2 0 1 6 A N N U A L R E P O R T
BUILDING TOGETHER
For the future of healthcare, our partners, and shareholders.
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OUR PUR POSE
It’s all about helping people.
OUR MISSION
We provide exceptional care and unparalleled service
to patients and families who have placed their trust in us.
OUR VISION
We will improve the quality of life in the United States
by transforming the delivery of healthcare services.
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KEITH G. MYERS
Chairman and
Chief Executive Officer
TO OUR VALUED STAKEHOLDERS:
In 2016, America’s hospitals and health systems were reminded of the
importance of quality patient outcomes. Government penalties — largely
due to avoidable readmissions — and shifting payment models continued to
make news as many of America’s best healthcare facilities struggled to find an
effective solution to their patients’ post-acute needs.
The conclusion is clear: As healthcare providers seek ways to better support
the health and well-being of their patients both within and outside hospital
settings — an operational and financial necessity — post-acute services are
more important than ever.
LHC Group’s operating and financial results for 2016 reflected a favorable
impact from this growing market recognition of the role we can play in
providing high-quality, low-cost care for post-acute and non-acute patients.
Strong growth in both total admissions and organic home health admissions,
combined with increasing patient acuity, produced 12.1 percent growth in net
service revenue to $914.8 million in 2016, compared to $816.4 million in 2015.
Net income attributable to LHC Group increased 13.1 percent to $36.6 million
for 2016 — up from $32.3 million in 2015, while growing 12.5 percent to $2.07
per diluted share — up from $1.84 per diluted share.
We achieved these results despite regulatory-related reductions in net
Medicare reimbursement that decreased net income attributable to LHC
Group for 2016 by an estimated $0.28 per diluted share compared with 2015.
We are proud of our record of continued success and equally proud to
report that our team remains among the best in the healthcare industry,
thanks to its tireless work ethic, extensive experience, and extraordinary
level of skill. LHC Group continues to enjoy growth and stability, and our
quality performance scores — particularly in regard to our HomeCare Elite®
performance and Centers for Medicare and Medicaid Services Star Rating
scores — continue to lead our industry peers, as referenced and remarked
upon by respected independent observers and analysts.
As we look forward to 2017, we are encouraged by our remarkable
achievements during the past year, and we have no intention of being
satisfied with where we are today. Our eyes are fixed firmly on the future
— and on how we can bring the benefits of our post-acute care partnership
model and reputation for quality to even more organizations.
Excellence may look like an overnight phenomenon to outsiders, but we
know it is the result of years of dedication and tireless work. As always, our
LHC Group family is guided by our six pillars of excellence — People, Service,
Quality, Efficiency, Growth, and Ethics.
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model of success for our post-acute partners
BUILDING ON QUALITY
PEOPLE
In 2016, the number of LHC Group employees grew to nearly 12,000 — an
all-time high for our company. An organization is only as good as its people, and
our workforce is the core reason for our outstanding quality performance.
It will always be a priority at our company to engage the best healthcare
and support professionals available. As the employment market for
qualified clinicians continues to shrink, it is imperative that our systems
and processes allow for a simplified experience in recruiting and
on-boarding top talent. We have implemented a number of enhancements
to help our talent acquisition team in its mission.
With the implementation of a new human resources structure in 2016, our
HR business partners are supplemented and aided by a transactional center.
We are also staffed by professionals with expertise in benefits, leave of absence, systems support, recruiting, and
compensation. This has enhanced our effort to recruit, retain, and engage quality clinicians and support staff across
our organization.
We have made significant enhancements in our on-boarding and orientation processes and renewed a strong focus
on employee engagement. I’m proud to say that these efforts are bearing fruit, and 2016 was a year of significant
employee retention for our company.
LHC Group has also invested in an efficient, mobile-optimized talent platform utilized in our recruiting and
on-boarding processes. The new platform provides our field staff candidates easier access to view jobs, apply,
interview, and on-board with the company.
The soul of our LHC Group team originates in our unique purpose, values, strategies, and goals. These characteristics
make us who we are and drive us at the deepest level. They keep us focused as a team and contribute to a happy,
healthy work environment where our family members can thrive and flourish individually and professionally.
When we combine great employees, a great company culture, and best-in-class business practices, we possess the
key elements essential for long-lasting organizational success.
2
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SERVICE
Since our foundation, maintaining the highest-possible level of service has been a top priority for LHC Group. Our
service is based on a genuine compassion for people, a drive to improve the healthcare system in America, and a
commitment to each and every individual community in which we operate.
In 2016, we reaffirmed our commitment to our communities and the teams that serve them. We operate under the
firm conviction that health care is local, and each of our teams has the experience and earned autonomy to measure
service differentiators in their market and provide a highly customized level of care.
In 2016, we turned our focus to expanding our range of services in communities around the country. Our goal is to
provide a tri-level of care to include home health, hospice, and community-based services in the markets we
serve — becoming a trusted source for even more of our patients’ healthcare needs. This focus will continue as
we move forward in 2017 and beyond.
With a commitment to providing best-in-class service, we are working to differentiate ourselves from other
post-acute providers in our local markets. Our agencies are focused on faster and more efficient admissions,
compassionate and effective management of patients’ needs, and timely and dependable responses to patient calls.
LHC Group remains an industry leader in evaluating and working with new forms of technology that enable
our teams to better and more efficiently serve patients. We have participated in pilot programs for many of these
technologies, and we will continue these efforts in 2017. We want to help design the future of health care, and be a
leader in utilizing the best tools in pursuit of that goal.
In addition, we developed a number of therapy programs in 2016 to better serve our patients at home — including
our low-vision and balance programs. In many of our markets, we are working collaboratively with hospitals to
establish programs that help patients leave the hospital sooner and achieve optimum health in their homes.
EMPLOYEES
11,598
10,922
10,767
ADMISSIONS
172,983
153,951
8,186
142,087
129,581
2013
2014
2015
2016
2013
2014
2015
2016
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QUALITY
At LHC Group, quality is imbedded in
our culture. Quality outcomes — for
our patients and partners — are the
driving force behind everything we
do. Through a program of dedicated,
consistent internal monitoring
and review, we are able to take a
proactive approach in identifying
opportunities for improvement
and further differentiate our
company among competitors.
Our dashboards and internal
reporting tools provide us with valuable
real-time data, which in turn lead to insights that enable our Home Office team and performance improvement
coordinators in the field to provide specific agencies with additional resources, training, and other needs to help
raise their overall level of service.
The oversight and experience provided by Home Office is backed and enhanced by our team of
highly-trained performance improvement coordinators who help us set priorities at the agency level.
These coordinators are empowered to consider all of LHC Group’s quality metrics and serve as a connection
between our Home Office team and agency leadership in developing a targeted and focused plan for
addressing needs.
The ability to design and implement improvements in real time and at the agency level — without relying
on more retroactive data — has helped us achieve and maintain a position as the post-acute care industry’s
recognized leader in quality.
The year 2016 saw LHC Group consistently achieve industry-leading scores in our CMS Five-Star Rating System
results. With the January 2017 ratings update, LHC Group not only again achieved ratings well above national
averages in both the quality and patient satisfaction categories, but also achieved the industry’s highest scores in
both measures for the third consecutive quarter. It is particularly notable that the national average in the CMS
quality category is three stars. Currently, 95 percent of LHC Group providers have a quality rating of 4 - 5
stars. In October, our company earned 2016 HomeCare Elite® rankings for 103 providers, including 179 individual
locations.
With more than 60 percent of our home health locations named among the 2016 HomeCare Elite®
nationwide, and with the highest CMS Star Ratings compared to home health national averages,
4
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QUALITY
LHC Group continues to enhance its reputation as one of the top quality home health providers in the country.
As quality metrics have now become the preferred standard for evaluating healthcare providers of all
types, it’s more important than ever that we remain vigilant and ceaseless in our efforts to identify and isolate
opportunities to increase performance.
In 2016, LHC Group’s hospice division met or exceeded national benchmark standards on eight out of
eight Hospice Consumer Assessment of Healthcare Providers and Systems (CAHPS) key indicators of patient
satisfaction. Our hospice agencies also exceeded the national benchmark on all seven “Hospice Item Set”
quality measures. These are both measures required by the Centers for Medicare and Medicaid Services and
are designed to measure the hospice patient/family experience of care and compliance with expected hospice
clinical processes.
At our long-term acute care facilities, we provide care for patients with medically complex issues requiring
intensive, long-term care. I am proud to report that, once again, our LTAC hospitals achieved overall scores
better than national averages — as compared to similar facilities around the nation — according to the 2016
data provided by Deyta Analytics, Inc.
Our community-based services division’s customer satisfaction rating rose to an overall average of 94
percent, and, once again, the division achieved 100 percent compliance in responding to referrals within a
24-hour period. The division also celebrated the opening of three new locations in Arkansas in early 2017 with
two more scheduled for mid-2017, which will bring our total number of CBS locations to 16.
Quality care is our top priority, and our 2016 results validate the hard work and commitment to excellence
exemplified by our teams across the nation.
NET SERVICE REVENUE
(in millions)
2013
2014
2015
2016
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$658.3
$733.6
$816.4
$914.8
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EFFICIENCY
Our guiding purpose statement — “It’s all about helping people” — informs every aspect of our daily work at LHC
Group. This includes our fiduciary responsibility to remain a strong and vibrant company.
Excellence in financial management and stewardship is a must if we are to continue fulfilling our responsibilities to
our partners, patients, employees, shareholders, and communities. It is a responsibility we hold sacred, and, since our
founding, we have insisted on an organization-wide awareness of and focus on sustainable long-term success. It is my
privilege to report that our 2016 results clearly demonstrate that LHC Group is meeting and exceeding expectations in
terms of both achieving current financial success and delivering long-term value. Here are a few highlights:
•
•
•
LHC Group’s balance sheet contains little debt. Our current leverage ratio is 1.1x compared to the
average leverage ratio of the S&P 500 companies at 4.4x.
For 2016, revenue growth for LHC Group was 12.1 percent — compared to an average of 6 percent for
S&P 500 companies — a rate that drives increased economies of scale.
On Dec. 31, 2016, return on assets for LHC Group was 7.4 percent — compared to the average of 2.3
percent for S&P 500 companies.
LHC Group finished 2016 with a general and administrative expense of 29.6 percent of revenue — down from
32.5 percent of revenue in 2013. Despite substantial reductions in Medicare reimbursement over this period, our
team demonstrated remarkable efficiency by performing at increasingly higher levels with less overhead expense.
The strong improvements during the last three years reflect, in part, the final implementation of our point of care
system in 2014, which, combined with increased operating leverage, is expected to help us produce further efficiency
gains in years to come.
CONSOLIDATED GENERAL AND ADMINISTRATIVE EXPENSE
33.0%
32.5%
32.0%
31.5%
31.0%
30.5%
30.0%
29.5%
29.0%
28.5%
28.0%
6
2011
2012
2013
2014
2015
2016
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GROWTH
LHC Group States
LHC Group states
LHC Group’s double-digit revenue and per-share earnings growth for 2016 was driven primarily by a 12.9 percent
increase in total admissions for all service lines, which we produced organically and through acquisition. In part,
we attribute our organic growth — especially the 9.3 percent increase in organic home health admissions for the
year — to increased recognition by hospitals and health systems that LHC Group can be a tremendous asset to their
operations through our proven ability to provide high quality care, while reducing their costs for non-acute care. The
increased patient volume from our hospital and health system joint venture partners, in particular, is of higher acuity,
resulting in both an increasing Medicare case mix of 1.06 from 2016 versus 1.03 for 2015, and a 4.2 percent increase
in average Medicare reimbursement for 2016 from 2015.
Our organic admissions growth also reflects our increased marketing in our secondary markets, which we are
serving more efficiently and effectively with the completion of our point of care system in 2014. These markets
are comprised of more than 660 counties in our licensed service areas in which we do not have a location. Yet
our Medicare admission market share in these secondary markets is less than one-third of our market share in
our primary markets. Prior to point of care, we could not profitably serve these secondary markets, and now they
represent a meaningful and long-term organic growth opportunity.
In addition to organic growth, the continued success of LHC Group’s acquisition strategies contributed significantly
to the growth in 2016 net service revenue. During 2016, we announced acquisitions with annualized revenues of
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GROWTH
$106 million. We completed six acquisitions during the year that included 23 locations — 12 for home health, 10 for
hospice, and one for community-based services — that produce annualized revenue of approximately $34 million.
Net service revenues for 2016 also benefited from full-year operations of our 2015 acquisitions, which included nine
locations for home health, 11 for hospice, and two for community-based services.
We believe LHC Group is well positioned to produce further growth in 2017 due to the continuing momentum in
factors driving increased volume and acuity of organic admissions and growth in admissions from our secondary
markets. We also expect to complete additional acquisitions in 2017 from a robust pipeline of acquisition
opportunities, which are primarily related to joint ventures with hospitals and health systems.
With the closing of our LifePoint Health joint venture on January 1, 2017, we began a phased process of acquiring,
managing, and consolidating the results of 29 LifePoint home health locations and 12 LifePoint hospice locations.
Twelve of the home health and seven of the hospice locations were acquired on January 1, 2017, and we began
to manage the operations of 10 additional home health locations. On April 1, 2017, we acquired seven additional
LifePoint home health locations and five more hospice locations. On September 1, 2017, we are scheduled to acquire
the remaining 10 LifePoint home health locations we are currently managing.
LOCATIONS
2013
2014
2015
2016
8
308
340
363
376
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GROWTH
For families and communities, we provide care
that is prescribed, designed, and administered
through a partnership that includes the best
acute and post-acute care knowledge
and experience in their community.
These 41 LifePoint locations produce annual revenue of approximately $72 million, about $50 million of which
is expected to be consolidated into our revenues for 2017, due to the phased acquisition of the locations during
the year. In addition, reflecting the strong alignment in both LifePoint’s and LHC Group’s shared vision of building
stronger healthcare delivery systems in the communities we serve, we plan to add home health and hospice
locations during the next three to five years to serve the communities in which each of the 72 LifePoint hospitals
operate. As LifePoint acquires additional hospitals in the future, we expect to add locations to serve them, as well.
This joint venture with LifePoint, a company recognized in its industry as an innovative quality leader, has
substantially enhanced the momentum of our discussions with other hospitals and health systems, as has our
strong quality and patient satisfaction ratings. Given our long experience with and strong network of hospital and
system joint ventures, our acquisition integration capabilities, our financial resources, and our demonstrated ability
to help hospitals and health systems provide their post-acute patients high quality care in less medically intensive
and costly settings, we expect to continue being a partner of choice for hospitals and health systems as they
develop their integrated networks of care for a value-based healthcare system.
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ETHICS
Ethics and quality go hand-in-hand. Without adherence
to high standards and a commitment to doing the right
thing every time, an organization cannot rise — no matter
how talented its workforce.
I’m proud to say that LHC Group continues its reputation of adherence to the highest ethical standards in the
industry. During the past three years, our company has dedicated a budget of more than $2 million per year solely
to the Compliance Department. Our industry-leading comprehensive compliance program — based on the Office of
Inspector General’s Compliance Program Guidance — continues as the gold standard among our peers. Throughout
the years, LHC Group representatives have been called on many times to speak to healthcare industry organizations
about the design and effectiveness of the program.
LHC Group’s Compliance Department consists of 23 full-time dedicated employees focused entirely on compliance
— including seven full-time registered nurses dedicated to compliance auditing and monitoring. All clinical compliance
auditors are required to attain and maintain COS-C (Certificate for OASIS Specialist-Clinical) and HCS-D (Home Care
Coding Specialist-Diagnosis) home health coding certifications.
LHC Group continues an agency-level focused compliance audit program which targets high-risk areas identified by
data mining, compliance reports to the hotline, or other means. In addition, an end-of-episode audit process has been
implemented at each agency to review each claim prior to its release for billing.
We also employ a full-time RN dedicated to overseeing successful implementation of all compliance action plans. Our
auditing and monitoring controls include a provider-level clinical billing compliance audit program, which results in a
repayment of all identified overpayments and implementation of a root-cause-based action plan for all identified errors.
Overall, 2016 was another year of great strides forward across all departments, service lines, and disciplines
represented at LHC Group. We will never waiver in our determination to lead the industry in changing the American
healthcare system for the better. Our success is fueled by the persistence, hard work, and courage it takes to be
best-in-class in all that we do — at every level of our organization.
Thanks to my LHC Group colleagues on behalf of the many patients, families, and communities we are privileged to
serve. And thank you for the opportunity to be part of one of the highest performing, most dedicated and hard-working
group of healthcare professionals in America. It remains a wonderful privilege.
Sincerely,
Keith G. Myers, Chairman and CEO
10
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FINANCIAL HIGHLIGHTS
(in thousands, except share and per share data)
Net service revenue
Cost of service revenue
Gross margin
Provision for bad debts
General and administrative expenses
Impairment of intangibles and other
Loss on disposal of assets
Operating income
Interest expense
Non-operating income
Income from continuing operations before income taxes and noncontrolling interest
Income tax expense
Income from continuing operations
Less net income attributable to noncontrolling interests
Year Ended December 31
2016
2015
$914,823
557,650
357,173
14,790
270,622
—
1,199
70,562
(2,936)
492
68,118
22,176
45,942
9,359
$816,366
480,878
335,488
19,243
247,919
1,273
710
66,343
(2,302)
457
64,498
22,848
41,650
9,315
Net income attributable to LHC Group’s common stockholders
$36,583
$32,335
Earnings per share – basic:
Net income attributable to LHC Group’s common stockholders
$2.08
$1.86
Earnings per share – diluted:
Net income attributable to LHC Group’s common stockholders
$2.07
$1.84
Weighted average shares outstanding:
Basic
Diluted
17,559,477
17,682,820
17,405,379
17,547,531
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2 0 1 6 A N N U A L R E P O R T
BUILDING TOGETHER
For the future of healthcare, our partners, and shareholders.
2016 Form 10-K
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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, 2016
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.)
901 Hugh Wallis Road South
Lafayette, Louisiana 70508
(Address of principal executive offices, including zip code)
(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 $0.01 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 reports), and (2) has
3
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 website, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter
3
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 (117 CFR 229.405) is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by
3
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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act.
No l
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, 2016, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $655.2 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 18,153,486 shares of common stock, $0.01 par value, issued and outstanding as of March 6, 2017.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Annual Report to Stockholders for the fiscal year ended December 31, 2016 are incorporated by reference in
Part II of this Annual Report on Form 10-K. Portions of the Registrant’s Proxy Statement for its 2017 Annual Meeting of Stockholders are
incorporated by reference in Part III of this Annual Report on Form 10-K.
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LHC GROUP, INC.
Table of Contents
PART I.
Cautionary Statement Regarding Forward-Looking Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II.
Item 5.
Item 6.
Item 7.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Market for Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . 38
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV.
Item 15.
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Changes In and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . 56
Disclosure Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Other Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . . . . . . 60
Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Exhibits, and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Signatures
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exhibit Index
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Form 10-K
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LHC GROUP, INC.
Table of Contents
PART I.
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II.
Item 5.
Item 6.
Item 7.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV.
Item 15.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Market for Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . 38
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Changes In and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . 56
Disclosure Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Other Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . . . . . . 60
Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Exhibits, and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Signatures
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exhibit Index
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cautionary Statement Regarding Forward-Looking Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Securities Exchange Act of 1934 (the “Exchange Act”). Forward-looking statements relate to future plans and strategies, anticipated
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
events or trends, future financial performance and expectations and beliefs concerning matters that are not historical facts or that
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
necessarily depend upon future events. The words “may,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “foresee,”
Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
“estimate,” “predict,” “potential,” “intend,” and similar expressions are intended to identify forward-looking statements. Specifically, this
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Annual Report on Form 10-K contains, among others, forward-looking statements about:
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
BUILDING TOGETHER
• our expectations regarding financial condition or results of operations for periods after December 31, 2016;
• our critical accounting policies;
• our business strategies and our ability to grow our business;
• our participation in the Medicare and Medicaid programs;
• the reimbursement levels of Medicare and other third-party payors;
• the prompt receipt of payments from Medicare and other third-party payors;
• our future sources of and needs for liquidity and capital resources;
• the effect of any regulatory changes under the new presidential administration;
• the effect of any changes in market rates on our operations and cash flows;
• our ability to obtain financing;
• our ability to make payments as they become due;
• the outcomes of various routine and non-routine governmental reviews, audits and investigations;
• our expansion strategy, the successful integration of recent acquisitions and, if necessary, the ability to relocate or restructure our
current facilities;
• the value of our proprietary technology;
• the impact of legal proceedings;
• our insurance coverage;
• our competitors and our competitive advantages;
• our ability to attract and retain valuable employees;
• the price of our stock;
• our compliance with environmental, health and safety laws and regulations;
• our compliance with health care laws and regulations;
• our compliance with 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 this cautionary statement. 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.
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.
Form 10-K Part I
3
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LHC GROUP
Item 1. Business.
Overview
We provide post-acute health care services to patients through our home nursing agencies, hospice agencies, community-based services
agencies, and long-term acute care hospitals (“LTACHs”). As of December 31, 2016, through our wholly- and majority-owned subsidiaries,
equity joint ventures and controlled affiliates, we operated in 372 service providers in 26 states within the continental United States.
We operate in four segments: home health services, hospice services, community-based services, and facility-based services.
Our home health service 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 health agencies work closely with
patients and their families to design and implement individualized treatment plans in accordance with a physician-prescribed plan of care.
As of December 31, 2016, we operated 283 home health service locations, of which 164 are wholly-owned by us, 114 are majority-
owned by us through equity joint ventures, three are under license lease arrangements, and the operations of the remaining two locations
are managed by us.
Our hospices provide end-of-life care to patients with terminal illnesses through interdisciplinary teams of physicians, nurses, home health
aides, counselors, and volunteers. We offer a wide range of services, including pain and symptom management, emotional and spiritual
support, inpatient and respite care, homemaker services, and counseling. As of December 31, 2016, we operated 65 hospice locations, of
which 49 are wholly-owned by us, 14 are majority-owned by us through equity joint ventures, and two are under license lease arrangements.
Our community-based service locations offer assistance with activities of daily living to elderly, chronically ill, and disabled patients.
As of December 31, 2016, we operated 11 locations, of which 10 are wholly-owned by us and one is majority-owned by us through an
equity joint venture.
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, 2016, our LTACHs
had 189 licensed beds. We own and operate six LTACHs with eight locations, of which all but one are located within host hospitals.
As part of our facility-based services segment, we also own and operate a pharmacy, a family health center, a family health clinic, and
physical therapy clinics. Of these 13 facility-based services locations, seven are wholly-owned by us and six are majority-owned by us
through equity joint ventures.
Our net service revenue by segment for the years ended December 31, 2016, 2015 and 2014 was as follows (amounts in thousands):
Year Ended December 31,
Home Health Services
Hospice Services
Community-Based Services
Facility-Based Services
Consolidated Net Service Revenue
2016
2015
2014
$ 665,896
134,948
43,891
70,088
$ 613,188
85,854
41,202
76,122
$ 564,966
67,621
27,698
73,347
$ 914,823
$ 816,366
$ 733,632
For further information regarding the financial performance of our segments, see Note 11 to the Consolidated Financial Statements
included in this Annual Report on Form 10-K.
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, 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 with LHC Group, Inc.
being the surviving entity. Our principal executive offices are located at 901 Hugh Wallis Road, South, Lafayette, Louisiana, 70508.
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.
4
Form 10-K Part I
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BUILDING TOGETHER
Business Strategy
Our objective is to become the leading provider of home health, hospice, and community-based services 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 from whom we receive referrals and by expanding the breadth of our services in each market. 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
the 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 utilizing our point of care technology, developing
de novo locations, and acquiring existing Medicare and/or Medicaid-certified agencies in attractive markets throughout the United States.
We will also continue our unique strategy of partnering with hospitals and health systems, as these ventures provide significant return
on investment. We also plan to continue acquiring freestanding agencies that can serve as growth platforms in markets we do not currently
serve in order to support our growth into new markets.
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 will endeavor to joint venture with hospitals to provide post-acute services, such as home health, hospice, and
community-based services.
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, place of residence, or long-term acute care hospital facility. Our services can be broadly classified into
four principal categories: (1) home health services, (2) hospice services, (3) community-based services, and (4) facility-based services
offered through our LTACHs.
Home Health Services
Our registered nurses 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 caring, teaching or monitoring. These
services include, but are not limited to:
• wound care and dressing changes,
• cardiac rehabilitation,
• infusion therapy,
• pain management,
• pharmaceutical administration,
• skilled observation and assessment, and
• patient education.
We have also designed proprietary 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. 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.
1943-Fin-R1.indd 5
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Form 10-K Part I
5
LHC GROUP
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 system and support services through a third-party service
provider (“PERS”) for qualified patients who require intensive medical monitoring, but want to maintain an independent lifestyle. These
services consist principally of a communicator that connects to the telephone line in the patient’s home and a personal help button that is
worn or carried by the individual patient that, when activated, initiates a telephone call from the patient’s communicator to PERS’s
central monitoring facilities. Their trained personnel identify the nature and extent of the patient’s particular need and notify the patient’s
family members, neighbors, and/or emergency personnel, as needed. We believe our use of this system increases patient satisfaction and
loyalty by providing our patients a point of contact between scheduled nursing visits. As a result, we believe that 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 Services
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. The key services provided through our hospice agencies include pain
and symptom management accompanied by palliative medication, emotional, and spiritual support, inpatient and respite care, homemaker
services, dietary counseling, and family bereavement counseling and social worker visits for up to 13 months after a patient’s death.
