LHC Group Annual Report 2017

Plain-text annual report

L E A D I N G T H E C H A N G E 05759-Cvr-R1.indd 2 4/10/18 12:56 PM 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. 05759-Cvr-R1.indd 3 4/10/18 12:56 PM 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. 05759-Narr-R1.indd 1 4/10/18 2:19 PM Keith G. Myers Chairman and Chief Executive Officer TO OUR VALUED STAKEHOLDERS: In the countless conversations I have every year — at conferences and conventions, and with partners, peers, and industry leaders — I am often asked to share the most important thing I have learned from more than 20 years of providing service in the healthcare sector. It is a question I ask myself quite frequently, and it’s difficult to pin down one concise answer. As I look back on 2017 — on what we have accomplished and where we are going — I come back to a thought that sums up our mission quite well: When it comes to something as intimate, personal, and impactful as healthcare, there is no substitute for friends and neighbors taking care of their own. At LHC Group, we know that all healthcare is local, and it is our foundational mission to provide care at a personal level. Long ago, we made the strategic choice to operate as a “house of brands” — retaining established and well-known provider names and personnel in the communities they serve. This allows us to maintain brand awareness and leverage existing community relationships as we work to provide that personal level of care to as many people as we can reach. I believe our ongoing success and continued growth in 2017 confirms the effectiveness of this approach. It is a key differentiator for our organization and a driving force behind LHC Group’s strong reputation as a leader and innovator in the in-home healthcare industry. Our employees — the clinicians and support staff on the front lines, as well as all who support them from our Home Office — are LHC Group’s greatest asset and the key to our ongoing success. Our company will only be as successful as they are in providing consistent quality service to patients and families. So many of you know the story of our origin — a story of service to four underserved patients in a small rural community in Louisiana, the foundation of a single home health agency, and growth into a publicly traded NASDAQ company and one of the nation’s leading providers of in-home healthcare. We will never abandon the lessons and values we’ve learned along this great journey. Organic growth was the driving force behind our expansion in those early days, as we joined forces with more and more local agencies in different communities around the nation. And it remains a key to our success as we move forward. Local healthcare providers — from our partner health systems to small clinics — have a legacy and responsibility as leaders and guardians for the health of individuals in the communities they serve. It is our mission to help every agency, facility, and partner in our family live up to and exceed this fundamental expectation. That is no easy thing. Managing the massive array of needs, demands, interests, and perspectives in today’s challenging healthcare environment is tough. It is a constant reminder that we must remain flexible and adaptable in thinking about our long-term strategy. That being said, I am pleased to say that my confidence in our ability to adapt and thrive — and to help each individual agency and community in our family reach its pinnacle — remains as steadfast as ever. We’re leading the way as our industry transitions to value-based reimbursement and highly coordinated care, and we will continue to lead as our industry evolves. Our model for success is tested, proven, and scalable across the spectrum of in-home healthcare and in cities and towns throughout the nation. As always, we are guided by the “Six Pillars of Excellence” outlined below — People, Service, Quality, Efficiency, Growth, and Ethics. And our unique company culture — putting individual patients, families, colleagues, and communities first — and the founding values and principles that reinforce it, will continue to differentiate LHC Group and direct our path as we achieve more of our goals and change healthcare in America for the better. 05759-Narr-R1.indd 2 1 4/10/18 2:19 PM PEOPLE than 6 percent. This is an all-time low for our organization. Our team members who go to work each and every day in In 2017, our headcount increased by more than 25 percent over communities across America are the backbone of our infrastructure. 2016. We are operating with just over 14,500 employees — the result The leaders who guide them are experienced mentors and teachers, of aggressive M&A activity while utilizing a just-in-time (JIT) hiring dedicated to nurturing, leading by example, and bringing out the best strategy. JIT allows our human resources and talent acquisition teams in their teams through a perspective grounded in servant leadership. to plan for organic growth ahead of anticipated need and leverage staff We learned long ago that leadership will not produce sustainable forecasting to ensure a balanced full-time employee relationship to results without a fundamental grounding in humanity — without the current and planned patient census. understanding that our colleagues are not the means to an end, but With our continued commitment to strong orientation real people who have something to offer our organization. Every programs, employee voice, and transparency, our turnover has employee is unique, adding their own skills, experiences, values, declined to historic lows. And our overall employment reputation backgrounds, influences, and beliefs to a team approach that helps us continues to strengthen — in 2017 our social media rankings on customize our service for our equally unique patients. sites such as Glassdoor and others reached the highest levels in Our leaders measure success by how effectively they educate, our company’s history. empower, and inspire those in their charge to produce the best The healthcare employment market is extraordinarily competitive, possible outcomes for our individual patients and hospital partners but LHC Group is a leader in attracting the best healthcare and serving communities around the nation — and great servant leaders support professionals in the industry. I can say with confidence that take the time to interact on a personal level with the people they lead. our growth, success, and reputation for quality and patient satisfaction It is no secret that staffing and retention remain among the demonstrate that we have assembled one of the finest teams in the in- toughest challenges across the in-home healthcare sector, and I am home healthcare industry. proud to report that because of our unrelenting focus on people — our most important asset — our vacancy rate has dropped to less SERVICE 14,554 Service is the heart and soul of our organization and our culture at LHC Group. Everything we do is measured against the results we produce for our patients and our partners — from clinical outcomes to EMPLOYEES 10,922 11,598 10,767 financial performance. I am pleased to report that — as clearly evidenced by our quality and patient satisfaction scores detailed under the QUALITY pillar — our level of service here at LHC Group has never been better. Our ongoing goal is to provide an expanding variety of healthcare services for our patients in the communities we serve. We are always looking for new opportunities and innovations to enhance the level and value of our service. In 2017, we began offering a nurse practitioner (NP) service line in a few select communities. Our NPs are able to provide a primary caregiver for patients who may not have access to a doctor’s office due to geographical location or other circumstances. 2014 2015 2016 2017 2 05759-Narr-R2.indd 3 4/12/18 2:48 PM We have achieved good results and received positive feedback so far in rolling out our NP service line, and we plan to continue development, enhancement, and expansion as we move forward — providing additional value for our patients. The consistent contact we maintain with our patients and their families is a vital part of achieving the best possible health outcomes and avoiding unnecessary re-hospitalizations. Our call center is open every day around the clock, and our team members reach out to patients on a regular schedule to make sure we minimize any unresolved issues and head off potential problems. We are proud of the legacy of outstanding service our team is building here at LHC Group. We see that legacy as both an honor and a responsibility — as a standard that requires around-the-clock dedication and vigilance to sustain and enhance. If we do not maintain our focus on the people we serve, and on the people most directly responsible for providing that service, we cannot expect success to follow. Service is the reason we exist. Our company’s leaders — if they are to succeed in our organization — must realize one important thing: Great service does not come from their superior skills or talents, but from the hard work and dedication of the individual teams they lead. It is at the core of being a servant leader. Great service comes from the talented clinicians who travel every day to care for the neediest in their community. It comes from the nurses, therapists, and support staff who serve on weekends and holidays. And it comes from those who go the extra mile — every time — to uphold and deliver on our promise of quality care for the patients, families, and communities we are privileged to serve. As a national provider, delivering quality service on a consistent basis requires an extraordinary amount of cooperation and coordination “Great service comes from those who go the extra mile — every time — to uphold and deliver on our promise of quality care for the patients, families, and communities we are privileged to serve.” Compounded Annual Growth Rate = 13.9% ADMISSIONS (All service lines) 172,983 153,951 209,977 across a widely dispersed and diverse group of people. Our team has clearly demonstrated the ability to accomplish this task on a level that 142,087 continues to impress industry analysts and peers. We learned long ago that efficient decision-making — the ability to confront and resolve problems as quickly and as close to the source as possible — is the key to providing great service. Our experience demonstrates that this is most effectively accomplished by utilizing the talent and experience of our people in the communities they serve — not by adopting a top-down, corporate-focused approach. 2014 2015 2016 2017 05759-Narr-R1.indd 4 3 4/10/18 2:19 PM “We are in the business of helping people. We will continue to set the gold standard of quality, and, if needed, be ready and willing to be different to achieve that standard.” In communities across the nation, our local teams operate worked hard to earn a reputation for excellence among healthcare with the autonomy to confront problems in real time and providers. It is our most effective “sales strategy” with the many customize their level of care to the individuals they serve. When patients, families, and communities we engage with every day. we encourage decisive leadership at the local level, we are more I cannot over-emphasize how much our quality scores — and strategic and less reactive as we work through everyday concerns, the ability to provide a full and scaled continuum of in-home setbacks, and roadblocks — never settling for the status quo, but healthcare — come up in discussions with potential joint venture always finding opportunities for improvement. partners. Quite often it is the difference maker and driver of choice. QUALITY The importance of these quality scores means we must continue to build upon our foundation with professionalism and vigilance. We must continue to have pride in our work and execute our Our leadership team could not be more pleased with the level of responsibilities to those we serve with care and integrity, always consistent quality we have achieved — and maintained — across taking the time to listen to and answer with dignity and patience the our entire organization over the past few years. Each year, as questions and concerns of the many we are privileged to serve. independent industry and regulatory analysts release their highly LHC Group’s home health quality measurements maintained their anticipated results, LHC Group continues to lead in almost every industry-leading status throughout 2017. We consistently achieved measurable quality and patient satisfaction standard. industry-leading scores in our Centers for Medicare & Medicaid Consistent quality translates to value. When we provide excellent Services (CMS) Star Rating results. healthcare service, satisfied patients and families, as well as our In the most recent CMS results, released in January 2018, 98 hospital and health system partners, develop loyalty to our LHC percent of LHC Group locations achieved a rating of four stars or Group family. Customer service in the healthcare industry — above better. In the quality category, we produced an average score of and beyond minimum expectations — is critical to customer loyalty. 4.55, excluding recent acquisitions. That is an improvement over Patients and families expect and deserve high quality from their our 4.51 average from the previous report released in October healthcare providers. 2017. This compares quite favorably with a national average that Our LHC Group family strives every day to build on a legacy of has maintained a range of 3.24 to 3.26 for the last five quarters. In healthcare excellence and quality. Our desire to achieve this legacy the patient satisfaction category, our average rating was 4.2 stars, is the foundation upon which our company was built. We have compared with the industry average of 3.6. 4 05759-Narr-R1.indd 5 4/10/18 2:19 PM Compounded Annual Growth Rate = 13.5% NET SERVICE REVENUE (in millions) 2014 2015 2016 2017 $733.6 $816.4 $914.8 $1,072.1 In 2017, our company earned HomeCare Elite® recognition for 71 standards on eight out of eight Hospice Consumer Assessment of percent of our home health locations — a significant increase over the Healthcare Providers and Systems (CAHPS) — key indicators of 60 percent that earned recognition in 2016. This means that 217 of patient satisfaction — and exceeded the national benchmark on our home health locations were named in this annual ranking of the all seven “Hospice Item Set” quality measures. These measures top-performing home health agencies in the United States — with 56 — required by CMS — are designed to measure the hospice locations recognized as top 500, and 21 recognized as top 100. patient/family experience of care and compliance against expected We continue leading our industry in accreditations by The Joint hospice clinical processes. Commission. Less than 15 percent of all home care agencies In addition to exceeding the current CMS quality measures, nationwide earn Joint Commission accreditation. LHC Group the hospice division also exceeded the national benchmark in the remains the only national home health provider that is 100 percent CMS proposed quality measures, which address the number of accredited by the Joint Commission. visits made by various members of the hospice interdisciplinary We continue utilizing dashboards and internal reporting tools to group within the last three-to-seven days of the patient’s life. obtain real-time data — allowing our Home Office quality teams and At our extended care hospitals, we provide care for patients performance improvement coordinators in the field to help individual who are critically ill and suffering with medically complex issues agencies address problem areas quickly and raise their level of service. that require intensive services for a longer period of time than Our on-the-ground, highly trained performance improvement in traditional hospitals. Once again, our long-term acute care coordinators help connect our experienced Home Office staff with hospitals (LTACHs), a part of our facility-based services, achieved our local agencies. Working together, they identify concerns, set overall scores better than national averages (compared with priorities, and develop plans to address the specific needs of each similar facilities around the nation) according to the 2017 data individual location. provided by CMS and patient satisfaction surveys conducted by The ability to design and implement improvements in real time Press Ganey. and at the agency level — without relying on more retroactive We will never lose sight of the vital role we play in making the data — helps us achieve and maintain our current position as the world a better place for the people we serve across the nation. in-home healthcare industry’s recognized leader in quality. We are in the business of helping people. We will continue to set LHC Group’s hospice division continued to lead peers in quality the gold standard of quality, and, if needed, be ready and willing measures in 2017. The division met or exceeded national benchmark to be different to achieve that standard. 