estimated net realizable amount due from Medicare, Medicaid,

commercial insurance, managed care payors, patients and others for services rendered. All payors contribute to both the

home-based services and facility-based services.

The following table sets forth the percentage of net service revenue earned by category of payor for the years ending

December 31:

Payor:
Medicare
Medicaid
Other

2011

2010

2009

79.7%
2.3
18.0

80.5%
2.7
16.8

82.2%
2.9
14.9

100.0%

The percentage of net service revenue contributed from each reporting segment was as follows for the years ending

December 31:

Home-Based Services
Facility-Based Services

2011

88.0%
12.0

2010

87.9%
12.1

2009

88.2%
11.8

100.0%

Note s to Consolidated Financial Statements

For m 1 0-K Pa r t IV

F-7

LH C Group

Medicare

Home-Based Services

Home Nursing Services. The Company’s home nursing Medicare patients are classified into one of 153 home health resource

groups prior to receiving services. Based on this home health resource group, the Company is entitled to receive a standard

prospective Medicare payment for delivering care over a 60-day period referred to as an episode. The Company recognizes

revenue based on the number of days elapsed during an episode of care within the reporting period.

Final payments from Medicare may reflect one of four retroactive adjustments to ensure the adequacy and effectiveness

of the total reimbursement: (a) an outlier payment if the patient’s care was unusually costly; (b) a low utilization adjustment

if the number of visits was fewer than five; (c) a partial payment if the patient transferred to another provider before

completing the episode; or (d) a payment adjustment based upon the level of therapy services required in the population

base. Management estimates the impact of these payment adjustments based on historical experience and records

this estimate during the period the services are rendered. The Company’s payment is also adjusted for geographic wage

differences. In calculating the Company’s reported net service revenue from home nursing services, the Company

adjusts the prospective Medicare payments by an estimate of the adjustments. The adjustments are calculated using a

historical average of prior adjustments.

Hospice Services. The Company is paid by Medicare under a per diem payment system. The Company receives one

of four predetermined daily or hourly rates based upon the level of care the Company furnished. The Company records

net service revenue from hospice services based on the daily or hourly rate and recognizes revenue as hospice

services are provided.

Hospice payments are also subject to an inpatient cap and an overall payment cap. Inpatient cap relates to individual

programs receiving more than 20% of its total Medicare reimbursement from inpatient care services and the overall

payment cap relates to individual programs 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. The Company has not received notification that any of its hospices have

exceeded the cap on inpatient care services or overall payments during 2010 or 2011 to date.

Facility-Based Services

Long-Term Acute Care Services. The Company is reimbursed by Medicare for services provided under the long-term

acute care hospital (“LTACH”) prospective payment system, which was implemented on October 1, 2002. 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 in a manner similar to either Medicare or Medicaid.

Accordingly, the Company recognizes revenue from managed care and other payors in the same manner as the

Company recognizes revenue from Medicare or Medicaid.

Management Services

The Company records management services revenue as services are provided in accordance with the various

management services agreements to which the Company is a party. As described in the agreements, the Company

F-8

F or m 10 -K Par t IV

Notes to Co nsolidated F inanc ial S tate m en ts

A Strong Foundation

provides billing, management and other consulting services suited to and designed for the efficient operation of the

applicable home nursing agency or inpatient rehabilitation facility. The Company is responsible for the costs associated

with the locations and personnel required for the provision of services. The Company is compensated based on

a percentage of cash collections, a flat fee or is reimbursed for operating expenses and compensated based on a

percentage of operating net income.

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 primarily consist of amounts due from Medicare, other third-party payors,

and patients. To provide for accounts receivable that could become uncollectible in the future, the Company establishes

an allowance for uncollectible accounts to reduce the carrying amount of such receivables to their estimated net realizable

value. Because Medicare is the Company’s primary payor, the credit risk associated with receivables from other payors

is limited. The Company believes the credit risk associated with its Medicare accounts, which represent approximately

66% of its patient accounts receivable at December 31, 2011 and December 31, 2010, 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 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 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 RAPs

received for that episode will be recouped by Medicare from any other Medicare claims in process for that particular

provider. The RAP and final claim must then be resubmitted. For subsequent episodes of care contiguous with the first

episode for a particular patient, the Company submits a RAP for 50% instead of 60% of the estimated reimbursement.

The Company’s Medicare population is paid at a prospectively set amount 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 we provide. 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 our 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.

Business Combination

The Company accounts for business combinations using the acquisition method. The assets acquired consist primarily

of Medicare license, certificate of need and/or a noncompete agreement. The assets acquired and liabilities assumed,

if any, are measured at fair value on the acquisition date using the appropriate valuation method. The noncontrolling

interest associated with joint venture acquisitions is also measured and recorded at fair value as of the acquisition date.

The residual purchase price is recorded as goodwill. The operations of the acquisitions are included in the consolidated

financial statements from their respective dates of acquisition.

Goodwill and Intangible Assets

Goodwill and other intangible assets with indefinite lives are reviewed annually for impairment or more frequently if

circumstances indicate impairment may have occurred. An impairment loss is recognized if the carrying value of goodwill

or an indefinite-lived intangible asset exceeds its fair value. The evaluation of impairment involves comparing the

current fair value of each of the Company’s reporting units to their recorded value, including goodwill. Components of the

Note s to Consolidated Financial Statements

For m 1 0-K Pa r t IV

F-9

LH C Group

Company’s home-based services segment are generally represented by individual subsidiaries or joint ventures with

individual licenses to conduct home care or hospice operations within geographic markets as limited by the terms of each

license. The Company’s homecare and hospice business represent two reporting units for the purposes of evaluating

impairment. Components of the Company’s facility-based services are represented by individual operating entities. For

purposes of evaluating impairment, the Company aggregates these operating components.

The Company estimates the fair value of its identified reporting units using the discounted cash flow method and the market

multiple analysis method. These valuations require management to make estimates and assumptions regarding industry

economic factors and the profitability of future business strategies. Management considers historical experience and all

available information at the time the fair values of its reporting units are estimated. For each of the reporting units, the

estimated fair value is determined based on a formula that considers 50% of the estimated value based on a multiple of

earnings before interest, taxes, depreciation and amortization plus 50% of the estimated value using recent sales of

comparable facilities. A change in the weight assigned to each methodology would not have changed the conclusion that

no impairment charge is necessary during the year ending December 31, 2011. The Company has not recognized

goodwill impairment charges in 2011, 2010 or 2009.

Included in intangible assets, net, are definite-lived assets subject to amortization such as non-compete agreements.

Amortization of definite-lived intangible assets is calculated on a straight-line basis over the estimated useful lives of the

related assets.

The Company also has indefinite-lived assets that are not subject to amortization expense such as trade names,

certificates of need and licenses to conduct specific operations within geographic markets. The Company has concluded

that trade names, certificates of need and licenses have indefinite lives, because there are no legal, regulatory, contractual,

economic or other factors that would limit the useful life of these intangible assets and the Company intends to renew and

operate the certificates of need, licenses and use these trade names indefinitely. The Company performs an annual

impairment test on the trade names using the relief-from royalty method. Under this method, the fair value of the intangible

asset is determined by calculating the present value of the after-tax cost savings associated with owning the trade

names and, therefore, not having to pay royalties for its use for the remainder of its estimated useful lives. The certificates

of need and licenses are tested annually for impairment using the cost approach. Under this method assumptions are

made about the cost to replace the certificates of need.

Due to/from Governmental Entities

The Company’s LTACHs are reimbursed for certain activities based on tentative rates. The amounts recorded in due to/

from governmental entities on the Company’s consolidated balance sheets relate to settled and open cost reports that are

subject to the completion of audits and the issuance of final assessments. Final reimbursement is determined based on

submission of annual cost reports and audits by the fiscal intermediary. Adjustments are accrued on an estimated basis in

the period the related services were rendered and further adjusted as final settlements are determined. These adjustments

are accounted for as changes in estimates. There have been no significant changes in estimates during the years ended

December 31, 2011 and 2010.