Community-Based Services
Our community-based service operations offer a wide range of services to patients in their home or in a medical facility. The services range
from assistance with grooming, medication reminders, meal preparation, assistance with feeding, light housekeeping, respite care,
transportation, and errand services.
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 have been diagnosed as
being too medically unstable for treatment in a non-acute setting. For example, our LTACHs typically serve patients suffering from
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.
Other. As part of our facility-based services, we operate an institutional pharmacy, which focuses on providing a full array of services to
our LTACHs, as well as other non-related facilities. We also operate a family health center, a family health clinic, and physical therapy
providers that staff both facilities and outpatient clinics.
Operations
Financial information relating to the home health, hospice, community-based, and facility-based operating segments of our business,
including their contributions to our net service revenue, operating income, and total assets for each of the twelve months ended
December 31, 2016, 2015 and 2014, respectively, is found in Note 11 to the Consolidated Financial Statements included in this Annual
Report on Form 10-K.
Our home health agencies are operated in one segment that is separated into four geographical regions and further separated into
individual operating areas. Our hospice agencies are operated in one segment that is separated into four geographical regions. Our
community-based agencies are operated in one segment within one geographic region. Each of our home health agencies is staffed with
experienced clinical home health and administrative professionals who provide a wide range of patient care services. Each of our home
6
Form 10-K Part I
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BUILDING TOGETHER
health agencies, hospice agencies, and community-based agencies are licensed and certified by the state and federal governments.
As of December 31, 2016, 267 of our 283 home health service locations and 36 of our 65 hospice service locations were accredited by
the Joint Commission, a nationwide commission that establishes standards relating to the facilities, 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 completing the acquisition.
Our facility-based service locations are operated in one segment within one geographic region. Our facility-based services, through our
LTACHs, follow a clinical approach under which each patient is discussed in weekly, multidisciplinary team meetings. In these meetings,
patient progress is assessed and compared to goals and future goals are set. We believe that this model results in higher quality care and
more predictable discharge patterns and avoids unnecessary delays.
Our home health service locations 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 coordinated on-site at the agency level of each home health service, hospice service, and community-based service location.
All coding, medical records, case management, utilization review, and medical staff credentialing are provided on-site at the hospital level
of each facility-based service location. Centralized functions such as 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 are provided from our executive offices.
Equity Joint Ventures
As of December 31, 2016, we had 72 equity joint ventures including 62 with hospitals, four with physicians, and six with other parties.
Our equity joint ventures are generally structured as limited liability companies in which we own a majority equity interest and our partner(s)
own(s) a minority equity interest. At the time of formation, each party contributes 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, and we maintain processes to confirm and document those determinations. None of our equity
joint venture partners are required to make or influence referrals to our equity joint ventures. In fact, agreements with our hospital joint
venture partners require that they follow the same Medicare discharge planning regulations that, among other things, require the hospitals
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 structure our equity joint ventures as either manager-managed or board-managed. We control our manager-managed joint ventures,
since LHC Group, Inc. is typically designated as the manager to oversee the day-to-day operations of the joint venture. We control our
board-managed joint ventures, since we typically hold a majority of the votes required to take board action and/or we control the senior
officer positions, although a majority of our joint ventures require super majority board approval for certain actions. Our equity joint venture
partners participate in the profits and losses of the joint venture 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 partners.
Most of our equity joint ventures include a buy/sell option that grants to us and our equity joint venture partners the right to require the
other 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 parties but will be subject to a fair market valuation process.
1943-Fin-R1.indd 7
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Form 10-K Part I
7
LHC GROUP
License Leasing Agreements
As of December 31, 2016, we had three license leasing agreements, through our wholly-owned subsidiaries, granting us the right to use
the lessors’ home health licenses necessary to operate home nursing agencies and hospice agencies. These license leasing agreements
are entered into when state law would otherwise prohibit the sale and transfer of the agency. The table below details the monthly fees and
termination dates of the license leasing agreements.
Number of License
Leasing Agreements
2016 Current Monthly Fee
Increase in Monthly Fee
Initial Termination Dates
1
1
1
$18,375
Based on net quarterly projections
with an annual cap of $423,000
Based on net quarterly projections
with an annual cap of $208,000
5% increase every three years
2017 with a 2 year automatic renewal
None
None
2016 with a 1 year automatic renewal
2016 with a 1 year automatic renewal
In all three license leasing agreements, we have a right of first refusal in the event that the lessor intends to sell the agency to a third party.
Management Services Agreements
As of December 31, 2016, we had two management services agreements under which we manage the operations of home nursing
agencies. We do not have ownership interest in these home nursing agencies. Instead, for a fee, we provide billing, management, and
other consulting services suited to and designed for the efficient operation of the home nursing agency. We are responsible for the costs
associated with the locations and personnel required for the provision of services. Under one management services agreement, we are
compensated based on a percentage of cash collections for the agency, and under the other management services agreement we are
reimbursed for operating expenses and receive a percentage of the operating net income of the agency. The term of these
management services agreements is five years, with an option to renew for an additional five-year term. Both management services
agreements will automatically renew annually unless either party gives written notice of termination.
We record management services revenue as services are provided in accordance with the management services agreements.
Competition
The home health care market is highly fragmented. According to the Medicare Payment Advisory Commission, an independent agency
that advises Congress on various Medicare issues (“MedPac”), there were approximately 12,416 Medicare-certified home nursing
agencies in the United States in 2014. In 2015, MedPac estimated that approximately 16% of Medicare-certified home health agencies
provided a majority of their services in rural areas, and 89% of agencies were proprietary. 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 do not have the population size to support more than
one or two general acute care hospitals, the local community 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 local community hospital, is not an area of focus for that hospital. Similarly, patients in these markets who require
services typically offered by LTACHs are more likely to remain in the community hospital because it is often the only local facility
equipped to deal with severe and complex medical conditions. We choose to enter these rural markets through affiliations with local
hospitals, since we typically experience significantly less competition for the services we provide.
As we expand into new markets, we may encounter competitors that have greater resources or greater access to capital. Generally,
competition in our home health service markets comes 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.
Although several publicly held and privately owned national and regional companies own or manage LTACHs, they generally do not operate
in the rural markets that we serve. Generally, competition in our facility-based service markets comes from local health care providers.
We believe our diverse service offerings, collaborative approach to working with health care providers, business experience gained from
focusing on rural markets and patient-oriented operating model provide our principal competitive advantages over local providers.
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Quality Assurance & Performance Improvement
The LHC Group Quality Assurance and Performance Improvement Department, overseen by our Chief Clinical Officer, is responsible
for formulating quality of care indicators, identifying performance improvement priorities, and facilitating best-practices for quality care.
Company-wide, we have adopted a “Plan, Do, Check, Act” methodology for our quality/performance improvement activities and
initiatives. We also set forth a quality platform that reviews:
BUILDING TOGETHER
• performance improvement audits,
• Joint Commission accreditation,
• state and regulatory surveys,
• publicly reported quality data, and
• patient perception of care.
The Quality Department is also responsible for ensuring that the infrastructure of the quality initiatives throughout the Company is
appropriate, for overseeing and evaluating the effectiveness of the quality plans and initiatives, and for recommending appropriate quality
and performance improvement initiatives.
The Clinical Quality Committee of the Board of Directors is responsible for advising our 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.
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 maintain a continuous quality improvement program, which involves:
• ongoing education of staff and quarterly continuous quality improvement meetings at each of our agencies, facilities and principal
executive offices;
• monthly comprehensive audits of patient charts performed at each of our agencies and facilities;
• at least annually, a comprehensive survey readiness assessment on each of our agencies and facilities;
• review of Home Health Compare scores;
• assessment of patient’s and/or family member’s perception of care using third party data; and
• assessment of infection control practices and risk events.
We constantly expand and refine our continuous 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 areas identified for improvement through
regulatory interpretation and enforcement activities. We believe our consistent focus on continuous quality improvement programs provide
us with a competitive advantage in the markets we serve.
In December 2014, CMS introduced the Five-Star Quality Rating System to help consumers, their families, and the caregivers compare
home health agencies more easily. The Five-Star Quality Rating System gives each home health agency a rating of between one and five
based upon a number of quality measures associated with such agency, such as timely initiation of care, medication education
provided to patients/caregivers, improvements in ambulation, bed transferring, and bathing, and acute care hospitalization, among others.
The Quality of Patient Care Start Ratings were first published in July 2015, and are updated quarterly thereafter based upon new data that
is published with the ratings on the “Home Health Compare” section of the medicare.gov website. While we are pleased with the initial
ratings received by our home health agencies, we continue to strive to improve our results. As of December 31, 2016, 151 of our 283
home health agencies were rated 4 stars or greater.
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Form 10-K Part I
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LHC GROUP
Compliance
We have established and continually maintain a comprehensive compliance and ethics program that is designed to assist all of our
employees to exceed applicable standards established by federal and state laws and regulations and industry practice. Our goal is
to foster and maintain the highest standards of compliance, ethics, integrity, and professionalism in every aspect of our business dealings,
and we utilize our compliance and ethics program to assist our employees toward achieving that goal.
The purpose of our compliance and ethics program is to promote and foster 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 other policies and procedures that support and enhance overall compliance within our
Company. Our compliance and ethics program focuses on regulations related to the federal False Claims Act, the Stark Law, the federal
Anti-Kickback Law, billing and overall adherence to health care regulations.
To ensure the independence of our compliance department staff, we have implemented the following:
• our Chief Compliance Officer reports to and has direct oversight by the Audit Committee of the Board of Directors;
• our compliance department has its own operating budget; and
• our 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 the Company’s policies and procedures related to compliance and ethics issues;
• reviewing, making recommended revisions, 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;
• 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 health care 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. When cases reported to our compliance hotline 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, will result in
discipline, up to and including termination of employment.
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BUILDING TOGETHER
We continually expand and refine our compliance and ethics programs. We promote a culture of compliance, ethics, integrity and
professionalism within the 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 program provides us with a competitive advantage in the markets we serve.
On January 4, 2017, the Office of Inspector General of the Department of Health and Human Services acknowledged that the Company
had completed its Corporate Integrity Agreement requirements and the Company has since been removed from the current listing of
Corporate Integrity Agreements.
Technology and Intellectual Property
Our Service Value Point system is a proprietary information system that assists us in, among other things, monitoring clinical utilization 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 at our home nursing agencies. We were issued a patent for our
Service Value Point system 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 our staff’s initial
assessment of the patient’s 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 monitor and manage the quality and delivery
of care across our system, including the cost of providing that care, on both a patient-specific and agency-specific basis.
In addition to our Service Value Point system, our business is substantially dependent on non-proprietary software. For example, we utilize
a third-party software information system for billing and maintaining patient claim receivables for our LTACHs. Also, as of December 31,
2016, our home nursing and hospice agencies primarily utilized commercially-available billing and patient claim systems.
During 2014, we successfully completed the roll out of our point of care (“POC”) strategy. Our POC system allows a visiting clinician to
access records and other information from the patient’s home or at the POC, complete required documentation at the POC and submit it
electronically into our patient record system. As of December 31, 2016, all of our home nursing and hospice locations were utilizing our
POC system.
Technology plays a key role in our 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 further growth. We believe that our ability to build and enhance our information and software systems provides us with a
competitive advantage that allows us to grow our business in a cost-efficient manner and provide better patient care.
Reimbursement
Medicare
The federal government’s Medicare program, governed by the Social Security Act of 1965 (the “Social Security Act”), 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 74.5%, 74.5% and 75.9% of our net service
revenue for the years ended December 31, 2016, 2015 and 2014, respectively. Medicare reimburses us based upon the setting in which
we provide our services or the Medicare category in which those services fall.
In 2011, sequestration was implemented in the Budget Control Act of 2011(BCA, P.L. 112-25) as a tool in federal budget control. The
sequestration cut to Medicare payments began on April 1, 2013, and reduced Medicare payments for patients whose service dates
ended on or after April 1, 2013 by 2%. Absent any additional Congressional action, the 2% sequestration cuts are planned to continue
through 2023.
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Form 10-K Part I
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LHC GROUP
Home Health
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 skilled intermittent care. While the services received need not be rehabilitative or of a finite
duration, 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, meaning they are unable to leave their
home without a considerable and taxing 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 60-day episode of care. There is no limit to the number of
episodes a beneficiary may receive as long as he or she remains eligible. The base episode payment 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.
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 the episode 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 adjustments to ensure the
adequacy and effectiveness of the total reimbursement: (a) an outlier payment if the patient’s care was unusually costly; (b) a low
utilization adjustment if the number of visits was fewer than five; (c) a partial payment if the patient transferred to another provider or
transferred from another provider before completing the episode; (d) a payment adjustment based upon the level of therapy services
required; (e) base payment adjustments for case-mix and geographic wage differences; and (f) 2% sequestration reduction for episodes
beginning after March 31, 2013. Because such adjustments are determined upon the completion date of the episode, retroactive
adjustments could impact our financial results.
In 2011, CMS finalized two provisions of the Patient Protection and Affordable Care Act (“the PPACA”) that substantially impact our
business. First, as a condition for Medicare payment, the PPACA mandates that prior to certifying a patient’s eligibility for home health
services, the certifying physician must document that he or she, or allowed non-physician practitioner, had a face-to-face encounter
with the patient that relates to the condition for which the patient receives home health services. The face-to-face 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
in the patient’s home health medical record. In 2015, documentation supporting these encounters must be in the certifying physician’s or
hospital medical record.
Beginning in 2015, CMS also 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.
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 material amounts of reimbursements
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
amounts of reimbursements due from patients who are self-pay.
The base payment rate for Medicare home nursing was $2,965.12 per 60-day episode for the year ended December 31, 2016. The base
payment rate does not take into consideration the 2% sequestration payment reduction mandated by the Budget Control Act of 2011.
Home health payment rates are updated annually 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.
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BUILDING TOGETHER
Hospice
In order for a Medicare beneficiary to qualify for the Medicare hospice benefit, two physicians must certify that, in their clinical judgment,
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 curative benefits related to his or her terminal
illness. At the end of each benefit period (described below), 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 90 days and subsequent benefit periods are 60 days. 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.
Medicare reimburses for hospice care using one of four predetermined daily or hourly rates based upon the level of care we furnish to a
beneficiary. These rates are subject to annual adjustments based on inflation and geographic wage considerations. The base Medicare
rate for services that we provide to a beneficiary depends upon which of the following four levels of care we provide to that beneficiary:
• Routine Care. Care that is not classified under any of the other levels of care, such as the work of nurses, social workers or home
health aides.
• General Inpatient Care. 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. Care for patients experiencing a medical crisis that requires nursing services to achieve palliation and
symptom control, if the agency provides a minimum of eight hours of care within a 24-hour period.
• Respite Care. Short-term, inpatient care to give temporary relief to the caregiver who regularly provides care to the patient.
Medicare limits the reimbursement we may receive for inpatient care services (both respite and general care) for hospice patients. Under the
“80-20 rule,” if the number of inpatient care days of hospice care furnished by us to Medicare hospice beneficiaries under a unique provider
number exceeds 20% of the total days of hospice care furnished by us to all Medicare hospice beneficiaries for both inpatient and in-home
care, Medicare payments to us for inpatient care days exceeding the inpatient cap will be reduced to the routine home care rate, with
excess amounts due back to Medicare. This determination is made annually based on the twelve-month period beginning on November 1
each year. Our Medicare hospice reimbursement is also subject to a cap amount calculated at the end of the hospice cap period,
based on the twelve-month period beginning on November 1 each year, which determines the maximum allowable payments per provider.
In 2011, CMS finalized a face-to-face encounter requirement for hospice reimbursement, mandating that a physician or qualifying nurse
practitioner must certify a face-to-face encounter with the patient no later than the 30-day period prior to the 180th-day recertification
(beginning of the third benefit period) and each subsequent recertification in order to gather clinical findings that support continued
hospice care.
In the fiscal year 2016 hospice payment rule, CMS established a new two-tiered payment system for routine home care hospice services,
which replaces the former single per diem routine home care rate. Effective January 1, 2016, hospices will be reimbursed at a higher
routine home care rate ($186.84) for days 1 through 60 of a hospice episode of care and a lower rate ($146.83) for days 61 and beyond of
a hospice episode of care. In this rule, CMS also provided for a Service Intensity Add-on increasing payments for routine home care
services provided directly by registered nurses and social workers to hospice patients during the final seven days of life.
Long-Term Acute Care Hospitals
All Medicare payments to our LTACHs are made in accordance with a PPS specifically applicable to LTACHs, referred to as “LTACH-PPS.”
The LTACH-PPS was established by CMS final regulations published in 2002, that require each patient discharged from an LTACH to be
assigned a distinct long-term care diagnosis-related group (“MS-LTC-DRG”), which take into account (among other things) the severity of
a patient’s condition. Our LTACHs are paid a pre-determined fixed amount based upon the assigned MS-LTC-DRG (adjusted for area
wage differences), which includes adjustments for short stay and high cost outlier patients (described in further detail below). The payment
amount for each MS-LTC-DRG classification is intended to reflect the average cost of treating a Medicare patient assigned to that
MS-LTC-DRG in an LTACH.
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Form 10-K Part I
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LHC GROUP
Adjustments to MS-LTC-DRG payments might include:
• Short Stay Outlier Policy. CMS has established a modified payment methodology for Medicare patients with a length-of-stay less than
or equal to five-sixths of the geometric average length-of-stay for that particular MS-LTC-DRG, referred to as a short stay outlier, or
“SSO.” When LTACH-PPS was established, SSO cases were paid based on the lesser of (1) 120% of the average cost of the case;
(2) 120% of the LTC-DRG specific per diem amount multiplied by the patient’s length-of-stay; or (3) the full LTC-DRG payment.
CMS modified the payment methodology for discharges occurring on or after July 1, 2006, which changed the limitation in clause
(1) above to reduce payment for SSO cases to 100% (rather than 120%) of the average cost of the case, and also added a fourth
limitation, potentially further limiting payment for SSO cases at a per diem rate derived from blending 120% of the MS-LTC-DRG specific
per diem amount with a per diem rate based on the general acute care hospital inpatient prospective payment system, or “IPPS.”
Under this methodology, as a patient’s length-of-stay increases, the percentage of the per diem amount based upon the IPPS component
will decrease and the percentage based on the MS-LTC-DRG component will increase.
• High Cost Outliers. Some cases are extraordinarily costly, producing losses that may be too large for healthcare providers to offset.
Cases with unusually high costs, referred to as “high cost outliers,” receive a payment adjustment to reflect the additional resources
utilized. CMS provides an additional payment if the estimated costs for the patient exceed the adjusted MS-LTC-DRG payment plus a
fixed-loss amount that is established in the annual payment rate update.
• Interrupted Stays. An interrupted stay occurs when an LTACH patient is admitted upon discharge to a general acute care hospital,
inpatient rehab facility (“IRF”), skilled nursing facility or a swing-bed hospital and returns to the same LTACH within a specified period
of time. If the length-of-stay at the receiving provider is equal to or less than the applicable fixed period of time, it is considered to be an
interrupted stay case and is treated as a single discharge for the purposes of payment to the LTACH.
Freestanding, HwH and Satellite LTACHs
LTACHs may be organized and operated as freestanding facilities or as a hospital within a hospital, or “HwH.” An HwH is an LTACH that is
located on the “campus” of another hospital, meaning the physical area immediately adjacent to a hospital’s main buildings, other areas
and structures that are not strictly contiguous to a hospital’s main buildings but are located within 250 yards of its main buildings, and any
other determined, on an individual case basis by the applicable CMS regional office, to be part of a hospital’s campus. An LTACH that
uses the same Medicare provider number of an affiliated “primary site” LTACH is known as a “satellite”. Under Medicare policy, a satellite
LTACH must be located within 35 miles of its primary site LTACH and be administered by such primary site LTACH. As of December 31,
2016, we had a total of eight LTACH facilities, with 189 licensed beds. Seven of our LTACH facilities were classified as HwHs and one was
classified as freestanding. Of the seven HwH facilities, three were located in Metropolitan Statistical Area (“MSA”) or urban areas and
four were located in non-MSA or rural areas. One of our HwH facilities was a satellite location of a parent hospital located in an MSA. Our
single freestanding location was a remote campus site of a parent located in an MSA.
An LTACH must have an average inpatient length-of-stay for Medicare patients (including both Medicare covered and non-covered days)
of greater than 25 days during each annual cost reporting period. LTACHs that fail to exceed an average length-of-stay of 25 days during
any cost reporting period may be paid under the general acute care hospital IPPS. CMS clarified its policy on the calculation of the
average length-of-stay by specifying that all data on all Medicare inpatient days, including Medicare Advantage days, must be included in
the average length-of-stay calculation effective for cost reporting periods beginning on or after January 1, 2012.
Fiscal Year 2016 Rates
On July 31, 2015, CMS issued a final rule to update fiscal year 2016 payment policies and rates under the IPPS and LTACH-PPS,
which affects discharges occurring in cost reporting periods beginning on or after October 1, 2015. CMS projects that LTACH-PPS
rates would decrease by 4.6%. This estimated decrease is primarily attributable to the statutory decrease in payment rates for site
neutral LTACH-PPS cases that do not meet the clinical criteria to qualify for higher LTACH rates in cost reporting years beginning on or
after October 1, 2015. Cases that do qualify for higher LTACH-PPS rates will see a payment rate increase of 1.7% (based on a market
basket update of 2.4% adjusted by a multi-factor productivity adjustment of -0.5 percentage point and an additional adjustment of
-0.2 percentage point in accordance with the Affordable Care Act). CMS also finalized its proposal to implement a transitional blended
payment rate (50% site neutral rate and 50% LTACH-PPS rates) for site neutral discharges occurring in fiscal years 2016 and 2017.
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BUILDING TOGETHER
The Bipartisan Budget Act of 2013 “BBA 2013” included the following changes in LTACH policies:
LTACH Patient Criteria: Effective for cost reporting periods beginning on or after October 1, 2015, Medicare payment for LTACH
services will change based on certain new patient criteria. To be paid at the full Medicare LTACH-PPS rate, a patient discharged from
an LTACH must either (1) have a short-term acute care hospital stay including a three day length-of-stay in an intensive care unit
during that hospitalization preceding the LTACH stay, or (2) receive ventilator services for more than 96 hours while hospitalized in the
LTACH. In addition such patients cannot be hospitalized in an LTACH for a psychiatric or rehabilitation diagnosis.
Site Neutral Payment: Also effective for cost reporting periods beginning on or after October 1, 2015, all other Medicare discharges
from LTACHs will be paid at a new “site neutral” rate, which is the lesser of: (1) the IPPS comparable per diem amount determined
using the formula in the LTACH short-stay outlier regulation, plus applicable outlier payments, or (2) 100% of the cost of the services
provided. The site neutral payment provision will be phased in over two years, so discharges receiving a “site neutral” rate get paid
50% based on current LTAC rate and 50% based on the “site neutral” rate. Our LTACHs have cost-reporting periods that begin in July
or September of each year so we did not have any impact until the third quarter of 2016.
Twenty-five Day Average Length-of-stay: Patient stays paid the site neutral rate will not count toward calculation of the 25 day
average length-of-stay requirement for LTACHs. Additionally, the law clarifies that patient stays paid by Medicare Advantage plans will
also not count toward the 25 day average length-of-stay requirement for LTACHs. The BBA 2013 also included a provision that
these exceptions to the 25 day average length-of-stay will not be used in calculating the length-of-stay for short-term acute care
hospitals that seek to qualify as LTACHs as of December 10, 2013.
Compliance With LTACH Patient Criteria: Effective for cost reporting periods beginning in federal fiscal year 2020, LTACHs with less
than half of their discharges paid at the full LTACH-PPS rates will lose certification as LTACHs and will transition to payment under
the IPPS for all discharges in subsequent cost reporting periods. However, CMS is required to establish a process for LTACHs to seek
reinstatement of LTACH-PPS payments for applicable discharges.
Moratorium on LTACHs: The BBA 2013 enacted a moratorium on new LTACH beds and hospitals (including satellite locations)
effective January 1, 2015 through September 30, 2017. The law clarifies that there will be no exceptions to the moratorium.