05759-Narr-R2.indd 6 5 4/12/18 2:48 PM EFFICIENCY Among our greatest responsibilities here at LHC Group is that of providing and growing value for our partners, patients, employees, shareholders, and communities. All of these stakeholders have demonstrated their commitment to stand with us in our mission to reach even more people with quality healthcare. By every measure imaginable, we lived up to this trust with disciplined stewardship and allocation of our capital to investments that will fuel our organic and external growth for years to come. We also demonstrated another year of strong growth in revenues and earnings while keeping our balance sheet in great shape — delivering on our mutual goals of maximizing current financial growth and sustaining long-term success. I would like to share some of our more important financial highlights: • For 2017, net service revenues increased 17.2 percent to $1.07 billion — pushing us over the symbolic billion-dollar milestone for the first time in our history. This revenue growth far exceeded the average increase of 9.9 percent for the S&P 500. CONSOLIDATED GENERAL AND ADMINISTRATIVE EXPENSE (Expressed as percentage of net service revenue) 33.0% 32.5% 32.0% 31.5% 31.0% 30.5% 30.0% 29.5% 29.0% 28.5% 28.0% 6 • On December 31, 2017, LHC Group’s return on assets was 7.1 percent, compared with an average of 2.5 percent for the S&P 500. • While we have faced consistent headwinds in Medicare reimbursements over the past several years, we were once again successful across our organization in achieving more with less overhead expense. For 2017, our general and administrative expenses were 27.6 percent of revenue after adjusting for one-time merger and acquisition costs — down from 29.6 percent of revenue in 2016, as we have continued to leverage substantial investments in technology and implemented our proven model across recently acquired locations. I cannot overstate how great an accomplishment this is for us, and how important it is to ensuring that our patients and their families receive the highest levels of clinical quality. • Our balance sheet continued to have little debt, with a current leverage ratio of 1.4x at year-end compared with an average leverage ratio of 4.4x for the S&P 500 companies. Even after our expected merger with Almost Family, we are anticipating that our leverage will remain under 1.5x. GROWTH Growth is not the only measure of success, but it is an indispensable and never-ending pursuit of any thriving organization. As a leading healthcare provider for communities around the nation, we have a responsibility to continue pursuing opportunities for growth and expansion in conjunction with our mission, goals, and strategic outlook. Growth — in the form of both new partnerships and acquisitions — is vital to the continued health of our organization. Vigilance in the pursuit of opportunity enables us to fulfill our duty to stakeholders, employees, and, most importantly, to the patients and families who depend on us to remain strong and be there to meet their healthcare needs. As 2017 came to an end, our company operated almost 450 locations across all our service lines in 27 states around the nation. We operated joint venture partnerships with 74 health systems comprising 250 2012 2013 2014 2015 2016 2017 hospitals serving communities, towns, and cities nationwide. 05759-Narr-R1.indd 7 4/10/18 2:19 PM LOCATIONS 2014 2015 2016 2017 340 363 376 ONE COMPANY. ONE FAMILY. ONE FOCUS. On April 1, 2018, LHC Group and Almost Family — two of the in-home healthcare sector’s most established and recognized leaders — finalized an all-stock “merger of equals.” We are now one family of healthcare providers with one focus — providing 442 quality care to people and communities around the nation. With the merger, LHC Group operates more than 780 locations in 36 states, with approximately 30,000 employees and a licensed service area that covers more than 60 percent A notable achievement occurred in November 2017 with the of the U.S. population aged 65 and over. We have successfully announcement of our intended merger with Almost Family of combined two leadership teams with an industry-wide Louisville, Kentucky. The merger was finalized on April 1, 2018. reputation as the best in their class, a broad spectrum of talent, We are truly thrilled at the prospects this merger holds for LHC deep industry relationships, and a proven track record for Group and Almost Family. With our combined assets, talents, and creating shareholder value. experience, we will enhance service across the continuum of care, As a team of dedicated healthcare providers, we are improve service and financial performance for our joint venture genuinely excited by the promise this holds for our future. At hospital and health system partners, and increase opportunities every level of our organization, the excitement generated by for new partnerships throughout the nation. this momentous milestone is palpable and invigorating. Our company will be positioned as one of the primary Both companies entered this merger in solid condition — consolidators in the fragmented home health and hospice both financially and operationally. LHC Group is now well- industries — and the preferred in-home healthcare partner to positioned to lead the industry’s transition to value-based current and potential hospital joint venture partners as well as reimbursement and highly coordinated care, enhance service referral sources. We will be an innovative healthcare provider across the continuum of care, and deliver outstanding results with the capability to enhance in-home healthcare quality and for our joint venture hospital and health system partners. value for even more seniors, veterans, and other recovering Following the merger, our combined home health, hospice, patients across America. and personal care resources include more than 570 home Our joint venture partnership model is a tested and proven health locations, more than 105 hospice locations, and more success, and we will continue that strategy with hospitals and than 85 personal care locations across our 36-state footprint. health systems. Organic growth — at the local level in cities Post-closing, our continued low leverage means we and towns across America — will also continue as a key focus are well-positioned to execute upon a robust pipeline of for our organization. It is ingrained in our mission to reach as acquisitions and joint venture opportunities. Both companies many individuals as possible with quality in-home healthcare, have been very active in pursuing these joint ventures, and our and it reflects our focus on communities and on maintaining and strengthening local brands. CONTINUED ON PAGE 9 05759-Narr-R1.indd 8 7 4/10/18 2:19 PM LHC Group states We accomplish our mission by providing support for our for LHC Group. Here are a few highlights: acquired agencies while allowing the autonomy to adapt and • In April, LHC Group entered into a home health and hospice function in their respective market. For our hospital and health joint venture with Pleasant Valley Hospital in West Virginia. system partners, we provide customized solutions based on their Pleasant Valley Hospital is a 101-bed, not-for-profit hospital specific needs. that, in partnership with Cabell Huntington Hospital and We work alongside the nation’s leading hospitals and health Marshall University Joan C. Edwards School of Medicine, systems, and our joint venture model is recognized across the provides quality healthcare through a wide range of industry for producing results — reducing avoidable readmissions, medical services and specialties to residents of Mason and improving clinical outcomes, and enhancing operational performance. Jackson counties in West Virginia, and Gallia and Meigs The year 2017 saw many notable acquisitions and partnerships counties in Ohio. 8 05759-Narr-R1.indd 9 4/10/18 2:19 PM • In June, LHC Group joined Baptist Memorial Health Care in a joint venture to enhance home health and hospice services in Tennessee and Mississippi — with possible future ONE COMPANY. ONE FAMILY. ONE FOCUS. CONTINUED FROM PAGE 7 expansion into Arkansas. Baptist Memorial Health Care, shareholders should expect to see even more activity here based in Memphis, is a 12-hospital system spanning a than in the past. We are also very enthusiastic about the three-state area. healthcare innovation (HCI) business that Almost Family • In July, LHC Group added a stand-alone home health formed several years ago to pursue complementary and location in Murray, Kentucky, to our current joint venture innovative strategies related to home healthcare-provided partnership with LifePoint Health. homes — but outside of the more traditional home health, • In September, LHC Group and CHRISTUS Health finalized hospice, and personal care operations. a new joint venture involving home health, hospice, and To capture the strategic benefits of the merger, we facility-based services across four states. The JV includes worked diligently in combining our two companies into one 23 service locations of CHRISTUS Health — 10 home health family. This was not an overnight process, but it is a process agencies, five hospice programs, one community-based that we do very well. Although confident in our track record home care service, one inpatient hospice unit, and six of integrating acquisitions and joint ventures successfully, LTACHs. we began focusing on the important aspect of integration • In December, LHC Group and Erlanger Health System planning well in advance — during the comprehensive due finalized a new joint venture for home health and diligence efforts conducted prior to signing the merger community-based services in Chattanooga and agreement in November 2017. southeast Tennessee. The JV includes a Chattanooga Through those rigorous and dedicated efforts, we facility providing both skilled home healthcare and have been working diligently to plan for the integration non-skilled, community-based services, further of systems, processes, and personnel, as well as working expanding LHC Group’s joint venture presence and to educate and encourage the approximately 30,000 services footprint in the state of Tennessee. combined employees who are the face of our organization Erlanger Health System, based in Chattanooga, among the people we are privileged to serve. Tennessee, operates four acute-care hospitals in Yes, LHC Group is now a much larger organization than that state. ETHICS we were in 2017, but our values, purpose, and inner essence of integrity and empathy for the people we serve remains as individually focused as they were in 1994, when one nurse decided to check in on four neighboring patients after they At LHC Group, we remind ourselves every day how vitally important had been discharged from the local hospital. it is to maintain the highest standards of integrity, honesty, and We were born in small-town America, with a mission to responsibility. We cannot stress enough the importance of always serve those in need. This is why we exist. This is why we doing the right thing, without exception. Compliance with the persist. This is why — no matter how much we achieve — law, LHC Group’s Code of Conduct and Ethics, and policies and we will never waiver in our duty to set the standard for procedures is the responsibility of every employee at every level healthcare service in our industry. of our organization — without exception. 05759-Narr-R1.indd 10 9 4/10/18 2:19 PM “Our philosophy of a strong work ethic, integrity, humility, and overall excellence will continue to guide us as we embrace our expanding role as one of the nation’s most influential in-home healthcare providers.” Our legacy and ability to continue achieving long-term end-of-episode audit process is present at each agency to review sustainable success depends upon our everyday behaviors and each claim prior to its release for billing. Each one of our audit choices. At each individual agency in communities across the programs includes integrated action plans. nation, our team members understand that it is always important LHC Group’s comprehensive program stands as the example of to be honest and truthful in everything they do, in every instance, excellence in our industry. regardless of the circumstances or pressures. We are proud of our reputation as a leader in compliance. On When we take integrity-based action every day, we reinforce numerous occasions, the National Association for Home Care and build on a legacy where success is defined and measured by has invited LHC Group to present on the effectiveness of our both our performance and our adherence to the values that have compliance program. always been the bedrock of our organization. The year 2017 was another great one for LHC Group, and Operating from a premise of integrity and respect will always I look forward to the many ways we will continue leading the be more than words to us. Our values are our filter and guiding improvements and adaptations our industry needs as we move light for the work we do every day, and for our decisions, our forward. LHC Group will lead by example. Our philosophy of conversations, and the assumptions we make about people. A a strong work ethic, integrity, humility, and overall excellence will focus on our core foundation of integrity — as we seek to achieve continue to guide us as we embrace our expanding role as one positive outcomes for our team and our patients — helps us build of the nation’s most influential in-home healthcare providers. a legacy of success that will far outlive our current tenure as In doing so, we will lead our employees, our company, and our in-home healthcare leaders. industry through the maze of change to reach even more people with In demonstrating our never-ending commitment to compliance quality healthcare, achieve superior results, and succeed together. and integrity, we increased our resources in 2017 and now have a dedicated staff of 27 full-time employees focused entirely on Sincerely, compliance. The staff includes nine full-time registered nurses dedicated to compliance auditing and monitoring. And over the past four years our company has earmarked a budget of more than $2 million per year solely for the efforts of our Compliance Department. We also continue our agency-level focused compliance audit program, targeting areas identified by data mining, compliance Keith G. Myers reports to the hotline, or other means. In addition, our Chairman and CEO 10 05759-Narr-R2.indd 11 4/12/18 2:48 PM 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 before income taxes and noncontrolling interest Income tax expense Net income Less net income attributable to noncontrolling interests Year Ended December 31 2017 2016 $1,072,086 675,810 396,276 9,484 310,539 1,511 60 74,682 (3,876) 524 71,330 10,994 60,386 10,274 $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 Net income attributable to LHC Group’s common stockholders $50,112 $36,583 Earnings per share – basic: Net income attributable to LHC Group’s common stockholders $2.83 $2.08 Earnings per share – diluted: Net income attributable to LHC Group’s common stockholders $2.79 $2.07 Weighted average shares outstanding: Basic Diluted 17,715,992 17,961,018 17,559,477 17,682,820 05759-Narr-R3.indd 12 11 4/13/18 12:46 PM L E A D I N G T H E C H A N G E 2017 Form 10-K 05759-LHC.indd 1 4/4/18 4:23 PM 05759-LHC.indd 2 4/4/18 4:23 PM 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 (cid:31) For the ﬁscal year ended December 31, 2017 or (cid:31) 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 (cid:31) No (cid:31) 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 (cid:31) No (cid:31) 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 (cid:31) 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 (cid:31) 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. (cid:31) 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 (cid:31) No (cid:31) 3 Large accelerated ﬁler (cid:31) Accelerated ﬁler (cid:31) Non-accelerated ﬁler (cid:31) Smaller reporting company (cid:31) Emerging growth company (cid:31) 3 Indicate by check mark whether the registrant is a shell company (as deﬁned in Rule 12b-2 of the Act). Yes (cid:31) No (cid:31) If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised ﬁnancial accounting standards provided pursuant to Section 13(a) of the Exchange Act. (cid:31) As of June 30, 2017, the aggregate market value of the registrant’s common stock held by non-afﬁliates of the registrant was $1.1 billion 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. There were 18,285,192 shares of common stock, $0.01 par value, issued and outstanding as of February 26, 2018. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant’s Annual Report to Stockholders for the ﬁscal year ended December 31, 2017 are incorporated by reference in Part II of this Annual Report on Form 10-K. Portions of the Registrant’s Proxy Statement for its 2018 Annual Meeting of Stockholders are incorporated by reference in Part III of this Annual Report on Form 10-K. 05759-LHC.indd 3 4/4/18 4:23 PM 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . 44 Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 Changes In and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . 64 Disclosure Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 Directors, Executive Ofﬁcers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 Security Ownership of Certain Beneﬁcial Owners and Management and Related Stockholder Matters . . . . . . . 68 Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 Exhibits, and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Form 10-K 05759-LHC.indd 4 4/4/18 4:23 PM 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . 44 Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 Changes In and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . 64 Disclosure Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 Directors, Executive Ofﬁcers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 Security Ownership of Certain Beneﬁcial Owners and Management and Related Stockholder Matters . . . . . . . 68 Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 Exhibits, and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cautionary Statement Regarding Forward-Looking Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 the 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 necessarily depend upon future events. The words “may,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “foresee,” Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 “estimate,” “predict,” “potential,” “intend,” and similar expressions are intended to identify forward-looking statements. Speciﬁcally, this Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Annual Report on Form 10-K contains, among others, forward-looking statements about: LEADING THE CHANGE National Growth – Community Focus 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 • our expectations regarding ﬁnancial condition or results of operations for periods after December 31, 2017; • our critical accounting policies; • our business strategies and our ability to grow our business; • our participation in the Medicare and Medicaid programs; • the reimbursement levels of Medicare and other third-party payors; • the prompt receipt of payments from Medicare and other third-party payors; • our future sources of and needs for liquidity and capital resources; • the effect of any regulatory changes under the current 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; • the impact of changes in or future interpretations of fraud, anti-kickback or other laws; • that the required stockholder approvals of the proposed transaction with Almost Family, Inc. (“Almost Family”) may not be obtained; • that the other condition(s) to closing of the proposed transaction with Almost Family may not be satisﬁed; • the length of time necessary to consummate the proposed transaction with Almost Family, which may be longer than anticipated for various reasons; • that the businesses of the Company and Almost Family will not be integrated successfully; • that the cost savings, synergies, growth and other beneﬁts from the proposed transaction with Almost Family may not be fully realized or may take longer to realize than expected; • the diversion of management time on issues associated with the proposed transaction with Almost Family; • that the Company or Almost Family may be unable to obtain all other regulatory approvals in connection with the proposed transaction; • that costs associated with the integration of the businesses of the Company and Almost Family are higher than anticipated; and • litigation risks related to the proposed transaction with Almost Family. 