Property, Building and Equipment

Property, building and equipment are stated at cost. Depreciation is computed using the straight-line method over the

estimated useful lives of the individual assets. Estimated useful lives for buildings is 39 years and ranges from 3 to 10 years

for transportation equipment and furniture and other equipment. The useful life for leasehold improvements is the lesser

of the lease term or the expected life of the leasehold improvement. Routine repairs and maintenance are expensed

when incurred.

Property, building and equipment is reviewed whenever events or changes in circumstances occur that indicate possible

impairment. There were no impairments recognized during the periods ended December 31, 2011, 2010 or 2009.

F-10

F or m 10 -K Par t IV

Notes to Co nsolidated F inanc ial S tate m en ts

The following table describes the Company’s components of property, building and equipment:

December 31,

Land
Building and improvements
Transportation equipment
Fixed equipment
Office furniture and medical equipment

Less accumulated depreciation

A Strong Foundation

2011

2010

(In thousands)

673
$
6,275
5,664
3,630
40,013
56,255
28,073

$ 28,182

$
818
4,853
5,759
3,639
33,486
48,555
21,693

$ 26,862

Depreciation expense for the years ended December 31, 2011, 2010 and 2009 was $6.6 million, $6.7 million and

$4.8 million, respectively. The Company writes off assets that are fully depreciated and no longer in use.

Noncontrolling Interest

The nonredeemable interest held by third parties in subsidiaries owned or controlled by the Company is reported on the

consolidated balance sheets as noncontrolling interest as a component of stockholders’ equity. Redeemable interest held

by third parties in subsidiaries owned or controlled by the Company is reported on the consolidated balance sheets

outside permanent equity. All noncontrolling interest reported in the consolidated statements of income reflects the respective

interests in the income or loss after income taxes of the subsidiaries attributable to the other parties, the effect of which

is removed from the net income available to LHC Group, Inc.

Stock-Based Employee Compensation

The Company grants restricted stock or restricted stock units to employees and members of its Board of Directors as a

form of compensation. The expense for such awards is based on the grant date fair value of the award and is recognized

on a straight-line basis over the requisite service period. See Note 7 to these consolidated financial statements.

Earnings Per Share

Basic per share information is computed by dividing the item by the weighted-average number of shares outstanding

during the period, under the treasury stock method. Diluted per share information is computed by dividing the item by the

weighted-average number of shares outstanding plus dilutive potential shares.

The following table sets forth shares used in the computation of basic and diluted per share information for the years

ended December 31, 2011, 2010 and 2009:

Weighted average number of shares outstanding for basic per share calculation
Effect of dilutive potential shares:
Options
Nonvested restricted stock
Contingent shares

2011

2010

2009

18,265,118

18,119,183

17,960,376

—
—
—

5,368
101,540
—

6,158
74,320
29,043

Adjusted weighted average shares for diluted per share calculation

18,265,118

18,226,091

18,069,897

Antidilutive shares

316,928

153,290

17,271

Recent Accounting Pronouncements

In August 2010, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance which changes the

presentation of insurance claims and related insurance recoveries. The guidance clarifies that insurance recoveries on

medical malpractice claims and other similar contingent liabilities should not be presented net of the related claim liability.

The new guidance was effective for the Company on January 1, 2011 and is applied on a prospective basis. Included in

other current assets at December 31, 2011 was $1.0 million for expected insurance recoveries.

Note s to Consolidated Financial Statements

For m 1 0-K Pa r t IV

F-11

LH C Group

In December 2010, FASB issued new accounting guidance related to the Disclosure of Supplementary Pro Forma

Information for Business Combinations. The guidance specifies that if a public entity presents comparative financial

statements, the entity should disclose revenue and earnings of the combined entity as though the business combinations

that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period

only. The guidance also expands the supplemental pro forma disclosures to include a description of the nature and

amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the

reported pro forma revenue and earnings. The guidance was effective for the Company January 1, 2011 and did not

have a material effect on the Company’s financial statements.

In July 2011, FASB issued new accounting guidance that requires certain health care entities to change the presentation

of their statement of operations by reclassifying the provision for bad debts associated with patient service revenue from an

operating expense to a separate line as a deduction from patient service revenue. The guidance also requires enhanced

disclosure about the Company’s policies for recognizing revenue and assessing bad debts. The guidance further requires

qualitative and quantitative disclosures about changes in the allowance for doubtful accounts. The Company will adopt

the new guidance prospectively in the first quarter of 2012. While the adoption is prospective, disclosure requirements will

be applied retrospectively for the periods presented in the Company’s filings subsequent to adoption. The Company

does not expect the adoption of the new guidance to have a material effect on the Company’s financial condition, results

of operations, or cash flows.

3. Acquisitions and Disposals

2011 Acquisitions

Pursuant to its strategy for becoming the leading provider of post-acute health care services in the United States, the

Company acquired five home health entities and eight hospices during the twelve months ended December 31, 2011, and

maintains an ownership interest in the entities set forth below.

Acquired Entity

Ownership Percentage State of Operations

Acquisition Date

LHCG XX III, LLC (d/b/a Marshall County Hospital Home Health)
LHCG XXII, LLC (d/b/a Hospice Complete)
Vital Hospice, Inc. (d/b/a Vital Hospice)
LHCG XIX, LLC (Baptist Home Health Care)
Texas Health Care Group of Texarkana, LLC

(d/b/a Texarkana HomeCare and Christus HomeCare)

LHCG XXV, LLC (d/b/a Community Loving Care Hospice,LLC)
LHCG XXIX, LLC (d/b/a Keller HomeCare & Keller Hospice)

75%
100%
100%
75%

73.68%
100%
67%

Kentucky
Alabama
Louisiana
Florida

Texas
Missouri
Alabama

01/01/2011
01/01/2011
01/01/2011
02/01/2011

03/01/2011
04/01/2011
04/05/2011

Each of the acquisitions was accounted for under the acquisition method of accounting, and accordingly, the

accompanying consolidated financial statements include the results of operations of each acquired entity from the date

of acquisition.

The total purchase price for the Company’s acquisitions was $12.3 million, which was paid primarily in cash. Purchase

prices are determined based on an analysis of comparable acquisitions and the target market’s potential future cash flows.

Consideration for one of the acquisitions was a transfer of a 26.32% ownership interest in one of the Company’s wholly

owned home health agencies. The transfer of the noncontrolling interest in the Company’s existing home health agency was

accounted for as an equity transaction, resulting in the Company recognizing additional paid in capital of $206,000.

The Company’s home-based segment recognized goodwill of $7.4 million, including $658,000 of noncontrolling goodwill.

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 following table

summarizes the consideration paid for the acquisitions and the amounts of the assets acquired and liabilities assumed at

the acquisition dates, as well as the fair value at the acquisition dates of the noncontrolling interest acquired (all amounts

are in thousands).

F-12

F or m 10 -K Par t IV

Notes to Co nsolidated F inanc ial S tate m en ts

Consideration
Cash
Equity instruments (the Company exchanged a noncontrolling interest in one of its entities)
Working capital

Fair value of total consideration transferred

Acquisition-related costs (included in general and administrative expenses)

Recognized amounts of identifiable assets acquired and liabilities assumed
Trade name
Certificates of need/license
Other identifiable intangible assets
Other assets

Total identifiable assets

Noncontrolling interest
Goodwill, including noncontrolling interest of $658,000

A Strong Foundation

2011

$ 11,745
369
143

$ 12,257

420

$ 4,471
1,354
398
13

$ 6,236

$ 1,372
$ 7,393

Trade names, certificates of need and licenses are indefinite-lived assets and, therefore, not subject to amortization. The

other identifiable assets include non-compete agreements that are amortized over the life of the agreements, ranging from

two to five years. Noncontrolling interest is valued at fair value by applying a discount to the value of the acquired entity

for lack of control. The fair value of the acquired intangible assets is preliminary pending the final valuations of those assets.