Fiscal Year 2017 Rates
On August 2, 2016, CMS released the final rule to update fiscal year 2017 LTACH reimbursement and policies under the LTACH PPS, which
affects discharges occurring in cost reporting periods beginning on or after October 1, 2016. CMS projects that overall LTACH PPS spending
would decrease by 7.1%, compared to fiscal year 2016 payments. This estimated decrease is attributable to the statutory decrease in
payment rates for site neutral LTACH PPS cases that do not meet the clinical criteria to qualify for higher LTACH rates in cost reporting years
beginning on or after October 1, 2016. Cases that do qualify for higher LTACH PPS rates will see a payment rate increase of 0.7%
(including a market basket update of 2.8% reduced by a multi-factor productivity adjustment of 0.3%, minus an additional adjustment of
0.75 percentage point in accordance with the PPACA, for a net market basket of 1.75%). The LTACH PPS standard federal payment
rate for fiscal year 2017 is $42,476.41 (increased from $41,762.85 in fiscal year 2016). Site-neutral discharges will have a 23% reduction in
payments. CMS also proposes to begin enforcement of the 25 Percent rule which will cap the number of patients treated at an LTACH
who have been referred from all locations of a hospital. Grandfathered LTACH facilities are exempt from the 25 Percent rule, while rural
LTACHs will have a threshold of 50% and MSA-dominant hospitals will have a threshold between 25% and 50%. The 25 Percent rule will
apply to discharges occurring after October 1, 2016. CMS will have two separate outlier pools and thresholds for LTACH-appropriate patients
and for site-neutral patients. For 2017, CMS finalized an increase of its fixed-loss threshold to $21,943 from 2016’s $16,432, to limit
outlier spending at no more than 8% of total LTACH spending (2016 outlier payments may reach 9.0%). CMS is applying the proposed
inpatient fixed-loss threshold of $23,570 for site neutral patients. CMS also finalized four new measures for the LTACH Quality Reporting
Program to meet the requirements of the Improving Medicare Post-Acute Care Transformation (IMPACT) Act. For the fiscal year 2018 LTACH
Quality Reporting Program, CMS added quality measures for Medicare spending per beneficiary, discharge to community and potentially-
preventable 30-day post-discharge readmissions. For the fiscal year 2020 LTACH Quality Reporting Program, CMS adopted a new drug
regimen review measure.
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Form 10-K Part I
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LHC GROUP
Medicaid
Medicaid is a joint federal and state funded health insurance program for certain low-income individuals administered by the states.
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 based rates depending upon the terms
and conditions of the payor. This reimbursement category includes payors such as insurance companies, workers’ compensation
programs, health maintenance organizations, preferred provider organizations, other managed care companies and employers, as well as
payments received directly from patients.
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 co-payments for deductibles and co-insurance obligations of their coverage. Patient out-of-pocket costs for the payment of deductibles
and co-insurance have 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 commercial payors such as 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 normally 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. As of December 31, 2016, our managed care contracts included 181 different payors between
all of our divisions. 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.
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 regulation that could affect our ability to conduct
our business include the following:
• Medicare and Medicaid participation and reimbursement regulations;
• the federal Anti-Kickback Statute and similar state laws;
• the federal Stark Law and similar state laws;
• false claims laws and regulations;
• HIPAA;
• laws and regulations imposing civil monetary penalties;
• environmental health and safety laws;
• licensing laws and regulations; and
• laws and regulations governing 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 and regulations, these are
complex matters 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.
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Medicare Participation
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. While 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 Medicare participation.
Federal 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 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. While we operate our business to comply with the prohibitions of the Anti-Kickback Statute, 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 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.
Stark Law
Congress has passed significant prohibitions against physician self-referrals of patients for certain designated health care services,
commonly known as the Stark Law, which 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 or 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 home health services, inpatient and outpatient hospital services,
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, and the provision of
durable medical equipment and supplies, parenteral and enteral nutrients, equipment and supplies, prosthetics, orthotics and prosthetic
devices and supplies, and outpatient prescription drugs. 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.
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Form 10-K Part I
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LHC GROUP
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 shares of
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 and physician compensation arrangements.
If an investment relationship or compensation agreement between a physician, or a physician’s immediate family member, and the subject
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 a physician investment relationship include ownership in an entire hospital and
ownership in rural providers. The exceptions for compensation arrangements cover employment relationships, personal services contracts
and space and equipment leases, among others. We believe our physician investment relationships and compensation arrangements
with referring physicians meet the requirements as exceptions under the Stark Law and that our ope rations 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 that is listed on the New York Stock Exchange or NASDAQ. If 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. For example, this Stark Law exception
requires 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, 2016, 2015 and 2014, we have in excess of $75.0 million in
stockholders’ equity.
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 without
regard to whether the payor is a governmental body (such as Medicare) or a commercial party (such as an insurance company). While
we believe that our operations are structured to comply with applicable state laws with respect to physician relationships and referrals, 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 significantly negative impact on our operations.
False 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, under false claims statutes such as 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, increasing 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. Many states have enacted similar laws providing for the imposition
of civil and criminal penalties for the filing of fraudulent claims. While we operate our business to avoid exposure under the federal False
Claims Act and similar state laws, because of the complexity of the government regulations applicable to our industry, we cannot
guarantee that we will not be the subject of an action under the federal False Claims Act or similar state law.
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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.
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 rule, 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, and
also applies to many of our payors and to our relationships with those payors. We believe that our operations materially comply with the
Transaction Standards rule.
These regulatory requirements impose significant administrative and financial obligations on companies like us that use or disclose
electronic health information. We have modified our existing HIPAA privacy and security policies and procedures to comply with the
HIPAA 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 severity 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 such as Medicare
and Medicaid.
HHS can also 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 can also 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 their qualifications in obtaining their license or their 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.
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Form 10-K Part I
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LHC GROUP
Governmental Review, Audits and Investigations
CMS, DOJ and other federal and state agencies continue to impose intensive enforcement policies and conduct random and directed
audits, reviews and investigations designed to insure compliance with applicable healthcare program participation and payment laws and
regulations. As a result, we are routinely the subject of such audits, reviews and investigations.
In addition, CMS has engaged a number of third party firms, including Zone Program Integrity Contractors (“ZPICs”) and Recovery Audit
Contractors (“RACs”) to conduct extensive reviews of claims data and state and Federal Government health care program laws
and regulations applicable to healthcare providers. These audits evaluate the appropriateness of billings submitted for payment. Audit
contractors identify overpayments resulting from incorrect payment amounts, non-covered services, medically unnecessary services,
incorrectly coded services, and duplicate services and are paid on a contingency basis. In addition to identifying overpayments, audit
contractors can refer suspected violations of law to government enforcement authorities.
The findings of these audits, reviews and investigations may result in citations of regulatory deficiencies, sanctions and other criminal,
civil, and regulatory penalties. They may also result in the refund of overpayments, a retroactive adjustment to amounts previously
paid, termination from the Medicare and Medicaid programs, bars on Medicare and Medicaid payments for new admissions, and civil
monetary penalties.
The Company’s costs to respond to and defend any such audits, reviews and investigations could be significant and are likely to increase
in the current enforcement environment. These enforcement activities and policies and resulting fines, recoupments and penalties could
have a material adverse effect on our business and financial condition.
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 are not aware of any violations related to compliance with environmental, health and safety laws through 2016.
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 operate our business 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, as a dispenser of controlled substances, our pharmacy operations 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 are not aware of any violations of applicable laws relating to our institutional pharmacy operations
through December 31, 2016.
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,
constructing, acquiring or expanding certain health services, operations or facilities. 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
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or permit of approval issued by the state determines the service areas for the applicable agency or program. The following U.S.
jurisdictions require certificates of need or permits of approval for home nursing agencies: Alabama, Alaska, Arkansas, Georgia, Hawaii,
Kentucky, Maryland, Mississippi, Montana, New Jersey, New York, North Carolina, Rhode Island, South Carolina, Tennessee, Vermont,
Washington, West Virginia and the District of Columbia. In addition, the state of Louisiana continues to have a moratorium on the issuance
of new licenses for home nursing agencies that we expect to remain in effect for 2017.
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.
Accreditations
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, 2016, the Joint Commission had accredited 267 of our 283 home health
agencies and 36 of our 65 hospice agencies. Those not yet accredited are working towards achieving this accreditation. As we acquire
companies, we apply for accreditation 12 to 18 months after completing the acquisition.
Employees
As of December 31, 2016, we had 11,598 employees, of which 7,299 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.
Insurance
We are subject to claims and legal actions in the ordinary course of our business. To cover claims that may arise, we maintain commercial
insurance for healthcare professional liability, general liability, automobile liability, employed lawyers liability, fiduciary liability, crime liability,
information security and privacy liabilities, and workers’ compensation/employer’s liability in amounts that we believe are appropriate and
sufficient for our operations. We maintain claims-made healthcare professional liability and occurrence based general liability insurance
that provides primary limits of $1.0 million per incident/ occurrence and $3.0 million in annual aggregate amounts. We maintain workers’
compensation insurance that meets state statutory requirements and provides a primary employer liability limit of $1.0 million to cover
claims that may arise in the states in which we operate, excluding Ohio and Washington. Coverage for workers compensation matters
within Ohio and Washington is procured from each state’s specific mandated programs and not through third party insurance payors.
Under our workers’ compensation insurance policies, the Company maintains a deductible of the first $0.5 million 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 $40.0 million that provides excess
coverage for healthcare professional liability, general liability, automobile liability and employer’s liability. We also maintain directors’ and
officers’ liability insurance in the aggregate amount of $65.0 million. 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. Information
contained on our website is not part of or incorporated by reference into this Annual Report on Form 10-K.
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Form 10-K Part I
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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 negative effects associated with 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 PPACA 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 either just recently or 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.
The PPACA also amended the False Claims Act to provide that a provider must report and return overpayments within 60 days of
identifying the overpayment or the claims for the services that generated the overpayments become false claims subject to the False Claims
Act. Overpayments include payments for services for which the provider does not have proper documentation. If we were to identify
documentation failures that could not be corrected, we could be required to return payments received for those claims within the mandated
60-day time period. If we fail to identify and return overpayments within the required 60-day period we could be subject to suits under
the False Claims Act by the government or relators (whistleblowers). On February 13, 2015, CMS announced that it will delay finalizing
regulations that were intended to clarify when a payment is “identified” for purposes of the 60-day rule. Notwithstanding the delay,
providers are still required to comply with the rule even though there is considerable uncertainty over exactly when the 60-day period
begins. Due to this uncertainty, our continued compliance with the False Claims Act and its implementing regulations could have a
material adverse impact on our business and operations.
Significant developments resulting from the recent U.S. presidential election could have a material effect on our business.
On January 30, 2017, President Trump issued an Executive Order entitled “Reducing Regulation and Controlling Regulatory Costs” that,
among other things, will require federal agencies to cut two existing regulations for every new regulation they implement. The impact
of any such changes to health care regulations on our financial performance and business prospects cannot be estimated at this time.
It remains unclear what regulations might change, and whether any regulatory changes might affect, positively or negatively, our home
health services, hospice services, community-based services, or facility-based services. Additionally, the new Executive Order also
required a suspension of the implementation of any new planned regulations for a review period, which calls into question whether the
implementation of changes to Conditions of Participation (CoPs) recently issued by CMS will be halted. Substantive changes to the
regulations applicable to our businesses, in particular changes in compliance requirements or in reimbursement rates under Medicare,
could have a material effect on our businesses and our financial performance.
Additionally, as a candidate, President Trump vowed to repeal and replace the PPACA. Significant changes to or the repeal of the
PPACA could shift the U.S. health care system away from government reimbursement toward private business. It remains unclear which
provisions of the PPACA will change, and whether any changes will affect our businesses or financial performance.
The appointment of Representative Tom Price as the new head of the Department of Health and Human Services (HHS) may also affect
our businesses. During his confirmation hearings, Rep. Price expressed his personal opinions concerning health care priorities and the
PPACA. Rep. Price spoke about the possibility of incentivizing home health care providers, if such support resulted in improved and more
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accessible health care for home health patients. Rep. Price has also been a vocal opponent of the home health Pre-Claim Review
Demonstration, which requires the submission of documentation for affirmation of compliance with Medicare certification and coverage
requirements prior to the submission of final claims for reimbursement. The Pre-Claim Review was rolled-out in Illinois on August 1, 2016,
with delayed roll-out in Florida (estimated April 1, 2017), Texas, Michigan, and Massachusetts. The Pre-Claim Review has largely been
criticized by the home health care industry as causing unnecessary increases in costs and errors and delays in reimbursement. With the
appointment of Rep. Price to head HHS, the continued implementation of the Pre-Claim Review remains in doubt. While the future of
the Pre-Claim Review process remains uncertain, the elimination or significant alteration of the Pre-Claim Review process could have a
material effect on our business and financial performance.
We derive a majority 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, 2016, 2015 and 2014, we received 74.5%, 74.5% and 75.9%, 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. See Part I, Item 1. Reimbursement in this Annual Report on Form 10-K for additional information
regarding reimbursements. 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 shifting more responsibility for a portion of payment to beneficiaries, such as
co-payments;
• 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, which may be less than actual inflation. This adjustment could be eliminated or reduced in any given
year. Also beginning on April 1, 2013 Medicare reimbursement was cut an additional 2% through sequestration as mandated by the
Congressional Budget Act. 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.
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Form 10-K Part I
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LHC GROUP
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. See Part I, Item 1. Government Regulations
in this Annual Report on Form 10-K for additional information concerning applicable laws and regulations. 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.
On December 11, 2014, CMS proposed a star rating methodology for home health agencies to meet the PPACA’s call for more
transparent, public information on provider quality. All Medicare-certified home health agencies would be eligible to receive a star rating
(from one to five stars) based on a number of quality measures, such as timely initiation of care, drug education provided to patients,
fall risk assessment, depression assessments, improvements in bed transferring, and bathing, among others. The “Quality of Patient Care
Star Ratings” were first published in July, 2015, and are updated quarterly thereafter based upon new data that is published with the
ratings on the “Home Health Compare” section of the medicare.gov website. While we are pleased with the initial ratings received by our
home health agencies and are striving to improve our results, it is not clear at this time what impact, if any, the new rating system will
have on our home health business.
We face reviews, audits and investigations under our contracts with federal and state government agencies and private payors, and these
audits could have adverse findings that may negatively impact our business.
We are subject to various routine and non-routine governmental reviews, audits and investigations. These audits include those conducted
through the recovery audit contractor program (“RAC”) and the zone program integrity contractor program (“ZPIC”), 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.
We are subject to federal and state laws that govern our employment practices. Failure to comply with these laws, or changes to these
laws that increase our employment-related expenses, could adversely impact our operations.
We are required to comply with all applicable federal and state laws and regulations relating to employment, including occupational safety
and health requirements, wage and hour requirements, employment insurance, and equal employment opportunity laws. These laws can
vary significantly among states and can be highly technical. Costs and expenses related to these requirements are a significant operating
expense and may increase as a result of, among other things, changes in federal or state laws or regulations requiring employers to
provide specified benefits to employees, increases in the minimum wage and local living wage ordinances, increases in the level of existing
benefits, or the lengthening of periods for which unemployment benefits are available. We may not be able to offset any increased costs
and expenses. Furthermore, any failure to comply with these laws, including even a seemingly minor infraction, can result in significant
penalties which could harm our reputation and have a material adverse effect on our business. Additionally, a number of states require that
direct care workers receive state-mandated minimum wage and/or overtime pay. Opponents say that the new protections will make
in-home care more expensive for government programs that pay for such services, and that these new rules and regulations could result
in a reduction in covered services. We will continue to evaluate the effect of these various new rules and regulations on our operations.
24
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BUILDING TOGETHER
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 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 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.
On October 6, 2014, CMS issued a proposed rule that would revise the Medicare and Medicaid conditions of participation for home
health agencies. The proposed rule would require home health agencies to develop, implement, and maintain an agency-wide, data-driven
quality assessment and improvement program and a system of communication and integration to identify patient needs and coordinate
care. The proposed rule also aims to clarify and expand current patient rights requirements and contains several other clarifications and
updates largely focused on creating a more patient-centered, data-driven, outcome-oriented process for patient care. If the proposed
rule is finalized, we expect to face additional costs associated with compliance with such changes.
Our revenue may be negatively impacted by a failure to appropriately document services, resulting delays in reimbursement.
Reimbursement to us is conditioned upon providing the correct administrative and billing codes and properly documenting the services
themselves, including the level of service provided, and the necessity for the services. If incorrect or incomplete documentation is provided
or inaccurate reimbursement codes are utilized, this could result in nonpayment for services rendered and could lead to allegations of
billing fraud. This could subsequently lead to civil and criminal penalties, including exclusion from government healthcare programs, such
as Medicare and Medicaid. In addition, third-party payors may disallow, in whole or in part, requests for reimbursement based on
determinations that certain amounts are not covered, services provided were not medically necessary, or supporting documentation was
not adequate. In addition, timing delays may cause working capital shortages. Working capital management, including prompt and diligent
billing and collection, is an important factor in achieving our financial results and maintaining liquidity. It is possible that documentation
support, system problems, provider issues or industry trends may extend our collection period, which may materially adversely affect our
working capital, and our working capital management procedures may not successfully mitigate this risk.
The inability of our long-term acute care hospitals to maintain their certification as long-term acute care hospitals could have an adverse
effect 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 patient length-of-
stay and restrictions on sources of referral (e.g. 25 Percent rule), 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 LTACHs receiving less Medicare reimbursement than they currently
receive for their patient services. If any of our LTACHs were subject to payment as general acute care hospitals, our net service revenue
and net income would decline.
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Form 10-K Part I
25
LHC GROUP
The implementation of new patient criteria for our LTACHs under the BBA 2013 will reduce the population of patients eligible for
LTACH-PPS and change the basis upon which we are paid which could adversely affect our revenues and profitability.
The BBA 2013 creates new Medicare criteria and payment rules for our LTACHs. Under the new criteria, our LTACHs treating patients with
at least a three-day prior stay in an acute care hospital intensive care unit and patients on prolonged mechanical ventilation admitted
from an acute care hospital will continue to receive payment under LTACH-PPS rate. Other patients will continue to have access to LTACH
care, but our LTACH will be paid at a “site-neutral rate” for these patients, based on the lesser of per diem Medicare rates paid for
patients with the same diagnoses under IPPS or LTACH costs.
The effective date of the new patient criteria was October 1, 2015, followed by a two-year phase-in period tied to each LTACH’s cost
reporting period. During the phase-in period, payment for patients receiving the site-neutral rate will be based 50% on the current
LTACH-PPS rate and 50% on the new site-neutral rate. For our two LTACHs that have a cost reporting period starting before July 1 of
each year, the phase-in began on June 1, 2016. For our six LTACHs that have a cost reporting period starting on or after July 1 of each
year, the phase-in began on September 1, 2016.
We continue to analyze Medicare and internal data to estimate the number of our cases that will continue to be paid under the LTACH-
PPS rate. At this time, we estimate that less than one-third of our current LTACH patients will be paid at the site-neutral rate under
the new criteria once it is fully phased-in. The site-neutral payment rates will be based on the lesser of per diem Medicare rates paid for
patients with the same diagnoses under IPPS or our LTACHs costs. There can be no assurance that these site-neutral payments will
not be materially less than the payments currently provided under LTACH-PPS rates.
The additional patient criteria imposed by the BBA 2013 will reduce the population of patients eligible for LTACH-PPS rates and change
the basis upon which our LTACHs are paid for other patients. In addition, the BBA 2013 will generate additional governmental regulations,
including interpretations and enforcement actions surrounding those regulations. These changes could have a material adverse effect
on our business, financial position, results of operations and liquidity.
Our hospice operations are subject to two annual Medicare caps. If any of our hospice providers exceeds such caps, our business and
consolidated financial condition, results of operations and cash flows could be materially adversely affected.
Overall payments made by Medicare to each hospice provider number (generally corresponding to each of our hospice agencies) are
subject to an inpatient cap amount and an overall payment cap amount, which are calculated and published by the Medicare fiscal
intermediary on an annual basis covering the period from November 1 through October 31. If payments received under any of our hospice
provider numbers exceeds either of these caps, we may be required to reimburse Medicare for payments received in excess of the caps,
which could have a material adverse effect on our business and consolidated financial condition, results of operations and cash flows.
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 federal 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 federal 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 his or her investment;
• neither we nor the joint venture entity lends funds to or guarantees a loan to the hospital or physician to acquire interests in the joint
venture; 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.
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BUILDING TOGETHER
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 operate, or
may wish to operate in the future, may adopt a similar moratorium.
As of December 31, 2016, we operated in 12 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 failure to obtain any requested certificate of need, permit of approval or other license
could impair our ability to operate or expand our business.
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 sources to fund the capital and liquidity requirements of our business.
Financial markets may experience significant disruptions, which could impact 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. 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 position, 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 credit facility, 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.
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Form 10-K Part I
27
LHC GROUP
The agreement governing our revolving 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 revolving 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/or
• 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 revolving 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.
Our net service revenue is concentrated in a small number of states, which makes us sensitive to regulatory and economic changes in
those states.
For the year ended December 31, 2016, our facilities in Louisiana, Mississippi, Tennessee, Alabama, and Arkansas accounted for
approximately 58.4% of our net service revenue. 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 effect on our results of operations and 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.
We may be more vulnerable to the effects of a public health catastrophe than other businesses due to the nature of our patients.
The majority of our patients are older individuals and others with complex medical challenges, many of whom may be more vulnerable
than the general public during a pandemic or in a public health catastrophe. Our employees are also at greater risk of contracting
contagious diseases due to their increased exposure to vulnerable patients. For example, if a flu pandemic were to occur, we could suffer
significant losses to our consumer population or a reduction in the availability of our employees and, at a high cost, be required to hire
replacements for affected workers. Accordingly, certain public health catastrophes could have a material adverse effect on our financial
condition and results of operations.
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Form 10-K Part I
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BUILDING TOGETHER
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% for an initial episode of care and 50% for subsequent
episodes of care) for each Medicare episode is billed at the commencement of the episode and we typically receive payment within
approximately seven 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 intangible assets represent a significant portion of the assets on our balance sheet and are assessed for impairment
annually or whenever circumstances indicate potential impairment. The goodwill 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 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 operations, which could have a material adverse effect on our
earnings, debt covenants and ability to access capital.
We assess other intangible assets, such as trade names and licenses, individually, based on expected revenue and cash flows to be
generated by those assets. Specific economic factors and conditions attributed to local agencies could cause these expected revenue
and cash flows to decrease. If we determine that the fair value is less than the carrying value, we could be required to record material
non-cash impairment charges, which could have a material adverse effect on our earnings, debt covenants and ability to access capital.
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 uncollectible 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.
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Form 10-K Part I
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LHC GROUP
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. 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 and, therefore, 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.
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 adversely affect 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 and loss of market acceptance of our services. Future increases in competition from existing competitors or new
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BUILDING TOGETHER
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.
We may close additional underperforming agencies in the future.
We regularly review the performance of our various agencies. Our review considers the current financial performance, market penetration,
forecasted market growth and current and future reimbursement payment forecasts.
We will continue to monitor the performance of our agencies on an ongoing basis, and closures may from time to time occur in the future.
If we take any further action to close agencies, we will incur additional costs and expenses, which may require us to record significant
charges in future periods. While any such closures would be made in connection with our constant efforts to improve our profitability,
associated charges would have a negative impact on our revenue and possibly our operating results during the short-term.
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 hospice agencies 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-based agencies and the formation of joint ventures with
hospitals for the operation of home-based 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 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 home nursing agencies or open new start-up
home nursing agencies. For example, CMS has adopted a regulation known as the “36 Month Rule” that is applicable to home health
agency acquisitions. Subject to certain exceptions, 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 home health 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 home health agencies that are subject to the rule.
Form 10-K Part I
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LHC GROUP
If we are subject to substantial malpractice or other similar claims, it could materially adversely impact our results of operations and
financial condition.
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 $40.0 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.
Failure of, or problems with, our critical software or information systems could harm our business and operating results.
We depend upon reliable and secure information systems to provide valuable tools by which we manage our business, comply with legal
requirements and provide services. 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 systems require constant maintenance and upgrading to preserve and enhance system capabilities and security. Problems
with, or the failure of, our information systems or software could negatively impact our clinical performance and our management and
reporting capabilities. Any significant problems with or failures of our information systems or software 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 our
proprietary and non-proprietary software may be substantial and could adversely affect our net income. Our agencies also depend upon
our information systems for accounting, billing, collections, risk management, quality assurance, payroll, education tracking and
operational performance. If we experience a reduction in the performance, reliability, availability or accuracy of our information systems,
our operations and financial performance, and ability to report timely and accurate information, could be adversely affected.
Operations that we acquire must be integrated into our various information systems in an efficient and effective manner. For certain
aspects, we rely upon third party contractors to assist us with those activities. If we are unable to integrate and transition any acquired
business into our information systems, due to our failures or any failure of our third party contractors, we could incur unanticipated
expenses, suffer disruptions in service, experience regulatory issues and lose revenue from the operation of such business.
Our information systems are networked via public network infrastructure and standards based encryption tools that meet regulatory
requirements for transmission of protected health information over such networks. We have installed privacy protection systems on our
network and point-of-care devices to prevent unauthorized access to proprietary, sensitive and legally protected information. 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
HIPAA or other judicial acts, as applicable.
Our information systems are also subject to damage or service interruption due to natural disasters, floods, fires, loss of power, loss of
telecommunications connectivity, and other events that may be beyond our immediate control. While we maintain and test various disaster
recovery plans and procedures, our failure to successfully implement and execute upon such plans and procedures, and restore the full
operational capabilities of our information systems and software in an effective and efficient manner, could have a material adverse effect
on the functionality of our information systems and our business, financial condition, results of operations and cash flows, and cause a
possible significant disruption of our operations and services.