05759-LHC.indd 5 4/4/18 4:23 PM Form 10-K Part I 5 LHC GROUP 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 (i) 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 or, (ii) with respect to the risks associated with the proposed transaction with Almost Family, under the heading “Risk Factors” in the deﬁnitive joint proxy statement/prospectus that is included in the registration statement on Form S-4 that was ﬁled by the Company with the SEC in connection with the proposed transaction, 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. 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, 2017, through our wholly- and majority-owned subsidiaries, equity joint ventures and controlled afﬁliates, we operated 442 service providers in 27 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, 2017, we operated 318 home health service locations, of which 159 are wholly-owned by us, 153 are majority-owned by us through equity joint ventures, three are under license lease arrangements, and the operations of the remaining three 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, 2017, we operated 91 hospice locations, of which 45 are wholly-owned by us, 44 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, 2017, we operated 12 locations, of which 10 are wholly-owned by us and two are majority-owned by us through equity joint ventures. 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, 2017, our LTACHs had 353 licensed beds. We operated 11 LTACHs with 15 locations, of which all but one are located within host hospitals. As part of our facility-based services segment, we also own and operate two pharmacies, a family health center, a rural health clinic, and two physical therapy clinics. Of these 21 facility-based services locations, eight are wholly-owned by us, 12 are majority-owned by us through equity joint ventures, and one is managed by us. 6 Form 10-K Part I 05759-LHC.indd 6 4/4/18 4:23 PM Our net service revenue by segment for the years ended December 31, 2017, 2016 and 2015 was as follows (amounts in thousands): LEADING THE CHANGE National Growth – Community Focus Year Ended December 31, Home Health Services Hospice Services Community-Based Services Facility-Based Services Consolidated Net Service Revenue 2017 2016 2015 $ 783,507 159,197 46,909 82,473 $ 1,072,086 $ 665,896 134,948 43,891 70,088 $ 914,823 $ 613,188 85,854 41,202 76,122 $ 816,366 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. Proposed Merger with Almost Family On November 15, 2017, we announced the execution of an Agreement and Plan of Merger (the “Merger Agreement”) entered into among the Company, Almost Family, Inc. (“Almost Family”), and Hammer Merger Sub, Inc. (“Merger Sub”), a wholly owned subsidiary of the Company, providing for a “merger of equals” business combination of the Company and Almost Family. The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, Merger Sub will be merged with and into Almost Family (the “Merger”), with Almost Family continuing as the surviving corporation and as a wholly-owned subsidiary of the Company. Under the terms of the Merger Agreement, which was unanimously approved by both our board of directors and the Almost Family board of directors, the stockholders of Almost Family will be entitled to receive 0.9150 shares of our common stock for each share of Almost Family common stock, plus the cash equivalent of any fractional share. Upon the closing of the proposed Merger, the Company stockholders will own approximately 58.5% and the Almost Family stockholders will own approximately 41.5% of the combined company. In connection with the proposed Merger, we ﬁled with Almost Family a deﬁnitive joint proxy statement/prospectus with the SEC on February 13, 2018. The deﬁnitive joint proxy statement/prospectus was also included in a registration statement on Form S-4 that was ﬁled by us and declared effective by the SEC on February 12, 2018. The deﬁnitive joint proxy statement/prospectus relates to a special meeting of stockholders to be held by each the Company and Almost Family on March 29, 2018 to vote on matters in connection with the proposed Merger. The deﬁnitive joint proxy statement/prospectus contains additional important information concerning the proposed transaction and can be accessed on the SEC’s website. On February 22, 2018, we issued a joint press release with Almost Family announcing that the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (“HSR Act”), with respect to the proposed Merger, has expired, satisfying one of the important conditions to the Merger. The Merger is expected to close on April 1, 2018, subject to the approval of both companies’ stockholders and the satisfaction of other customary closing conditions. See Part I, Item A. Risk Factors in this Annual Report on Form 10-K for additional information. 05759-LHC.indd 7 4/4/18 4:23 PM Form 10-K Part I 7 LHC GROUP Business Strategy Our objective is to become the leading provider of home health, hospice, community-based services, and LTACHs 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. In addition, we 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 aim to continue entering into joint ventures with hospitals to provide our current post-acute care services, to their patients upon discharge from the hospital setting. 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 care, 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 clinical pathways to treat chronic diseases and conditions, including diabetes, hypertension, arthritis, Alzheimer’s disease, low vision, spinal stenosis, Parkinson’s disease, osteoporosis, complex wounds, 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. 8 Form 10-K Part I 05759-LHC.indd 8 4/4/18 4:23 PM LEADING THE CHANGE National Growth – Community Focus 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 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 rural health clinic, two physical therapy providers that staff both facilities and outpatient clinics, and one retail pharmacy. 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, 2017, 2016 and 2015, respectively, is found in Note 11 to the Consolidated Financial Statements included in this Annual Report on Form 10-K. 05759-LHC.indd 9 4/4/18 4:23 PM Form 10-K Part I 9 LHC GROUP Our home health agencies are operated in one segment that is separated into multiple geographical regions and further separated into individual operating areas. Our hospice agencies are operated in one segment that is separated into multiple geographical regions. Our community-based agencies are operated in one segment separated into multiple geographic regions. 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 health agencies, hospice agencies, and community-based agencies are licensed and certiﬁed by the state and federal governments. As of December 31, 2017, 302 of our 318 home health service locations and 77 of our 91 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 separated into multiple geographic regions. 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, 2017, we had 74 equity joint ventures including 66 with hospital systems, which are comprised of 165 hospitals, four with physicians, and four 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 10 Form 10-K Part I 05759-LHC.indd 10 4/4/18 4:23 PM LEADING THE CHANGE National Growth – Community Focus 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. License Leasing Agreements As of December 31, 2017, 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 2017 Current Monthly Fee Increase in Monthly Fee Initial Termination Dates 1 1 1 $19,294 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 2017 with a 1 year automatic renewal 2017 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, 2017, we had four management services agreements under which we manage the operations of three home nursing agencies and one LTACH. We do not have ownership interest in these providers. Instead, for a fee, we provide billing, management, and other consulting services suited to and designed for the efﬁcient operation of the providers. We are responsible for the costs associated with the locations and personnel required for the provision of services. We have three different types of agreements. One management services agreement provides compensation based on a percentage of cash collections for the agency. Another agreement mandates that we are reimbursed for operating expenses and receive a percentage of the operating net income of the agency. The ﬁnal two agreements provide a base monthly fee in addition to reimbursement for operating expenses. The terms of these agreements vary. Two of the management service agreements have a term of ﬁve years, with an option to renew for an additional ﬁve-year term. Renewal for these two agreements is automatic unless either party gives written notice of termination. The term of another agreement is for an initial three year period with an automatic renewal for successive one year terms unless terminated by either party. The ﬁnal agreement expires upon the earlier of (i) the effective date of the proposed acquisition, (ii) cancellation of the proposed acquisition, or (iii) termination at any time by mutual written consent of the parties. 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 (“MedPac”), an independent agency that advises Congress on various Medicare issues, there were approximately 12,416 Medicare-certiﬁed home nursing agencies in the United States in 2015. MedPac estimated that in 2015 approximately 17% of Medicare-certiﬁed home health agencies provided a majority of their services in rural areas, and 78% 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. 05759-LHC.indd 11 4/4/18 4:23 PM Form 10-K Part I 11 LHC GROUP 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. 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. 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: • 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, overseeing and evaluating the effectiveness of the quality plans and initiatives, and 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 patients’ and/or family members’ 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. 12 Form 10-K Part I 05759-LHC.indd 12 4/4/18 4:23 PM LEADING THE CHANGE National Growth – Community Focus 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 ratings received by our home health agencies, we continue to strive to improve our results. As of December 31, 2017, 98% of our 318 home health agencies were rated 4 stars or greater. 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. 05759-LHC.indd 13 4/4/18 4:23 PM Form 10-K Part I 13 LHC GROUP 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. 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. As of December 31, 2017, all of our home nursing and hospice locations utilize our point of care (“POC”) system. 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. 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 71.0%, 74.5% and 74.5% of our net service revenue for the years ended December 31, 2017, 2016 and 2015, 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. 14 Form 10-K Part I 05759-LHC.indd 14 4/4/18 4:23 PM LEADING THE CHANGE National Growth – Community Focus 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 base payment adjustments for case-mix and geographic wage differences and 2% sequestration reduction for episodes beginning after March 31, 2013. In addition, ﬁnal adjustments may reﬂect one of four retroactive adjustments to ensure the adequacy and effectiveness of the total reimbursement: (a) an outlier payment if the patient’s care was unusually costly; (b) a low utilization adjustment if the number of visits was fewer than ﬁve; (c) a partial payment if the patient transferred to another provider or transferred from another provider before completing the episode; (d) a payment adjustment based upon the level of therapy services required. 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 $2,989.97 per 60-day episode for the year ended December 31, 2017. 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. 05759-LHC.indd 15 4/4/18 4:23 PM Form 10-K Part I 15 LHC GROUP Effects of the Bipartisan Budget Act of 2018 on Home Health On February 9, 2018, President Trump signed into law the Bipartisan Budget Act of 2018 (the “BBA 2018”), which included the following provisions impacting our home health business: • A new case mix model • Mandates the development of a new case mix model in a transparent process involving Centers for Medicare and Medicaid Services (“CMS”), the home health industry, and the Congressional committees of jurisdiction. • The new model will use a 30-day payment period (leaving intact the 60-day assessment and order process), and must be implemented in a budget-neutral manner beginning in 2020 and will not include the use of therapy visits as a determinant. Congressional Budget Ofﬁce (“CBO”) scored this at zero savings and zero cost due to the budget-neutrality requirement. • CMS is speciﬁcally instructed to consider the use of alternative payment reform recommendations like the “Risk Based Grouper Model” proposed in lieu of the Home Health Groupings Model (“HHGM”) proposed in the preliminary rule. • The new model must be developed on a budget-neutral basis as opposed to the HHGM, which was proposed on a non-budget- neutral basis in the preliminary rule. Further, any behavioral adjustments must now be transparent and subject to public notice, comment, and the rule-making process. The HHGM, as proposed, footnoted a reference to behavioral adjustments that were not deﬁned and not transparent in its underlying assumptions period in 2017. • Restoration of the 3% rural add-on • Restores the 3% home health rate add-on for home health patients who reside in rural geographies, effective January 1, 2018. The add-on rate will be phased downward over a ﬁve-year period following a formula speciﬁed in the legislation. • Restores an important protection of access to Medicare home health care for rural America, and provides sufﬁcient time for the industry to produce additional compelling evidence to demonstrate the positive impact of the rural add-on payment to rural Medicare beneﬁciaries. • Since its inception, the rural rate has been repeatedly renewed by Congress in recognition of the continued need. • Face-to-face documentation improvements allowing the home health medical record in its entirety to be used in support of the physician’s attestation of medical necessity. • A study is to be conducted by the GAO (Government Accounting Ofﬁce) on Medicare improvements to address the needs of the chronically ill through healthcare services provided at home, including interdisciplinary care management, tele-health, and tele- monitoring for Medicare Advantage plans, requiring states to better integrate Medicare and Medicaid services for the dually-eligible, and the extension and expansion of the Independence at Home Demonstration Program. • A speciﬁc market basket update percentage of 1.5% for ﬁscal year 2020, leaving intact the full market basket update (generally expected to be between 2-3%) for ﬁscal year 2019. Suspends the productivity adjustment in 2020. • Repeal of the Independent Payment Advisory Board, effective upon passage. • Payment rate feasibility study to be conducted concerning the feasibility of a higher payment rate for providers, including home health providers that engage in the management of patients’ chronic conditions. 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. 16 Form 10-K Part I 05759-LHC.indd 16 4/4/18 4:23 PM LEADING THE CHANGE National Growth – Community Focus Medicare reimburses for hospice care using one of four predetermined daily 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. Effective January 1, 2017, hospices will be reimbursed at a higher routine home care rate ($190.55) for days 1 through 60 of a hospice episode of care and a lower rate ($149.82) 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. Effects of BBA 2018 on Hospice The BBA 2018 included the following provisions impacting our hospice business: • Hospice included in Hospital Post-Acute Transfer Policy for early discharges to hospice care. Hospice will be included as a post-acute service subject to the transfer DRG policy, in which acute-care hospitals receive a reduction in payments if they transfer a patient to post-acute care prior to achieving the mean length of stay for the DRG. Currently, home health, skilled nursing facilities, and LTACHs are included within the policy, and the BBA 2018 adds hospice as a post-acute provider subject to the policy. • Physician Assistants recognized as attending physicians to serve hospice patients, effective January 1, 2019. 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 predetermined 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. 