During the twelve months ended December 31, 2011, the Company purchased additional ownership interests in three of

its joint ventures. The total purchase price for the additional ownership was $891,000 and was accounted for as an equity

transaction, resulting in the Company reducing additional paid in capital by $641,000.

During the twelve months ended December 31, 2011, the Company sold membership interests in three of its wholly

owned subsidiaries. The total sales price was $308,000 for the sale of 26% membership interests and was accounted for

as equity transactions, resulting in the Company increasing additional paid in capital by $212,000.

During the twelve months ended December 31, 2011, the Company settled the working capital amounts acquired on a

2011 acquisition paying $155,000 in cash related to the settlements.

The following table contains unaudited pro forma consolidated income statement information assuming the 2011

acquisitions closed January 1, 2010 (amount in thousands):

Net service revenue
Operating income (loss)
Net income (loss)
Basic earnings per share
Diluted earnings per share

2011

2010

$ 635,628
(6,228)
(13,311)
(0.73)
(0.73)

$ 651,632
95,349
46,778
2.58
2.57

The pro forma disclosure in the table above includes adjustments for depreciation expense, amortization of intangible

assets, income tax expense and an estimate of additional costs to provide administrative services for these locations as if

the acquisition had occurred on January 1, 2010. This pro forma information is presented for illustrative purposes only

and may not be indicative of the results of operations that would have actually occurred. In addition, future results may

vary significantly from the results reflected in the pro forma information.

Note s to Consolidated Financial Statements

For m 1 0-K Pa r t IV

F-13

LH C Group

2010 Acquisitions

Home-Based

The total purchase price of home-based acquisitions was $18.4 million, which was paid primarily in cash. The purchase

prices were determined based on the Company’s analysis of comparable acquisitions and the target market’s potential

future cash flows.

The Company recognized goodwill of $11.2 million, including $663,000 of goodwill attributable to noncontrolling interests,

related to acquisitions made in 2010. The Company expects its portion of goodwill to be fully tax deductible.

During 2010, the Company purchased certain noncontrolling interest holders’ assigned interests in one of the Company’s

joint ventures, resulting in cash payments of $1.9 million and a decrease in additional paid in capital of $1.9 million.

On December 30, 2010, the Company paid $6.9 million in cash for three acquisitions with January 1, 2011 acquisition

dates. Control was not assumed until January 1, 2011; therefore, the $6.9 million cash payments are recorded as advance

payment on acquisitions at December 31, 2010.

One of the Company’s 2009 acquisitions provided for up to $2.5 million in contingent consideration to be paid to the seller

if certain financial measurements are achieved. The fair value of the contingent consideration recognized on the

acquisition date was $1.7 million. The fair value of the contingent consideration was estimated using the income approach

based on financial projections of the acquired company. The projected cash flows were discounted using a discount rate

of London Interbank Offered Rate plus 100 basis points, which the Company believes is appropriate and is representative

of a market participant assumption. During the fourth quarter of 2010, the Company paid $1.7 million to satisfy the

contingent consideration obligation.

Facility-Based

The total purchase price of the facility-based acquisitions was $7.2 million, which was paid primarily in cash. The purchase

price was determined based on the Company’s analysis of comparable acquisitions and the target market’s potential

future cash flows.

The Company recognized goodwill of $6.0 million related to the acquisitions, which is fully tax deductible.

During 2010, certain noncontrolling interest holders redeemed their interest in one of the Company’s joint ventures,

resulting in a cash payment of approximately $36,000. In connection with the partial redemption, the Company decreased

noncontrolling interest redeemable by approximately $41,000 and increased retained earnings by the same amount,

representing the fair value at December 31, 2009 of the shares converted during the first quarter of 2010. Simultaneously,

the Company recorded goodwill of $36,000, which is not deductible for income tax purposes, to represent the value of

the noncontrolling interest redeemed. As of December 31, 2010, all noncontrolling interest associated with this joint venture

had been redeemed.

2009 Acquisitions

Home-Based

The total purchase price of home-based acquisitions was $33.2 million, which was paid primarily in cash. The purchase

prices were determined based on the Company’s analysis of comparable acquisitions and the target market’s potential

future cash flows. The purchase price for Southeast Louisiana HomeCare, LLC included a transfer of a 25% noncontrolling

interest in three of the Company’s wholly owned home health agencies. The transfer of the noncontrolling interest in the

Company’s existing home health agencies was accounted for as an equity transaction, resulting in the Company recognizing

additional paid in capital of $181,000.

F-14

F or m 10 -K Par t IV

Notes to Co nsolidated F inanc ial S tate m en ts

A Strong Foundation

The Company recognized goodwill of $22.0 million, including $3.2 million of goodwill attributable to noncontrolling

interests, related to acquisitions made in 2009. The Company expects its portion of goodwill to be fully tax deductible.

During 2009, the Company purchased additional ownership interests in five of its joint ventures. The total purchase price

for the additional ownership interests was $2.3 million and was accounted for as an equity transaction, resulting in the

Company recognizing additional paid in capital of $2.3 million.

In 2008, one of the Company’s acquisitions contained contingent consideration to the seller, a portion of which was to be

settled in shares of the Company’s stock one year after the acquisition date. The number of shares to be issued was

contingent upon the acquired company achieving certain financial measurements in the year after the acquisition. During

the year end December 31, 2009, the Company recorded $1.9 million of additional purchase price related to the

contingent consideration as the acquired company achieved the required financial measurements. Of the contingent

consideration, $950,000 was paid in cash during 2009. The remaining $950,000 was recorded as a liability as of

December 31, 2009. In the first quarter of 2010, the Company issued 29,988 shares of the Company’s common stock,

valued at $950,000, as settlement of the remaining contingent consideration.

During 2009, the Company settled the working capital amounts acquired on several 2008 acquisitions. An additional

$349,000 was paid in cash in 2009 related to the settlements. An additional $2.7 million was recognized as goodwill and a

deferred tax liability related to the finalization of acquisition accounting.

On December 31, 2009, the Company paid $1.2 million in cash for two acquisitions with January 1, 2010 acquisition dates.

Control was not assumed until January 1, 2010; therefore, the $1.2 million cash payment is recorded in other assets on the

balance sheet as of December 31, 2009.

Facility-Based

The total purchase price of the facility-based acquisitions was $1.2 million, which was paid primarily in cash. The purchase

price was determined based on the Company’s analysis of comparable acquisitions and the target market’s potential

future cash flows.

The Company recognized goodwill of $86,000, including $22,000 of noncontrolling goodwill, related to the acquisitions.

The Company expects its portion of goodwill to be fully tax deductible.

In conjunction with the redemption by certain noncontrolling interest holders of their interest in one of the Company’s joint

ventures, $15,000 of goodwill, which is not deductible for income tax purposes, was recognized in the facility-based

services segment.

2009 Divestitures

In September 2009, the Company sold its outpatient rehabilitation clinic, generating a loss of $22,000 which was part of

the Facility-Based services. The results of operations related to the clinic are included in discontinued operations in the

Company’s condensed consolidated statement of income for the year ended December 31, 2009. There was no operating

activity related to the outpatient rehabilitation clinic after it was sold.