32
Form 10-K Part I
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4/4/17 6:39 PM
BUILDING TOGETHER
Our failure to negotiate favorable managed care contracts, or our loss of existing favorable managed care contracts, could have a material
adverse effect on our business and consolidated financial condition, results of operations and cash flows.
One of our strategies is to diversify our payor sources by increasing the business we do with managed care companies, and we strive to
secure favorable contracts with managed care payors. However, we may not be successful in these efforts. Additionally, there is a risk that
any favorable managed care contracts that we can secure may be terminated on short notice, since managed care contracts typically
permit the payor to terminate without cause, typically on 60 days notice. Such provisions can provide payors with leverage to reduce
volume or obtain favorable pricing. Our failure to negotiate, secure and maintain favorable managed care contracts could have a material
adverse effect on our business and consolidated financial condition, results of operations and cash flows.
Risk Factors Related to our Ownership and Management
As a holding company, we have no material assets or operations of our own.
We are a holding company, whereby our material assets and operations are held by our subsidiaries. Accordingly, our ability to service
our debt, 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.
The loss of certain executive management or key employees could have a material adverse effect on our operations and financial
performance.
Our success depends upon the continued employment of our executive management team and key employees and our ability to retain
and motivate these individuals. If we lose the services of one or more of our executive officers or key employees, we may not be able
to successfully manage our business, achieve our business goals or replace them with equally qualified personnel. The loss of any of our
executive officers or key employees could have a material adverse effect on our operations and financial performance.
Our executive officers and directors and their affiliates hold a substantial portion of our outstanding shares of common 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 14.9%
of our outstanding shares of common stock as of December 31, 2016. 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 governing documents contain provisions that may enable our Board of Directors to resist a change in control of the
Company. These provisions include:
• staggered terms for our 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.
1943-Fin-R1.indd 33
4/11/17 10:57 AM
Form 10-K Part I
33
LHC GROUP
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 traded infrequently, 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 (“NASDAQ”). For example, the
average daily trading volume of our common stock on NASDAQ over the three-month trading period ending March 1, 2017 was
approximately 128,094 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 common 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 our common stock in connection with acquisitions, could have an
adverse effect on the market price of our common stock.
We do not anticipate paying dividends on our common stock in the foreseeable future and, consequently, your ability to achieve a return
on your investment will depend solely on appreciation in the price of our common stock.
We do not pay dividends on our shares of common stock and intend to retain all future earnings to finance the continued growth and
development of our business and for general corporate purposes. In addition, we do not anticipate paying cash dividends on our common
stock in the foreseeable future. Any future payment of cash dividends will depend upon our financial condition, capital requirements,
credit facility limitations, earnings and other factors deemed relevant by our board of directors.
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 could 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 price of our common stock.
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 principal executive office is located in Lafayette, Louisiana, in a 66,846 square feet building that is leased. The lease agreement
commenced on February 1, 2015 and will expire on March 30, 2025.
Of our operating service locations, three are owned by us and the remaining locations are in leased facilities. Most of our operating service
locations are located in general commercial office space. Generally, the leases 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.
Seven of our LTACHs are HWHs, 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.
34
Form 10-K Part I
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4/4/17 6:39 PM
The following table shows our locations of our home health services, hospice services, community-based services, and facility-based
services facilities as of December 31, 2016:
BUILDING TOGETHER
Louisiana
Mississippi
Alabama
Tennessee
Arkansas
Kentucky
West Virginia
Georgia
Washington
Missouri
Maryland
Illinois
Texas
Idaho
North Carolina
Arizona
California
South Carolina
Colorado
Florida
Oregon
Virginia
Ohio
Oklahoma
Rhode Island
Wisconsin
Home Health
Services
Hospice
Services
Community- Facility-Based
Based Services
Services
40
34
27
29
21
28
17
8
10
6
10
9
8
4
2
4
5
1
4
4
4
3
2
1
1
1
283
7
9
8
2
8
—
3
11
4
5
—
—
—
2
1
1
—
4
—
—
—
—
—
—
—
—
65
—
—
—
1
1
2
—
—
1
2
1
—
—
—
3
—
—
—
—
—
—
—
—
—
—
—
11
12
—
—
—
1
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
13
Item 3. Legal Proceedings.
We provide services in a highly regulated industry and are a party to various proceedings and regulatory and other governmental and
internal audits and investigations in the ordinary course of business (including audits by Zone Program Integrity Contractors (“ZPICs”) and
Recovery Audit Contractors (“RACs”) and investigations resulting from our obligation to self-report suspected violations of law). We
cannot predict the ultimate outcome of any regulatory and other governmental and internal audits and investigations. The DOJ, CMS, or other
federal and state enforcement and regulatory agencies may conduct additional investigations related to our businesses in the future. These
matters could potentially subject us to sanctions, damages, recoupments, fines, and other penalties (some of which may not be covered by
insurance), which may, either individually or in the aggregate, have a material adverse effect on our business and financial condition.
We are 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 on our condensed
consolidated financial statements, after considering the effect of our insurance coverage.
On October 7, 2015, the parties entered into a Stipulation of Settlement in the consolidated case styled In re LHC Group, Inc. Derivative
Litigation, Case No. 6:13-cv-02899-JTT-CBW. On October 19, 2015, Plaintiffs filed an Unopposed Motion for Preliminary Approval of
Proposed Derivative Settlement. On October 26, 2015, the District Court entered an Order Preliminarily Approving Settlement in the amount
of $0.6 million. On January 11, 2016, the District Court entered its Order and Final Judgment approving the settlement and dismissing
the consolidated action with prejudice. The Company’s insurance carrier has funded the entire settlement amount, which was immediately
releasable to Plaintiffs’ counsel on January 11, 2016. The time for appeal has passed and no appeals were filed. This matter is now
concluded. At December 31, 2015, the Company’s balance sheet reflected the entire settlement in current assets as a receivable due
from insurance carrier and correspondingly reflected the entire settlement in current liabilities as a legal settlement payable.
Item 4. Mine Safety Disclosures.
Not applicable.
Form 10-K Part I
35
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4/11/17 10:57 AM
LHC GROUP
PART II
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 6, 2017, there
were approximately 167 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 debt instruments.
Price Range of Common Stock
The following table provides the high and low prices of our common stock during each quarter in 2016 and 2015 as quoted by NASDAQ:
2016
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
2015
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
High
Low
$ 45.70
46.51
43.67
44.10
$ 49.16
51.12
40.61
34.40
$ 32.48
34.90
35.05
33.55
$ 42.97
36.95
30.15
28.88
The closing price of our common stock as reported by NASDAQ on March 6, 2017 was $48.86.
Performance Graph
This item is incorporated by reference from our Annual Report to Stockholders for the fiscal year ended December 31, 2016.
Issuer Purchases of Equity Securities
None.
36
Form 10-K Part I I
1943-Financials.indd 36
4/4/17 6:39 PM
BUILDING TOGETHER
Item 6. Selected Financial Data.
The selected consolidated financial data presented below is derived from our audited consolidated financial statements for each of the
years in the five year period ended December 31, 2016. The financial data for the years ended December 31, 2016, 2015 and 2014
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 Results of Operations and Item 8. Financial Statements and Supplementary Data included herein
(amounts in thousands, except share and per share data).
Year Ended December 31,
2016
2015
2014
2013
2012
Consolidated Statements of Operations Data:
Net service revenue
Gross margin
Operating income
Income from continuing operations
Net income attributable to LHC Group, Inc.’s
$ 914,823
357,173
70,562
45,942
$ 816,366
335,488
66,343
41,650
$ 733,632
298,857
45,486
28,752
$ 658,283
274,819
46,737
29,146
$ 637,569
271,817
54,305
35,428
common stockholders
36,583
32,335
21,837
22,342
27,440
Net income attributable to LHC Group, Inc.’s
common stockholders:
Basic
Diluted
Weighted average shares outstanding:
Basic
Diluted
$
$
2.08
2.07
$
$
1.86
1.84
$
$
1.27
1.26
$
$
1.31
1.30
$
$
1.54
1.53
17,559,477
17,682,820
17,405,379
17,547,531
17,229,026
17,315,333
17,049,794
17,132,751
17,853,321
17,899,195
As of December 31,
2016
2015
2014
2013
2012
Consolidated Balance Sheet Data:
Cash
Total assets
Total debt
Total LHC Group, Inc. stockholders’ equity
$ 3,264
614,071
87,796
395,126
$ 6,139
566,054
98,784
354,582
531
$
491,739
61,008
318,639
$ 14,014
422,226
23,212
293,009
$ 9,720
386,894
19,500
268,181
1943-Fin-R1.indd 37
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Form 10-K Part I I
37
LHC GROUP
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis contains forward-looking statements about 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 Statement Regarding Forward-Looking Statements” set forth at the beginning of this Annual Report on Form 10-K.
In addition, 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 health
agencies, hospice agencies, community-based services agencies, and long-term acute care hospitals. Our net service revenue
increased $98.4 million to $914.8 million for the year ending December 31, 2016 from $816.4 million for the year ending December 31,
2015. During 2016, we acquired 23 agencies, such that, as of December 31, 2016, we operated 372 locations in 26 states within the
continental United States.
Segments
Our services are classified into four segments: (1) home health services; (2) hospice services; (3) community-based services and
(4) facility-based services offered primarily through our LTACHs.
Through our home health services segment we offer a wide range of services, including skilled nursing, medically-oriented social services,
and physical, occupational and speech therapy. As of December 31, 2016, we operated 283 home health service locations, of which
164 are wholly-owned by us, 114 are majority-owned or controlled by us through equity joint ventures, three are controlled by us through
license lease arrangements and the remaining two are only managed by us.
Through our hospice services segment, we offer a wide range of services, including pain and symptom management, emotional and
spiritual support, inpatient and respite care, homemaker services, and counseling. As of December 31, 2016, we operated 65 hospice
locations, of which 49 are wholly-owned by us, 14 are majority-owned by us through equity joint ventures and two are controlled by us
through license lease arrangements.
Through our community-based services segment, our services are performed by paraprofessional personnel, and include assistance to
the elderly, chronically ill, and disabled patients with activities of daily living. As of December 31, 2016, we operated 11 community-based
services locations, of which 10 are wholly-owned and one is majority-owned through an equity joint venture.
We provide facility-based services principally through our LTACHs. As of December 31, 2016, we owned and operated six LTACHs with
eight locations, of which all but one are located within host hospitals. We also operate a pharmacy, family health center, family health
clinic, and physical therapy clinics. Of these 13 facility-based services locations as of December 31, 2016, seven are wholly-owned by us
and six are controlled by us through equity joint ventures.
The percentage of net service revenue contributed from each reporting segment for the each of the periods ended December 31, 2016,
2015 and 2014 was as follows:
Type of Segment
Home Health Services
Hospice Services
Community-Based Services
Facility-Based Services
2016
72.8%
14.8
4.8
7.6
2015
75.1%
10.5
5.1
9.3
2014
77.0%
9.2
3.8
10.0
100.0%
100.0%
100.0%
38
Form 10-K Part I I
Management’s Discussion and Analysis of Financial Condition and Results of Operations
1943-Financials.indd 38
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Development Activities
The following table provides a summary of our acquisitions, divestitures and internal development activities from January 1, 2014 through
December 31, 2016. This table does not include the two management services agreements under which we manage the operations
of two home nursing agencies, through our home health services segment, nor does it include our pharmacy, family health center, family
health clinic, and physical therapy clinics through our facility-based services segment.
BUILDING TOGETHER
Total at January 1, 2014
Developed
Acquired
Divested/Merged
Total at January 1, 2015
Developed
Acquired
Divested/Merged
Total at December 31, 2015
Developed
Acquired
Divested/Merged
Total at December 31, 2016
Recent Developments
Home Health Services
Home Health
Agencies
Hospice
Agencies
Community-
Based
Agencies
Long-Term
Acute Care
Hospitals
256
3
40
(22)
277
—
9
(6)
280
5
12
(16)
281
34
1
6
(3)
38
2
17
(1)
56
1
10
(2)
65
7
—
6
(1)
12
—
2
(1)
13
—
1
(3)
11
9
—
—
(1)
8
—
—
—
8
—
—
—
8
On April 14, 2015, legislation was passed which limits any increase in home health payments to 1% for fiscal year 2018 and extended the
3% rural home health safeguard for two years through December 31, 2017.
On October 30, 2015, CMS released a Final Rule (effective January 1, 2016) regarding payment rates for home health services provided
during calendar year 2016. The national, standardized 60-day episode payment rate increased to $2,965.12 for 2016. The rural rate
is $3,054.07. This is a net 0.01% increase in the national, standardized 60-day episode payment rate due to application of (1) rebasing
decrease of $80.95, (2) case-mix adjustment decrease of 0.97%, (3) net market basket increase of 1.9%, (4) case-mix recalibration
budget neutrality adjustment increase of 1.87%, and (5) wage index budget neutrality adjustment increase of 0.11%. The home health
market basket percentage increase for 2016 is 2.3% and the multifactor productivity adjustment is 0.4%, resulting in a net home
health market basket of 1.9%. CMS reduced its estimate of nominal case-mix growth between 2012 and 2014 from 3.41% to
2.88% (0.53%) and spread the adjustment over three years at 0.97% each year to account for nominal case-mix growth. The finalized
payment policies results in a 1.4% reduction in Medicare payments for all home health agencies.
In addition, CMS finalized its proposal to implement a Home Health Value-Based Purchasing (“HHVBP”) program that is intended to
incentivize the delivery of high-quality patient care. The HHVBP program would withhold 3% to 8% of Medicare payments, which would
be redistributed to participating home health agencies depending on their performance relative to specified measures. The HHVBP
would apply to all home health agencies in Arizona, Florida, Iowa, Massachusetts, Maryland, Nebraska, North Carolina, Tennessee,
and Washington.
On October 31, 2016, CMS released a Final Rule (effective January 1, 2017) regarding payment rates for home health services provided
during calendar year 2017. The national, standardized 60-day episode payment rate will increase to $2,989.97 for 2017. The rural rate
is $3,079.67. The Final Rule implements the final year of the four year phase-in of the rebasing adjustments to the national, standardized
60-day episode payment rate and the decrease of 0.97% to account for nominal case-mix growth between calendar year 2012 and
calendar year 2014, which was not accounted for in the rebasing adjustments finalized in calendar year 2014. The Final Rule also contains
minor adjustments to the HHVBP program and to the home health quality reporting program. CMS estimates the overall economic
impact of the proposed rule’s policy changes and payment rate update is an estimated aggregate decrease of 0.7% in payments to home
health agencies, which decrease will vary based on each agency’s wage index and patient mix weight.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Form 10-K Part I I
39
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LHC GROUP
Hospice
On July 31, 2015, CMS released a Final Rule that updated the Medicare hospice payment rates and wage index for fiscal year 2016,
which resulted in an increase in payment rates of 1%. Beginning January, 1, 2016, CMS finalized its proposal for two routine home care
rates, in a budget-neutral manner, to provide separate payment rates for the first 60 days of care and care beyond 60 days. In addition
to the two routine home care rates, CMS is implementing a service intensity add-on payment that would help to promote and compensate
for the provision of skilled visits at end of life. As finalized, fiscal year 2016 will be the seventh and final year of the Budget Neutrality
Adjustment Factor for hospice. CMS updated the aggregate hospice cap to $27,820.75 for the 2016 hospice cap year. CMS is also
changing the hospice inpatient and aggregate cap year to coincide with the fiscal year (October 1 to September 30) beginning October 1,
2017. The following table shows the hospice Medicare payment rates for fiscal year 2016, which began on October 1, 2015 and
ended September 30, 2016:
Description
Routine Home Care days 1-60 (effective January 1, 2016)
Routine Home Care days 60+ (effective January 1, 2016)
Continuous Home Care
Full Rate = 24 hours of care
$39.37 = hourly rate
Inpatient Respite Care
General Inpatient Care
Rate Per Patient Day
$ 186.84
$ 146.83
$ 944.79
$ 167.45
$ 720.11
On July 29, 2016, CMS issued a final rule updating Medicare payment rates and the wage index for hospices for fiscal year 2017, which
will result in 2.1% increase in payment rates. The 2.1% increase is based on 2.7% inpatient hospital market basket update, reduced
by a 0.3% productivity adjustment, and a 0.3% adjustment set by the Patient Protection and Affordable Care Act (“PPACA”). The hospice
cap amount for the 2017 hospice cap year will be $28,404.99. The following table shows the hospice Medicare payment rates for fiscal
year 2017, which began on October 1, 2016 and will end September 30, 2017:
Description
Routine Home Care days 1-60
Routine Home Care days 60+
Continuous Home Care
Full Rate = 24 hours of care
$40.19 = hourly rate
Inpatient Respite Care
General Inpatient Care
Community-Based Services
Rate Per Patient Day
$ 190.55
$ 149.82
$ 964.63
$ 170.97
$ 734.94
Community-based services are in-home care services, which are primarily performed by paraprofessional personnel, and include
assistance with activities of daily living to elderly, chronically ill, and disabled patients. Revenue is generated on an hourly basis. Our
primary payors are TennCare Managed Care Organization and Medicaid. Approximately 80% of our net service revenue in this segment
is generated in Tennessee.
40
Form 10-K Part I I
Management’s Discussion and Analysis of Financial Condition and Results of Operations
1943-Financials.indd 40
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BUILDING TOGETHER
Facility-Based Services
On December 26, 2013, President Obama signed into law the Bipartisan Budget Act of 2013 (Public Law 113-67). This law prevents a
scheduled payment reduction for physicians and other practitioners who treat Medicare patients from taking effect on January 1, 2014.
Included in the legislation are the following changes to LTACH reimbursement:
• Medicare discharges from LTACHs will continue to be paid at full LTACH-PPS rates if
• the patient spent at least three days in a short-term care hospital (“STCH”) intensive care unit (“ICU”) during a STCH stay that
immediately preceded the LTACH stay, or
• the patient was on a ventilator for more than 96 hours in the LTACH (based on the MS-LTACH DRG assigned) and had a STCH stay
immediately preceding the LTACH stay.
• Also, the LTACH discharge cannot have a principal diagnosis that is psychiatric or rehabilitation.
• All other Medicare discharges from LTACHs will be paid at a new “site neutral” rate, which is the lesser of the IPPS comparable
per diem amount determined using the formula in the short-stay outlier regulation at 42 C.F.R. § 412.529(d)(4) plus applicable outlier
payments or 100% of the estimated cost of the services involved.
• The above new payment policy became effective for cost reporting periods that began on or after October 1, 2015, and the site neutral
payment rate will be phased-in over two years.
• For cost reporting periods beginning on or after October 1, 2015, discharges paid at the site neutral payment rate or by a Medicare
Advantage plan (Part C) will be excluded from the LTACH average length-of-stay (“ALOS”) calculation.
• For cost reporting periods beginning in fiscal year 2016 and later, CMS will notify LTACHs of their “LTACH discharge payment
percentage” (i.e., the number of discharges not paid at the site neutral payment rate divided by the total number of discharges).
• For cost reporting periods beginning in fiscal year 2020 and later, LTACHs with less than 50% of their discharges paid at the full
LTACH-PPS rates will be switched to payment under the IPPS for all discharges in subsequent cost reporting periods. However, CMS
will set up a process for LTACHs to seek reinstatement of LTACH-PPS rates for applicable discharges.
• MedPAC will study the impact of the above changes on quality of care, use of hospice and other post-acute care settings, different
types of LTACHs and growth in Medicare spending on LTACHs. MedPAC is to submit a report to Congress with any recommendations
by June 30, 2019. The report is to also include MedPAC’s assessment of whether the 25 Percent rule should continue to be applied.
• The moratorium on new LTACH facilities and increases in LTACH beds will be renewed for the period from April 1, 2014 to September 30,
2017. Although the introductory language only refers to a moratorium extension for LTACH bed increases, the amendment to the
Medicare, Medicaid, and SCHIP Extension Act (“MMSEA”) would extend both moratoriums. No exceptions will apply during this extension
of the moratoriums. The original rule renewed the moratorium for the period beginning January 1, 2015; however, a provision with
HR4302 accelerated the moratorium period beginning on April 1, 2014.
On July 31, 2015, CMS issued a Final Rule to update fiscal year 2016 payment policies and rates under the IPPS and LTACH PPS, which
affects discharges occurring in cost reporting periods beginning on or after October 1, 2015. CMS projects that LTACH PPS rates would
decrease by 4.6%. This estimated decrease is preliminary attributable to the statutory decrease in payment rates for site neutral LTACH
PPS cases that do not meet the clinical criteria to qualify for higher LTACH rates in cost reporting years beginning on or after October 1, 2015.
Cases that do qualify for higher LTACH PPS rates will see a payment rate increase of 1.7% (based on a market basket update of 2.4%
adjusted by a multi-factor productivity adjustment of -0.5 percentage point and an additional adjustment of -0.2 percentage point in
accordance with the Affordable Care Act). CMS also finalized its proposal to implement a transitional blended payment rate (50% site
neutral rate and 50% LTACH PPS rates) for site neutral discharges occurring in fiscal years 2016 and 2017.
On August 2, 2016, CMS released the final rule to update fiscal year 2017 LTACH reimbursement and policies under the LTACH PPS,
which affects discharges occurring in cost reporting periods beginning on or after October 1, 2016. CMS projects that overall LTACH PPS
spending would decrease by 7.1%, compared to fiscal year 2016 payments. This estimated decrease is attributable to the statutory
decrease in payment rates for site neutral LTACH PPS cases that do not meet the clinical criteria to qualify for higher LTACH rates in cost
reporting years beginning on or after October 1, 2016. Cases that do qualify for higher LTACH PPS rates will see a payment rate
increase of 0.7% (including a market basket update of 2.8% reduced by a multi-factor productivity adjustment of 0.3%, minus an
additional adjustment of 0.75 percentage point in accordance with the PPACA, for a net market basket of 1.75%). The LTACH PPS
standard federal payment rate for fiscal year 2017 is $42,476.41 (increased from $41,762.85 in fiscal year 2016). Site-neutral discharges
will have a 23% reduction in payments. CMS also proposes to begin enforcement of the 25 Percent rule which will cap the number of
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Form 10-K Part I I
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patients treated at an LTACH who have been referred from all locations of a hospital. Grandfathered LTACH facilities are exempt from the
25 Percent rule, while rural LTACHs will have a threshold of 50% and MSA-dominant hospitals will have a threshold between 25%
and 50%. The 25 Percent rule will apply to discharges occurring after October 1, 2016. CMS will have two separate outlier pools and
thresholds for LTACH-appropriate patients and for site-neutral patients. For 2017, CMS finalized an increase of its fixed-loss threshold
to $21,943 from 2016’s $16,423, to limit outlier spending at no more than 8% of total LTACH spending (2016 outlier payments may reach
9.0%). CMS is applying the proposed inpatient fixed-loss threshold of $23,570 for site neutral patients. CMS also finalized four new
measures for the LTACH Quality Reporting Program to meet the requirements of the Improving Medicare Post-Acute Care Transformation
(IMPACT) Act. For the fiscal year 2018 LTACH Quality Reporting Program, CMS added quality measures for Medicare spending per
beneficiary, discharge to community and potentially-preventable 30-day post-discharge readmissions. For the fiscal year 2020 LTACH
Quality Reporting Program, CMS adopted a new drug regimen review measure.
On December 7, 2016, Congress passed the 21st Century Cures Act (“Cures”), which boosts funding for medical research, eases the
development and approval of experimental treatments and reforms federal policy on mental health care. Included in the bill was relief for
LTACHs under a one year moratorium on the 25 Percent Rule, which would otherwise penalize LTACHs that admit more than 25% of
their patients from a particular acute care hospital. As modified by Cures, implementation of the 25 Percent Rule will be suspended during
federal fiscal year 2017 (October 1, 2016 through September 30, 2017).
None of the above described estimated changes to Medicare payments for home health, hospice and LTACHs include the deficit
reduction sequester cuts to Medicare that began on April 1, 2013, which reduced Medicare payments by 2% for patients whose service
dates ended on or after April 1, 2013.