05759-LHC.indd 17 4/4/18 4:23 PM Form 10-K Part I 17 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, 2017, we had a total of 15 LTACH facilities, with 353 licensed beds. Fourteen of our LTACH facilities were classiﬁed as HwHs and one was classiﬁed as freestanding. Of the ﬁfteen facilities, ten were located in Metropolitan Statistical Area (“MSA”) or urban areas and ﬁve 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 2018 Rates On August 2, 2017, CMS posted a display copy of its ﬁnal rule for the annual update to Medicare payment rates and policies for the Fiscal Year 2018 inpatient hospitals prospective payment system and the LTACH PPS. CMS estimates the impact of the proposed rule will result in a 2.4% overall reduction in LTACH spending. The LTACH standard federal rate is reduced to $41,430.56 from $42,476.41. CMS is also proposing a 12 month administrative moratorium on application of the 25 Percent Rule beginning with the expiration of the statutory moratorium after September 30, 2017. The 25 Percent Rule will not be applied to LTACHs for discharges occurring on or before September 30, 2018. CMS also adopted certain adjustments to high cost outlier and short stay outlier policies. CMS ﬁnalized its proposal for a new severe wound exception to be paid at standard Federal LTACH rates instead of site neutral payments for grandfathered LTACHs. CMS changed the separateness and control restrictions for certain co-located IPPS-exempt hospitals. The Final Rule also adds three new quality measures and discontinues two quality measures. CMS also ﬁnalized its proposal to implement collection of standardized patient assessment data under the IMPACT Act on functional status, cognitive function, cancer treatments, respiratory treatments, transfusions and other special services effective for admissions on/after April 1, 2019. 18 Form 10-K Part I 05759-LHC.indd 18 4/4/18 4:23 PM LEADING THE CHANGE National Growth – Community Focus Effects of BBA 2018 on LTACHS The impact of BBA 2018 on our LTACH business includes a two-year extension of site-neutral blended payments rates for certain long-term care hospital discharges, based upon a 4.6% reduction in site-neutral payments over 7 years. 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, 2017, our managed care contracts included 182 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. 05759-LHC.indd 19 4/4/18 4:23 PM Form 10-K Part I 19 LHC GROUP 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. 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 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. 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. 20 Form 10-K Part I 05759-LHC.indd 20 4/4/18 4:23 PM LEADING THE CHANGE National Growth – Community Focus “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. 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 operations comply with the Stark Law. The Stark Law also includes an exception for a physician’s ownership or investment interest in certain entities through the ownership of stock 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, 2017, 2016 and 2015, 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. 05759-LHC.indd 21 4/4/18 4:23 PM Form 10-K Part I 21 LHC GROUP 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. 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 as well as persons who contract with excluded persons may be penalized. 22 Form 10-K Part I 05759-LHC.indd 22 4/4/18 4:23 PM LEADING THE CHANGE National Growth – Community Focus 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. 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. We cannot predict the ultimate outcome of any regulatory and other governmental and internal audits and investigations. While such audits and investigations are the subject of administrative appeals, the appeals process, even if successful, may take several years to resolve. 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. The Department of Justice, CMS, or other federal and state enforcement and regulatory agencies may conduct additional investigations related to the Company’s businesses in the future. These audits and investigations have caused and could potentially continue to cause delays in collections, recoupments, retroactive adjustment to amounts previously paid from governmental payors. Currently, the Company has recorded $16.9 million in other assets, which are from government payors related to the disputed ﬁnding of pending ZPIC audits. Additionally, these audits may subject the Company to sanctions, damages, extrapolation of damage ﬁndings, additional recoupments, ﬁnes, and other penalties (some of which may not be covered by insurance), termination from the Medicare and Medicaid programs, bars on Medicare and Medicaid payments for new admissions, any of which may, either individually or in the aggregate, have a material adverse effect on the Company’s 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 2017. 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. 05759-LHC.indd 23 4/4/18 4:23 PM Form 10-K Part I 23 LHC GROUP 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, 2017. 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 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 2018. 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 are 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, 2017, the Joint Commission had accredited 302 of our 318 home health agencies and 77 of our 91 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, 2017, we had 14,554 employees, of which 9,315 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 respective 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 24 Form 10-K Part I 05759-LHC.indd 24 4/4/18 4:23 PM LEADING THE CHANGE National Growth – Community Focus 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. 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. 05759-LHC.indd 25 4/4/18 4:23 PM Form 10-K Part I 25 LHC GROUP 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 business, in particular changes in compliance requirements or in reimbursement rates under Medicare, could have a material effect on our business 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 business or ﬁnancial performance. The appointment of Alex Azar as the new Secretary of the Department of Health and Human Services (HHS) may also affect our business. During his conﬁrmation hearings, Mr. Azar expressed his personal opinions concerning the need to improve the way that Medicare and Medicaid reimburse for end-of-life care and praised the role that home health companies play in efforts to lower government health spending. While we look forward to working with Secretary Azar and HHS under his leadership, we cannot anticipate the effect that the appointment of Secretary Azar will have on HHS policy and/or Medicare or Medicaid reimbursements. The impact of the recent signiﬁcant federal tax reform on the combined company is uncertain and may signiﬁcantly affect the operations of the combined company. On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act (the “Tax Act”) into law. The Tax Act is the most comprehensive tax legislation signed into law in over three decades and makes broad and complex changes to the U.S. tax code. The Tax Act will signiﬁcantly change how our earnings are taxed, including, among other items, (1) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent, (2) repealing the corporate alternative minimum tax (“AMT”) and changing how existing AMT credits can be utilized, (3) temporarily providing for elective immediate expensing for certain depreciable property, (4) creating a new limitation on deductible interest expense, and (5) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017. While we currently expect the Tax Act to have a long-term positive impact on our net income, we are continuing to evaluate the impact of the Tax Act on our current and prospective business and such impact remains uncertain. Furthermore, our ﬁnancial results may be negatively impacted should tax rates be increased in the future or otherwise adversely affected by changes in allowable expense deductions. 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, 2017, 2016 and 2015, we received 71.0%, 74.5% and 74.5%, 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. 26 Form 10-K Part I 05759-LHC.indd 26 4/4/18 4:23 PM LEADING THE CHANGE National Growth – Community Focus 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. 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. 05759-LHC.indd 27 4/4/18 4:23 PM Form 10-K Part I 27 LHC GROUP 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. 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’ abilities 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. 28 Form 10-K Part I 05759-LHC.indd 28 4/4/18 4:23 PM LEADING THE CHANGE National Growth – Community Focus Our revenue may be negatively impacted by a failure to appropriately document services, resulting in 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. The 25 Percent rule will not be applied to LTACHs for discharges occurring on or before September 30, 2018. 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. As described in Item 1 above, the BBA 2018 extended the site neutral phase-in period for an additional two years, based upon a 4.6% reduction in site neutral payments over seven years. 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. 05759-LHC.indd 29 4/4/18 4:23 PM Form 10-K Part I 29 LHC GROUP 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. 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 the moratorium in Louisiana will be extended. In addition, we cannot predict 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, 2017, 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. 30 Form 10-K Part I 05759-LHC.indd 30 4/4/18 4:23 PM LEADING THE CHANGE National Growth – Community Focus 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 (other than the Merger), 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. In addition, we must obtain the consent of certain of the lenders under our credit facility prior to the consummation of the Merger with Almost Family, as the Merger would constitute a default under our credit facility. Almost Family’s credit facility contains similar consent requirements and default provisions that would be triggered by the Merger. As a result, we intend to amend or reﬁnance our credit facility, potentially seek additional sources of ﬁnancing, and terminate Almost Family’s credit facility in connection with the closing of the Merger. We intend to pay the outstanding borrowings and accrued and unpaid interest under Almost Family’s credit facility and certain debt issuance costs and Merger-related fees and expenses from the proceeds of such amendment or reﬁnancing. Although we currently believe that we will be able to obtain any necessary amendment or reﬁnancing of our credit facility at a reasonable cost, there can be no assurance that we will succeed in obtaining such amendment or reﬁnancing on favorable terms, if at all, which could signiﬁcantly increase our future interest expense and adversely impact our results of operations and the anticipated beneﬁts from the Merger. 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. 05759-LHC.indd 31 4/4/18 4:23 PM Form 10-K Part I 31 LHC GROUP 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, 2017, our facilities in Louisiana, Mississippi, Tennessee, Alabama, and Arkansas accounted for approximately 55.0% 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. 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. 32 Form 10-K Part I 05759-LHC.indd 32 4/4/18 4:23 PM LEADING THE CHANGE National Growth – Community Focus 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. 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. 05759-LHC.indd 33 4/4/18 4:23 PM Form 10-K Part I 33 LHC GROUP 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 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. 34 Form 10-K Part I 05759-LHC.indd 34 4/4/18 4:23 PM LEADING THE CHANGE National Growth – Community Focus 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. 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. Form 10-K Part I 35 05759-LHC.indd 35 4/4/18 4:23 PM LHC GROUP 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 third-party software information systems for billing and maintaining patient claim receivables. Our systems require constant maintenance and upgrades 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. 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. 36 Form 10-K Part I 05759-LHC.indd 36 4/4/18 4:23 PM LEADING THE CHANGE National Growth – Community Focus 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 10.5% of our outstanding shares of common stock as of December 31, 2017. 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 us. 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 us. These provisions could also discourage proxy contests and make it more difﬁcult for stockholders to elect directors or cause us to take other corporate actions. We have implemented other anti-takeover provisions or provisions that could have an anti-takeover effect. These provisions and others that our Board of Directors may adopt hereafter, may discourage offers to acquire us and may permit our Board of Directors to choose not to entertain offers to purchase us, even if such offers include a substantial premium to the market price of our common stock. Therefore, our stockholders may be deprived of opportunities to proﬁt from a sale of control. 05759-LHC.indd 37 4/4/18 4:23 PM Form 10-K Part I 37 LHC GROUP 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 February 23, 2018 was approximately 223,874 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, our stockholders’ ability to achieve a return on 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. Risk Factors Related to the Merger with Almost Family While the Merger is pending, we will be subject to business uncertainties that could adversely affect our business and operations. Uncertainty about the effect of the Merger on employees, joint venture partners, third party payors, customers, and other persons with whom we have a business relationship may have an adverse effect on our business, operations, and stock price. During the pendency of the Merger, our existing customers or partners could decide to no longer do business with us. In addition, certain of our projects may be delayed or ceased and business decisions could be deferred. Persons with whom we have a business relationship, such as joint venture partners and third party payors, could also decide to terminate, modify, or renegotiate their relationships with us or take other actions as a result of the Merger that could negatively affect our revenue, earnings, and cash ﬂows. Employee retention may be challenging during the pendency of the Merger, as certain employees may experience uncertainty about their future roles. If key employees depart, our business prior to the Merger, and the business of the combined company following the Merger, could be materially harmed. In addition, stockholders and market analysts could also have a negative perception of the Merger, which could cause a material reduction in our stock price and could also result in (i) our not achieving the requisite vote to approve the issuance of our shares in the Merger and/or (ii) Almost Family not achieving the requisite vote to adopt the Merger. 38 Form 10-K Part I 05759-LHC.indd 38 4/4/18 4:23 PM LEADING THE CHANGE National Growth – Community Focus Failure to complete the Merger could negatively impact our stock prices and the future business and ﬁnancial results. Completion of the Merger is not assured. If the Merger is not completed, our ongoing business and ﬁnancial results may be adversely affected and we will be subject to several risks, including the following: • the price of our common stock may decline to the extent that current market prices reﬂect a market assumption that the Merger will be completed; • having to pay signiﬁcant costs relating to the Merger without receiving the beneﬁts of the Merger, including, in certain circumstances, a termination fee of $30 million or an expense reimbursement of up to $5 million; • negative reactions from customers, stockholders, and market analysts; • the possible loss of employees necessary to operate our business; • we will have been subject to certain restrictions on the conduct of our business, which may have prevented us from making certain acquisitions or dispositions or pursuing certain business opportunities while the Merger was pending, and • the diversion of the focus of our management to the Merger instead of on pursuing other opportunities that could have been beneﬁcial to us and our business. If the Merger is not completed, we cannot assure our stockholders that these risks will not materialize and will not materially adversely affect our business, ﬁnancial results, and stock price. The consummation of the Merger is contingent upon the satisfaction of a number of conditions, including stockholder and regulatory approvals, that are outside of our or Almost Family’s control and that we and Almost Family may be unable to satisfy or obtain or which may delay the consummation of the Merger or result in the imposition of conditions that could reduce the anticipated beneﬁts from the Merger or cause the parties to abandon the Merger. Consummation of the Merger is contingent upon the satisfaction of a number of conditions, some of which are beyond our and Almost Family’s control, including, among others: (i) the adoption of the Merger Agreement by the afﬁrmative vote of the holders of at least a majority of the outstanding shares of Almost Family’s common stock, (ii) the approval of the issuance of shares of our common stock to be issued to the Almost Family stockholders in the Merger by the afﬁrmative vote of a majority of the shares of our common stock present in person or represented by proxy at our special meeting, (iii) the expiration or termination of the required waiting periods under the HSR Act, which expiration occurred on February 21, 2018, (iv) the absence of any order or law prohibiting the Merger or the other transactions contemplated by the Merger Agreement, (v) the effectiveness of the registration statement concerning our common stock to be issued to the Almost Family stockholders in the Merger, (vi) the receipt of certain tax opinions, and (vii) the absence of a material adverse effect with respect to either us or Almost Family (as deﬁned in the Merger Agreement). In addition, several lawsuits have been ﬁled against Almost Family and us challenging the adequacy of