Note s to Consolidated Financial Statements

For m 1 0-K Pa r t IV

F-15

LH C Group

The following table provides financial results of discontinued operations for the year ended December 31, 2009

(amounts in thousands):

Net service revenue
Costs of services and general and administrative expenses
Income (loss) from discontinued operations before income taxes
Income tax benefit
Loss from discontinued operations net of income tax benefit
Less loss from discontinued operations attributable to noncontrolling interest
Income (loss) from discontinued operations attributable to LHC Group Inc.’s common stockholders

4. Goodwill and Other Intangibles, Net

The following table summarizes the changes in goodwill by segment:

Home-based services segment:
Balances at beginning of period
Goodwill from acquisitions
Goodwill related to noncontrolling interest

Home-based balance at end of period

Facility-based services segment:
Balances at beginning of period
Goodwill from acquisitions
Goodwill related to noncontrolling interest
Goodwill acquired during the period from redemption of noncontrolling interest

Facility-based balance at end of period

Consolidated balance at end of period

2009

$ 402
(543)
(141)
55
(86)
—
$ (86)

2011

2010

(In thousands)

$ 145,747
6,735
658
153,140

$ 133,909
11,175
663
145,747

$ 11,591
—
—
—
—
11,591

$ 5,565
5,990
—
—
36
11,591

$ 164,731

$ 157,338

The following table summarizes the changes in intangible assets during the twelve months ended December 31, 2011

(amounts in thousands):

Balance at December 31, 2010
Additions
Write off
Amortization

Balance at December 31, 2011

Certificate of
Trade Names Need / License

Other
Intangibles

$ 45,369
4,471
—
—

$ 49,840

$ 7,207
1,354
(59)
—

$ 8,502

$ 1,475
398
—
(826)

$ 1,047

Total

$ 54,051
6,223
(59)
(826)

$ 59,389

Intangible assets of $57.7 million, net of accumulated amortization, related to the home-based services segment and

$1.7 million related to the facility-based services segment as of December 31, 2011.

5. Income Taxes

The Company accounts for income taxes using the liability method. Under the liability method, deferred taxes are

determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured

using the enacted tax laws that will be in effect when the differences are expected to reverse.

F-16

F or m 10 -K Par t IV

Notes to Co nsolidated F inanc ial S tate m en ts

Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2011 and 2010 were

as follows:

A Strong Foundation

Deferred tax assets:
Allowance for uncollectible accounts
Accrued employee benefits
Stock compensation
Accrued self-insurance
Acquisition costs
Net operating loss carry forward
Valuation allowance
Dividend received deduction
Intangible asset impairment

Litigation Reserve
Uncertain Tax Position – State Tax Portion
Charitable contribution carryforward

Deferred tax assets

Deferred tax liabilities:
Amortization of intangible assets
Tax depreciation in excess of book depreciation
Prepaid expenses
Non-accrual experience accounting method
Conversion from cash basis accounting

Deferred tax liabilities

Net deferred tax liability

2011

2010

(In thousands)

$ 3,582
2,665
1,362
2,161
650
542
(44)
(78)
66
41
215
17

$ 3,125
2,633
1,176
1,855
526
583
(477)
30
71
—
—
—

$ 11,179

$ 9,522

(17,508)
(7,182)
(655)
(968)
(120)

(13,518)
(4,811)
(721)
(968)
(380)

(26,433)

(20,398)

$ (15,254)

$ (10,876)

Based on the Company’s historical pattern of taxable income, the Company believes it will produce sufficient income in

the future to realize its deferred income tax assets. Management provides a valuation allowance for any net deferred tax

assets when it is more likely than not that a portion of such net deferred tax assets will not be recovered. Management

established a valuation allowance during 2008 purchase accounting related to the tax net operating losses acquired in a

stock acquisition in 2008. The acquired Company had state tax net operating losses of approximately $65.5 million which

will fully expire by 2029. The acquired Company has two providers, one of which has generated cumulative income over

the last three years and has shown increased profits. Management expects to continue to generate net revenue for this

provider and therefore, the entire valuation allowance was released in the current year.

The components of the Company’s income tax expense (benefit) from continuing operations, less noncontrolling interest,

were as follows:

Current:
Federal
State

Deferred:
Federal
State

Total income tax expense (benefit)

2011

2010

2009

(In thousands)

$ (5,924)
(636)
(6,560)

4,545
47
4,592

$ (1,968)

$ 24,811
4,145
28,956

2,520
251
2,771

$ 31,727

$ 19,026
3,071
22,097

4,001
645
4,646

$ 26,743

The above table does not include a deferred tax asset adjustment related to state income tax on the settlement. The amount

of this adjustment is $214,000 and did not affect income tax expense for the year.

Note s to Consolidated Financial Statements

For m 1 0-K Pa r t IV

F-17

LH C Group

A reconciliation of the differences between income taxes expense on net income attributable to LHC Group, Inc.,

computed at the federal statutory rate and provisions for income taxes for each period is as follows:

Income taxes computed at federal statutory tax rate
State income taxes, net of federal benefit
Reduction in valuation allowance
Nondeductible expenses
Uncertain tax position
Other items
Income tax credits

Total income tax expense (benefit)

2011

2010

2009

$ (5,232)
(443)
(392)
675
3,200
437
(213)

$ (1,968)

(In thousands)

$ 28,170
2,984
(193)
766
—
—
—

$ 24,734
2,480
(689)
743
—
—
(525)

$ 31,727

$ 26,743

The Company is subject to both federal and state income tax for jurisdictions within which it operates. Within these

jurisdictions, the Company is open to examination for tax years ended after December 31, 2008.

As of December 31, 2011, $3.4 million was recorded in income tax payable as an unrecognized tax benefit which, if

recognized, would decrease our effective tax rate. A reconciliation of the total amounts of unrecognized tax benefits follows:

Total unrecognized tax benefits as of December 31, 2010

Increases (decreases) in unrecognized tax benefits as a result of:
Tax positions taken during the current period

Total unrecognized tax benefits as of December 31, 2011

$ —

3,415

$ 3,415

The Company recognizes interest and penalties related to uncertain tax positions in interest expense and general and

administrative expenses, respectively. During the years ended December 31, 2011, 2010 and 2009, the Company did not

recognize any interest or penalties in its consolidated financial statements, nor has it recorded an accrued liability of

interest or penalty payments related to uncertain tax positions.

The unrecognized tax benefit relates to the settlement with the United States of America. See Note 10 to these

consolidated financial statements.

6. Credit Facility

On October 12, 2010, the Company entered into a Second and Amended Restated Credit Agreement (the “Credit Facility”).

The Credit Facility is unsecured and provides for a maximum aggregate principal borrowing of $75.0 million (with a

letter of credit sub-limit equal to $5.0 million). The Credit Facility is scheduled to expire on October 12, 2013. The annual

facility fee is 0.50% of the total availability. An additional fee of 0.375% is charged for any unused amounts. The interest

rate for borrowings under the Credit Facility is a function of the prime rate (Base Rate) or the Eurodollar rate (Eurodollar), as

elected by the Company, plus the applicable margin based on the Leverage Ratio as defined in the Credit Facility.

As of December 31, 2011 the Company had $34.8 million drawn and letters of credit in the amount of $3.8 million

outstanding under the Credit Facility. The interest rate for borrowings under the Credit Facility is a function of the prime rate

(Base Rate) or Eurodollar rate, as elected by the Company, plus the applicable margin based on the Leverage Ratio, as

defined in the Credit Facility, which was 2.25% at December 31, 2011. The interest rate at December 31, 2011 was 4.25%.

On September 28, 2011, the Company entered into a Second Amendment to the Credit Facility (the “Second Amendment”).

The Second Amendment permits the Company to borrow up to $1.5 million pursuant to a real estate construction loan

extended by American First Bank in Opelousas, Louisiana. The loan proceeds are to be used to construct a building in

Opelousas, Louisiana, which will be used as office space by the home health and hospice agencies there.

F-18

F or m 10 -K Par t IV

Notes to Co nsolidated F inanc ial S tate m en ts

A Strong Foundation

On September 28, 2011, the Company entered into a Third Amendment to the Credit Facility (the “Third Amendment”).

The Third Amendment permits the Company to fund the settlement with the United States of America entered into on

September 27, 2011. The Third Amendment revises the Minimum Fixed Charge Coverage and Leverage Ratio covenant

requirements in order to remove the settlement amount from the calculation of these covenants. See Note 10 to these

consolidated financial statements.

On December 8, 2011, the Company entered into a Fourth Amendment to the Credit Facility (the “Fourth Amendment”).

The Fourth Amendment permits the Company to increase the sublimit for letters of credit to $7.5 million and provides for a

prospective increase to the total line of credit commitment from $75 million to a maximum aggregate principal amount

of up to $100 million.