2016 and 2015 Operational Data
The following table sets forth, for the period indicated, each of our segment’s data regarding census, admissions, billable hours and
patient days:
Home Health Services:
Average census
Average Medicare census
Admissions
Medicare admissions
Hospice Services:
Average census
Average Medicare census
Admissions
Medicare admissions
Patient days
Community-Based Services:
Billable hours
Facility-Based Services:
LTACHs:
Patient days
Three Months
Three Months
Three Months
Three Months
Ended March 31, Ended June 30, Ended Sept. 30, Ended Dec. 31,
2016
2016
2016
2016
38,218
28,246
39,124
26,136
2,425
2,248
2,463
2,152
220,694
38,357
28,046
38,949
25,817
2,615
2,431
2,523
2,246
237,968
38,511
27,983
40,657
26,810
2,736
2,547
2,554
2,266
251,753
39,407
28,381
41,184
26,812
2,713
2,520
2,607
2,218
249,608
304,487
330,350
354,998
349,053
15,537
13,929
13,499
13,257
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Home Health Services:
Average census
Average Medicare census
Admissions
Medicare admissions
Hospice Services:
Average census
Average Medicare census
Admissions
Medicare admissions
Patient days
Community-Based Services:
Billable hours
Facility-Based Services:
LTACHs:
Patient days
BUILDING TOGETHER
Three Months
Three Months
Three Months
Three Months
Ended March 31, Ended June 30, Ended Sept. 30, Ended Dec. 31,
2015
2015
2015
2015
36,450
27,235
35,965
24,875
1,357
1,256
1,481
1,285
122,179
36,834
27,336
35,211
23,862
1,446
1,328
1,497
1,316
131,565
36,858
27,278
35,772
24,114
1,528
1,411
1,584
1,379
140,592
37,060
27,432
36,249
24,060
2,360
2,205
2,225
1,935
217,157
294,016
316,598
318,995
307,781
16,162
15,393
15,422
14,450
Consolidated Results of Operations
The following table sets forth, for the periods indicated, our consolidated results (amounts in thousands):
Year Ended December 31,
Consolidated Services Data:
Net service revenue
Cost of service revenue
Gross margin
Provision for bad debts
General and administrative expenses
Impairment of intangibles and other
Loss on disposal of assets
Operating income
Interest expense
Non-operating income
Income tax expense
Income attributable to noncontrolling interests
2016
2015
2014
$ 914,823
557,650
357,173
14,790
270,622
—
1,199
70,562
(2,936)
492
22,176
9,359
$ 816,366
480,878
335,488
19,243
247,919
1,273
710
66,343
(2,302)
457
22,848
9,315
$ 733,632
434,775
298,857
15,780
233,898
3,646
47
45,486
(2,486)
265
14,513
6,915
Net income available to LHC Group, Inc.’s common stockholders
$ 36,583
$ 32,335
$ 21,837
The following table sets forth our consolidated results as a percentage of net service revenue, except income tax expense, which is
presented as a percentage of income attributable to LHC Group, Inc.’s common stockholders:
Year Ended December 31,
Consolidated Services Data:
Cost of service revenue
Gross margin
Provision for bad debts
General and administrative expenses
Impairment of intangibles and other
Loss on disposal of assets
Operating income
Interest expense
Non-operating income
Income tax expense
Income attributable to noncontrolling interests
Net income attributable to LHC Group, Inc.’s common stockholders
2016
2015
2014
61.0%
39.0
1.6
29.6
—
0.1
7.7
(0.3)
0.1
37.7
1.0
4.0
58.9%
41.1
2.4
30.4
0.2
0.1
8.1
(0.3)
0.1
41.4
1.1
4.0
59.3%
40.7
2.2
31.9
0.5
—
6.2
(0.3)
—
39.9
0.9
3.0
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Net Service Revenue
Consolidated net service revenue for the year ended December 31, 2016 was $914.8 million compared to $816.4 million for the same
period in 2015, an increase of $98.4 million, or 12.1%. Consolidated net service revenue growth in 2016 was primarily due to both our
acquisitions of 28 agencies during 2015 and an increase in same store growth. Consolidated net service revenue was comprised of the
following for the periods ending December 31:
Type of Segment
Home Health Services
Hospice Services
Community-Based Services
Facility-Based Services
2016
2015
72.8%
14.8
4.8
7.6
75.1%
10.5
5.1
9.3
100.0%
100.0%
Revenue derived from Medicare represented 74.5% of our consolidated net service revenue for both years ended December 31, 2016
and 2015.
The following table sets forth each of our segment’s revenue growth or loss, admissions, census, episodes and patient days for the twelve
months ended December 31, 2016 and the related change from the same period in 2015 (amounts in thousands, except admissions,
census, episode data and patient days):
Home Health Services
Revenue
Revenue Medicare
New admissions
New Medicare admissions
Average census
Average Medicare census
Home health episodes
Hospice Services
Revenue
Revenue Medicare
New admissions
New Medicare admissions
Average census
Average Medicare census
Patient days
Community-Based Services
Revenue
Billable hours
Facility-Based Services
LTACHs
Revenue
Patient days
Same Store (1)
De Novo (2)
Organic (3)
$ 651,015
$ 494,378
156,359
103,175
37,344
27,226
195,057
$
$
95,095
88,852
7,392
6,493
1,668
1,547
687,853
$ 1,158
$ 921
159
106
265
188
303
$ 2,028
$ 1,985
55
48
68
66
14,564
$ 652,173
$ 495,299
156,518
103,281
37,609
27,414
195,360
$
$
97,123
90,837
7,447
6,541
1,736
1,613
702,417
Organic
Growth
(Loss) %
Acquired (4)
Total
Total
Growth
(Loss) %
6.4%
4.7
9.3
6.6
2.3
0.4
2.2
13.1
13.8
9.7
10.6
3.6
3.9
14.9
$ 13,723
$ 10,775
3,396
2,294
978
732
3,875
$ 37,825
$ 35,047
2,700
2,342
887
824
257,606
$ 665,896
$ 506,074
159,914
105,575
38,587
28,146
199,235
$ 134,948
$ 125,884
10,147
8,883
2,623
2,437
960,023
8.6%
6.9
11.7
8.9
5.0
3.1
4.2
57.2
57.7
49.5
50.2
56.6
57.0
57.0
43,734
$
1,331,448
$ —
—
43,734
$
1,331,448
6.1%
9.7%
$
157
7,734
43,891
$
1,339,182
6.5%
10.3%
$
64,607
56,224
$ —
—
$
64,607
56,224
(11.1)
(8.5)
$
—
—
$
64,607
56,224
(10.3)%
(8.5)
(1) Same store – location that has been in service with us for greater than 12 months.
(2) De Novo – internally developed location that has been in service for 12 months or less.
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BUILDING TOGETHER
(3) Organic – combination of same store and de novo.
(4) Acquired – purchased location that has been in service with us 12 months or less.
Total organic revenue and patient days decreased in our facility-based services segment due to the negative impact from the reduction
of 18 beds in one LTACH location. In addition, patient criteria changes went into effect for two of our LTACH locations on June 1, 2016
and six of our LTACH locations on September 1, 2016. The criteria changes are reflective in our decrease of revenue per patient day.
Organic growth is primarily generated by population growth in areas covered by mature agencies and by increased market share in acquired
and developing agencies. Historically, acquired agencies have the highest growth in admissions and average census in the first 24 months
after acquisition, and have the highest contribution to organic growth, measured as a percentage of growth, in the second full year of
operation after the acquisition.
Cost of Service Revenue
Consolidated cost of service revenue for the year ended December 31, 2016 was $557.7 million compared to $480.9 million for the same
period in 2015, an increase of approximately $76.8 million, or 16.0%.
The following table summarizes cost of service revenue (amounts in thousands, except percentages, which are percentages of the
segment’s respective net service revenue):
Home Health Services
Salaries, wages and benefits
Transportation
Supplies and services
Total
Hospice Services
Salaries, wages and benefits
Transportation
Supplies and services
Total
Community-Based Services
Salaries, wages and benefits
Transportation
Supplies and services
Total
Facility-Based Services
Salaries, wages and benefits
Transportation
Supplies and services
Total
2016
2015
$ 360,378
22,252
15,820
54.1%
3.3
2.4
$ 320,548
21,056
13,146
52.3%
3.4
2.1
$ 398,450
59.8%
$ 354,750
57.9%
$ 58,094
5,384
19,881
$ 83,359
43.0%
4.0
14.7
61.8%
$ 35,022
3,638
12,246
$ 50,906
40.8%
4.2
14.3
59.3%
$ 32,086
263
254
73.1%
0.6
0.6
$ 28,525
263
288
69.2%
0.6
0.7
$ 32,603
74.3%
$ 29,076
70.5%
$ 28,802
233
14,203
41.1%
0.3
20.3
$ 29,898
240
16,008
39.3%
0.3
21.0
$ 43,238
61.7%
$ 46,146
60.6%
Consolidated cost of service revenue variances were as follows:
• Home Health Segment – Cost of service increased as a percentage of net service revenue due in part to 1.5% Medicare reimbursement
cuts recognized in 2016. Additionally, acquisitions accounted for $7.0 million of the $76.8 million increase, with the remaining difference
caused by the growth in our same store agencies.
• Hospice Segment – Acquisitions accounted for $26.3 million of the $76.8 million increase.
• Community-Based Services Segment – Cost of service revenue increased as a percentage of net service revenue due to an increase
in labor costs related to providing a higher level of care for our current patient mix.
• Facility-Based Services Segment – Cost of service revenue increased as a percentage of net service revenue due to the reduction
of LTACH licensed beds and lower revenue per patient day for the period caused by patient criteria changes that went into effect in
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LHC GROUP
June and September of 2016.
Provision for Bad Debts
Consolidated provision for bad debts for the year ended December 31, 2016 was $14.8 million, or 1.6% of net service revenue, compared
to $19.2 million, or 2.4% of net service revenue, for the same period in 2015, a decrease of approximately $4.5 million, or 23.1%. The
decrease in provision for bad debts was primarily due to continued process improvements in our revenue cycle department that were
implemented during 2015 and improved cash collections. In addition, provisions for bad debts in 2015 was higher due to claims
associated with two payors in our home health services segment and delayed payment issues related to our transition to a new billing
system for our community-based services segment. These issues were resolved.
General and Administrative Expenses
Consolidated general and administrative expenses for the year ended December 31, 2016 were $270.6 million compared to $247.9 million
for the same period in 2015, an increase of approximately $22.7 million, or 9.2%; however, as a percentage of net service revenue,
it is a decrease of 0.8%. Of the $22.7 million increase: acquisitions accounted for $14.0 million; a severance package of $1.1 million
was recorded due to the resignation of our prior Chief Financial Officer; the remainder of the increase was due to growth in our same
store agencies.
The following table summarizes general and administrative expenses (amounts in thousands, except percentages, which are percentages
of the segment’s respective net service revenue):
Home Health Services
General and administrative
Depreciation and amortization
Total
Hospice Services
General and administrative
Depreciation and amortization
Total
Community-Based Services
General and administrative
Depreciation
Total
Facility-Based Services
General and administrative
Depreciation and amortization
Total
Loss on disposal of assets
2016
2015
$ 195,591
7,827
$ 203,418
29.4%
1.1
30.5%
$ 182,107
8,484
$ 190,591
29.7%
1.4
31.1%
$ 35,046
2,161
$ 37,207
26.0%
1.6
27.6%
$ 24,893
1,544
$ 26,437
29.0%
1.8
30.8%
$ 8,380
405
$ 8,785
19.1%
0.9
20.0%
$ 8,309
156
$ 8,465
20.2%
0.4
20.6%
$ 19,445
1,767
$ 21,212
27.7%
2.5
30.2%
$ 20,657
1,769
$ 22,426
27.1%
2.3
29.5%
The loss on disposal of assets increased during the twelve months ended December 31, 2016 due to the sale of an aircraft. The aircraft
incurred damage and was subsequently sold at a price below the aircraft’s net book value. The sale generated a loss of $0.9 million,
which was realized during the twelve months ended December 31, 2016.
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Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Net Service Revenue
Consolidated net service revenue for the year ended December 31, 2015 was $816.4 million compared to $733.6 million for the same
period in 2014, an increase of $82.7 million, or 11.3%. Consolidated net service revenue growth in 2015 was primarily due to both our
acquisitions of 28 agencies during 2015 and an increase in same store growth. Consolidated net service revenue was comprised of the
following for the periods ending December 31:
BUILDING TOGETHER
Type of Segment
Home Health Services
Hospice Services
Community-Based Services
Facility-Based Services
2015
2014
75.1%
10.5
5.1
9.3
77.0%
9.2
3.8
10.0
100.0%
100.0%
Revenue derived from Medicare represented 74.5% and 75.9% of our consolidated net service revenue for the years ended December 31,
2015 and 2014, respectively.
The following table sets forth the growth or loss of each of our segment’s revenue and patient statistical data for the twelve months ended
December 31, 2015 and the related change for the same period in 2014 (revenue amounts are in thousands):
Home Health Services
Revenue
Revenue Medicare
New admissions
New Medicare admissions
Average census
Average Medicare census
Episodes
Hospice Services
Revenue
Revenue Medicare
New admissions
New Medicare admissions
Average census
Average Medicare census
Patient days
Community-Based Services
Revenue
Billable hours
Facility-Based Services
LTACHs
Revenue
Patient days
Same Store (1)
De Novo (2)
Organic (3)
Organic
Growth
(Loss) %
Acquired (4)
Total
Total
Growth
(Loss) %
$ 588,003
$ 452,136
137,041
92,290
35,216
26,114
184,774
$ 71,620
$ 66,378
5,952
5,191
1,284
1,184
514,496
$ 2,105
$ 1,542
507
339
132
92
610
$ 1,809
$ 1,783
46
45
34
33
12,440
$ 590,108
$ 453,678
137,548
92,629
35,348
26,206
185,384
$ 73,429
$ 68,161
5,998
5,236
1,318
1,217
526,936
4.5%
3.5
3.4
2.4
0.1
(0.5)
1.4
8.6
9.0
8.2
7.8
(1.9)
(1.5)
7.5
$ 23,080
$ 19,515
5,649
4,282
1,404
1,091
5,824
$ 12,425
$ 11,685
789
679
357
336
84,557
$ 613,188
$ 473,193
143,197
96,911
36,752
27,297
191,208
$
$
85,854
79,846
6,787
5,915
1,675
1,553
611,493
$ 31,797
947,395
$ 180
5,844
$ 31,977
953,239
15.4
4.6
$ 9,225
260,630
$
41,202
1,213,869
8.5%
7.9
7.6
7.1
4.1
3.6
4.5
27.1
27.8
22.4
21.8
24.7
25.8
24.7
48.8
33.2
$ 72,668
61,427
$ —
—
$ 72,668
61,427
—
—
$
—
—
$
72,668
61,427
3.2
(1.5)
(1) Same store – location that has been in service with us for greater than 12 months.
(2) De Novo – internally developed location that has been in service for 12 months or less.
(3) Organic – combination of same store and de novo.
(4) Acquired – purchased location that has been in service with us 12 months or less.
Organic growth is primarily generated by population growth in areas covered by mature agencies and by increased market share in acquired
and developing agencies. Historically, acquired agencies have the highest growth in admissions and average census in the first
24 months after acquisition, and have the highest contribution to organic growth, measured as a percentage of growth, in the second
full year of operation after the acquisition.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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Cost of Service Revenue
Consolidated cost of service revenue for the year ended December 31, 2015 was $480.9 million compared to $434.8 million for the same
period in 2014, an increase of $46.1 million, or 10.6%; however, as a percentage of net service revenue, it was a decrease of 0.4%.
Of the $46.1 million increase, acquisitions purchased during 2015 accounted for $8.7 million. The remainder of the increase was due to
the accretion of same store agencies. The following table summarizes cost of service revenue (amounts in thousands, except
percentages, which are percentages of the segment’s respective net service revenue):
Home Health Services
Salaries, wages and benefits
Transportation
Supplies and services
Total
Hospice Services
Salaries, wages and benefits
Transportation
Supplies and services
Total
Community-Based Services
Salaries, wages and benefits
Transportation
Supplies and services
Total
Facility-Based Services
Salaries, wages and benefits
Transportation
Supplies and services
Total
Provision For Bad Debts
2015
2014
$ 320,548
21,056
13,146
52.3%
3.4
2.1
$ 295,340
21,463
13,053
52.3%
3.8
2.3
$ 354,750
57.9%
$ 329,856
58.4%
$ 35,022
3,638
12,246
$ 50,906
40.8%
4.2
14.3
59.3%
$ 27,263
3,027
9,514
$ 39,804
40.3%
4.5
14.1
58.9%
$ 28,525
263
288
$ 29,076
69.2%
0.6
0.7
70.5%
$ 19,287
170
154
$ 19,611
69.6%
0.6
0.6
70.8%
$ 29,898
240
16,008
$ 46,146
39.3%
0.3
21.0
60.6%
$ 30,047
281
15,176
$ 45,504
41.0%
0.4
20.7
62.0%
Consolidated provision for bad debts for the year ended December 31, 2015 was $19.2 million compared to $15.8 million for the same
period in 2014, an increase of $3.4 million, or 21.5%. Provision for bad debts increased in the home health services segment due to
additional reserves being recorded for patient claims related to prior period patient care associated with commercial payors. Accounts
receivable that are aged over 365 days increased during the period by $4.5 million. For home health services and facility-based services,
an increase of $2.1 million was due to the continued backlog of Medicare Administrative Contractor audit claims awaiting appeal hearing.
Appeals have historically experienced a substantial success rate in claim recovery. In addition, aged account receivable in our home
health services increased by $0.8 million due to a legacy system transition for prior year acquisitions.
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General and Administrative Expenses
Consolidated general and administrative expenses for the year ended December 31, 2015 was $247.9 million compared to $233.9 million
for the same period in 2014, an increase of $14.0 million, or 6.0%; however, as a percentage of net service revenue, it is a decrease
of 1.5%. The following table summarizes general and administrative expenses (amounts in thousands, except percentages, which are
percentages of the segment’s respective net service revenue):
BUILDING TOGETHER
Home Health Services
General and administrative
Depreciation and amortization
Total
Hospice Services
General and administrative
Depreciation and amortization
Total
Community-Based Services
General and administrative
Depreciation and amortization
Total
Facility-Based Services
General and administrative
Depreciation and amortization
Total
2015
2013
$ 182,107
8,484
29.7%
1.4
$ 180,363
6,917
31.9%
1.2
$ 190,591
31.1%
$ 187,280
33.1%
$ 24,893
1,544
29.0%
1.8
$ 17,789
1,086
26.3%
1.6
$ 26,437
30.8%
$ 18,875
27.9%
$ 8,309
156
$ 8,465
20.2%
0.4
20.6%
$ 6,445
106
$ 6,551
23.3%
0.4
23.7%
$ 20,657
1,769
$ 22,426
27.1%
2.3
29.5%
$ 19,730
1,462
$ 21,192
26.9%
2.0
28.9%
For home health services, hospice services, and community-based services, $6.9 million of the increase was from agencies acquired
during 2015. The remainder of the increase was due to growth in our same store agencies. This increase was partially offset with savings
associated with prior year closures of underperforming providers. For the facility-based services segment, general and administrative
expenses increased due to the implementation of management roles in sales and administrative support staff.
Depreciation and amortization expense increased in the home health services segment and hospice services segment due to the
capitalization of point of care licenses. In 2014, we successfully completed the roll out of our point of care technology. These licenses are
amortized over their estimated useful life of 36 months. Depreciation in the facility-based services segment increased due to the purchase
of patient care equipment, which occurred during the latter part of 2014.
Prior to 2015, the Company’s principal executive offices were located in three properties. During 2015, the Company consolidated its
corporate headquarters into one property. Depreciation expense associated with leasehold improvements and office furniture in the
original three properties was accelerated during 2015 as the Company terminated these leases and disposed of the assets; the depreciation
expense related to this was $1.3 million.
Impairment of Intangibles and Other
Consolidated impairment of intangibles and other for the year ended December 31, 2015 was $1.3 million compared to $3.6 million for
the same period in 2014. During 2015, goodwill and other intangible asset disposal costs for underperforming providers that were closed
was $0.7 million and as other intangible asset impairment of $0.6 million in the home health segment was recorded. In 2014, goodwill
and other intangible asset disposal costs for closures were $1.6 million. In addition, there was $2.0 million related to the impairment of
intangible trade names in the home-health segment.
Net Income Attributable to Noncontrolling Interest
Consolidated net income attributable to noncontrolling interest represents the minority owners’ allocable share of income in the equity
joint venture partners. For the year ended December 31, 2015, noncontrolling interest was $9.3 million compared to $6.9 million for
the same period in 2014, an increase of approximately $2.4 million, or 34.8%. Noncontrolling interest increased due to the overall growth
in same store agencies, and overall operational efficiencies gained through the joint ventures’ use of our point of care platform.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Form 10-K Part I I
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Liquidity and Capital Resources
Cash at December 31, 2016 was $3.3 million, compared to $6.1 million at December 31, 2015. 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 credit facility 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 needed to fund our operating activities is the collection of patient accounts receivable, most of which are
collected from governmental and third-party commercial payors. We also have the ability to obtain additional liquidity, if necessary, through
our revolving credit facility, which provides for aggregate borrowings, including outstanding letters of credit, up to $225 million.
Our reported cash flows are affected by various external and internal factors, including the following:
• Operating Results – Our net income has a significant effect on our operating cash flows. Any significant increase or decrease in our
net income could have a material effect on our operating cash flows.
• Timing of Acquisitions – We use a portion of our operating and/or financing cash flows for acquisitions. When the acquisitions occur
at or near the end of a period, our cash outflows significantly increase.
• Timing of Payroll – Our employees are paid bi-weekly on Fridays. Operating cash outflows increase in reporting periods that end on
a Friday.
• Self Insurance Plan Funding – We are self-funded for health insurance and workers compensation insurance. Any significant changes
in the amount of insurance claims submitted could have a direct effect on our operating cash flows.
Cash used in investing activities primarily relates to acquisitions of home nursing and hospice agencies, while cash used by financing
activities primarily 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,
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
2016
2015
$ 67,472
(50,380)
(19,967)
$ 59,934
(83,855)
29,529
Cash provided by operating activities changed due to acquisitions purchased in 2016 and the accretion of agencies purchased in 2015.
Cash used in investing activities and financing activities changed due to the difference in volume of acquisition activity occurring between
2016 and 2015. We paid $34.6 million for acquisitions in 2016 compared to $70.6 million for acquisitions in 2015. The acquisition activity
in 2015 caused us to draw more on our line of credit compared to 2016.
Credit Facility
Our revolving credit facility with Capital One, National Association is unsecured and provides for a maximum aggregate principal borrowing
of $225 million (with a letter of credit sub-limit equal to $15 million), and is scheduled to expire on June 18, 2019. We are required to pay
a commitment fee for the unused commitments at rates ranging from 0.225% to 0.375% per annum depending upon the Company’s
consolidated Leverage Ratio, as defined in the Credit Agreement.
A letter of credit fee equal to the applicable Eurodollar rate multiplied by the face amount of the letter of credit is charged upon issuance
and on each anniversary date while the letter of credit is outstanding. The agent’s standard up-front fee and other customary administrative
charges are also due upon issuance of the letter of credit, along with a renewal fee on each anniversary date while the letter of credit
is outstanding. At December 31, 2016 and 2015, outstanding letters of credit were $11.0 million and $9.8 million, respectively, which are
issued as collateral on our workers’ compensation insurance.
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Borrowings accrue interest under the Credit Agreement at either the Base Rate or Eurodollar rate are subject to the applicable margins as
BUILDING TOGETHER
set forth below:
Leverage Ratio
1.00:1.00
>1.00:1.00 1.50:100
>1.50:1.00 2.00:1.00
>2.00:1.00
Eurodollar Margin
Base Rate Margin
Commitment Fee Rate
1.75%
2.00%
2.25%
2.50%
0.75%
1.00%
1.25%
1.50%
0.225%
0.250%
0.300%
0.375%
Our Credit Agreement contains customary affirmative, negative and financial covenants. For example, without prior approval of our bank
group, we are restricted in incurring additional debt, disposing of assets, making investments, allowing fundamental changes to our
business or organization and making certain payments in respect of stock or other ownership interests, such as dividends and stock
repurchases, up to $50.0 million. Under our Credit Agreement, we are also required to meet certain financial covenants with respect to
minimum fixed charge coverage and leverage ratios.
Our Credit Agreement contains customary events of default, including bankruptcy and other insolvency events, cross-defaults to other
debt agreements, a change in control involving us or any subsidiary guarantor and the failure to comply with certain covenants.
At December 31, 2016, we were in compliance with all covenants contained in the Credit Agreement governing our credit facility.
Contractual Obligations
The following table discloses aggregate information about our contractual obligations and the periods in which payments are due as of
December 31, 2016 (amounts in thousands):
Contractual Cash Obligation
Long-term debt
Operating leases
Total contractual cash obligations
Off-Balance Sheet Arrangements
Payment Due by Period
Total
$ 87,796
51,276
$ 139,072
Less Than
1 Year
$
252
17,785
$ 18,037
1-3 Years
3-5 Years
$ 87,544
19,056
$ 106,600
$ —
8,808
$ 8,808
More Than
5 Years
$ —
5,627
$ 5,627
We currently do not 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.
Recently Issued Accounting Pronouncements
For a discussion of recently issued accounting pronouncements, see Note 2 of the Notes to Condensed Consolidated Financial Statements,
which is incorporated herein by reference.
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 reporting period. 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.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Form 10-K Part I I
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Principles of Consolidation
The consolidated financial statements include all subsidiaries and entities controlled by us through our direct ownership of a majority
interest or controlling member ownership of such entities. 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:
Ownership Type
Wholly owned subsidiaries
Equity joint ventures
Other
2016
57.2%
41.2
1.6
2015
55.2%
42.9
1.9
2014
53.5%
43.9
2.6
100.0%
100.0%
100.0%
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.