public disclosures related to the Merger and adverse rulings in these lawsuits may delay or prevent the Merger from being completed or require us or Almost Family to incur signiﬁcant costs to defend or settle these lawsuits. Any delay in completing the Merger could cause the combined company not to realize, or to be delayed in realizing, some or l of the beneﬁts that we expect it to achieve if the Merger is successfully completed within its expected time frame. The Merger Agreement also requires that we and Almost Family use reasonable best efforts to obtain all necessary or advisable approvals from governmental authorities, including those from a number of the federal, state, and municipal authorities that regulate our business and the business of Almost Family, including in the state New York, which accounts for approximately 7% of Almost Family’s annual revenues. There can be no assurances that these regulatory approvals will be obtained or what conditions may be imposed on the companies in order to obtain such approvals. While these regulatory approvals are not a condition to closing the Merger, the failure to obtain any of these regulatory approvals could impose additional material costs on, or materially limit the revenue of, the combined company following the Merger, including ceasing operations or divesting assets in certain jurisdictions, including in the state of New York. 05759-LHC.indd 39 4/4/18 4:23 PM Form 10-K Part I 39 LHC GROUP The combined company may fail to realize all of the anticipated beneﬁts of the Merger or those beneﬁts may take longer to realize than expected. The combined company may also encounter signiﬁcant difﬁculties in integrating the two businesses. The ability of the combined company to realize the anticipated beneﬁts of the Merger will depend, to a large extent, on the combined company’s ability to successfully integrate the two businesses. The combination of two independent businesses is a complex, costly, and time-consuming process. As a result, the combined company will be required to devote signiﬁcant management attention and resources to integrating our business practices and operations with the business practices and operations of Almost Family. The integration process may disrupt the business of the combined company and, if implemented ineffectively, would restrict the full realization of the anticipated beneﬁts. The failure to meet the challenges involved in integrating the two businesses and to realize the anticipated beneﬁts of the transaction could cause an interruption of, or a loss of momentum in, the activities of the combined company and could adversely impact the business, ﬁnancial condition, and results of operations of the combined company. In addition, the overall integration of the businesses may result in material unanticipated problems, expenses, liabilities, loss of customers, and diversion of the attention of the combined company’s management and employees. The challenges of combining the operations of the companies include, among others: • difﬁculties in achieving anticipated cost savings, synergies, business opportunities, and growth prospects from the combination; • difﬁculties in the integration of operations and systems, including information technology systems; • difﬁculties in establishing effective uniform controls, standards, systems, procedures, and accounting and other policies; business cultures and compensation structures between the two companies; • difﬁculties in the acculturation of employees; • difﬁculties managing the expanded operations of a larger and more complex company; • challenges in keeping existing customers and obtaining new customers; • challenges in attracting new joint venture partners and acquisition targets; • challenges in attracting and retaining key personnel, including personnel that are considered key to the future success of the combined company; and • challenges in keeping key business relationships in place. Many of these factors will be outside of the control of the combined company, and any one of them could result in increased costs and liabilities, decreases in the amount of expected revenue and earnings, and diversion of management’s time and energy, which could have a material adverse effect on the business, ﬁnancial condition, and results of operations of the combined company. In addition, even if the operations of our business and the business of Almost Family are integrated successfully, the full beneﬁts of the transaction may not be realized, including the synergies, cost savings, growth opportunities, or cash ﬂows that are expected, and the combined company will also be subject to additional risks that could impact future earnings. These beneﬁts may not be achieved within the anticipated time frame, or at all. Further, additional unanticipated costs may be incurred in the integration of our business with the business of Almost Family. All of these factors could cause dilution of the earnings per share of the combined company, decrease or delay the expected accretive effect of the Merger, negatively impact the price of the combined company’s stock, impair the ability of the combined company to return capital to its stockholders, or have a material adverse effect on the business, ﬁnancial condition, and results of operations of the combined company. The Merger may not be accretive and may cause dilution of the combined company’s adjusted earnings per share, which may negatively affect the market price of the combined company’s common stock. We currently anticipate that the Merger will be accretive to stockholders of the combine company on an adjusted earnings per share basis in 2018. This expectation is based on preliminary estimates, which may materially change. The combined company could also encounter additional transaction and integration-related costs or other factors such as the failure to realize all of the beneﬁts anticipated in the Merger. All of these factors could cause dilution of the combined company’s adjusted earnings per share or decrease or delay the expected accretive effect of the Merger and cause a decrease in the market value of the combined company’s common stock. 40 Form 10-K Part I 05759-LHC.indd 40 4/4/18 4:23 PM LEADING THE CHANGE National Growth – Community Focus The combined company is expected to incur substantial expenses related to the Merger and our integration with Almost Family. The combined company is expected to incur substantial expenses in connection with the Merger and our integration with Almost Family. There are a large number of processes, policies, procedures, operations, technologies, and systems that must be integrated, including purchasing, accounting and ﬁnance, legal, sales, payroll, pricing, revenue management, research and development, marketing, and beneﬁts. While we have assumed that a certain level of expenses would be incurred, there are many factors beyond our control that could affect the total amount or the timing of the integration expenses. Moreover, many of the expenses that will be incurred are, by their nature, difﬁcult to estimate accurately. These expenses could, particularly in the near term, exceed the savings that the combined company expects to achieve from the elimination of duplicative expenses and the realization of economies of scale and cost savings. These integration expenses likely will result in the combined company taking signiﬁcant charges against earnings following the completion of the Merger, and the amount and timing of such charges are uncertain at present. The future results of the combined company will suffer if the combined company does not effectively manage its expanded operations following the Merger. Following the Merger, the size of the business of the combined company will increase signiﬁcantly beyond the current size of either our business or Almost Family’s business. The combined company’s future success depends, in part, upon its ability to manage this expanded business, which will pose substantial challenges for the management of the combined company, including challenges related to the management and monitoring of new operations and associated increased costs and complexity. There can be no assurances that the combined company will be successful or that it will realize the expected operating efﬁciencies, cost savings, revenue enhancements, and other beneﬁts currently anticipated from the Merger. Furthermore, we have incurred and expect to incur signiﬁcant costs, expenses and fees for professional services and other transaction costs in connection with the Merger. In addition, the Merger could result in additional costs and expenses that were not expected or anticipated, and such costs and expenses could have a material adverse effect on our ﬁnancial condition and results of operation prior to the Merger and of the combined company thereafter. 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. Fourteen 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. 05759-LHC.indd 41 4/4/18 4:23 PM Form 10-K Part I 41 LHC GROUP The following table shows the locations of our home health, hospice, community-based services, and facility-based services facilities by state as of December 31, 2017: Home Health Hospice Services Services Community- Facility-Based Based Services Services Louisiana Mississippi Tennessee Kentucky Alabama Arkansas West Virginia Texas Maryland Virginia Washington Illinois Georgia Pennsylvania North Carolina Arizona Colorado Michigan Idaho Florida Oregon Ohio California Missouri South Carolina Rhode Island Wisconsin 44 35 33 30 27 20 18 14 11 9 9 9 8 8 6 6 5 4 4 4 4 3 3 1 1 1 1 318 11 11 7 — 7 7 4 3 — 4 4 — 11 1 5 1 — 3 2 — — 1 — 5 4 — — 91 — — 1 2 — 1 — 1 1 — 1 — — — 3 — — — — — — — — 2 — — — 12 14 — — — — 3 — 3 — — — — 1 — — — — — — — — — — — — — — 21 Item 3. Legal Proceedings. We provide services in a highly regulated industry and are a party to various proceedings (regulatory and other governmental), and internal audits and investigations in the ordinary course of business (including audits by Zone Program Integrity Contractors (“ZPICs”), 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. While such audits and investigations are the subject of administrative appeals, the appeals process, even if successful, may take several years to resolve. The Department of Justice, CMS, or other federal and state enforcement and regulatory agencies may conduct additional investigations related to our businesses in the future. These audits and investigations have caused and could potentially continue to cause delays in collections and recoupments from governmental payors. Currently, the Company has recorded $16.9 million in other assets, which are from government payors related to the disputed ﬁnding of pending ZPIC audits. Additionally, these audits may subject us to sanctions, damages, extrapolation of damage ﬁndings, additional 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. 42 Form 10-K Part I 05759-LHC.indd 42 4/4/18 4:23 PM LEADING THE CHANGE National Growth – Community Focus On January 18, 2018, Jordan Rosenblatt, a purported shareholder of Almost Family, Inc. (“Almost Family”) ﬁled a complaint for Violations of the Securities Exchange Act of 1934 in the United States District Court for the Western District of Kentucky, styled Rosenblatt v. Almost Family, Inc., et al., Case No. 3:18-cv-40-TBR (the “Rosenblatt Action”). The Rosenblatt Action was ﬁled against the Company, Almost Family, Almost Family’s board of directors, and Hammer Merger Sub, Inc. (“Merger Sub”). The complaint in the Rosenblatt Action (“Complaint”) asserts that the Form S-4 Registration Statement (“Registration Statement”) ﬁled on December 21, 2017 contains false and misleading statements with respect to the Merger. The Complaint asserts claims against Almost Family and its board of directors for violations of Section 14(a) of the 1934 Act in connection with the dissemination of the Registration Statement, and asserts claims against the Almost Family board of directors and the Company for violations of Section 20(a) of the 1934 Act as controlling persons of Almost Family. The Rosenblatt Action seeks, among other things, an injunction enjoining the Merger from closing and an award of attorneys’ fees and costs. In addition to the Rosenblatt Action, two additional complaints were ﬁled against Almost Family in the United States District Court for the District of Delaware alleging similar violations as the Rosenblatt Action. While the Company is not named as a party in either of these additional complaints, these additional complaints also seek, among other things, an injunction enjoining both the vote of the Almost Family stockholders with respect to the Merger and the closing of the Merger, monetary damages and an award of attorneys’ fees and costs from Almost Family. We believe that the claims asserted in these lawsuits are entirely without merit and intend to defend these lawsuits vigorously. We are involved in various legal proceedings arising in the ordinary course of business. Although the results of litigation cannot be predicted with certainty, we believe the outcome of pending litigation will not have a material adverse affect, after considering the effect of our insurance coverage, on our consolidated ﬁnancial information. Item 4. Mine Safety Disclosures. Not applicable. 05759-LHC.indd 43 4/4/18 4:23 PM Form 10-K Part I 43 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 February 23, 2018, there were approximately 254 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 2017 and 2016 as quoted by NASDAQ: 2017 Fourth Quarter Third Quarter Second Quarter First Quarter 2016 Fourth Quarter Third Quarter Second Quarter First Quarter High Low $ 72.07 70.92 68.35 54.10 $ 45.70 46.51 43.67 44.10 $ 59.70 57.72 51.76 44.64 $ 32.48 34.90 35.05 33.55 The closing price of our common stock as reported by NASDAQ on February 26, 2018 was $64.97. Performance Graph This item is incorporated by reference from our Annual Report to Stockholders for the ﬁscal year ended December 31, 2017. Issuer Purchases of Equity Securities None. 44 Form 10-K Part I I 05759-LHC.indd 44 4/4/18 4:23 PM LEADING THE CHANGE National Growth – Community Focus 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, 2017. The ﬁnancial data for the years ended December 31, 2017, 2016 and 2015 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, 2017 2016 2015 2014 2013 Consolidated Statements of Operations Data: Net service revenue Gross margin Operating income Net income Net income attributable to LHC Group, Inc.’s common stockholders Net income attributable to LHC Group, Inc.’s common stockholders: Basic Diluted Weighted average shares outstanding: Basic Diluted $ 1,072,086 396,276 74,682 60,386 $ 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 50,112 36,583 32,335 21,837 22,342 $ $ 2.83 2.79 $ $ 2.08 2.07 $ $ 1.86 1.84 $ $ 1.27 1.26 $ $ 1.31 1.30 17,715,992 17,961,018 17,559,477 17,682,820 17,405,379 17,547,531 17,229,026 17,315,333 17,049,794 17,132,751 As of December 31, 2017 2016 2015 2014 2013 Consolidated Balance Sheet Data: Cash Total assets Total debt Total LHC Group, Inc. stockholders’ equity $ 2,849 793,702 144,286 448,868 $ 3,264 614,071 87,796 395,126 $ 6,139 566,054 98,784 354,582 $ 531 491,739 61,008 318,639 $ 14,104 422,226 23,212 293,009 05759-LHC.indd 45 4/4/18 4:23 PM Form 10-K Part I I 45 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 $157.3 million to $1,072.1 million for the year ending December 31, 2017 from $914.8 million for the year ending December 31, 2016. During 2017, we acquired 77 agencies, such that, as of December 31, 2017, we operated 442 locations in 27 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, 2017, we operated 318 home health service locations, of which 159 are wholly-owned by us, 153 are majority-owned or controlled by us through equity joint ventures, three are controlled by us through license lease arrangements and the remaining three 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, 2017, we operated 91 hospice locations, of which 45 are wholly-owned by us, 44 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 elderly, chronically ill, and disabled patients with activities of daily living. As of December 31, 2017, we operated 12 community-based services locations, of which 10 are wholly-owned and two are majority-owned through an equity joint venture. We provide facility-based services principally through our LTACHs. As of December 31, 2017, we operated 11 LTACHs with 15 locations, of which all but one are located within host hospitals. We also operate two pharmacies, a family health center, a rural health clinic, and two physical therapy clinics. Of these 21 facility-based services locations as of December 31, 2017, eight are wholly-owned by us, 12 are controlled by us through equity joint ventures, and one is managed by us. The percentage of net service revenue contributed from each reporting segment for the each of the periods ended December 31, 2017, 2016 and 2015 was as follows: Type of Segment Home Health Services Hospice Services Community-Based Services Facility-Based Services 2017 73.1% 14.8 4.4 7.7 2016 72.8% 14.8 4.8 7.6 2015 75.1% 10.5 5.1 9.3 100.0% 100.0% 100.0% 46 Form 10-K Part I I Management’s Discussion and Analysis of Financial Condition and Results of Operations 05759-LHC.indd 46 4/4/18 4:23 PM LEADING THE CHANGE National Growth – Community Focus Development Activities The following table provides a summary of our acquisitions, divestitures and internal development activities from January 1, 2015 through December 31, 2017. This table does not include the three management services agreements under which we manage the operations of three home nursing agencies and one LTACH, through our home health services segment or facility-based services segment, nor does it include our pharmacies, family health center, rural health clinic, physical therapy clinics through our facility-based services segment. Total at January 1, 2015 Developed Acquired Divested/Merged Total at December 31, 2015 Developed Acquired Divested/Merged Total at December 31, 2016 Developed Acquired Divested/Merged Total at December 31, 2017 Recent Developments Proposed Merger with Almost Family Home Health Agencies Hospice Agencies Community- Based Agencies Long-Term Acute Care Hospitals 277 — 9 (6) 280 5 12 (16) 281 3 43 (12) 315 