The Company paid $578,000 of credit fees on the Credit Facility during 2011. The Company issued letters of credit as

collateral on its workers’ compensation insurance. At December 31, 2011 and 2010, outstanding letters of credit under this

program were $3.8 million and $2.9 million, respectively.

The Credit Facility contains customary affirmative, negative and financial covenants. For example, the Company is

restricted in incurring additional debt, disposing of assets, making investments, allowing fundamental changes to the

Company’s business or organization, and making certain payments in respect of stock or other ownership interests, such

as dividends and stock repurchases. Under the Credit Facility, the Company is also required to meet certain financial

covenants with respect to minimum fixed charge coverage, consolidated net worth and leverage ratios. At December 31,

2011, the Company believes it was in compliance with all covenants.

The Credit Facility also contains customary events of default. These include bankruptcy and other insolvency events,

cross-defaults to other debt agreements, a change in control involving the Company or any subsidiary guarantor, and the

failure to comply with covenants.

7. Stockholders’ Equity

Stock Repurchase Program

In October 2010, the Company’s Board of Directors authorized a program to repurchase shares of the Company’s common

stock, par value $0.01 per share, from time to time, in an amount not to exceed $50.0 million (“Stock Repurchase Program”).

The Company anticipates that it will finance the Stock Repurchase Program with cash from general corporate funds, or

draws under the Credit Facility. The Company may repurchase shares of common stock in open market purchase or in

privately negotiated transactions in accordance with applicable securities laws, rules and regulations. The timing and

extent to which the Company repurchases its shares will depend upon market conditions and other corporate considerations.

The Company uses the cost method to account for the repurchase of common stock and the average cost method to

account for reissuance of treasury shares. During the twelve months ended December 31, 2011, the Company

repurchased 24,159 shares of common stock at an aggregate cost of $577,000, including commissions, or an average

cost per share of $23.93. The remaining dollar value of shares authorized to be purchased under the share repurchase

program is $49.4 million at December 31, 2011.

Equity Based Awards

At the Company’s 2010 Annual Meeting of Stockholders, the stockholders of the Company approved the Company’s 2010

Long Term Incentive Plan (the “2010 Incentive Plan”). The 2010 Incentive Plan is administered by the Compensation

Committee of the Company’s Board of Directors (the “Compensation Committee”). A total of 1,500,000 shares of the

Company’s common stock are reserved and 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.

The Compensation Committee will determine the exercise price for non-statutory stock options, which cannot be less than

the fair market value of our common stock as of the date of grant.

Note s to Consolidated Financial Statements

For m 1 0-K Pa r t IV

F-19

LH C Gro up

In the event of a change of control as defined in the 2010 Incentive Plan, all restricted periods and restrictions imposed on

non-performance based restricted stock awards will lapse and outstanding options will become immediately exercisable in full.

Share Based Compensation

Stock Options

The following table represents stock options activity for the year ended December 31, 2011:

Options outstanding at January 1, 2011
Options granted
Options exercised
Options forfeited or expired
Options outstanding at December 31, 2011
Options exercisable at December 31, 2011

Number
of Shares

15,000
—
—
—
15,000
15,000

Weighted
Average

Average
Remaining

Exercise Price Contractual Term

$ 16.88
—
—
—
$ 16.88
$ 16.88

5.0 years
—
—
—
4.0 years
4.0 years

Aggregate
Intrinsic
Value

$ 196,875
—
—
—
—
—

$
$

All options are fully vested and exercisable at December 31, 2011. There were no options granted and no compensation

expense related to stock options grants recorded in the years ended December 31, 2011, 2010 or 2009.

Non-vested Stock

The Company issues stock-based compensation to employees in the form of non-vested stock, which is an award of

common stock subject to certain restrictions. The awards, which the Company calls non-vested shares, generally vest

over a five year period, conditioned on continued employment for the full incentive period. Compensation expense for the

non-vested stock is recognized for the awards that are expected to vest. The expense is based on the fair value of the

awards on the date of grant recognized on a straight-line basis over the requisite service period, which generally relates to

the vesting period.

During 2011 and 2010, respectively, 139,470 and 20,000 non-vested shares were granted to employees pursuant to the

2010 Incentive Plan. During 2010 and 2009, respectively, 130,755 and 238,028 non-vested shares were granted to

employees pursuant to the 2005 Long-Term Incentive Plan. No further awards can be granted under the 2005 Long-Term

Incentive Plan. All shares granted vest over a five year period.

The Company also issues non-vested stock to its independent directors of the Company’s Board of Directors. During 2011,

2010 and 2009, respectively, 15,200, 18,700 and 14,000 non-vested shares of stock were granted to the independent

directors under the 2005 Director Compensation Plan. The shares issued under the 2005 Director Compensation Plan

were drawn from the 1,500,000 shares reserved and available for issuance under the 2010 Incentive Plan. The shares fully

vest one year from the date of the grant.

The fair value of non-vested shares is determined based on the closing trading price of the Company’s shares on the grant

date. The weighted average grant date fair values of non-vested shares granted during the years ended December 31, 2011,

2010 and 2009 were $26.37, $30.01 and $20.49, respectively.

The following table represents the non-vested stock activity for the year ended December 31, 2011:

Non-vested shares outstanding at January 1, 2011
Granted
Vested
Forfeited

Non-vested shares outstanding at December 31, 2011

Number of
Shares

502,304
154,670
(161,979)
—

494,995

Weighted
Average
Grant Date
Fair Value

$ 23.79
$ 26.37
$ 23.51
$ —

$ 24.17

F-20

F or m 10 -K Par t IV

Notes to Co nsolidated F inanc ial S tate m en ts

A Strong Foundation

As of December 31, 2011, there was $8.5 million of total unrecognized compensation cost related to non-vested shares

granted. That cost is expected to be recognized over the weighted average period of 2.0 years. The total fair value of

shares vested in the years ended December 31, 2011, 2010 and 2009 were $3.9 million, $2.8 million and $1.9 million,

respectively. The Company records compensation expense related to non-vested share awards at the grant date for

shares that are awarded fully vested and over the vesting term on a straight line basis for shares that vest over time. The

Company has recorded $4.1 million, $3.7 million and $2.4 million in compensation expense related to non-vested stock

grants in the years ended December 31, 2011, 2010 and 2009, respectively.

Employee Stock Purchase Plan

In 2006, the Company adopted the Employee Stock Purchase Plan allowing eligible employees to purchase the Company’s

common stock at 95% of the market price on the last day of each calendar quarter. There were 250,000 shares reserved for

the plan. The table below details the shares issued during 2011, 2010 and 2009 under the Employee Stock Purchase Plan.

Shares available as of January 1, 2008
Shares issued in 2009
Shares issued in 2010
Shares issued in 2011

Shares available as of December 31, 2011

Treasury Stock

Weighted
Average
Per Share
Price

$ 24.97
$ 28.04
$ 23.40

Number of
Shares

203,023
24,792
28,508
38,291

111,432

In conjunction with the vesting of the non-vested shares of stock, recipients incur personal income tax obligations. The

Company allows the recipients to turn in shares of common stock to satisfy those personal tax obligations. The Company

redeemed 43,182, 31,531 and 19,102 shares of common stock related to these tax obligations during the years ended

December 31, 2011, 2010 and 2009, respectively.

Issuance of Common Stock

During the year ending December 31, 2010, the Company issued 29,988 shares of the Company’s common stock, valued

at $950,000, as settlement of contingent consideration on one of the Company’s 2008 acquisitions. The shares were

contingent upon the acquired company achieving certain financial measurements in the year after acquisition. The acquired

company achieved the financial measurements and the Company remitted the contingent consideration to the seller.

The Company also issued 20,162 shares, valued at $600,000 during the year ending December 31, 2010 as consideration

for one of the Company’s acquisitions.