Equity Joint Ventures
Our equity joint ventures are structured as limited liability companies in which we typically own a majority equity interest ranging from
51% to 91%. 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 equity joint venture partner whose participation in losses is limited; otherwise, earnings and losses are based on
ownership interest. We consolidate these entities as we have voting control over the entities.
Other (License Leasing Arrangements and Management Services)
Through our wholly owned subsidiaries, we lease home health licenses necessary to operate certain of our home nursing agencies.
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.
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 other than our management fee.
Revenue Recognition
For a detailed discussion of revenue recognition, see Item 1, which is incorporated here by reference.
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 the home health services, hospice services, community-based
services and facility-based services.
The following table sets forth the percentage of net service revenue earned by category of payor for the respective years ending
December 31:
Payor
Medicare
Medicaid
Other
2016
74.5%
1.8
23.7
2015
74.5%
1.5
24.0
2014
75.9%
1.4
22.7
100.0%
100.0%
100.0%
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BUILDING TOGETHER
Medicare
Home Health 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, 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 adjustments to ensure the adequacy and effectiveness of the total reimbursement:
(a) an outlier payment if the patient’s care was unusually costly; (b) a low utilization adjustment if the number of visits was fewer than
five; (c) a partial payment if the patient transferred to another provider or transferred from another provider before completing the
episode; (d) a payment adjustment based upon the level of therapy services required; (e) base payment adjustments for case-mix and
geographic wage differences; and (f) 2% sequestration reduction for episodes beginning after March 31, 2013. Management estimates
the adjustments outlined above based on historical experience and as changes become known, and records these adjustments during
the period in which the services are provided to the patient. Net service revenue and related patient accounts receivable are recorded at
amounts estimated to be realized from Medicare for services rendered.
Hospice Services
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 the Company furnished. We record net service revenue from hospice services based on the daily or hourly rate and recognizes
revenue as hospice services are provided.
Hospice payments are subject to an inpatient cap and an overall Medicare payment cap. The inpatient cap relates to individual programs
receiving more than 20% of its total Medicare reimbursement from inpatient care services and the overall Medicare payment cap relates
to individual 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 its limits on a provider-by-provider basis and record an estimate of its liability for
reimbursements received in excess of the cap amount. Annually, we receive notification of whether any of our hospice providers have
exceeded either cap. Beginning with cap year October 1, 2014, CMS implemented a new process requiring hospice providers to self-report
their cap liabilities and remit applicable payment by March 31 of the following year.
Facility-Based Services
Long-Term Acute Care Services. We are reimbursed by Medicare for services provided under the LTACH-PPS, 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, and we recognize revenue, in a manner similar to our Medicare and Medicaid reimbursements.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Form 10-K Part I I
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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. 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 for one
management services agreement and reimbursed for operating expenses plus a percentage of operating net income for the remaining
management services agreement.
Income Tax
We operate in numerous tax jurisdictions and recognize income tax expense based on the revenue and expenses earned in those
jurisdictions, which requires us to apportion and allocate revenue and expenses in all taxable jurisdictions. During 2011, we entered into a
settlement with the United States of America which we believe is fully deductible for income tax purposes. As of December 31, 2016,
$1.3 million was recorded in income tax payable as an unrecognized tax benefit which, if recognized, would decrease the our effective tax
rate. All of the unrecognized tax benefit is due to the settlement with the United States of America, which was announced September 30,
2011. On July 31, 2014, the Internal Revenue Service (“IRS”) issued a notice of proposed adjustment asserting that a portion of the
original tax deduction claimed by us associated with the settlement of the United States of America should be disallowed. In December 2016,
we signed a final settlement offer from the IRS that reduced the unrecognized tax benefit from $3.4 million to $1.3 million. We received
approval from Joint Committee Review in February 2017 to finalize the settlement. Due to the approval being received subsequent to year-end,
we continue to show the amount as an uncertain tax position as of December 31, 2016.
Accounts Receivable and Allowances for Uncollectible Accounts
We report accounts receivable net of estimated allowances for uncollectible accounts and adjustments. Accounts receivable are
uncollateralized and primarily consist of amounts due from Medicare, other third-party payors and patients. To provide for accounts
receivable that could become uncollectible in the future, we establish an allowance for uncollectible accounts to reduce the carrying
amount of such receivables to their estimated net realizable value. The amount of the provision for uncollectible accounts 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 that the account will not be collected.
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 over 60% of our patient accounts receivable at December 31, 2016 and 2015,
respectively, is limited due to (a) our historical collections experience with Medicare and (b) 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.
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 the Medicare and Medicaid payment methodologies. Because of our payor mix, we are able to more accurately
calculate our actual amount due at the patient level and adjust the gross charges to the actual amount at the time of billing. This negates
the need to record an estimated allowance for uncollectible accounts, similar to a contractual adjustment, when reporting the majority of
our net service revenue for each reporting period.
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BUILDING TOGETHER
At December 31, 2016, our allowance for uncollectible accounts, as a percentage of patient accounts receivable, was approximately
18.9%, or $29.0 million, compared to 19.5%, or $26.7 million, at December 31, 2015. Accounts Receivable days sales outstanding
(“DSO”) for the year ended December 31, 2016 was 49 days compared to 46 days for the same period in 2015. Increased accounts
receivable from acquisitions, an increase in managed care accounts receivable, and collection delays resulting from reviews, audits and
investigations from ZPICs, RACs, and additional development requests have each contributed to the increase in days sales outstanding.
The following table sets forth, as of December 31, 2016, the aging of accounts receivable (based on the end of episode date)
(amounts in thousands):
Payor
Medicare
Medicaid
Other
Total
0-90
91-180
181-365
Over 365
Total
$ 71,386
4,600
33,084
$ 109,070
$ 9,590
1,470
5,943
$ 17,003
$ 5,547
1,380
7,179
$ 14,106
$ 5,720
268
7,672
$ 13,660
$ 92,243
7,718
53,878
$ 153,839
For home health services, hospice services, and community-based services, we calculate the allowance for uncollectible accounts as
a percentage of total patient receivables. The percentage changes depending on the payor and increases as the patient receivables age.
For facility-based services, we calculate the allowance for uncollectible accounts based on a claim by claim review.
The following table sets forth, as of December 31, 2015, the aging of accounts receivable (based on the end of episode date)
(amounts in thousands):
Payor
Medicare
Medicaid
Other
Total
0-90
91-180
181-365
Over 365
Total
$ 65,910
2,994
26,794
$ 95,698
$ 8,244
1,033
7,248
$ 16,525
$ 4,971
903
7,699
$ 13,573
$ 4,960
561
5,745
$ 11,266
$ 84,085
5,491
47,486
$ 137,062
The following table summarizes the activity and ending balances in the allowance for uncollectible accounts (amounts in thousands):
Year ended December 31:
2016
2015
2014
Goodwill and Intangible Assets
Beginning of
Year Balance
Additions
Deductions
End of
Year Balance
$ 26,712
18,582
14,334
$ 14,790
19,243
15,780
$ 12,466
11,113
11,532
$ 29,036
26,712
18,582
We have a significant amount of goodwill on our balance sheet that resulted from the numerous business acquisitions we have made in
prior years. 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 goodwill for impairment by comparing the current fair value of each of our reporting
units to their carrying value, including goodwill. Our business is comprised of four reporting units: home health, hospice, community-
based, and LTACH. 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. Our impairment analysis is performed on November 30th of each year.
We performed a qualitative assessment to determine if it is more likely than not that the fair value of the reporting units are less than its
carrying value. We evaluated relevant events and circumstances, such as market conditions, financial performance, and share price to
determine if any goodwill impairment is indicated. Based on our analysis, an impairment of goodwill was not indicated.
We have not recognized any goodwill impairment charges in 2016, 2015 or 2014 related to the annual impairment testing.
Included in intangible assets are definite-lived assets subject to amortization such as software licenses, non-compete agreements and
defensive assets, which are defined as trade names that are not actively used. Amortization of the definite-lived intangible assets is
calculated on a straight-line basis over the estimated useful lives of the related assets. Non-compete agreements are amortized over the
life of the agreement, usually ranging from one to three years.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Form 10-K Part I I
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We also have indefinite-lived assets that are not subject to amortization expense such as actively used trade names, certificates of need
and licenses to conduct specific operations within geographic markets. Such 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 and licenses and use these trade names indefinitely. These indefinite-lived
intangibles are reviewed annually for impairment or more frequently if circumstances indicate impairment may have occurred. To determine
whether an indefinite-lived intangible asset is impaired, we perform a qualitative assessment to support the conclusion that the indefinite-
lived intangible asset is not impaired. Based on the results of that qualitative assessment, we may perform a quantitative test. The
quantitative impairment test on trade names uses the relief-from-royalty method. Under this method, the fair value of the trade name 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 use over its estimated useful life. The quantitative impairment test for certificates of need and licenses applies
the cost approach. Under this method, assumptions are made about the cost to replace the certificates of need and licenses. Based
on our analysis, there were no indicators that any other intangible assets were impaired and no impairment charge was recorded for the
year ended December 31, 2016. We did record impairment charges of $0.6 million and $2.0 million for the twelve months ended
December 31, 2015 and 2014, respectively.
Self Insurance Reserves
We maintain insurance programs, which include employee health insurance and workers’ compensation. Our employee health insurance
program is self-funded, with stop-loss coverage on claims that exceed $0.2 million for any individually covered employee or employee
family member. We are responsible for workers’ compensation claims up to $0.5 million per individual incident. The self insurance reserve
payable reflects the current estimate of incurred but not reported losses, historical claims experience, and expected costs to settle
unpaid claims. We record amounts due from insurance policies in other current assets while recording the estimated liability in self
insurance reserves.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Our exposure to market risk relates to fluctuations in interest rates from borrowings under the credit facility. Our letter of credit fees and
interest accrued on our debt borrowings are subject to the applicable Eurodollar rate or Base Rate. A hypothetical 100 basis point
increase in interest rates on the average daily amounts outstanding under the credit facility would have increased interest expense by
$1.6 million and $0.6 million for the years ended December 31, 2016 and 2015, respectively.
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.
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
56
Form 10-K Part I I
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BUILDING TOGETHER
Item 9A. Disclosure 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 we file or submit under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to 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 Chief Executive Officer and Chief Financial Officer, the Company’s
management evaluated the effectiveness of the Company’s disclosure controls and procedures as of December 31, 2016. 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 of the Exchange Act) were effective as of December 31, 2016.
Management’s Annual 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 Rule 13a-15(f) of the Exchange Act. Under the supervision and with the participation of the Company’s Chief Executive Officer
and Chief Financial Officer, the Company’s management conducted an evaluation of its internal control over financial reporting based
on the framework in Internal Control – Integrated Framework (2013) 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 (2013), management
concluded that our internal control over financial reporting was effective as of December 31, 2016.
The attestation report of KPMG LLP, the independent registered public accounting firm that audited the financial statements included in
this Annual Report on Form 10-K, 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) of
the Exchange Act, during the Company’s fiscal quarter ended December 31, 2016 that have materially affected, or are reasonably likely to
materially affect, the Company’s internal control over financial reporting.
1943-Fin-R1.indd 57
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Form 10-K Part I I
57
LHC 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, 2016, based on criteria established
in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). LHC Group, Inc.’s 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 Annual 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 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 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,
2016, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO).
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, 2016 and 2015, and the related consolidated
statements of income, changes in equity, and cash flows for each of the years in the three-year period ended December 31, 2016,
and our report dated March 9, 2017 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Baton Rouge, Louisiana
March 9, 2017
58
Form 10-K Part I I
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Item 9B. Other Matters.
None noted.
BUILDING TOGETHER
1943-Fin-R1.indd 59
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Form 10-K Part I I
59
LHC GROUP
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by this Item regarding our directors and executive officers is incorporated by reference from the information
contained under the heading “Information About Directors, Nominees and Management” in the definitive Proxy Statement relating to the
Company’s 2017 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 “Section 16(a) Beneficial Ownership Reporting Compliance” in the definitive Proxy Statement
relating to the Company’s 2017 Annual Meeting of Stockholders.
The information required by this Item regarding our corporate governance Nominating Committee and Audit Committee 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 2017 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. Any substantive amendments to this code, or any waivers granted for any
directors or executive officers, including our principal executive officer, principal financial officer, principal accounting officer or controller,
will be disclosed on our website and remain available there for at least 12 months. This code of ethics is not incorporated in this report by
reference. Copies of our code of ethics will also be provided, without charge, upon written request to Investor Relations at LHC Group, Inc.,
901 Hugh Wallis Road South, Lafayette, Louisiana, 70508.
Item 11. Executive Compensation.
The information required by this Item regarding our executive compensation and Compensation Committee is incorporated by reference
from the information contained under the heading “Executive Officer Compensation” in the definitive Proxy Statement relating to the
Company’s 2017 Annual Meeting of Stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.
The information required by this Item regarding our securities authorized for issuance under equity compensation plans and security
ownership of certain beneficial owners and management is incorporated by reference from the information contained under the headings
“Security Ownership of Certain Beneficial Owners and Management” in the definitive Proxy Statement relating to the Company’s 2017
Annual Meeting of Stockholders.
Equity Compensation Plan Information
The following table provides information as of December 31, 2016, regarding shares of common stock that may be issued under the
Company’s existing equity compensation plans:
Plan Category
(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) (1)
Equity compensation plans approved by Stockholders:
Equity compensation plans not approved by Stockholders:
Total
—
—
—
$ —
—
$ —
666,740
—
666,740
(1) Includes 477,129 shares remaining available for issuance under the LHC Group, Inc. 2010 Long-Term Incentive Plan (all of which are available for issuance pursuant to grants of
full-value stock awards) and 189,611 shares remaining available for issuance under the Amended and Restated LHC Group, Inc.’s 2006 Employee Stock Purchase Plan.
60
Form 10-K Part II I
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BUILDING TOGETHER
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item regarding transactions with related persons 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
2017 Annual Meeting of Stockholders.
Item 14. Principal Accounting Fees and Services.
The information required by this Item regarding accounting and audit fees 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
2017 Annual Meeting of Stockholders.
1943-Fin-R1.indd 61
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Form 10-K Part III
61
LHC GROUP
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, 2015 and 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For each of the years in the three-year period ended December 31, 2015
Consolidated Statements of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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.
62
Form 10-K Part I V
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BUILDING TOGETHER
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 as of December 31, 2016 and
2015, and the related consolidated statements of income, changes in equity, and cash flows for each of the years in three-year period
ended December 31, 2016. 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, 2016 and 2015, and the results of their operations and their cash flows for each of
the years in three-year period ended December 31, 2016, 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, 2016, based on criteria established in Internal Control – Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 9, 2017
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 9, 2017
Report of Independent Registered Public Accounting Firm
Form 10-K Part I V
F-1
1943-Fin-R1.indd 1
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LHC 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 $29,036 and $26,712, respectively
Other receivables
Amounts due from governmental entities
Total receivables, net
Prepaid income taxes
Prepaid expenses
Other current assets
Receivable due from insurance carrier
Total current assets
Property, building and equipment, net of accumulated depreciation of $35,226 and $38,907, respectively
Goodwill
Intangible assets, net of accumulated amortization of $10,968 and $8,496, respectively
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and other accrued liabilities
Salaries, wages and benefits payable
Self insurance reserves
Current portion of long-term debt
Amounts due to governmental entities
Income tax payable
Legal settlement payable
Total current liabilities
Deferred income taxes
Income tax payable
Revolving credit facility
Long-term debt, less current portion
Total liabilities
Noncontrolling interest-redeemable
Stockholders’ equity:
LHC Group, Inc. stockholders’ equity:
Common stock – $0.01 par value: 40,000,000 shares authorized; 22,429,041 and
22,224,423 shares issued in 2016 and 2015, respectively
Treasury stock – 4,828,679 and 4,776,560 shares at cost, respectively
Additional paid-in capital
Retained earnings
Total LHC Group, Inc. stockholders’ equity
Noncontrolling interest – non-redeemable
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying Notes to the Consolidated Financial Statements
2016
2015
$ 3,264
$ 6,139
124,803
5,115
942
130,860
—
9,821
5,796
—
149,741
43,251
307,317
102,006
11,756
$ 614,071
$ 26,805
34,265
10,691
252
4,955
3,499
—
80,467
31,941
—
87,000
544
199,952
12,567
224
(39,135)
119,748
314,289
395,126
6,426
401,552
$ 614,071
110,350
2,093
1,081
113,524
1,949
10,833
5,835
550
138,830
38,096
290,694
96,405
2,029
$ 566,054
$ 24,586
28,098
9,636
241
7,055
—
550
70,166
23,729
3,415
98,000
543
195,853
12,408
222
(37,139)
113,793
277,706
354,582
3,211
357,793
$ 566,054
F-2
Form 10-K Part IV
Consolidated Balance Sheets
1943-Financials.indd 2
4/4/17 6:39 PM
LHC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except share and per share data)
For the Year Ended December 31,
Net service revenue
Cost of service revenue
Gross margin
Provision for bad debts
General and administrative expenses
Impairment of intangibles and other
Loss on disposal of assets
Operating income
Interest expense
Non-operating income
Income from continuing operations before income taxes and noncontrolling interests
Income tax expense
Income from continuing operations
Less net income attributable to noncontrolling interests
Net income attributable to LHC Group, Inc.’s common stockholders
Earnings per share – basic:
Net income attributable to LHC Group, Inc.’s common stockholders
Earnings per share – diluted:
Net income attributable to LHC Group, Inc.’s common stockholders
Weighted average shares outstanding:
Basic
Diluted
See accompanying Notes to the Consolidated Financial Statements
BUILDING TOGETHER
2016
2015
2014
$ 914,823
557,650
$ 816,366
480,878
$ 733,632
434,775
357,173
14,790
270,622
—
1,199
70,562
(2,936)
492
68,118
22,176
45,942
9,359
36,583
2.08
2.07
$
$
$
335,488
19,243
247,919
1,273
710
66,343
(2,302)
457
64,498
22,848
41,650
9,315
32,335
1.86
1.84
$
$
$
298,857
15,780
233,898
3,646
47
45,486
(2,486)
265
43,265
14,513
28,752
6,915
21,837
1.27
1.26
$
$
$
17,559,477
17,682,820
17,405,379
17,547,531
17,229,026
17,315,333
Consolidated Statements of Income
Form 10-K Part IV
F-3
1943-Fin-R1.indd 3
4/11/17 10:57 AM
LHC 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
Shares
Amount
Shares
Additional
Paid-In
Capital
Noncontrolling
Interest –
Total
Retained
Earnings Non-Redeemable Equity
Noncontrolling
Interest –
Redeemable
Net
Income
Balances at December 31, 2013
Net income
Acquired noncontrolling interest
Sale of noncontrolling interest
Noncontrolling interest distributions
Purchase of additional controlling
interest
Nonvested stock compensation
Issuance of vested stock
Treasury shares redeemed to pay
income tax
Excess tax benefits-vesting
nonvested stock
Issuance of common stock under
Employee Stock Purchase Plan
Balances at December 31, 2014
Net income
Acquired noncontrolling interest
Noncontrolling interest distributions
Purchase of additional controlling
interest
Stock options exercised
Nonvested stock compensation
Issuance of vested stock
Treasury shares redeemed to pay
income tax
Excess tax benefits-vesting
nonvested stock
Issuance of common stock under
Employee Stock Purchase Plan
Balances at December 31, 2015
Net income
Acquired noncontrolling interest
Sale of noncontrolling interest
Noncontrolling interest distributions
Stock options exercised
Nonvested stock compensation
Issuance of vested stock
Treasury shares redeemed to pay
income tax
Excess tax benefits-vesting
nonvested stock
Issuance of common stock under
Employee Stock Purchase Plan
Balances at December 31, 2016
$ 218
—
—
—
—
21,801,634
—
—
—
—
$ (34,715)
—
—
—
—
4,693,647 $ 103,972
—
—
161
—
—
—
—
—
$ 223,534
21,837
—
—
—
$ 2,875
1,214
138
—
(1,271)
$ 295,884
23,051
138
161
(1,271)
$ 11,258
5,701
130
—
(5,572)
28,752
—
—
—
—
—
—
—
177,272
—
—
—
—
—
—
(359)
4,094
—
—
(945)
40,716
—
—
—
—
60
—
—
—
—
—
—
—
—
(359)
4,094
—
—
(945)
—
60
—
—
—
—
—
2
$ 220
36,305
—
22,015,211 $ (35,660)
—
780
4,734,363 $ 108,708
—
$ 245,371
—
$ 2,956
782
$ 321,595
—
$ 11,517
—
—
—
—
—
—
—
—
—
—
—
—
—
9,500
—
176,989
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(275)
144
4,225
—
—
(1,479)
42,197
—
—
—
—
211
—
—
—
32,335
—
—
1,737
155
(1,637)
34,072
155
(1,637)
7,578
—
(6,687)
41,650
—
—
—
—
—
—
—
—
—
—
(275)
144
4,225
—
—
(1,479)
—
211
—
—
—
—
—
—
2
$ 222
22,723
—
22,224,423 $ (37,139)
—
780
4,776,560 $ 113,793
—
$ 277,706
—
$ 3,211
782
$ 357,793
—
$ 12,408
—
—
—
—
—
—
2
—
—
—
—
—
—
5,500
—
174,969
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(931)
—
109
4,872
(2)
—
(1,996)
52,119
—
—
—
—
995
36,583
—
—
—
—
—
—
—
—
37,956
1,783
469
(1,341)
109
4,872
—
1,373
1,783
1,400
(1,341)
—
—
—
(1,996)
—
995
45,942
7,986
—
(7,827)
—
$ 224
24,149
—
22,429,041 $ (39,135)
—
912
4,828,679 $ 119,748
—
$ 314,289
—
$ 6,426
912
$ 401,552
$ 12,567
See accompanying Notes to the Consolidated Financial Statements
F-4
Form 10-K Part IV
Consolidated Statements of Changes in Equity
1943-Financials.indd 4
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LHC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
For the Year Ended December 31,
2016
2015
2014
BUILDING TOGETHER
Operating activities
Net income
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 disposal of assets
Impairment of intangibles and other
Changes in operating assets and liabilities, net of acquisitions:
Receivables
Prepaid expenses and other assets
Prepaid income taxes
Accounts payable and accrued expenses
Income tax payable
Net amounts due to/from governmental entities
Net cash provided by operating activities
Investing activities
Cash paid for acquisitions, primarily goodwill and intangible assets
Purchases of property, building and equipment
Advanced payments on acquisitions
Other
Net cash (used in) investing activities
Financing activities
Proceeds from line of credit
Payments on line of credit
Excess tax benefits from vesting of stock awards
Proceeds from employee stock purchase plan
Payments on debt
Noncontrolling interest distributions
Payment of deferred financing fees
Purchase of additional controlling interest
Sale of noncontrolling interest
Withholding taxes paid on stock-based compensation
Proceeds from exercise of stock options
Net cash (used in) provided by 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
$ 45,942
$ 41,650
$ 28,752
12,160
14,790
4,872
7,402
1,199
—
(28,873)
1,034
1,641
9,182
84
(1,961)
67,472
(23,156)
(16,009)
(11,488)
273
(50,380)
38,000
(49,000)
1,303
912
(238)
(9,413)
—
—
356
(1,996)
109
(19,967)
(2,875)
6,139
$ 3,264
11,955
19,243
4,225
1,518
710
1,280
(27,951)
(3,793)
441
10,526
—
130
59,934
(70,572)
(13,283)
—
—
(83,855)
83,000
(45,000)
914
782
(233)
(8,324)
—
(275)
—
(1,479)
144
29,529
5,608
531
$ 6,139
9,571
15,780
4,094
2,402
47
3,603
(16,372)
191
911
(10,460)
—
138
38,657
(73,933)
(8,105)
—
—
(82,038)
75,000
(37,000)
124
782
(202)
(6,843)
(852)
(359)
193
(945)
—
29,898
(13,483)
14,014
531
$
$ 3,123
$ 11,533
$ 1,870
$ 20,361
$ 2,461
$ 11,781
Supplemental disclosure of non-cash transactions:
2014 non-cash transaction. $2.7 million of licenses associated with the Company’s point of care technology were capitalized as additions to property,
building and equipment upon placing associated equipment in service. These licenses were purchased during the twelve months ended December 31, 2010
and previously recorded in other assets on the balance sheet.
See accompanying Notes to the Consolidated Financial Statements
Consolidated Statements of Cash Flows
Form 10-K Part IV
F-5
1943-Fin-R1.indd 5
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LHC 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 health services, hospice services, community-based services, and facility-based services,
the latter primarily through long-term acute care hospitals (“LTACHs”). As of December 31, 2016, the Company, through its wholly
and majority-owned subsidiaries, equity joint ventures and controlled affiliates, operated 372 service providers in 26 states within the
continental United States.
2. Summary of Significant Accounting Policies
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 in the Company’s accompanying consolidated
financial statements and notes to the consolidated financial statements. Actual results could differ from those estimates.
The most significant estimates relate to revenue recognition, collectability of accounts receivable and impairment tests of goodwill and
other indefinite-lived intangible assets. A description of the significant accounting policies and a discussion of the significant estimates and
judgments associated with such policies are described below.