38 2 17 (1) 56 1 10 (2) 65 1 27 (2) 91 12 — 2 (1) 13 — 1 (3) 11 — 1 — 12 8 — — — 8 — — — 8 — 6 — 14 On November 15, 2017, we announced our entry into the Merger Agreement with Almost Family, providing for a “merger of equals” business combination of the Company and Almost Family. Pursuant to the Merger Agreement, Merger Sub will be merged with and into Almost Family, with Almost Family continuing as the surviving corporation and as a wholly-owned subsidiary of the Company. The Merger is expected to close on April 1, 2018, subject to the approval of both companies’ stockholders and the satisfaction of other customary closing conditions. The proposed Merger would create a nationwide provider of in-home healthcare services with a long track record of successfully partnering with hospitals and health systems led by the most experienced management teams in home health. The name of the combined company will continue to be LHC Group, Inc. and the common stock of the combined company will continue to trade on NASDAQ under the ticker symbol, “LHCG.” Additional information concerning the proposed transaction is included in the deﬁnitive proxy statement/prospectus, which was ﬁled with the SEC on February 13, 2018, and can be accessed on the SEC’s website. Home Health Services On April 14, 2015, legislation was passed which limits any increase in home health payments to 1% for ﬁscal year 2018 and extended the 3% rural home health safeguard for two years through December 31, 2017. On October 30, 2016, CMS released a Final Rule (effective January 1, 2017) regarding payment rates for home health services provided during calendar year 2017. The national, standardized 60-day episode payment rate increased to $2,989.97 for 2017. The rural rate is $3,079.67. The Final Rule implements the ﬁnal year of the four year phase-in of the rebasing adjustments to the national, standardized 60-day episode payment rate and the decrease of 0.97% to account for nominal case-mix growth between calendar year 2012 and calendar year 2014, which was not accounted for in the rebasing adjustments ﬁnalized in calendar year 2014. The Final Rule also contains minor adjustments to the Home Health Value-Based Purchasing (“HHVBP”) program and to the home health quality reporting program. CMS estimates the overall economic impact of the proposed rule’s policy changes and payment rate update is an estimated aggregate decrease of 0.7% in payments to home health agencies, which decrease will vary based on each agency’s wage index and patient mix weight. Management’s Discussion and Analysis of Financial Condition and Results of Operations Form 10-K Part I I 47 05759-LHC.indd 47 4/4/18 4:23 PM LHC GROUP 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 effective January 1, 2018. On November 1, 2017, CMS released the Final Rule (effective January 1, 2018) regarding payment rates for home health services provided during calendar year 2018. The national, standardized 60-day episode payment rate will increase to $3,039.64 in 2018. The Final Rule estimates an impact of 0.5% reduction in payments due to the expiration of the rural add-on provision, a 1% home health payment update percentage, and 0.97% adjustment for case mix (the third year of a three year adjustment). CMS also estimates a reduction in regulatory reporting due to the removal of a number of quality measures and OASIS items. CMS estimates the overall economic impact of the Final Rule’s changes and payment rate update is an estimated decrease of 0.4% in payments to home health agencies. In addition, CMS decided not to ﬁnalize its rule on the Home Health Groupings Model (“HHGM”) as was proposed, but instead will take additional time to further engage with stakeholders to move towards a system that shifts the focus from volume of services to a more patient-centered model. The BBA 2018 included the following provisions impacting our home health business: • A new case mix model • Mandates the development of a new case mix model in a transparent process involving CMS, the home health industry, and the Congressional committees of jurisdiction. • The new model will use a 30-day payment period (leaving intact the 60-day assessment and order process), and must be implemented in a budget-neutral manner beginning in 2020 and will not include the use of therapy visits as a determinant. Congressional Budget Ofﬁce (“CBO”) scored this at zero savings and zero cost due to the budget-neutrality requirement. • CMS is speciﬁcally instructed to consider the use of alternative payment reform recommendations like the “Risk Based Grouper Model” proposed in lieu of the Home Health Groupings Model (“HHGM”) proposed in the preliminary rule. • The new model must be developed on a budget-neutral basis as opposed to the HHGM, which was proposed on a non-budget- neutral basis in the preliminary rule. Further, any behavioral adjustments must now be transparent and subject to public notice, comment, and the rule-making process. The HHGM, as proposed, footnoted a reference to behavioral adjustments that were not deﬁned and not transparent in its underlying assumptions period in 2017. • Restoration of the 3% rural add-on • Restores the 3% home health rate add-on for home health patients who reside in rural geographies, effective January 1, 2018. The add-on rate will be phased downward over a ﬁve-year period following a formula speciﬁed in the legislation. • Restores an important protection of access to Medicare home health care for rural America, and provides sufﬁcient time for the industry to produce additional compelling evidence to demonstrate the positive impact of the rural add-on payment to rural Medicare beneﬁciaries. • Since its inception, the rural rate has been repeatedly renewed by Congress in recognition of the continued need. • Face-to-face documentation improvements allowing the home health medical record in its entirety to be used in support of the physician’s attestation of medical necessity. • A study is to be conducted by the GAO (Government Accounting Ofﬁce) on Medicare improvements to address the needs of the chronically ill through healthcare services provided at home, including interdisciplinary care management, tele-health, and tele- monitoring for Medicare Advantage plans, requiring states to better integrate Medicare and Medicaid services for the dually-eligible, and the extension and expansion of the Independence at Home Demonstration Program. • A speciﬁc market basket update percentage of 1.5% for ﬁscal year 2020, leaving intact the full market basket update (generally expected to be between 2-3%) for ﬁscal year 2019. Suspends the productivity adjustment in 2020. • Repeal of the Independent Payment Advisory Board, effective upon passage. • Payment rate feasibility study to be conducted concerning the feasibility of a higher payment rate for providers, including home health providers that engage in the management of patients’ chronic conditions. 48 Form 10-K Part I I Management’s Discussion and Analysis of Financial Condition and Results of Operations 05759-LHC.indd 48 4/4/18 4:23 PM LEADING THE CHANGE National Growth – Community Focus Hospice On July 29, 2016, CMS issued a Final Rule updating Medicare payment rates and the wage index for hospices for ﬁscal year 2017, which resulted in a 2.1% increase in payment rates. The 2.1% increase is based on 2.7% inpatient hospital market basket update, reduced by a 0.3% productivity adjustment, and a 0.3% adjustment set by the Patient Protection and Affordable Care Act (“PPACA”). The hospice cap amount for the 2017 hospice cap year will be $28,404.99. The following table shows the hospice Medicare payment rates for ﬁscal year 2017, which began on October 1, 2016 and ended September 30, 2017: Description Routine Home Care days 1-60 Routine Home Care days 61+ Continuous Home Care Full Rate = 24 hours of care $40.19 = hourly rate Inpatient Respite Care General Inpatient Care Rate Per Patient Day $ 190.55 $ 149.82 $ 964.63 $ 170.97 $ 734.94 On August 1, 2017, CMS issued a Final Rule updating Medicare payment rates and the wage index for hospices for ﬁscal year 2018. The result will be a 1.0% increase in payment rates due to the provisions of Section 411 (d) of the Medicare Access and CHIP Reauthorization Act of 2015 (Pub. L. 114-10) (“MACRA”). The hospice cap will be $28,689.04, which is a 1% increase. The Final Rule ﬁnalizes eight measures from Consumer Assessment of Healthcare Providers and Systems (“CAHPS”) Hospice Survey data already submitted by hospices. The rule also ﬁnalizes the extension of the exception for quality reporting purposes from 30 calendar days to 90 calendar days after the date that an extraordinary circumstance occurred. CMS began public reporting Hospice Quality Reporting Program (“HQRP”) data via a Hospice Compare Site in August 2017 to help customers make informed choices. Hospices that fail to meet quality reporting requirements will receive a two percentage point reduction to their payments. The following table shows the hospice Medicare payment rates for ﬁscal year 2018, which began on October 1, 2017 and will end September 30, 2018: Description Routine Home Care days 1-60 Routine Home Care days 61+ Continuous Home Care Full Rate = 24 hours of care $40.19 = hourly rate Inpatient Respite Care General Inpatient Care Rate Per Patient Day $ 192.78 $ 151.41 $ 976.42 $ 172.78 $ 743.55 The BBA 2018 included the following provisions impacting our hospice business: • Hospice included in Hospital Post-Acute Transfer Policy for early discharges to hospice care. Hospice will be included as a post-acute service subject to the transfer DRG policy, in which acute-care hospitals receive a reduction in payments if they transfer a patient to post-acute care prior to achieving the mean length of stay for the DRG. Currently, home health, skilled nursing facilities, and LTACHs are included within the policy, and the BBA 2018 adds hospice as a post-acute provider subject to the policy. Physician Assistants recognized as attending physicians to serve hospice patients, effective January 1, 2019. Community-Based Services Community-based services are in-home care services, which are primarily performed by skilled nursing and paraprofessional personnel, and include assistance with activities of daily living to elderly, chronically ill, and disabled patients. Revenue is generated on an hourly basis and our current primary payors are TennCare Managed Care Organization and Medicaid. Approximately 70% of our net service revenue for the twelve months ended December 31, 2017 in this segment was generated by our locations in Tennessee. Management’s Discussion and Analysis of Financial Condition and Results of Operations Form 10-K Part I I 49 05759-LHC.indd 49 4/4/18 4:23 PM LHC GROUP 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 will be effective for LTACH cost reporting periods beginning on or after October 1, 2015, and the site neutral payment rate will be phased-in over two years. • For cost reporting periods beginning on or after October 1, 2015, discharges paid at the site neutral payment rate or by a Medicare Advantage plan (Part C) will be excluded from the LTACH average length-of-stay (“ALOS”) calculation. • For cost reporting periods beginning in ﬁscal year 2016 and later, CMS will notify LTACHs of their “LTACH discharge payment percentage” (i.e., the number of discharges not paid at the site neutral payment rate divided by the total number of discharges). • For cost reporting periods beginning in ﬁscal year 2020 and later, LTACHs with less than 50% of their discharges paid at the full LTACH PPS rates will be switched to payment under the IPPS for all discharges in subsequent cost reporting periods. However, CMS will set up a process for LTACHs to seek reinstatement of LTACH PPS rates for applicable discharges. • MedPAC will study the impact of the above changes on quality of care, use of hospice and other post-acute care settings, different types of LTACHs and growth in Medicare spending on LTACHs. MedPAC is to submit a report to Congress with any recommendations by June 30, 2019. The report is to also include MedPAC’s assessment of whether the 25 Percent rule should continue to be applied. 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 will decrease by 7.1% compared to ﬁscal year 2016 payments. This estimated decrease is attributable to the statutory decrease in payment rates for site neutral LTACH PPS cases that do not meet the clinical criteria to qualify for higher LTACH rates in cost reporting years beginning on or after October 1, 2016. Cases that do qualify for higher LTACH PPS rates will see a payment rate increase of 0.7% (including a market basket update of 2.8% reduced by a multi-factor productivity adjustment of 0.3%, minus an additional adjustment of 0.75 percentage point in accordance with the PPACA, for a net market basket of 1.75%). The LTACH PPS standard federal payment rate for ﬁscal year 2017 is $42,476.41 (increased from $41,762.85 in ﬁscal year 2016). Site-neutral discharges will have a 23% reduction in payments. CMS also proposes to begin enforcement of the 25 Percent rule which will cap the number of patients treated at an LTACH who have been referred from all locations of a hospital. Grandfathered LTACH facilities are exempt from the 25 Percent rule, while rural LTACHs will have a threshold of 50% and MSA-dominant hospitals will have a threshold between 25% and 50%. The 25 Percent rule will apply to discharges occurring after October 1, 2016. CMS will have two separate outlier pools and thresholds for LTACH-appropriate patients and for site-neutral patients. For 2017, CMS ﬁnalized an increase of its ﬁxed-loss threshold to $21,943 from 2016’s $16,423, to limit outlier spending at no more than 8% of total LTACH spending (2016 outlier payments may reach 9.0%). CMS is applying the proposed inpatient ﬁxed-loss threshold of $23,570 for site neutral patients. CMS also ﬁnalized four new measures for the LTACH Quality Reporting Program to meet the requirements of the Improving Medicare Post-Acute Care Transformation (IMPACT) Act. For the ﬁscal year 2018 LTACH Quality Reporting Program, CMS added quality measures for Medicare spending per beneﬁciary, discharge to community and potentially-preventable 30-day post-discharge readmissions. For the ﬁscal year 2020 LTACH Quality Reporting Program, CMS adopted a new drug regimen review measure. 50 Form 10-K Part I I Management’s Discussion and Analysis of Financial Condition and Results of Operations 05759-LHC.indd 50 4/4/18 4:23 PM LEADING THE CHANGE National Growth – Community Focus On December 7, 2016, Congress passed the 21st Century Cures Act (“Cures”), which boosts funding for medical research, eases the development and approval of experimental treatments and reforms federal policy on mental health care. Included in the bill was relief for LTACHs under a one year moratorium on the 25 Percent Rule, which would otherwise penalize LTACHs that admit more than 25% of their patients from a particular acute care hospital. As modiﬁed by Cures, implementation of the 25 Percent Rule will be suspended during federal ﬁscal year 2017 (October 1, 2016 through September 30, 2017). On August 2, 2017, CMS posted a display copy of its ﬁnal rule for the annual update to Medicare payment rates and policies for the Fiscal Year 2018 inpatient hospitals prospective payment system and the LTACH PPS. CMS estimates the impact of the proposed rule will result in a 2.4% overall reduction in LTACH spending. The LTACH standard federal rate is reduced to $41,430.56 from $42,476.41. CMS is also proposing a 12 month administrative moratorium on application of the 25 Percent Rule beginning with the expiration of the statutory moratorium after September 30, 2017. The 25 Percent Rule will not be applied to LTACHs for discharges occurring on or before September 30, 2018. CMS also adopted certain adjustments to high cost outlier and short stay outlier policies. CMS ﬁnalized its proposal for a new severe wound exception to be paid at standard Federal LTACH rates instead of site neutral payments for grandfathered LTACHs. CMS changed the separateness and control restrictions for certain co-located IPPS-exempt hospitals. The Final Rule also adds three new quality measures and discontinues two quality measures. CMS also ﬁnalized its proposal to implement collection of standardized patient assessment data under the IMPACT Act on functional status, cognitive function, cancer treatments, respiratory treatments, transfusions and other special services effective for admissions on/after April 1, 2019. Effects of BBA 2018 on LTACHS The impact of BBA 2018 on our LTACH business includes a two-year extension of site-neutral blended payments rates for certain long-term care hospital discharges, based upon a 4.6% reduction in site-neutral payments over 7 years. None of the aforementioned 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. 2017 and 2016 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 LTACHs: Patient days Three Months Three Months Three Months Three Months Ended March 31, Ended June 30, Ended Sept. 30, Ended Dec. 31, 2017 2017 2017 2017 41,874 29,244 47,375 29,957 2,861 2,650 3,112 2,657 257,474 43,395 29,743 47,625 29,868 3,031 2,803 3,227 2,791 275,866 43,450 29,691 47,841 29,964 3,108 2,888 3,438 2,967 285,971 44,362 29,925 49,668 30,745 3,180 2,959 3,655 3,199 292,568 344,186 342,337 369,700 469,963 13,732 13,075 14,599 21,719 Management’s Discussion and Analysis of Financial Condition and Results of Operations Form 10-K Part I I 51 05759-LHC.indd 51 4/4/18 4:23 PM LHC GROUP 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 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 Consolidated Results of Operations The following table sets forth, for the period 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 2017 2016 2015 $ 1,072,086 675,810 396,276 9,484 310,539 1,511 60 74,682 (3,876) 524 10,944 10,274 $ 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 Net income available to LHC Group, Inc.’s common stockholders $ 50,112 $ 36,583 $ 32,335 52 Form 10-K Part I I Management’s Discussion and Analysis of Financial Condition and Results of Operations 05759-LHC.indd 52 4/4/18 4:23 PM LEADING THE CHANGE National Growth – Community Focus 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, 2017 2016 2015 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 63.0% 37.0 0.9 29.0 0.1 — 7.0 (0.4) — 17.9 1.0 4.7 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 Year Ended December 31, 2017 Compared to Year Ended December 31, 2016 Consolidated net service revenue for the year ended December 31, 2017 was $1.1 billion compared to $914.8 million for the same period in 2016, an increase of $157.3 million, or 17.2%. Consolidated net service revenue growth in 2017 was primarily due to both our acquisitions of 77 agencies during 2017 and an increase in same store growth in our home health services segment. 