8. Leases

In certain instances, state laws may prohibit the sale of a home nursing agency or hospitals may be reluctant to sell their

home health agencies. In these instances, the Company, through its wholly owned subsidiaries, enters into a lease

agreement for a Medicare and Medicaid license, as well as the associated provider number to provide home health or

hospice services. As of December 31, 2011, the Company had four license lease arrangements to operate five home

nursing agencies and three hospice agencies.

Two of the leases were entered into in 2007 and expire in 2017. Expense related to these leases was $245,000 in 2011 and

$268,000 in 2010. Payments due under these leases are $210,000 in 2012.

Two of the leases were amended during 2010 to extend the lease terms to one year with an automatic renewal clause of four

years. Expense related to these leases was $135,892 in 2011 and $201,690 in 2010. The lease payments associated with

these leases are based on a percentage of net quarterly profits; therefore, the future payments will vary with the future profits.

Note s to Consolidated Financial Statements

For m 1 0-K Pa r t IV

F-21

LH C Group

The Company leases office space and equipment at its various locations. Many of the leases contain renewal options with

varying terms and conditions. Management expects that in the normal course of business, expiring leases will be renewed

or, upon making a decision to relocate, replaced by leases for new locations. Operating lease terms range from three to

ten years. Rent expense includes insurance, maintenance, and other costs as required by the lease. Total rental expense

was approximately $17.3 million in 2011, $15.0 million in 2010 and $13.8 million in 2009. Future minimum rental

commitments under non-cancelable operating leases are as follows (in thousands):

2012
2013
2014
2015
2016
Thereafter

9. Employee Benefit Plan

Defined Contribution Plan

$ 12,400
9,165
5,461
3,206
1,676
1,800

$ 33,708

The Company sponsors a 401(k) plan to all eligible full-time employees. The plan allows participants to contribute up to

15% of their compensation and allows discretionary Company contributions as determined by the Company’s Board of

Directors. Effective January 1, 2006, the Company implemented a discretionary match of up to two percent of participating

employee contributions. The employer contribution will vest 20% after two years and 20% each additional year until it is

fully vested in year six. Contribution expense to the Company was $3.4 million, $2.9 million and $2.2 million in 2011, 2010

and 2009, respectively.

10. Commitments and Contingencies

Contingencies

The Company is involved in various legal proceedings arising in the ordinary course of business. Although the results of

litigation cannot be predicted with certainty, management believes the outcome of pending litigation will not have a

material adverse effect, after considering the effect of the Company’s insurance coverage, on the Company’s consolidated

financial statements.

On May 12, 2010, the Company received a letter from the United States Senate Finance Committee in response to an

April 26, 2010 article in The Wall Street Journal entitled “Home Care Yields Medicare Bounty.” The letter from the Senate

Finance Committee asked the Company to provide documents and data related to the issues referenced in The Wall Street

Journal article. On June 25, 2010, the Company completed its response to the Senate Finance Committee’s letter. On

October 3, 2011, the Senate Finance Committee issued a report with its findings. At this time, the Company is unable to

predict whether any further actions will result from this matter.

On July 16, 2010, the Company received a subpoena from the Securities and Exchange Commission (“SEC”) that

included a request for documents related to the Company’s participation in the Medicare Home Health Prospective

Payment System, as well as the documents and information produced in response to the Senate Finance Committee’s

investigation set forth above. The Company produced the documents requested by the initial subpoena, produced

additional documents requested by the SEC as part of its review, and continues to cooperate with the SEC’s review. The

Company cannot predict the outcome or effect of this investigation, if any, on the Company’s business.

On October 17, 2011, the Company received a subpoena from the Department of Health and Human Services Office of

Inspector General (the “OIG”). The subpoena requests documents related to patients who received service from two of our

locations in the State of Oregon and some additional documents related to our agencies in Oregon, Washington and

Idaho. The Company will produce the requested documents and will cooperate with the OIG’s review in this matter. The

Company cannot predict the outcome or effect of this review, if any, on the Company’s business.

F-22

F or m 10 -K Par t IV

Notes to Co nsolidated F inanc ial S tate m en ts

A Strong Foundation

Except as discussed above, the Company is not aware of any pending or threatened investigations involving allegations of

potential wrongdoing.

Settlement Agreement with the United States of America

On September 30, 2011, the Company announced that it had entered into a settlement agreement with the United States

government to resolve an investigation the Company first announced on July 13, 2009. The investigation resulted from a

qui tam complaint filed by a relator against the Company under the whistleblower provisions of the False Claims Act,

31 U.S.C. sections 3729-3733 (the “False Claims Act”). Pursuant to the settlement agreement, the Company paid the

United States $65 million (“settlement amount”) in a single lump sum payment. In exchange for the payment of the

settlement amount, the United States and the relator released the Company from any civil or administrative monetary claim

under the False Claims Act for the covered conduct. The released covered conduct includes claims involving home

health services rendered by the Company from 2006 to 2008 with regard to whether such home health services were

either not medically necessary or were delivered to patients who were not homebound. The OIG also agreed to

release and refrain from instituting, directing or maintaining any administrative action seeking to exclude the Company

from Medicare, Medicaid and other federal health care programs with respect to the covered conduct described above.

The government did not find that all aspects of the relator’s complaint deserved intervention, including homebound

and medical necessity claims for 2005 and coding related claims for 2005 through 2008. The Company reached an

agreement in principle to settle these non-intervened claims for $1.0 million with the relator and the government.

Upon final approval of the agreement in principle, the Company expects to enter into a settlement agreement with regard

to these non-intervened claims. In connection with this settlement, the Company recorded an accrual of $1.0 million

in the current quarter.

Effective September 29, 2011, the Company entered into a five year Corporate Integrity Agreement (“CIA”) with the OIG.

The CIA formalizes various aspects of the Company’s already existing ethics and compliance programs and contains other

requirements designed to help ensure the Company’s ongoing compliance with federal health care program requirements.

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

Note s to Consolidated Financial Statements

For m 1 0-K Pa r t IV

F-23

LH C Group

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.

11. Segment Information

The Company’s segments consist of (a) home-based services and (b) facility-based services. Home-based services

include home nursing services and hospice services. Facility-based services include long-term acute care services. The

accounting policies of the segments are the same as those described in the summary of significant accounting policies.

Year Ended December 31, 2011

Home-Based
Services

Facility-Based
Services

Total

(In thousands)

Net service revenue
Cost of service revenue
Provision for bad debts
Settlement with government agencies
General and administrative expenses

Operating income (loss)
Interest expense
Non operating income, including gain on sale of assets

$ 557,901
307,744
11,680
65,000
190,264

(16,787)
914
1,645

Income (loss) from continuing operations before income taxes and noncontrolling interest (16,056)
Income tax expense (benefit)
(4,201)

Income (loss) from continuing operations
Noncontrolling interest

(11,855)
8,404

$ 75,971
44,602
640
—
20,324

10,405
104
136

10,437
2,233

8,204
1,189

$ 633,872
352,346
12,320
65,000
210,588

(6,382)
1,018
1,781

(5,619)
(1,968)

(3,651)
9,593

Net income (loss) attributable to LHC Group, Inc.’s common stockholders

$ (20,259)

$ 7,015

$ (13,244)

Total assets

$ 360,340

$ 36,036

$ 396,376

Net service revenue
Cost of service revenue
Provision for bad debts
General and administrative expenses

Operating income
Interest expense
Non operating income, including gain on sale of assets

Income from continuing operations before income taxes and noncontrolling interest
Income tax expense

Income from continuing operations
Noncontrolling interest

Year Ended December 31, 2010

Home-Based
Services

Facility-Based
Services

Total

(In thousands)

$ 555,110
281,013
7,078
182,750

84,269
(116)
746

84,899
28,613

56,286
14,170

$ 76,457
45,508
529
19,087

11,333
(18)
59

11,374
3,114

8,260
1,617

$ 631,567
326,521
7,607
201,837

95,602
(134)
805

96,273
31,727

64,546
15,787

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

$ 42,116

$ 6,643

$ 48,759

Total assets

$ 319,447

$ 37,858

$ 357,305

F-24

F or m 10 -K Par t IV

Notes to Co nsolidated F inanc ial S tate m en ts

Net service revenue
Cost of service revenue
Provision for bad debts
General and administrative expenses

Operating income
Interest expense
Non operating (loss) income, including gain on sale of assets

Income from continuing operations before income taxes and noncontrolling interest
Income tax expense

Income from continuing operations

Loss from discontinued operations
Noncontrolling interest
Net income attributable to LHC Group, Inc.’s common stockholders

Total assets

A Strong Foundation

Year Ended December 31, 2009

Home-Based
Services

Facility-Based
Services

Total

$ 466,736
231,397
4,199
155,670

75,470
(126)
(299)

75,045
24,082

(In thousands)

$ 62,510
36,384
525
16,025

9,576
(16)
38

9,598
2,661

$ 529,246
267,781
4,724
171,695

85,046
(142)
(261)

84,643
26,743

50,963

6,937

57,900

12,527
$ 38,436

86
1,446
$ 5,405

86
13,973
$ 43,841

$ 280,798

$ 26,817

$ 307,615

12. 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. For the year ending December 31, 2011 the carrying value of the Company’s

long-term debt was based on the current interest rates and approximates its fair value.