Principles of Consolidation
The consolidated financial statements include all subsidiaries and entities controlled by the Company through direct ownership of majority
interest or controlling member ownership of such entities. Third party equity interests in the consolidated joint ventures are reflected as
noncontrolling interests in the Company’s 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 for the years ending December 31:
Ownership Type
Wholly owned subsidiaries
Equity joint ventures
Other
2016
57.2%
41.2
1.6
2015
55.2%
42.9
1.9
2014
53.5%
43.9
2.6
100.0%
100.0%
100.0%
All significant inter-company accounts and transactions have been eliminated in consolidation. All business combinations accounted for as
purchases have been included in the consolidated financial statements from the respective dates of acquisition.
Equity Joint Ventures
A majority of the Company’s equity joint ventures are structured as limited liability companies in which the Company typically owns a
majority equity interest ranging from 51% to 91%. 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 equity 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.
F-6
Form 10-K Part I V
Notes to Consolidated Financial Statements
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BUILDING TOGETHER
Other (License Leasing Arrangements and Management Services)
The Company, through wholly owned subsidiaries, leases home health licenses necessary to operate certain of its home nursing and
hospice agencies. As with wholly owned subsidiaries, the Company owns 100% of the equity of these entities and consolidates them
based on such ownership.
The Company has various management services agreements under which the Company manages operations of certain 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 other than management fees.
Revenue Recognition
The Company reports net service revenue at the estimated net realizable amount due from Medicare, Medicaid and others for services
rendered. The Company assesses the patient’s ability to pay for their healthcare services at the time of patient admission based on
the Company’s verification of the patient’s insurance coverage under the Medicare, Medicaid and other commercial or managed care
insurance programs. All such payors contribute to the net service revenue of the Company’s home health services, hospice 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
Medicare
Home Health Services
2016
74.5%
1.8
23.7
2015
74.5%
1.5
24.0
2014
75.9%
1.4
22.7
100.0%
100.0%
100.0%
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 adjustments to ensure the adequacy and effectiveness of the total reimbursement:
(a) an outlier payment if the patient’s care was unusually costly; (b) a low utilization adjustment if the number of visits was fewer than
five; (c) a partial payment if the patient transferred to another provider or transferred from another provider before completing the
episode; (d) a payment adjustment based upon the level of therapy services required; (e) base payment adjustments for case-mix and
geographic wage differences; and (f) 2% sequestration reduction for episodes beginning after March 31, 2013. Management estimates
the adjustments outlined above based on historical experience and as changes become known, and records these adjustments during
the period in which the services are provided to the patient. Net service revenue and related patient accounts receivable are recorded at
amounts estimated to be realized from Medicare for services rendered.
Notes to Consolidated Financial Statements
Form 10-K Part I V
F-7
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LHC GROUP
Hospice Services
The Company is paid by Medicare under a per diem payment system. The Company receives one of four predetermined daily or hourly
rates based upon the level of care the Company furnished. The Company records net service revenue from hospice services based on the
daily or hourly rate and recognizes revenue as hospice services are provided.
Hospice payments are subject to an inpatient cap and an overall Medicare payment cap. The inpatient cap relates to individual programs
receiving more than 20% of its total Medicare reimbursement from inpatient care services and the overall Medicare payment cap relates
to individual 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 and records an estimate of
its liability for reimbursements received in excess of the cap amount. Annually, the Company receives notification of whether any of its
hospice providers have exceeded either cap. Beginning with cap year ended October 1, 2014, CMS implemented a new process requiring
hospice providers to self-report their cap liabilities and remit applicable payment by March 31 of the following year.
Facility-Based Services
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. 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. 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 management services agreements, the Company provides billing,
management and other consulting services suited to and designed for the efficient operation of the applicable home nursing agency.
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 for one management service agreement and reimbursed for
operating expenses plus a percentage of operating net income for two management service agreements.
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, Medicaid, other third-party payors, and patients. To provide
for accounts receivable that could become uncollectible in the future, the Company establishes an allowance for uncollectible accounts to
reduce the carrying amount of such receivables to their estimated net realizable value. 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 have historically exceeded 60.0% of its patient accounts receivable, is limited due to (i) the historical
collection rate from Medicare and (ii) the fact that Medicare is a U.S. government payor. The Company does not believe that there are
any other significant concentrations of receivables from any particular payor that would subject it to any significant credit risk in the
collection of accounts receivable.
F-8
Form 10-K Part I V
Notes to Consolidated Financial Statements
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BUILDING TOGETHER
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 that 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 its actual amount due at the patient level and adjust the gross charges down to the actual
amount at the time of billing. This negates the need to record an estimated contractual allowance when reporting net service revenue for
each reporting period.
Business Combination
The Company accounts for business combinations using the acquisition method. The assets typically acquired consist primarily of
Medicare licenses, trade names, certificates of need and/or a non-compete 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
The Company performs its annual impairment review of goodwill at November 30, and when a triggering event occurs between annual
impairment tests. For 2016, the Company performed a qualitative assessment of goodwill and determined that it is not more likely than
not that the fair values of its reporting units are less than the carrying amounts. The Company has not recognized any goodwill impairment
charges in 2016, 2015 or 2014 related to the annual impairment testing.
Included in intangible assets are definite-lived assets subject to amortization such as non-compete agreements and defensive assets,
which are defined as trade names that are not actively used. Amortization of definite-lived intangible assets is calculated on a straight-line
basis over the estimated useful lives of the related assets, ranging from two to five years. 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 and licenses and use the trade names indefinitely. These indefinite-lived
intangible assets are reviewed annually for impairment or more frequently if circumstances indicate impairment may have occurred.
To determine whether an indefinite-lived intangible asset is impaired, the Company performs a qualitative assessment to support the
conclusion that the indefinite-lived intangible asset is not impaired. Based on the results of that qualitative assessment, the Company
may perform a quantitative test. The Company utilizes a relief-from-royalty method in its quantitative impairment test of trade names. Under
this method, the fair value of the trade name 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 use over its estimated useful life. The Company utilizes the
replacement cost approach in its quantitative impairment test for certificates of need and licenses. Under this method, assumptions
are made about the cost to replace the certificates of need and licenses. During the twelve months ended December 31, 2016,
the Company did not record an impairment charge related to indefinite-lived intangible assets. During the twelve months ended
December 31 2015 and 2014, the Company recorded impairment charges related to indefinite-lived intangible assets of $0.6 million and
$2.0 million, respectively.
Notes to Consolidated Financial Statements
Form 10-K Part I V
F-9
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LHC GROUP
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. Additionally, reimbursements
received in excess of hospice cap amounts are recorded in this account.
Property, Building and Equipment
Property, building and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated
useful lives of the individual assets. The estimated useful life of buildings is 39 years, while the estimated useful lives of transportation
equipment and furniture and other equipment range from 3 to 10 years. The useful life for leasehold improvements is the shorter of the
lease term or the expected life of the leasehold improvement. Expenditures that increase capacities or extend useful lives are capitalized
to the appropriate property, building and equipment accounts. Costs and related accumulated depreciation associated with assets that
are sold or retired are written off and any gain or losses are recorded in operating income. Routine repairs and maintenance costs are
expensed as incurred.
Property, building and equipment are reviewed whenever events or changes in circumstances occur that indicate possible impairment.
There were no impairments recognized during the periods ended December 31, 2016, 2015 and 2014.
The following table describes the Company’s components of property, building and equipment for the years ended December 31, 2016
and 2015 (amounts in thousands):
Land
Building and improvements
Transportation equipment
Fixed equipment
Office furniture and medical equipment
Less accumulated depreciation
2016
2015
$ 2,033
11,363
11,220
1,090
52,771
78,477
35,226
$ 43,251
$ 2,033
10,026
6,912
3,373
54,659
77,003
38,907
$ 38,096
Depreciation expense for the years ended December 31, 2016, 2015 and 2014 was $12.2 million, $12.0 million and $9.6 million,
respectively, which was recorded in general and administrative expenses. Amortization expense related to definite-lived intangible assets
is included in depreciation expense.
Self Insurance Reserves
The Company maintains insurance programs, which include employee health insurance and workers’ compensation. The Company’s
employee health insurance program is self-funded, with stop-loss coverage on claims that exceed $0.2 million for any individually covered
employee or employee family member. The Company is responsible for workers’ compensation claims up to $0.5 million per individual
incident. The self insurance reserve payable reflects the current estimate of incurred but not reported losses, historical claims experience,
and expected costs to settle unpaid claims. The Company records amounts due from insurance policies in other current assets while
recording the estimated liability in self insurance reserves.
F-10
Form 10-K Part I V
Notes to Consolidated Financial Statements
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BUILDING TOGETHER
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 of 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 attributable to the Company.
Stock-Based 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
The following table sets forth shares used in the computation of basic and diluted per share information for the years ended December 31,
2016, 2015 and 2014:
Weighted average number of shares outstanding for basic per share calculation
Effect of dilutive potential shares:
Options
Nonvested restricted stock
Adjusted weighted average shares for diluted per share calculation
Antidilutive shares
2016
2015
2014
17,559,477
17,405,379
17,229,026
863
122,480
17,682,820
3,663
138,489
17,547,531
4,284
82,023
17,315,333
219,855
200,525
173,360
Recently Adopted Accounting Pronouncements
In April 2015, the FASB issued ASU No. 2015-3, Simplifying the Presentation of Debt Issuance Costs, (“ASU 2015-3”) which requires
an entity to present debt issuance costs related to a recognized debt liability as a direct deduction from that liability. The Company adopted
this standard during the year ended December 31, 2016. In August 2015, the FASB issued ASU No. 2015-15, Interest – Imputation
of Interest, which stated ASU No. 2015-3 does not address presentation or subsequent measurement of debt issuance costs related to
line-of-credit arrangements; therefore, ASU No. 2015-3 will not have an effect on the Company’s consolidated financial statements
and related disclosures.
Recently Issued Accounting Pronouncements
On May 28, 2014, the FASB issued ASU No. 2014-9, Revenue from Contracts with Customers, (“ASU 2014-9”) which requires an
entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers.
ASU 2014-9 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is
effective for reporting periods beginning after December 15, 2017, with early adoption permitted for reporting periods beginning after
December 15, 2016. The standard permits the use of either the retrospective or cumulative effect transition method. As the Company
progresses with evaluating the effect that ASU 2014-9 will have on its consolidated financial statements and related disclosures, the
Company does not expect a material impact on its consolidated financial statements upon implementation on January 1, 2018.
The Company has not yet selected a transition method.
In February 2016, the FASB issued ASU No. 2016-2, Leases, (“ASU 2016-2”) which requires lessees to recognize qualifying leases on
the statement of financial position. Qualifying leases will be classified as right-of-use assets and lease liabilities. The new standard is
effective on January 1, 2019. Early adoption is permitted. ASU 2016-2 mandates a modified retrospective transition method for all
entities. The Company anticipates that the adoption of ASU 2016-2 will result in a material increase in total assets and total liabilities.
The Company continues to evaluate the effect that ASU 2016-2 will have on its related disclosures.
Notes to Consolidated Financial Statements
Form 10-K Part I V
F-11
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LHC GROUP
In March 2016, as part of its Simplification Initiative, the FASB issued ASU No. 2016-9, Compensation - Stock Compensation
(ASU 2016-09), which finalizes Proposed ASU No. 2015-270 of the same name, and seeks to reduce complexity in accounting standards.
The areas for simplification in ASU 2016-09 involve several aspects of the accounting for share-based payment transaction, including
(1) accounting for income taxes, (2) classification of excess tax benefits on the statement of cash flows, (3) forfeitures, (4) minimum statutory
tax withholding requirements, (5) classification of employee taxes paid on the statement of cash flows when an employer withholds
shares for tax withholding purposes, (6) the practical expedient for estimating the expected term, and (7) intrinsic value. The new standard
is effective on January 1, 2017. The adoption of this standard is not expected to have a material impact on the Company’s consolidated
financial statements.
3. Acquisitions and Disposals
2016 Acquisitions
The total aggregate purchase price for the acquired 23 locations that occurred in 2016 was $24.1 million, of which $23.1 million was
paid in cash. These providers conduct home health operations in Alabama, Arizona, Arkansas, Florida, Louisiana, and Oklahoma; hospice
operations in Alabama, Arizona, Arkansas, Georgia, and Missouri; and physical therapy clinics in Arkansas.
The fair values assigned to certain assets acquired and liabilities assumed in relation to the Company’s acquisition that occurred during
the fourth quarter of 2016 have been prepared on a preliminary basis with information currently available and are subject to change.
Specifically, the Company is further assessing the valuation of certain tangible and intangible assets acquired and obligations assumed
pending the final appraisals. The Company expects to finalize its analysis during 2017.
Goodwill generated from the acquisitions was recognized based on the expected contributions of each acquisition to the overall corporate
strategy. The Company expects its portion of goodwill to be fully tax deductible. The acquisitions were accounted for under the
acquisition method of accounting, and, accordingly, the accompanying financial information includes the results of operations of the
acquired entities from the dates of acquisition.
The following table summarizes the aggregate consideration paid for the acquisitions and the amounts of the assets acquired and
liabilities assumed at the acquisition dates, as well as their fair value at the acquisition dates and the noncontrolling interest acquired
(amounts in thousands):
Consideration
Cash
Fair value of total consideration transferred
Recognized amounts of identifiable assets acquired and liabilities assumed
Trade name
Certificates of needs/licenses
Other identifiable intangible assets
Other assets and (liabilities), net
Total identifiable assets
Noncontrolling interest
Goodwill, including noncontrolling interest of $1,275
$ 23,082
23,082
4,113
3,520
262
(865)
7,030
1,784
$ 17,836
Trade names, certificates of need and licenses are indefinite-lived assets and, therefore, not subject to amortization. Acquired trade names
that are not being used actively are amortized over the estimated useful life on the straight line basis. Trade names are valued using the
relief from royalty method, a form of the income approach. Certificates of needs are valued using the replacement cost approach based on
registration fees and opportunity costs. Licenses are valued based on the estimated direct costs associated with recreating the asset,
including opportunity costs based on an income approach. In the case of states with a moratorium in place, the licenses are valued using
the multi period excess earnings method. The other identifiable assets include non-compete agreements that are amortized over the life
of the agreements, ranging from one to three years. Noncontrolling interest is valued at fair value by applying a discount to the value of the
acquired entity for lack of control.
F-12
Form 10-K Part I V
Notes to Consolidated Financial Statements
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BUILDING TOGETHER
The Company has conducted an assessment of deferred income tax accounting and the calculation of the final net working capital
adjustment and has recognized provision amounts in it is accounting for the acquisition of Halcyon for all identified liabilities in accordance
with the requirements of ASC Topic 805. During the twelve months ended December 31, 2016, a decrease to net working capital
adjustment of $2.0 million and an increase to deferred tax liabilities of $0.8 million were recorded in goodwill.
The following table contains unaudited pro forma consolidated income statement information assuming the 2016 acquisitions closed
January 1, 2015 (amount in thousands, except earnings per share):
Net service revenue
Operating income
Net income
Basic earnings per share
Diluted earnings per share
2016
2015
$ 936,621
71,977
37,521
2.14
2.12
$ 907,941
64,547
31,217
1.79
1.78
The pro forma information presented above includes adjustments for (i) depreciation expense, (ii) amortization of identifiable intangible
assets, (iii) income tax provision using the Company’s effective tax rate and (iv) estimate of additional costs to provide administrative
costs for these locations. 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.
2015 Acquisitions
The total aggregate purchase price for the Company’s acquisitions, which closed in the twelve months ended December 31, 2015, was
$71.4 million, of which $70.1 million was paid in cash. The purchase prices are determined based on an analysis of comparable
acquisitions and the target market’s potential future cash flows. The Company expects its portion of goodwill to be fully tax deductible.
The company paid $0.4 million in acquisition-related costs, which was recorded in general and administrative expenses.
4. Goodwill and Other Intangibles, Net
The following table summarizes changes in goodwill by reporting unit during the twelve months ended December 31, 2016 and 2015
(amounts in thousands):
Home Health
Reporting Unit
Hospice
Reporting Unit
Community-Based Facility-Based
Reporting Unit
Reporting Unit
Balance as of December 31, 2014
Goodwill from acquisitions
Goodwill related to noncontrolling interests
Goodwill related to disposal
Balance as of December 31, 2015
Goodwill from acquisitions
Goodwill related to noncontrolling interests
Goodwill related to prior period net working
capital adjustments
Balance as of December 31, 2016
$ 196,296
7,069
14
(384)
$ 202,995
6,760
580
504
$ 210,839
$ 14,793
43,343
—
—
$ 58,136
7,460
355
(1,717)
$ 64,234
$ 17,339
638
22
(27)
$ 17,972
848
—
—
$ 18,820
$ 11,591
—
—
—
$ 11,591
1,493
340
—
$ 13,424
Total
$ 240,019
51,050
36
(411)
$ 290,694
16,561
1,275
(1,213)
$ 307,317
The Company determined that there was no impairment for the goodwill of any reporting units as of December 31, 2016, 2015 and 2014
based on the Company’s annual impairment testing; however, the Company did record $0.4 million and $0.2 million of disposal of
goodwill during the years ended December 31, 2015 and 2014, respectively, due to the closure of underperforming locations. This was
recorded in impairment of intangibles and other.
Notes to Consolidated Financial Statements
Form 10-K Part I V
F-13
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LHC GROUP
The Company performed an impairment analysis on its indefinite-lived intangible assets related to the Company’s trade names, licenses
and certificates of need and determined that it is not more likely than not that the fair values of the indefinite-lived intangible assets are
less than its carrying amount as of November 30, 2016. During the years ended December 31, 2015 and 2014, an impairment charge of
$0.6 million and $2.0 million, respectively, was recorded in impairment of intangibles and other.
The following tables summarize the changes in intangible assets during the twelve months ended December 31, 2016 and 2015
(amounts in thousands):
Indefinite-lived assets:
Trade names
Certificates of need/licenses
Total
Amortizing assets:
Trade names
Non-compete agreements
Total
Balance at December 31, 2016
Indefinite-lived assets:
Trade names
Certificates of need/licenses
Total
Amortizing assets:
Trade names
Non-compete agreements
Total
Balance at December 31, 2015
Remaining
Useful Life
Indefinite
Indefinite
8 months – 9 years
2 months – 3 years
Remaining
Useful Life
Indefinite
Indefinite
2 months – 5 years
3 months – 2 years
December 31, 2016
Gross
Carrying
Amount
$ 64,672
33,327
97,999
9,294
5,681
14,975
$ 112,974
Accumulated
Amortization
$
—
—
—
(5,991)
(4,977)
(10,968)
$ (10,968)
December 31, 2015
Gross
Carrying
Amount
$ 60,762
29,807
$ 90,569
$ 8,985
5,347
14,332
$ 104,901
Accumulated
Amortization
$
$
—
—
—
$ (4,385)
(4,111)
(8,496)
Net
Carrying
Amount
$ 64,672
33,327
97,999
3,303
704
4,007
$ 102,006
Net
Carrying
Amount
$ 60,762
29,807
$ 90,569
$ 4,600
1,236
5,836
$ (8,496)
$ 96,405
Intangible assets of $69.4 million, net of accumulated amortization, related to the home health services segment, $23.7 million related to
the hospice segment, $7.4 million related to the community-based services segment and $1.5 million related to the facility-based services
segment as of December 31, 2016. Amortization for the years ended December 31, 2016, 2015 and 2014 was $2.5 million, $1.9 million
and $2.1 million, respectively, which was recorded in general and administrative expenses.
The estimated intangible asset amortization expense for each of the five years subsequent to December 31, 2016 is as follows
(amounts in thousands):
Year
2017
2018
2019
2020
2021
Total
Amortization
Amount
$ 2,037
1,366
353
153
22
$ 3,931
F-14
Form 10-K Part I V
Notes to Consolidated Financial Statements
1943-Financials.indd 14
4/4/17 6:39 PM
BUILDING TOGETHER
5. Income Taxes
The Company accounts for income taxes using the asset and liability method. Under the asset and 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.
Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2016 and 2015 were as follows
(amounts in thousands):
Deferred tax assets:
Allowance for uncollectible accounts
Accrued employee benefits
Stock compensation
Accrued self-insurance
Acquisition costs
Net operating loss carry forward
Intangible asset impairment
Uncertain tax position – state tax portion
Uncertain tax position – interest expense
Other
Capital loss carryforward
Valuation allowance
Deferred tax assets
Deferred tax liabilities:
Amortization of intangible assets
Tax depreciation in excess of book depreciation
Prepaid expenses
Non-accrual experience accounting method
Deferred tax liabilities
Net deferred tax liability
2016
2015
$ 9,735
5,532
1,004
2,762
1,781
1,880
38
63
90
155
154
(44)
$ 23,150
(45,622)
(8,397)
(817)
(255)
(55,091)
$ (31,941)
$ 9,048
5,260
1,068
2,517
1,651
983
43
215
254
93
—
(44)
$ 21,088
(35,355)
(8,201)
(655)
(606)
(44,817)
$ (23,729)
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.
The components of the Company’s income tax expense from continuing operations, less noncontrolling interest, were as follows
(amounts in thousands):
Current:
Federal
State
Deferred:
Federal
State
Total income tax expense
2016
2015
2014
$ 12,563
2,371
14,934
6,223
1,019
7,242
$ 22,176
$ 18,094
3,232
21,326
1,389
133
1,522
$ 22,848
$ 10,195
1,916
12,111
2,187
215
2,402
$ 14,513
Notes to Consolidated Financial Statements
Form 10-K Part I V
F-15
1943-Fin-R1.indd 15
4/11/17 10:57 AM
LHC GROUP
A reconciliation of the difference between the federal statutory tax rate and the Company’s effective tax rate for income taxes for each
period is as follows:
Federal statutory tax rate
State income taxes, net of federal benefit
Nondeductible expenses
Uncertain tax position
Credits and other
Effective tax rate
2016
35.0%
3.8
2.6
(3.3)
(0.4)
37.7%
2015
35.0%
3.9
2.5
—
—
41.4%
2014
35.0%
3.5
2.3
—
(0.9)
39.9%
The Company is subject to both federal tax 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, 2012. Tax year ending December 31, 2011 is still open due to
being under current examination.
As of December 31, 2016, $1.3 million was recorded in income tax payable as an unrecognized tax benefit which, if recognized, would
decrease the Company’s effective tax rate. All of the Company’s unrecognized tax benefit is due to the settlement with the United States
of America, which was announced September 30, 2011. On July 31, 2014, the Internal Revenue Service (“IRS”) issued a notice of
proposed adjustment asserting that a portion of the original tax deduction claimed by the Company associated with the settlement of the
United States of America should be disallowed. In December 2016, the Company signed a final settlement offer from the IRS that
reduced the unrecognized tax benefit from $3.4 million to $1.3 million. The Company received approval from Joint Committee Review in
February 2017 to finalize the settlement. Due to the approval being received subsequent to year-end, the Company will continue to
show the amount as an uncertain tax position as of December 31, 2016. A reconciliation of the total amounts of unrecognized tax
benefits follows (amounts in thousands):
Total unrecognized tax benefits as of December 31, 2015
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, 2016
$ 3,415
(2,100)
$ 1,315
The Company recognizes interest and penalties related to uncertain tax positions in interest expense and general and administrative
expenses, respectively. During the year ended December 31, 2016, the Company recognized a decrease of $0.4 million in interest
expense and associated liability due to the decrease in the overall uncertain tax position. During the years ended December 31, 2015 and
2014, the Company recognized $0.2 million each year in interest expense, and recorded an accrued liability of interest payments related
to uncertain tax positions.
6. Debt
Credit Facility
On June 18, 2014, the Company entered into a Credit Agreement (the “Credit Agreement”) with Capital One, National Association, which
provides a senior, secured revolving line of credit commitment with a maximum principal borrowing limit of $225.0 million and a letter
of credit sub-limit equal to $15.0 million. The expiration date of the Credit Agreement is June 18, 2019. Revolving loans under the Credit
Agreement bear interest at either a (1) Base Rate, which is defined as a fluctuating rate per annum equal to the highest of (a) the Federal
Funds Rate in effect on such day plus 0.5% (b) the Prime Rate in effect on such day and (c) the Eurodollar Rate for a one month interest
period on such day plus 1.0%, plus a margin ranging from 0.75% to 1.5% per annum or (2) Eurodollar rate plus a margin ranging from
1.75% to 2.5% per annum. Swing line loans bear interest at the Base Rate. Borrowings under a Base Rate or Eurodollar Rate may be
outstanding at any time; however, there shall not be more than 15 Eurodollar borrowings outstanding at any given time. The Company
is required to pay a commitment fee for the unused commitments at rates ranging from 0.225% to 0.375% per annum depending upon the
Company’s consolidated Leverage Ratio, as defined in the Credit Agreement. The Base Rate at December 31, 2016 was 4.75% and
the Eurodollar rate was 3.02%. As of December 31, 2016, the interest rate on outstanding borrowings was 3.02%.