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 2017 2016 73.1% 14.8 4.4 7.7 72.8% 14.8 4.8 7.6 100.0% 100.0% Revenue derived from Medicare represented 71.0% and 74.5% of our consolidated net service revenue for the years ended December 31, 2017 and 2016, respectively. Management’s Discussion and Analysis of Financial Condition and Results of Operations Form 10-K Part I I 53 05759-LHC.indd 53 4/4/18 4:23 PM LHC GROUP The following table sets forth each of our segment’s revenue growth or loss, admissions, census, episodes, billable hours, and patient days for the twelve months ended December 31, 2017 and the related change from the same period in 2016 (amounts in thousands, except admissions, census, episode data, billable hours 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) Organic Growth (Loss) % Acquired (4) Total Growth (Loss) % Total $ 732,436 $ 529,618 177,028 111,266 40,211 27,779 201,420 $ 133,637 $ 125,249 10,222 8,853 2,529 2,342 963,591 $ $ 68 68 1 1 3 2 — $ 412 $ 367 18 12 7 7 2,676 $ 732,504 $ 529,686 177,029 111,267 40,214 27,781 201,420 $ 134,049 $ 125,616 10,240 8,865 2,536 2,349 966,267 10.0% 4.7 10.7 5.4 4.2 (1.3) 1.1 (0.7) (0.2) 2.5 1.2 (3.2) (3.5) 0.8 $ 51,003 $ 32,697 15,087 8,910 2,893 1,733 11,835 $ 25,148 $ 21,427 3,129 2,693 500 468 142,056 $ 783,507 $ 562,383 192,116 120,177 43,107 29,514 213,255 $ 159,197 $ 147,043 13,369 11,558 3,036 2,817 1,108,323 17.7% 11.1 20.1 13.8 11.7 4.9 7.0 18.0 16.8 33.9 31.9 15.9 15.7 15.6 $ 43,560 1,527,255 $ — — $ 43,560 1,527,255 (0.8)% 2.9% $ 3,349 117,117 $ 46,909 1,644,372 6.9% 10.8% $ 61,085 53,916 $ — — $ 61,085 53,916 (6.2) (4.1) $ 11,688 9,252 $ 72,773 63,168 11.7% 12.4 (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. Total home health organic revenue and patient metrics increased due to market share growth in service areas where we have quality scores greater than 4 stars. 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, 2017 was $675.8 million compared to $557.7 million for the same period in 2016, an increase of approximately $118.1 million, or 21.2%; however, as a percentage of net service revenue, it is an increase of 2.0%. 54 Form 10-K Part I I Management’s Discussion and Analysis of Financial Condition and Results of Operations 05759-LHC.indd 54 4/4/18 4:23 PM The following table summarizes cost of service revenue (amounts in thousands, except percentages, which are percentages of the segment’s respective net service revenue): LEADING THE CHANGE National Growth – Community Focus 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 2017 2016 $ 438,856 24,550 18,773 $ 482,179 $ 73,621 6,146 24,202 $ 103,969 $ 34,642 335 267 $ 35,244 $ 38,303 267 15,848 $ 54,418 56.0% 3.1 2.4 61.5% 46.2% 3.9 15.2 65.3% 73.8% 0.7 0.6 75.1% 46.4% 0.3 19.2 66.0% $ 360,378 22,252 15,820 $ 398,450 $ 58,094 5,384 19,881 $ 83,359 $ 32,086 263 254 $ 32,603 $ 28,802 233 14,203 $ 43,238 54.1% 3.3 2.4 59.8% 43.0% 4.0 14.7 61.8% 73.1% 0.6 0.6 74.3% 41.1% 0.3 20.3 61.7% Consolidated cost of service revenue variances were as follows: • Home Health Segment – Cost of service revenue increased as a percentage of net service revenue due in part to 2.0% Medicare reimbursement cuts recognized in 2017. Additionally, acquisitions accounted for $44.9 million of the $83.7 million increase, with the remaining difference caused by the growth in our same store agencies. • Hospice Segment – Acquisitions accounted for $19.1 million of the $20.6 million increase. Cost of service revenue increased as a percentage of net service revenue due to the decline in same store census during the twelve months ended December 31, 2017. • Community-Based Services Segment – Acquisitions accounted for the $2.6 million increase. • Facility-Based Services Segment – Acquisitions accounted for $11.8 million in cost of service revenue for the year. This amount was offset by a decrease in cost of service revenue for one LTACH location that had a reduction of beds during 2016. Cost of service revenue increased as a percentage of net service revenue due to lower revenue per patient day for the period caused by patient criteria changes that went into effect in June 2016 and September 2016. Provision for Bad Debts Consolidated provision for bad debts for the year ended December 31, 2017 was $9.5 million, or 0.9% of net service revenue, compared to $14.8 million, or 1.6% of net service revenue, for the same period in 2016, a decrease of approximately $5.3 million, or 35.9%; however, as a percentage of net service revenue, it is a decrease of 0.7%. The Company continues to have more timely cash collections, increases in amounts collected, and improvements in the health of our overall accounts receivable agings. The continued maturity of our back ofﬁce and ﬁeld operations, use of our point-of-care platform, and use of other technology advancements in reporting and analytics are drivers of our collection improvements. We also continue to see high success rates in the appeal process for Additional Documentation Request’s or ADRs at each stage of the appeal process, often times in cases where the receivables have signiﬁcantly aged. Management’s Discussion and Analysis of Financial Condition and Results of Operations Form 10-K Part I I 55 05759-LHC.indd 55 4/4/18 4:23 PM LHC GROUP General and Administrative Expenses Consolidated general and administrative expenses for the year ended December 31, 2017 were $310.5 million compared to $270.6 million for the same period in 2016, an increase of approximately $39.9 million, or 14.8%; however, as a percentage of net service revenue, it is a decrease of 0.6%. Of the $39.9 million increase, acquisitions accounted for $32.2 million, with the remainder of the increase attributable 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 Income Tax Expense 2017 2016 $ 220,509 8,755 $ 229,264 $ 43,102 2,414 $ 45,516 $ 9,491 455 $ 9,946 $ 24,015 1,798 $ 25,813 28.1% 1.0 29.3% 27.1% 1.5 28.6% 20.2% 1.0 21.2% 29.1% 2.2 31.3% $ 195,591 7,827 $ 203,418 $ 35,046 2,161 $ 37,207 $ 8,380 405 $ 8,785 $ 19,445 1,767 $ 21,212 29.4% 1.1 30.5% 26.0% 1.6 27.6% 19.1% 0.9 20.0% 27.7% 2.5 30.2% Consolidated income tax expense for the year ended December 31, 2017 was $10.9 million compared to $22.2 million for the same period in 2016. The Company adjusted its deferred state income tax rate taking into consideration the federal income tax adjustments signed into law on December 22, 2017. Deferred tax assets and liabilities were revalued as of December 31, 2017, which resulted in a credit to income tax expense of $14.0 million. 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 12.0%. 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. 56 Form 10-K Part I I Management’s Discussion and Analysis of Financial Condition and Results of Operations 05759-LHC.indd 56 4/4/18 4:23 PM 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, 2016 and the related change for the same period in 2015 (revenue amounts are in thousands): LEADING THE CHANGE National Growth – Community Focus 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 Growth (Loss) % Total $ 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 43,734 $ 1,331,448 $ — — 43,734 $ 1,331,448 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 6.1 9.7 $ 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 $ 157 7,734 43,891 $ 1,339,182 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 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. (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. Management’s Discussion and Analysis of Financial Condition and Results of Operations Form 10-K Part I I 57 05759-LHC.indd 57 4/4/18 4:23 PM LHC GROUP 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 $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 $ 398,450 59.8% $ 58,094 5,384 19,881 $ 83,359 $ 32,086 263 254 $ 32,603 $ 28,802 233 14,203 $ 43,238 43.0% 4.0 14.7 61.8% 73.1% 0.6 0.6 74.3% 41.1% 0.3 20.3 61.7% $ 320,548 21,056 13,146 $ 354,750 $ 35,022 3,638 12,246 $ 50,906 28,525 263 288 $ 29,076 $ 29,898 240 16,008 $ 46,146 52.3% 3.4 2.1 57.9% 40.8% 4.2 14.3 59.3% 69.2% 0.6 0.7 70.5% 39.3% 0.3 21.0 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 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. 58 Form 10-K Part I I Management’s Discussion and Analysis of Financial Condition and Results of Operations 05759-LHC.indd 58 4/4/18 4:23 PM LEADING THE CHANGE National Growth – Community Focus General and Administrative Expenses Consolidated general and administrative expenses for the year ended December 31, 2016 was $270.6 million compared to $247.9 million for the same period in 2015, an increase of $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 and amortization Total Facility-Based Services General and administrative Depreciation and amortization Total Loss on Disposal of Assets 2016 2015 $ 195,591 7,827 29.4% 1.1 $ 203,418 30.5% $ 182,107 8,484 $ 190,591 $ 35,046 2,161 $ 37,207 $ 8,380 405 $ 8,785 $ 19,445 1,767 $ 21,212 26.0% 1.6 27.6% 19.1% 0.9 20.0% 27.7% 2.5 30.2% $ 24,893 1,544 $ 26,437 $ 8,309 156 $ 8,465 $ 20,657 1,769 $ 22,426 29.7% 1.4 31.1% 29.0% 1.8 30.8% 20.2% 0.4 20.6% 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. Liquidity and Capital Resources Cash at December 31, 2017 was $2.8 million, compared to $3.3 million at December 31, 2016. Based on our current plan of operations, including acquisitions (without giving effect to the Merger), 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. As of December 31, 2017, we had $71.4 million available for borrowing under our credit facility. Management’s Discussion and Analysis of Financial Condition and Results of Operations Form 10-K Part I I 59 05759-LHC.indd 59 4/4/18 4:23 PM LHC GROUP 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, hospice agencies, and LTACHs, 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 2017 2016 $ 32,326 (74,774) 42,033 $ 67,472 (50,380) (19,967) During 2017, the change in operating activities was attributable to: • Improved cash collections on our older patient accounts receivable resulting in a decrease of $5.3 million in provision for bad debt. • The Company revalued its deferred tax assets and liabilities due to the passage and signing of the Tax Cuts and Jobs Act. The revaluation caused our deferred taxes to decrease by $13.6 million. • The 2016 year end tax payment deadlines were extended to January 2017; this extension caused a timing difference in payments of tax estimates, which decreased prepaid income taxes by $8.6 million. • The remainder of the change in cash provided by operating activities was due to acquisitions purchased in 2017 and the accretion of agencies purchased in 2016. Cash used in investing activities and ﬁnancing activities changed due to the difference in volume of acquisition activity occurring between 2017 and 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, 2017 and 2016, outstanding letters of credit were $9.6 million and $11.0 million, respectively, which are issued as collateral on our workers’ compensation insurance. 60 Form 10-K Part I I Management’s Discussion and Analysis of Financial Condition and Results of Operations 05759-LHC.indd 60 4/4/18 4:23 PM Borrowings accrue interest under the Credit Agreement at either the Base Rate or Eurodollar rate are subject to the applicable margins as LEADING THE CHANGE National Growth – Community Focus set forth below: Leverage Ratio 1.00:1.00 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% 1.75% 2.00% 2.25% 2.50% 0.75% 0.75% 1.00% 1.25% 1.50% 0.225% 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. In connection with the Merger, we must obtain the consent of certain of the lenders under our Credit Agreement prior to the closing thereof, as the Merger would constitute a default under our credit facility. Almost Family’s credit facility contains similar consent requirements and default provisions that would be triggered by the Merger. As a result, we intend to amend or reﬁnance our Credit Agreement, potentially seek additional sources of ﬁnancing, and terminate Almost Family’s credit facility in connection with the closing of the Merger. We intend to pay the outstanding borrowings and accrued and unpaid interest under Almost Family’s credit facility and certain debt issuance costs and Merger-related fees and expenses from the proceeds of such amendment or reﬁnancing. Although we currently believe that we will be able to obtain any necessary amendment or reﬁnancing of our Credit Agreement at a reasonable cost, there can be no assurance that we will succeed in obtaining such amendment or reﬁnancing on favorable terms, if at all. At December 31, 2017, 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, 2017 (amounts in thousands): Contractual Cash Obligation Long-term debt Operating leases Total contractual cash obligations Off-Balance Sheet Arrangements Payment Due by Period Total $ 144,286 73,214 $ 217,500 Less Than 1 Year 286 $ 23,119 $ 23,405 1-3 Years 3-5 Years $ 144,000 28,528 $ 172,528 $ — 14,395 $ 14,395 More Than 5 Years $ — 7,172 $ 7,172 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. Management’s Discussion and Analysis of Financial Condition and Results of Operations Form 10-K Part I I 61 05759-LHC.indd 61 4/4/18 4:23 PM LHC GROUP Recently Issued Accounting Pronouncements For a discussion of recently issued accounting pronouncements, see Note 2 of the Notes to 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 judgment 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. 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. Third party equity interests in the consolidated joint ventures are reﬂected as noncontrolling interests in our consolidated ﬁnancial statements. The following table summarizes the percentage of net service revenue earned by type of ownership or relationship we had with the operating entity for the periods presented for the years ending December 31: Ownership Type Wholly owned subsidiaries Equity joint ventures Other 2017 51.0% 47.0 2.0 2016 57.2% 41.2 1.6 100.0% 100.0% 2015 55.2% 42.9 1.9 100.0% All signiﬁcant inter-company accounts and transactions have been eliminated in consolidation. All business combinations accounted for under the acquisition method have been included in the consolidated ﬁnancial statements from the respective dates of acquisition. We consolidate equity joint venture entities as we have controlling interests, have voting control over these entities, or have the ability to exercise signiﬁcant inﬂuence in these entities. The members of our equity joint ventures participate in proﬁts and losses in proportion to their equity interest. We have various management service agreements under which we manage certain operations of agencies. We do not consolidate these agencies because we do not have an ownership interest in, nor do we have an obligation to absorb losses of, or right to receive beneﬁts from the entities that own the agencies. We, through wholly owned subsidiaries, lease home health licenses necessary to operate certain of our home nursing and hospice agencies. As with wholly owned subsidiaries, we consolidate these entities in which have license leasing arrangements as we own 100% of the equity of these subsidiaries. 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. 62 Form 10-K Part I I Management’s Discussion and Analysis of Financial Condition and Results of Operations 05759-LHC.indd 62 4/4/18 4:23 PM The following table sets forth the percentage of net service revenue earned by category of payor for the respective years ending LEADING THE CHANGE National Growth – Community Focus December 31: Payor Medicare Medicaid Other Medicare Home Health Services 2017 71.0% 1.8 27.2 2016 74.5% 1.8 23.7 100.0% 100.0% 2015 74.5% 1.5 24.0 100.0% Our home nursing Medicare patients are classiﬁed into one of 153 home health resource groups prior to receiving services. Based on this home health resource group, we are entitled to receive a standard prospective Medicare payment for delivering care over a 60-day period referred to as an episode. We recognize revenue based on the number of days elapsed during an episode of care within the reporting period. Final payments from Medicare may reﬂect base payment adjustments for case-mix and geographic wage differences and 2% sequestration reduction for episodes beginning after March 31, 2013. In addition, ﬁnal payments may reﬂect one of four retroactive adjustments to ensure the adequacy and effectiveness of the total reimbursement: (a) an outlier payment if the patient’s care was unusually costly; (b) a low utilization adjustment if the number of visits was fewer than ﬁve; (c) a partial payment if the patient transferred to another provider or transferred from another provider before completing the episode; or (d) a payment adjustment based upon the level of therapy services required. Adjustments outlined above are automatically recognized in net service revenue when changes occur during the period in which the services are provided to the patient. Net service revenue and related patient accounts receivable are recorded at amounts estimated to be realized from Medicare for services rendered. Hospice Services Hospice services provided by us are paid by Medicare under a per diem payment system. We receive one of four predetermined daily rates based upon the level of care we furnish. We record net service revenue from hospice services based on the daily rate and recognize 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 records an estimate of its liability for reimbursements received in excess of the cap amount. Beginning with cap year ended October 1, 2014, Center for Medicare and Medicaid Services (“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 long-term acute care hospital (“LTACH”) prospective payment system. 