13. Allowance for Uncollectible Accounts

The following table summarizes the activity and ending balances in the allowance for uncollectible accounts:

Year ended December 31:
2011
2010
2009

14. Concentration of Risk

Begining of
Year Balance

Additions
and Expenses

Deductions

End of Year
Balance

(In thousands)

$ 9,769
8,262
9,976

$ 12,320
7,607
4,724

$ 11,397
6,100
6,438

$ 10,692
9,769
8,262

The Company’s Louisiana facilities accounted for approximately 31.1%, 33.0% and 34.0% of net service revenue during

the years ended December 31, 2011, 2010 and 2009 respectively. Any material change in the current economic or

competitive conditions in Louisiana could have a disproportionate effect on the Company’s overall business results.

Note s to Consolidated Financial Statements

For m 1 0-K Pa r t IV

F-25

LH C Group

15. Unaudited Summarized Quarterly Financial Information

The following table presents the Company’s audited quarterly results of operations (amounts in thousands, except

share data):

Net service revenue
Gross margin
Net income (loss) attributable to LHC Group, Inc.
Net income (loss) available to common stockholders
Basic earnings per share
Net income (loss) attributable to LHC Group, Inc.’s

common stockholders
Diluted earnings per share
Net income (loss) attributable to LHC Group, Inc.’s

common stockholders

Weighted average shares outstanding
Basic
Diluted

Net service revenue
Gross margin
Net income attributable to LHC Group, Inc.
Net income available to common stockholders
Basic earnings per share
Net income attributable to LHC Group, Inc.’s

common stockholders
Diluted earnings per share
Net income attributable to LHC Group, Inc.’s

common stockholders

Weighted average shares outstanding
Basic
Diluted

First Quarter
2011

Second Quarter
2011

Third Quarter
2011

Fourth Quarter
2011

(In thousands)

$ 161,783
72,827
7,694
7,694

$ 161,015
74,799
9,788
9,788

$ 153,398
65,583
(37,960)
(37,960)

$ 157,676
68,317
7,234
7,234

0.42

0.54

(2.08)

0.40

0.42

0.53

(2.08)

0.39

18,215,831
18,351,637

18,278,479
18,346,441

18,263,237
18,263,237

18,296,062
18,353,505

First Quarter
2010

Second Quarter
2010

Third Quarter
2010

Fourth Quarter
2010

(In thousands)

$ 145,162
71,173
11,624
11,665

$ 153,642
74,905
12,393
12,393

$ 165,671
78,445
13,298
13,298

$ 167,092
80,523
11,444
11,444

0.64

0.68

0.73

0.63

0.64

0.68

0.73

0.63

18,041,563
18,179,013

18,118,197
18,236,380

18,148,678
18,224,019

18,166,586
18,294,369

Because of the method used to calculate per share amounts, quarterly per share amounts may not necessarily total to the

per share amounts for the entire year.

F-26

F or m 10 -K Par t IV

Notes to Co nsolidated F inanc ial S tate m en ts

A Strong Foundation

SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) 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.

/s/ KEITH G. MYERS

Keith G. Myers

Chief Executive Officer

March 15, 2012

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints

Keith G. Myers and Peter J. Roman and either of them (with full power in each to act alone) as true and lawful attorneys-

in-fact with full power of substitution, for him and in his name, place and stead, in any and all capacities, to sign any

and all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto and other documents

in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said

attorneys-in-fact, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons

on behalf of the registrant and in the capacities and on the dates indicated.

Signature

Title

Date

/s/ KEITH G. MYERS

Keith G. Myers

/s/ PETER J. ROMAN

Peter J. Roman

/s/ MONICA F. AZARE

Monica F. Azare

/s/ JOHN B. BREAUX

John B. Breaux

/s/ TED W. HOYT

Ted W. Hoyt

/s/ JOHN L. INDEST

John L. Indest

/s/ GEORGE A. LEWIS

George A. Lewis

/s/ RONALD T. NIXON

Ronald T. Nixon

/s/ W.J. “BILLY” TAUZIN

W.J. “Billy” Tauzin

/s/ KENNETH E.THORPE

Kenneth E. Thorpe

/s/ DAN S. WILFORD

Dan S. Wilford

Chief Executive Officer and
Chairman of the Board of Directors

March 15, 2012

Executive Vice President,
Chief Financial Officer,
Principal Accounting Officer

March 15, 2012

Director

March 15, 2012

Director

March 15, 2012

Director

March 15, 2012

Director

March 15, 2012

Director

March 15, 2012

Director

March 15, 2012

Director

March 15, 2012

Director

March 15, 2012

Director

March 15, 2012

For m 1 0-K Pa r t IV

F-27

LH C Group

EXHIBIT INDEX

Exhibit
Number

Description of Exhibits

3.1

3.2

4.1

10.1

10.2

10.3

10.4

10.5

10.6

10.7

10.8

10.9

10.10

10.11

10.12

10.13

Certificate of Incorporation of LHC Group, Inc. (previously filed as Exhibit 3.1 to LHC Group’s Form S-1/A
(File No. 333-120792) filed on February 14, 2005).

Bylaws of LHC Group, Inc., as amended on December 3, 2007 (previously filed as Exhibit 3.2 to LHC
Group’s Form 10-Q for the quarterly period ended March 31, 2008, filed on May 9, 2008).

Specimen Stock Certificate of LHC Group’s Common Stock, par value $0.01 per share (previously filed as
Exhibit 4.1 to LHC Group’s Form S-1/A (File No. 333-120792) filed on February 14, 2005).

LHC 2003 Key Employee Equity Participation Plan (previously filed as Exhibit 10.3 to LHC Group’s Form S-1
(File No. 333-120792) filed on November 26, 2004). +

LHC Group, Inc. 2005 Long-Term Incentive Plan (previously filed as Exhibit 10.4 to the Form S-1/A (File No.
333-120792) filed on February 14, 2005). +

LHC Group, Inc. 2010 Long-Term Incentive Plan (previously filed as Exhibit 10.1 to LHC Group’s Form 10-Q
for the quarterly period ended June 30, 2010, filed on August 6, 2010).

Form of Award under LHC Group, Inc. 2005 Director Compensation Plan. (previously filed as an exhibit to
LHC Group’s Form S-1/A (File No. 333-120792) filed on February 14, 2005). +

Form of Indemnity Agreement between LHC Group and directors and certain officers (previously filed as an
exhibit to the Form S-1/A (File No. 333-120792) filed on February 14, 2005). +

LHC Group, Inc. 2005 Director Compensation Plan (previously filed as Exhibit 10.5 to LHC Group’s Form
S-1/A (File No. 333-120792) filed on February 14, 2005). +

Amendment to the LHC Group, Inc. Amended and Restated 2005 Non-Employee Directors Compensation
Plan (previously filed as Exhibit 99.1 to LHC Group’s Form 8-K filed on June 16, 2006).