F-16
Form 10-K Part I V
Notes to Consolidated Financial Statements
1943-Financials.indd 16
4/4/17 6:39 PM
As of December 31, 2016 the Company had $87.0 million drawn and letters of credit in the amount of $11.0 million outstanding under the
credit facility. At December 31, 2015, the Company had $98.0 million drawn and letters of credit in the amount of $9.8 million outstanding
under the credit facility.
The scheduled principal payments on long-term debt for each of the five years subsequent to December 31, 2016 is as follows (amounts
BUILDING TOGETHER
in thousands):
Year
2017
2018
2019
2020
2021
Total
7. Stockholders’ Equity
Equity Based Awards
Principal Payment Amount
$
252
267
87,277
—
—
$ 87,796
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
477,129 shares are 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 the Company’s common stock as of the date of grant.
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
During the twelve months ended December 31, 2016, 5,500 options were exercised with an exercise price of $19.75. There were no
options granted or forfeited during the twelve months ended December 31, 2016, and no options were issued or exercisable as of
December 31, 2016. No compensation expense related to stock options grants was recorded in the years ended December 31, 2016,
2015 and 2014.
Nonvested Stock
The Company issues stock-based compensation to employees in the form of nonvested stock, which is an award of common stock
subject to certain restrictions. The awards, which the Company calls nonvested shares, generally vest over a five year period, conditioned
on continued employment for the full incentive period. Compensation expense for the nonvested 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 2016, 2015 and 2014, respectively, 220,800, 182,865 and 172,545 nonvested shares were granted to employees pursuant to the
2010 Incentive Plan.
Notes to Consolidated Financial Statements
Form 10-K Part I V
F-17
1943-Fin-R1.indd 17
4/11/17 10:57 AM
LHC GROUP
The Company also issues nonvested stock to its independent directors of the Company’s Board of Directors. During 2016, 2015 and
2014, respectively, 15,300, 16,200 and 26,900 nonvested 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 for issuance under the 2010 Incentive Plan. The shares fully vest one year from the date of the grant, except for grants provided
to new directors, which one-third on each of the first three anniversaries of the grant date.
The fair value of nonvested 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 nonvested shares granted during the years ended December 31, 2016, 2015 and 2014 were
$37.99, $34.06 and $23.59, respectively.
The following table represents the nonvested stock activity for the year ended December 31, 2016:
Nonvested shares outstanding at January 1, 2016
Granted
Vested
Forfeited
Nonvested shares outstanding at December 31, 2016
Number
of Shares
527,091
236,100
(174,969)
(13,511)
574,711
Weighted
Average
Grant Date
Fair Value
$ 26.64
37.99
25.72
25.27
$ 31.61
As of December 31, 2016, there was $11.9 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 3.16 years. The total fair value of shares vested in the year
ended December 31, 2016 was $4.5 million and the total fair value of shares vested in the years December 31, 2015 and 2014 was
$4.1 million and $3.9 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 $4.9 million, $4.2 million and $4.1 million in compensation expense related to non-vested stock grants in the
years ended December 31, 2016, 2015 and 2014, 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.
On June 20, 2013, the Amended and Restated Employee Stock Purchase Plan was approved by the Company’s stockholders. As a
result of the amendment, the Employee Stock Purchase Plan was modified as follows:
• An additional 250,000 shares of common stock were authorized for issuance over the term of the Employee Stock Purchase Plan.
• The term of the Employee Stock Purchase Plan was extended from January 1, 2016 to January 1, 2023.
The following table represents the shares issued during 2016, 2015 and 2014 under the Employee Stock Purchase Plan:
Shares available as of December 31, 2013
Shares issued in 2014
Shares issued in 2015
Shares issued in 2016
Shares available as of December 31, 2016
Weighted
Average
Per Share
Price
$ 21.49
$ 34.37
$ 37.79
Number
of Shares
272,788
36,305
22,723
24,149
189,611
F-18
Form 10-K Part I V
Notes to Consolidated Financial Statements
1943-Financials.indd 18
4/4/17 6:39 PM
Treasury Stock
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 52,119,
42,197 and 40,716 shares of common stock related to these tax obligations during the years ended December 31, 2016, 2015 and
BUILDING TOGETHER
2014, respectively.
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, 2016, the
Company had three license lease arrangements to operate four home nursing agencies and three hospice agencies.
One of the leases was entered into in 2007 and expires in 2017. Expense related to this lease was $0.2 million for each of the years
ended December 31, 2016, 2015, and 2014, respectively. Payment due under this lease is $0.2 million in 2017.
Two of the leases were amended during 2010 to extend the lease terms to one year with an automatic renewal clause for additional
consecutive one year terms. Expense related to these leases was $0.4 million, $0.5 million, and $0.4 million for the years ended
December 31, 2016, 2015 and 2014, respectively. The lease payments associated with these leases are based on a percentage of
quarterly net profits; therefore, the future payments will vary with the future profits.
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 $20.8 million, $20.7 million and $21.1 million for the
years ended December 31, 2016, 2015 and 2014, respectively.
The Company began participating in a fleet program during 2014. The program allows employees that drive over 12,000 miles on an
annual basis to qualify for a vehicle; all participation is voluntary. The individual operating leases are for a minimum of 12 months. Fleet
expense was $5.3 million, $7.2 million and $3.6 million for the years ended December 31, 2016, 2015 and 2014, respectively.
Future minimum rental commitments under non-cancelable operating leases are as follows (amounts in thousands):
Year
2017
2018
2019
2020
2021
Thereafter
9. Employee Benefit Plan
Defined Contribution Plan
Total
$ 17,785
11,439
7,617
5,064
3,744
5,627
$ 51,276
The Company sponsors a 401(k) plan for all eligible employees. The plan allows participants to contribute up to $18,000 in 2016, tax
deferred (subject to IRS guidelines). The plan also 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 $6.3 million, $5.4 million and $4.7 million in the years ended December 31, 2016, 2015 and
2014, respectively.
Notes to Consolidated Financial Statements
Form 10-K Part I V
F-19
1943-Fin-R1.indd 19
4/11/17 10:57 AM
LHC GROUP
10. Commitments and Contingencies
Contingencies
The Company provides services in a highly regulated industry and is a party to various proceedings and regulatory and other governmental
and internal audits and investigations in the ordinary course of business (including audits by Zone Program Integrity Contractors (“ZPICs”)
and Recovery Audit Contractors (“RACs”) and investigations resulting from the Company’s obligation to self-report suspected violations
of law). Management cannot predict the ultimate outcome of any regulatory and other governmental and internal audits and investigations.
The DOJ, CMS, or other federal and state enforcement and regulatory agencies may conduct additional investigations related to the
Company’s businesses in the future. These matters could potentially subject the Company to sanctions, damages, recoupments, fines, and
other penalties (some of which may not be covered by insurance), which may, either individually or in the aggregate, have a material
adverse effect on the Company’s business and financial condition.
The Company is involved in various legal proceedings arising in the ordinary course of business. Although the results of litigation cannot
be predicted with certainty, management believes the outcome of pending litigation will not have a material adverse effect, after considering
the effect of the Company’s insurance coverage, on the Company’s interim financial information.
On October 7, 2015, the parties entered into a Stipulation of Settlement in the consolidated case styled In re LHC Group, Inc. Derivative
Litigation, Case No. 6:13-cv-02899-JTT-CBW. On October 19, 2015, Plaintiffs filed an Unopposed Motion for Preliminary Approval of
Proposed Derivative Settlement. On October 26, 2015, the District Court entered an Order Preliminarily Approving Settlement in the amount
of $0.6 million. On January 11, 2016, the District Court entered its Order and Final Judgment approving the settlement and dismissing
the consolidated action with prejudice. The Company’s insurance carrier has funded the entire settlement amount, which was immediately
releasable to Plaintiffs’ counsel on January 11, 2016. The time for appeal has passed and no appeals were filed. This matter is now
concluded. At December 31, 2015, the Company’s balance sheet reflected the entire settlement in current assets as a receivable due
from insurance carrier and correspondingly reflected the entire settlement in current liabilities as a legal settlement payable.
Joint Venture Buy/Sell Provisions
Most of the Company’s joint ventures include a buy/sell option that grants to the Company and its joint venture partners the right to
require the other joint venture party to either purchase all of the exercising member’s membership interests or sell to the exercising
member all of the non-exercising member’s membership interest, at the non-exercising member’s option, within 30 days of the receipt of
notice of the exercise of the buy/sell option. In some instances, the purchase price is based on a multiple of the historical or future
earnings before income taxes and depreciation and amortization of the equity joint venture at the time the buy/sell option is exercised.
In other instances, the buy/sell purchase price will be negotiated by the partners and subject to a fair market valuation process. The
Company has not received notice from any joint venture partners of their intent to exercise the terms of the buy/sell agreement nor has
the Company notified any joint venture partners of its intent to exercise the terms of the buy/sell agreement.
Compliance
The laws and regulations governing the Company’s operations, along with the terms of participation in various government programs,
regulate how the Company does business, the services offered and its interactions with patients and the public. These laws and
regulations, and their interpretations, are subject to frequent change. Changes in existing laws or regulations, or their interpretations, or
the enactment of new laws or regulations could materially and adversely affect the Company’s operations and financial condition.
The Company is subject to various routine and non-routine governmental reviews, audits and investigations. In recent years, federal and
state civil and criminal enforcement agencies have heightened and coordinated their oversight efforts related to the health care industry,
including referral practices, cost reporting, billing practices, joint ventures and other financial relationships among health care providers.
Violation of the laws governing the Company’s operations, or changes in the interpretation of those laws, could result in the imposition
of fines, civil or criminal penalties, and/or termination of the Company’s rights to participate in federal and state-sponsored programs
and suspension or revocation of the Company’s licenses. The Company believes that it is in material compliance with all applicable laws
and regulations.
F-20
Form 10-K Part I V
Notes to Consolidated Financial Statements
1943-Financials.indd 20
4/4/17 6:39 PM
11. Segment Information
The Company’s segments consist of home health services, hospice services, community-based services, and facility-based services.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies.
The following tables summarize the Company’s segment information for the twelve months ended December 31, 2016, 2015 and 2014
(amounts in thousands):
BUILDING TOGETHER
Net service revenue
Cost of service revenue
Provision for bad debts
General and administrative expenses
Loss (gain) on disposal of assets
Operating income
Interest expense
Non-operating income
Income from continuing operations before
income taxes and noncontrolling interests
Income tax expense
Income from continuing operations
Less net income (loss) attributable to
noncontrolling interests
Net income attributable to LHC Group, Inc.’s
common stockholders
Total assets
Net service revenue
Cost of service revenue
Provision for bad debts
General and administrative expenses
Impairment of intangibles and other
Loss on disposal of assets
Operating income
Interest expense
Non-operating income
Income from continuing operations before
income taxes and noncontrolling interests
Income tax expense
Income from continuing operations
Less net income (loss) attributable to
noncontrolling interests
Net income attributable to LHC Group, Inc.’s
common stockholders
Total assets
Year Ended December 31, 2016
Home Health
Services
Hospice
Services
Community-
Facility-
Based Services Based Services
Total
$ 665,896
398,450
9,609
203,418
857
53,562
(2,216)
422
51,768
16,505
35,263
6,876
$ 134,948
83,359
3,401
37,207
338
10,643
(317)
25
$ 43,891
32,603
797
8,785
49
1,657
(144)
14
10,351
3,485
1,527
651
6,866
1,867
876
(58)
$ 70,088
43,238
983
21,212
(45)
4,700
(259)
31
4,472
1,535
2,937
$ 914,823
557,650
14,790
270,622
1,199
70,562
(2,936)
492
68,118
22,176
45,942
674
9,359
$ 28,387
$ 427,782
$ 4,999
$ 116,090
$
934
$ 33,520
$ 2,263
$ 36,679
$ 36,583
$ 614,071
Year Ended December 31, 2015
Home Health
Services
Hospice
Services
Community-
Facility-
Based Services Based Services
Total
$ 613,188
354,750
15,736
190,591
1,245
544
50,322
(1,819)
397
48,900
17,173
31,727
7,424
$ 85,854
50,906
1,002
26,437
—
80
7,429
(253)
38
7,214
2,541
4,673
1,077
$ 41,202
29,076
1,816
8,465
28
41
1,776
(23)
3
1,756
787
969
(144)
$ 76,122
46,146
689
22,426
—
45
6,816
(207)
19
6,628
2,347
4,281
$ 816,366
480,878
19,243
247,919
1,273
710
66,343
(2,302)
457
64,498
22,848
41,650
958
9,315
$ 24,303
$ 394,392
$ 3,596
$ 101,641
$ 1,113
$ 31,235
$ 3,323
$ 38,786
$ 32,335
$ 566,054
Notes to Consolidated Financial Statements
Form 10-K Part I V
F-21
1943-Fin-R1.indd 21
4/11/17 10:57 AM
LHC GROUP
Net service revenue
Cost of service revenue
Provision for bad debts
General and administrative expenses
Impairment of intangibles and other
Loss on disposal of assets
Operating income
Interest expense
Non-operating income
Income from continuing operations before
income taxes and noncontrolling interests
Income tax expense
Income from continuing operations
Less net income attributable to
noncontrolling interests
Net income attributable to LHC Group, Inc.’s
common stockholders
Total assets
12. Fair Value of Financial Instruments
Home Health
Services
$ 564,966
329,856
13,072
187,280
3,269
1
31,488
(1,969)
201
29,720
10,999
18,721
Year Ended December 31, 2014
Hospice
Services
$ 67,621
39,804
909
18,875
202
7
7,824
(249)
43
7,618
1,955
5,663
Community-
Facility-
Based Services Based Services
Total
$ 27,698
19,611
873
6,551
—
—
663
(19)
2
646
105
541
$ 73,347
45,504
926
21,192
175
39
5,511
(249)
19
5,281
1,454
3,827
$ 733,632
434,775
15,780
233,898
3,646
47
45,486
(2,486)
265
43,265
14,513
28,752
5,121
1,122
(36)
708
6,915
$ 13,600
$ 386,511
$ 4,541
$ 34,847
$
577
$ 34,027
$ 3,119
$ 36,354
$ 21,837
$ 491,739
The carrying amounts of the Company’s cash, receivables, accounts payable and accrued liabilities approximate their fair values. The
estimated fair value of intangible assets was calculated using level 3 inputs based on the present value of anticipated future benefits.
For the year ended December 31, 2016, the carrying value of the Company’s long-term debt approximates fair value as the interest rates
approximates current rates.
13. Allowance for Uncollectible Accounts
The following table summarizes the activity and ending balances in the allowance for uncollectible accounts for the twelve months ended
December 31, 2016, 2015 and 2014 (amounts in thousands):
Year
2016
2015
2014
14. Concentration of Risk
Beginning of Year
Balance
Additions
Deductions
$ 26,712
18,582
14,334
$ 14,790
19,243
15,780
$ 12,466
11,113
11,532
End of Year
Balance
$ 29,036
26,712
18,582
The Company’s Louisiana facilities accounted for approximately 18.5%, 21.0% and 22.7% of net service revenue during the years ended
December 31, 2016, 2015 and 2014, 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.
F-22
Form 10-K Part I V
Notes to Consolidated Financial Statements
1943-Financials.indd 22
4/4/17 6:39 PM
BUILDING TOGETHER
15. Unaudited Summarized Quarterly Financial Information
The following table represents the Company’s unaudited quarterly results of operations (amounts in thousands, except share data):
Net service revenue
Gross margin
Net income attributable to LHC Group, Inc.’s common stockholders
Net income attributable to LHC Group’ Inc.’s common stockholders
Basic earnings per share:
Diluted earnings per share:
Weighted average shares outstanding:
Basic
Diluted
Net service revenue
Gross margin
Net income attributable to LHC Group, Inc.’s common stockholders
Net income attributable to LHC Group’ Inc.’s common stockholders
Basic earnings per share:
Diluted earnings per share:
Weighted average shares outstanding:
Basic
Diluted
First Quarter
2016
$ 222,552
86,951
7,686
$
$
0.44
0.44
Second Quarter Third Quarter Fourth Quarter
2016
2016
2016
$
$
$
226,031
88,903
9,464
$ 230,797
89,965
9,616
$ 235,443
91,354
9,817
0.54
0.54
$
$
0.55
0.54
$
$
0.56
0.55
17,485,766
17,633,549
17,566,097
17,685,147
17,588,163
17,719,473
17,597,190
17,764,066
First Quarter
2015
$ 193,079
78,653
6,805
$
$
0.39
0.39
Second Quarter Third Quarter Fourth Quarter
2015
2015
2015
$
$
$
200,172
83,533
8,950
$ 204,122
83,249
8,845
$ 218,993
90,053
7,735
0.51
0.51
$
$
0.51
0.50
$
$
0.44
0.44
17,322,791
17,489,483
17,410,971
17,529,100
17,436,731
17,610,953
17,447,691
17,647,483
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.
16. Subsequent Event
On November 1, 2016, the Company entered into a definitive agreement to form a joint venture with LifePoint Health, Inc. (“LifePoint”).
LifePoint will contribute all of its existing home health and hospice agencies to the joint venture and the Company will contribute certain
existing home health agencies to the joint venture in areas serviced by LifePoint hospitals. The first phase of the contributions occurred
on January 1, 2017 and the remaining phases will occur over 2017 and 2018. When the contributions are complete, the joint venture will
operate 39 home health agencies and 12 hospice agencies. On December 30, 2016, the Company contributed $11.5 million to the joint
venture in relation to the first phase. This was recorded in Other Assets on the Company’s Consolidated Balance Sheets.
Notes to Consolidated Financial Statements
Form 10-K Part I V
F-23
1943-Fin-R1.indd 23
4/11/17 10:57 AM
LHC GROUP
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
POWER OF ATTORNEY
Chief Executive Officer
March 9, 2017
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Keith G. Myers and
Joshua L. Proffitt 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
Chief Executive Officer and Chairman of the Board of Directors
March 9, 2017
Executive Vice President, Chief Financial Officer, Principal Accounting Officer March 9, 2017
/s/ KEITH G. MYERS
Keith G. Myers
/s/ JOSHUA L. PROFFITT
Joshua L. Proffitt
/s/ MONICA F. AZARE
Monica F. Azare
/s/ JOHN B. BREAUX
John B. Breaux
/s/ JOHN L. INDEST
John L. Indest
/s/ GEORGE A. LEWIS
George A. Lewis
/s/ RONALD T. NIXON
Ronald T. Nixon
Director
Director
Director
Director
Director
/s/ CHRISTOPHER S. SHACKELTON
Christopher S. Shackelton
Director
/s/ W.J. “BILLY” TAUZIN
W.J. “Billy” Tauzin
/s/ KENNETH E. THORPE
Kenneth E. Thorpe
/s/ BRENT TURNER
Brent Turner
/s/ DAN S. WILFORD
Dan S. Wilford
Director
Director
Director
Director
March 9, 2017
March 9, 2017
March 9, 2017
March 9, 2017
March 9, 2017
March 9, 2017
March 9, 2017
March 9, 2017
March 9, 2017
March 9, 2017
F-24
Form 10-K Part I V
Signatures
1943-Financials.indd 24
4/4/17 6:39 PM
BUILDING TOGETHER
EXHIBIT INDEX
Exhibit
Number
Description of Exhibits
3.1
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).
3.2
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).
4.1
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).
10.1+
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).
10.2+
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).
10.3+
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).
10.4+
LHC Group, Inc. Second Amended and Restated 2005 Non-Employee Directors Compensation Plan (previously filed as
Exhibit 10.4 to LHC Group’s Form 10-K for the year ended December 31, 2014, filed on March 11, 2015).
10.5+
Form of Indemnity Agreement between LHC Group and directors and certain officers (previously filed as Exhibit 10.10 to
the Form S-1/A (File No. 333-120792) filed on February 14, 2005).
10.6+
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).
10.7
Credit Agreement, dated as of June 18, 2014, among LHC Group, Inc., Capital One, National Association, as administrative
agent, sole bookrunner, sole lead arranger, and a lender, JPMorgan Chase Bank, N.A., Regions Bank and Compass Bank, as
co-syndication agents and lenders, and Whitney Bank, as a lender (previously filed as Exhibit 10.1 to LHC Group’s Form 8-K
filed on June 23, 2014).
10.8+
Amended and Restated Employment Agreement between Keith G. Myers and LHC Group, Inc. dated April 1, 2014
(previously filed as Exhibit 10.1 to the Form 8-K filed April 4, 2014).
10.9+
Amended and Restated Employment Agreement between Donald D. Stelly and LHC Group, Inc. dated June 1, 2016
(previously filed as Exhibit 10.1 to the Form 8-K filed June 3, 2016).
10.10+
Amended and Restated Employment Agreement between Joshua L. Proffitt and LHC Group, Inc. dated September 12, 2016
(previously filed as Exhibit 10.2 to the Form 8-K filed November 3, 2016).
10.11+
Amendment to LHC Group, Inc. Second Amended and Restated 2005 Non-Employee Directors Compensation Plan,
effective January 20, 2015. (previously filed as Exhibit 10.1 to LHC Group’s Form 10-Q filed on May 7, 2015).
21.1
Subsidiaries of the Registrant.
23.1
Consent of KPMG LLP.
31.1
Certification of Keith G. Myers, Chief Executive Officer pursuant to Rule 13a- 14(a)/15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit Index
Form 10-K Part IV
F-25
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4/11/17 10:57 AM
LHC GROUP
Exhibit
Number
Description of Exhibits
31.2
Certification of Joshua L. Proffitt, Chief Financial Officer pursuant to Rule 13a- 14(a)/15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*
Certification of 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.
F-26
Form 10-K Part IV
Exhibit Index
1943-Financials.indd 26
4/4/17 6:39 PM
CORPORATE INFORMATION
Independent Registered Public Accounting Firm
KPMG LLP
301 Main Street, Suite 2150 • Baton Rouge, LA 70801
kpmg.com
Transfer Agent and Registrar
American Stock Transfer & Trust Company LLC
6201 15th Avenue • Brooklyn, NY 11219
800.937.5449
Corporate Headquarters
LHC Group, Inc.
901 Hugh Wallis Road South • Lafayette, LA 70508
Phone: 866.LHC.GROUP • Fax: 337.235.8037
LHCgroup.com
Common Stock
LHC Group’s common stock is traded on the NASDAQ Global Select Market under the symbol
“LHCG.” At March 29, 2017, the company had a total of approximately 8,000 shareholders,
including stockholders of record and approximately 7,700 persons or entities holding common
stock in nominee name.
Performance Graph
The graph below matches the cumulative 5-Year total return of holders of LHC Group, Inc.’s common
stock with the cumulative total returns of the NASDAQ Composite index and a customized peer group
of three companies that includes: Almost Family Inc., Amedisys Inc. and National Healthcare Corp.
The graph assumes that the value of the investment in our common stock, in each index, and in the peer
group (including reinvestment of dividends) was $100 on 12/31/2011 and tracks it through 12/31/2016.
PERFORMANCE GRAPH
Comparison of 5-Year Cumulative Total Return* Among LHC Group, Inc., The NASDAQ Composite Index and a Peer Group
$400
$350
$300
$250
$200
$150
$100
$50
0
12/11
12/12
12/13
12/14
12/15
12/16
LHC Group Inc.
NASDAQ Composite
Peer Group
12/11
$100.00
$100.00
$100.00
12/12
$166.02
$116.41
$115.85
12/13
$187.37
$165.47
$147.94
12/14
$243.02
$188.69
$204.81
12/15
$353.00
$200.32
$245.62
12/16
$356.20
$216.54
$284.01
*$100 invested on 12/31/11 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.
The stock price performance included in this graph is not necessarily indicative of future stock price performance.
LEADERSHIP
Executive Officers
Keith G. Myers
Chief Executive Officer
Donald D. Stelly
President, Chief Operating Officer
Joshua L. Proffitt
Executive Vice President,
Chief Financial Officer and Treasurer
Directors
Keith G. Myers
Chairman
Regulatory Affairs and Public Policy Committee
W. J. “Billy” Tauzin
Lead Independent Director
Co-Chair - Regulatory Affairs and Public Policy Committee
Nominating and Governance Committee
Dan S. Wilford
Chair - Nominating and Governance Committee
Clinical Quality Committee
Compensation Committee
George A. Lewis
Chair - Audit Committee
John L. Indest
Chair - Clinical Quality Committee
Corporate Development Committee
Ronald T. Nixon
Chair - Corporate Development Committee
Audit Committee
Nominating and Governance Committee
Monica F. Azare
Chair - Compensation Committee
Clinical Quality Committee
John B. Breaux
Corporate Development Committee
Co-Chair - Regulatory Affairs and Public Policy Committee
Brent Turner
Audit Committee
Compensation Committee
Corporate Development Committee
Christopher S. Shackelton
Audit Committee
Corporate Development Committee
Kenneth E. Thorpe, PhD
Clinical Quality Committee
Regulatory Affairs and Public Policy Committee
1943-Cvr-R3.indd 4
4/13/17 2:04 PM
LHC Group, Inc.
901 Hugh Wallis Road South
Lafayette, LA 70508
1.866.LHC.GROUP
LHCgroup.com
1943-Cvr-R1.indd 1
4/11/17 9:41 AM
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