LHC Group, Inc. 2006 Employee Stock Purchase Plan (previously filed as Exhibit 99.2 to LHC Group’s Form
8-K filed on June 16, 2006). +

Amended and Restated Employment Agreement between Donald D. Stelly and LHC Group, Inc. , dated
August 27, 2010 (previously filed as Exhibit 10.1 to LHC Group’s Form 8-K filed on August 30, 2010). +

Amended and Restated Employment Agreement between LHC Group, Inc. and Keith G. Myers, dated
January 1, 2011 (previously filed as Exhibit 10.1 to LHC Group’s Form 8-K filed on January 6, 2011 ). +

Amended and Restated Employment Agreement by and between LHC Group, Inc. and Peter J. Roman,
dated January 1, 2011 (previously filed as Exhibit 10.2 to LHC Group’s Form 8-K filed on January 6, 2011). +

Second Amended and Restated Credit Agreement by and between LHC Group, Inc., Capital One, National
Association, as a lender, administrative agent, sole book runner and sole lead arranger, and JP Morgan
Chase Bank, N.A., as a lender and syndication agent, dated October 12, 2010 (previously filed as Exhibit
10.1 to LHC Group’s Form 8-K filed on October 13, 2010).

First Amendment to Second Amended and Restated Credit Agreement by and between LHC Group, Inc.,
Capital One, National Association, as a lender, administrative agent, sole book runner and sole lead
arranger, and a syndicate of financial institutions acceptable to LHC Group, Inc. as lenders, dated October
29, 2010 (previously filed as Exhibit 10.1 to LHC Group’s Form 8-K filed on November 2, 2010).

10.14

Employment Agreement by and between LHC Group, Inc. and Pete C. November dated July 25, 2008
(previously filed as Exhibit 10.18 to LHC Group’s Form 10-K for the year ended December 31, 2009, filed on
March 15, 2010). +

F-28

F or m 10 -K Par t IV

A Strong Foundation

Exhibit
Number

10.15

Description of Exhibits

Amendment to the LHC Group, Inc. 2005 Non-Employee Directors Compensation Plan dated January 1,
2010 (previously filed as Exhibit 10.19 to LHC Group’s Form 10-K for the year ended December 31, 2009,
filed on March 15, 2010). +

10.16

Settlement Agreement among the United States of America, LHC Group, Inc. and certain of its subsidiaries
and relator, dated September 29, 2011 (previously filed as Exhibit 10.1 to LHC Group’s Form 8-K filed on
September 30, 2011).

10.17 Corporate Integrity Agreement between the Office of Inspector General of the Department of Health and

Human Services and LHC Group, Inc., dated September 29, 2011 (previously filed as Exhibit 10.2 to LHC
Group’s Form 8-K filed on September 30, 2011).

10.18

10.19

Second Amendment to Second Amended and Restated Credit Agreement, by and among LHC Group, Inc.,
the lenders and Capital One, National Association, as a lender, administrative agent, sole book runner and
sole lead arranger, dated September 26, 2011 (previously filed as Exhibit 10.3 to LHC Group’s Form 8-K
filed on September 30, 2011)

Third Amendment to Second Amended and Restated Credit Agreement, by and among LHC Group, Inc.,
the lenders and Capital One, National Association, as a lender, administrative agent, sole book runner and
sole lead arranger, dated September 28, 2011 (previously filed as Exhibit 10.4 to LHC Group’s Form 8-K
filed on September 30, 2011)

10.20

Fourth Amendment to Second Amended and Restated Credit Agreement, by and among LHC Group, Inc.,
the lenders and Capital One, National Association, as a lender, administrative agent, sole book runner and
sole lead arranger, dated December 8, 2011.

21.1

Subsidiaries of the Registrant.

23.1

Consent of KPMG LLP.

31.1

31.2

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.

Certification of Peter J. Roman, 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 the Chief Executive Officer and Chief Financial Officer 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

Attached as Exhibit 101 to this report are documents formatted in XBRL (Extensible Business Reporting Language). Users

of this data are advised pursuant to Rule 406T of Regulation S-T that the interactive data file is deemed not filed or part of

a registration statement or prospectus for purposes of section 11 or 12 of the Securities Act of 1933, is deemed not filed for

purposes of section 18 of the Securities Exchange Act of 1934, and otherwise not subject to liability under these sections.

The financial information contained in the XBRL-related documents is “unaudited” or “unreviewed.”

* 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.

+ Indicates a management contract or compensatory plan.

For m 1 0-K Pa r t IV

F-29

Corporate Information

Independent Registered
Public Accounting Firm
KPMG LLP
450 Laurel Street
Suite 1700
Baton Rouge, Louisiana 70801

www.kpmg.com

Transfer Agent and Registrar
American Stock Transfer
& Trust Company LLC
6201 15th Avenue
Brooklyn, New York 11219
(800) 937-5449

www.amstock.com

Corporate Headquarters
LHC Group Inc.
420 West Pinhook Road
Lafayette, Louisiana 70503
(866) LHC GROUP (phone)
(337) 235-8037 (fax)

www.lhcgroup.com

Common Stock
LHC Group’s common stock is traded on the NASDAQ
Global Select Market under the symbol “LHCG.”

At April 25, 2011, the company had a total of approximately
4,107 shareholders, including 398 stockholders of record and
approximately 3,000 persons or entities holding common stock
in nominee name.

Performance Graph
The following graph compares the 5 year cumulative total return on
the company’s common stock with the performance of the NASDAQ
Global Market Index and a peer group selected by the company
(the “Peer Group Index”) comprised of the following publicly
traded companies: Almost Family Inc., Amedisys Inc., Gentiva
Health Services Inc., Lincare Holdings Inc. and National Healthcare
Corp. For purposes of preparing the graph, the company assumed
an investment of $100 was made on December 31, 2006, in the
company’s common stock, the NASDAQ Composite index and the
Peer Group Index and that all dividends, if any, were reinvested at
the time they were paid.

Performance Graph

Comparison of 5 Year Cumulative Total Return*
Among LHC Group Inc., The NASDAQ Composite Index and a Peer Group

$140

$120

$100

$ 80

$ 60

$40

$20

$10

12/06

12/07

12/08

12/09

12/10

12/11

* $100 invested on 12/31/06 in stock or in index-including reinvestment

of dividends. Fiscal year ending December 31.

12/05

12/06

12/07

12/08

12/09

12/10

LHC Group Inc.

$ 100.00

$ 163.57

$ 143.32

$ 206.54

$ 192.83

$ 172.12

NASDAQ Composite

$ 100.00

$ 111.74

$ 124.67

Peer Group

$ 100.00

$ 103.87

$ 101.33

73.77

$ 107.12

$ 125.93

93.98

$ 106.60

$ 105.93

Design by Eisenberg And Associates

Leadership

Executive Officers

Keith G. Myers
Chief Executive Officer

Donald D. Stelly
President, Chief Operating Officer

Peter J. Roman
Executive Vice President,
Chief Financial Officer

Peter C. November
Executive Vice President, General Counsel
and Corporate Secretary

Directors

Keith G. Myers
Chairman

W. J. “Billy” Tauzin
Lead Independent Director

Monica F. Azare
Chair–Compensation Committee
Clinical Quality Committee

John B. Breaux
Nominating & Corporate
Governance Committee

Ted W. Hoyt
Audit Committee
Compensation Committee

John L. Indest
Chair–Clinical Quality Committee

George A. Lewis
Chair–Audit Committee
Compensation Committee

Ronald T. Nixon
Nominating & Corporate
Governance Committee
Audit Committee

Kenneth E. Thorpe, PhD
Clinical Quality Committee

Dan S. Wilford
Chair–Nominating & Corporate
Governance Committee
Clinical Quality Committee

It’s All About Helping People.®

LHC Group Inc.

420 West Pinhook Road

Lafayette, Louisiana 70503

1.866.LHC.GROUP

www.lhcgroup.com

LHC Group