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. Management’s Discussion and Analysis of Financial Condition and Results of Operations Form 10-K Part I I 63 05759-LHC.indd 63 4/4/18 4:23 PM LHC GROUP 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 and other payors reimburse us based upon a predetermined fee schedule or an episodic basis, depending on the terms of the applicable contract. Accordingly, we recognize revenue from managed care and other payors in the same manner similar to our Medicare and Medicaid reimbursements. 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 approximately 60% of our patient accounts receivable at December 31, 2017 and 2016, 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. At December 31, 2017, our allowance for uncollectible accounts, as a percentage of patient accounts receivable, was approximately 12.7%, or $23.6 million, compared to 18.9%, or $29.0 million, at December 31, 2016. Accounts Receivable days sales outstanding (“DSO”) for the year ended December 31, 2017 was 51 days compared to 49 days for the same period in 2016. 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 percentage of our allowance for uncollectible accounts decreased in 2017. Accounts receivable generated from our 2017 acquisitions caused a higher percentage of accounts receivable to be less than 365 days. In addition, improvements in 2017 in our outstanding accounts receivable and the resolution of prior year accounts receivables has led to healthier receivables. Accounts receivable over 180 days has decreased by 26.2% from 18% of total accounts receivable in 2016 to 14.1% of total accounts receivable in 2017, while our accounts receivable over 365 days has decreased by 32.8% from 8.9% of total accounts receivable in 2016 to 6.7% of total accounts receivable in 2017. 64 Form 10-K Part I I Management’s Discussion and Analysis of Financial Condition and Results of Operations 05759-LHC.indd 64 4/4/18 4:23 PM The following table sets forth, as of December 31, 2017, the aging of accounts receivable (based on the end of episode date) (amounts LEADING THE CHANGE National Growth – Community Focus in thousands): Payor Medicare Medicaid Other Total 0-90 91-180 181-365 Over 365 Total $ 79,286 3,479 58,760 $ 141,525 $ 9,257 2,184 6,411 $ 17,852 $ 5,407 2,340 5,871 $ 13,618 $ 5,751 1,790 4,918 $ 12,459 $ 99,701 9,793 75,960 $ 185,454 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, 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 The following table summarizes the activity and ending balances in the allowance for uncollectible accounts (amounts in thousands): Year ended December 31: 2017 2016 2015 Goodwill and Intangible Assets Beginning of Year Balance Additions Deductions End of Year Balance $ 29,036 26,712 18,582 $ 9,484 14,790 19,243 $ 14,964 12,466 11,113 $ 23,556 29,036 26,712 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 their carrying values. 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 2017, 2016 or 2015 related to the annual impairment testing. Components of our reporting units are represented by individual subsidiaries or joint ventures with individual licenses to conduct operations within geographic markets as limited by the terms of each license. We consider each component as individual businesses, as discrete ﬁnancial information is available and management regularly reviews the operating results of those businesses. During the year ended December 31, 2017, we recognized a disposal of $1.5 million related to goodwill associated with the closure of underperforming locations. The impairment was calculated using a market approach. Management’s Discussion and Analysis of Financial Condition and Results of Operations Form 10-K Part I I 65 05759-LHC.indd 65 4/4/18 4:23 PM LHC GROUP 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. 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 lives 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. Based on the results of the 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 intangible assets were impaired and no impairment charge was recorded for the year ended December 31, 2017 and 2016. We did record impairment charges of $0.6 million for the twelve months ended December 31, 2015. 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 $1.0 million and $1.6 million for the years ended December 31, 2017 and 2016, 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. 66 Form 10-K Part I I 05759-LHC.indd 66 4/4/18 4:23 PM LEADING THE CHANGE National Growth – Community Focus 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, 2017. 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, 2017. 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, 2017. Under guidelines established by the SEC, companies are allowed to exclude acquisitions from their assessment of internal control over ﬁnancial reporting during the ﬁrst year of an acquisition while integrating the acquired company. Accordingly, our assessment of the internal controls excluded our acquisitions from LifePoint Health, Inc., which were acquired during 2017, our acquisitions from Baptist Memorial Health Care, which were acquired on June 1, 2017, and our acquisitions from CHRISTUS Continuing Care, which were acquired on September 1, 2017. Operations from these acquisitions represented approximately 20% of total assets and 8% of total revenue as of and for the year ended December 31, 2017. 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, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over ﬁnancial reporting. 05759-LHC.indd 67 4/4/18 4:23 PM Form 10-K Part I I 67 LHC GROUP Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors LHC Group, Inc.: Opinion on Internal Control Over Financial Reporting We have audited LHC Group, Inc. and subsidiaries’ (the Company) internal control over ﬁnancial reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over ﬁnancial reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2017 and 2016, 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, 2017, and the related notes (collectively, the consolidated ﬁnancial statements), and our report dated March 1, 2018 expressed an unqualiﬁed opinion on those consolidated ﬁnancial statements. The Company formed joint ventures with LifePoint Health, Inc. during 2017, Baptist Memorial Health Care on June 1, 2017, and CHRISTUS Continuing Care on September 1, 2017, and management excluded from its assessment of the effectiveness of the Company’s internal control over ﬁnancial reporting as of December 31, 2017, LifePoint Health, Inc., Baptist Memorial Health Care, and CHRISTUS Continuing Care’s internal control over ﬁnancial reporting associated with approximately 20 percent of total assets and 8 percent of total revenue included in the consolidated ﬁnancial statements of the Company as of and for the year ended December 31, 2017. Our audit of internal control over ﬁnancial reporting of the Company also excluded an evaluation of the internal control over ﬁnancial reporting of LifePoint Health, Inc., Baptist Memorial Health Care, and CHRISTUS Continuing Care. Basis for Opinion The Company’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 are a public accounting ﬁrm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. 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 of internal control over ﬁnancial reporting 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. Deﬁnition and Limitations of Internal Control Over Financial Reporting 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. /s/ KPMG LLP Baton Rouge, Louisiana March 1, 2018 68 Form 10-K Part I I 05759-LHC.indd 68 4/4/18 4:23 PM Item 9B. Other Information. None noted. LEADING THE CHANGE National Growth – Community Focus 05759-LHC.indd 69 4/4/18 4:23 PM Form 10-K Part I I 69 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 2018 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 he information contained under the heading “Section 16(a) Beneﬁcial Ownership Reporting Compliance” in the deﬁnitive Proxy Statement relating to the Company’s 2018 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 2018 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 2018 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 2018 Annual Meeting of Stockholders. Equity Compensation Plan Information The following table provides information as of December 31, 2017, 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 — — — $ — — $ — 559,082 — 559,082 (1) Includes 391,737 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 167,345 shares remaining available for issuance under the Amended and Restated LHC Group, Inc.’s 2006 Employee Stock Purchase Plan. 70 Form 10-K Part I I I 05759-LHC.indd 70 4/4/18 4:23 PM LEADING THE CHANGE National Growth – Community Focus 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 2018 Annual Meeting of Stockholders. Item 14. Principal Accountant 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 Accountant Fees and Services” in the deﬁnitive Proxy Statement relating to the Company’s 2018 Annual Meeting of Stockholders. 05759-LHC.indd 71 4/4/18 4:23 PM Form 10-K Part I I I 71 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, 2017 and 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . For each of the years in the three-year period ended December 31, 2017 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. 72 Form 10-K Part I V 05759-LHC.indd 72 4/4/18 4:23 PM LEADING THE CHANGE National Growth – Community Focus Report of Independent Registered Public Accounting Firm The Stockholders and Board of Directors LHC Group, Inc.: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of LHC Group, Inc. and subsidiaries (the Company) as of December 31, 2017 and 2016, 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, 2017, and the related notes (collectively, the “consolidated ﬁnancial statements”). In our opinion, the consolidated ﬁnancial statements present fairly, in all material respects, the ﬁnancial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash ﬂows for each of the years in the three-year period ended December 31, 2017, 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) (PCAOB), the Company’s internal control over ﬁnancial reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 1, 2018 expressed an unqualiﬁed opinion on the effectiveness of the Company’s internal control over ﬁnancial reporting. Basis for Opinion 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 are a public accounting ﬁrm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated ﬁnancial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated ﬁnancial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated ﬁnancial statements. Our audits also included evaluating the accounting principles used and signiﬁcant estimates made by management, as well as evaluating the overall presentation of the consolidated ﬁnancial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ KPMG LLP We have served as the Company’s auditor since 2008. Baton Rouge, Louisiana March 1, 2018 Report of Independent Registered Public Accounting Firm Form 10-K Part I V F-1 05759-LHC.indd 1 4/4/18 4:23 PM 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 $23,556 and $29,036, respectively Other receivables Amounts due from governmental entities Total receivables, net Prepaid income taxes Prepaid expenses Other current assets Total current assets Property, building and equipment, net of accumulated depreciation of $43,565 and $35,226, respectively Goodwill Intangible assets, net of accumulated amortization of $13,041 and $10,968, 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 Total current liabilities Deferred income taxes Revolving credit facility Long-term debt, less current portion Total liabilities Noncontrolling interest-redeemable Stockholders’ equity: LHC Group, Inc. stockholders’ equity: Preferred stock – $0.01 par value: 5,000,000 shares authorized; none issued or outstanding Common stock – $0.01 par value: 40,000,000 shares authorized; 22,640,046 and 22,429,041 shares issued in 2017 and 2016, respectively Treasury stock – 4,890,504 and 4,828,679 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 2017 2016 $ 2,849 $ 3,264 161,898 3,163 830 165,891 7,006 13,042 12,177 200,965 46,453 392,601 134,610 19,073 $ 793,702 $ 39,750 44,747 12,450 286 5,019 — 102,252 27,466 144,000 — 273,718 13,393 124,803 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 — — 226 (42,249) 126,490 364,401 448,868 57,723 506,591 $ 793,702 224 (39,135) 119,748 314,289 395,126 6,426 401,552 $ 614,071 F-2 Form 10-K Part I V Consolidated Balance Sheets 05759-LHC.indd 2 4/4/18 4:23 PM LEADING THE CHANGE National Growth – Community Focus 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 before income taxes and noncontrolling interests Income tax expense Net income 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 2017 2016 2015 $ 1,072,086 675,810 $ 914,823 557,650 $ 816,366 480,878 396,276 9,484 310,539 1,511 60 74,682 (3,876) 524 71,330 10,944 60,386 10,274 50,112 2.83 2.79 $ $ $ 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 $ $ $ 17,715,992 17,961,018 17,559,477 17,682,820 17,405,379 17,547,531 Consolidated Statements of Income Form 10-K Part I I F-3 05759-LHC.indd 3 4/4/18 4:23 PM 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, 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 Net Income Acquired noncontrolling interest Purchase of additional controlling interest Sale of noncontrolling interest Noncontrolling interest distributions Nonvested stock compensation Issuance of vested stock Treasury shares redeemed to pay income tax Issuance of common stock under Employee Stock Purchase Plan Balances at December 31, 2017 $ 220 — — — 22,015,211 — — — (35,660) — — — 4,734,363 $ 108,708 — — — — — — $ 245,371 32,335 — — $ 2,956 1,737 155 (1,637) $ 321,595 34,072 155 (1,637) $ 11,517 7,578 — (6,687) 41,650 — — — — — — — 9,500 — 176,989 — — — — — — — — (275) 144 4,225 — — (1,479) 42,197 — — — — 211 — — — — — — — — — — (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) 36,583 — — — — — — 1,373 1,783 1,400 (1,341) — — — 37,956 1,783 469 (1,341) 109 4,872 — 7,986 — (7,827) — — — 45,942 — (1,996) 52,119 — — — — 995 — — — (1,996) — — 995 — — $ 224 24,149 — 22,429,041 $ (39,135) — 912 4,828,679 $ 119,748 — $ 314,289 — $ 6,426 912 $ 401,552 — $ 12,567 — — — — — — 2 — — — — — — — — — 192,463 — — — — — — — — — — — — — (3,114) 61,825 — — 50,112 — (595) 53,657 49,517 53,657 10,869 — 60,386 (368) 122 — 5,964 (2) (1,120) 412 (9,335) — — — — — — — 282 (2,047) — — (368) 404 (2,047) 5,964 — — (3,114) — $ 226 18,542 — 22,640,046 $ (42,249) — 1,026 4,890,504 $ 126,490 — $ 364,401 — $ 57,723 1,026 $ 506,591 $ 13,393 See accompanying Notes to the Consolidated Financial Statements F-4 Form 10-K Part IV Consolidated Statements of Changes in Equity 05759-LHC.indd 4 4/4/18 4:23 PM LEADING THE CHANGE National Growth – Community Focus LHC GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) For the Year Ended December 31, 2017 2016 2015 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 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 See accompanying Notes to the Consolidated Financial Statements $ 60,386 $ 45,942 $ 41,650 13,422 9,484 5,964 (4,475) 60 1,511 (36,390) (26,973) (7,006) 19,666 (3,499) 176 32,326 (64,598) (10,176) — — (74,774) 96,000 (39,000) — 1,026 (260) (11,382) (1,488) 251 (3,114) — 42,033 (415) 3,264 $ 2,849 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 $ 3,853 $ 25,199 $ 3,123 $ 11,533 $ 1,870 $ 20,361 Consolidated Statements of Cash Flows Form 10-K Part IV F-5 05759-LHC.indd 5 4/4/18 4:23 PM 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. 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, 2017, the Company, through its wholly and majority-owned subsidiaries, equity joint ventures, controlled afﬁliates, and management agreements, operated 442 service providers in 27 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 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 2017 51.0% 47.0 2.0 2016 57.2% 41.2 1.6 100.0% 100.0% 2015 55.2% 42.9 1.9 100.0% All signiﬁcant inter-company accounts and transactions have been eliminated in consolidation. All business combinations accounted for under the acquisition method have been included in the consolidated ﬁnancial statements from the respective dates of acquisition. The Company consolidates equity joint venture entities as the Company has controlling interests, has voting control over these entities, or has ability to exercise signiﬁcant inﬂuence in these entities. The members of the Company’s equity joint ventures participate in proﬁts and losses in proportion to their equity interests. The Company has various management services agreements under which the Company manages certain operations of agencies. The Company does not consolidate these agencies because the Company does not have an ownership interest in, nor does it have an obligation to absorb losses of, or right to receive beneﬁts from the entities that own the agencies. 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. F-6 Form 10-K Part I V Notes to Consolidated Financial Statements 05759-LHC.indd 6 4/4/18 4:23 PM LEADING THE CHANGE National Growth – Community Focus 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. Medicare contributes to the net service revenue of the Company’s home health services, hospice services, and facility-based services. Medicaid and other payors contribute to the net service revenue of all of the Company’s 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 Managed Care, Commercial and Other Medicare Home Health Services 2017 71.0% 1.8 27.2 2016 74.5% 1.8 23.7 100.0% 100.0% 2015 74.5% 1.5 24.0 100.0% 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 base payment adjustments for case-mix and geographic wage differences and 2% sequestration reduction for episodes beginning after March 31, 2013. In addition, ﬁnal payments may reﬂect one of four retroactive adjustments to ensure the adequacy and effectiveness of the total reimbursement: (a) an outlier payment if the patient’s care was unusually costly; (b) a low utilization adjustment if the number of visits was fewer than ﬁve; (c) a partial payment if the patient transferred to another provider or transferred from another provider before completing the episode; or (d) a payment adjustment based upon the level of therapy services required. Adjustments outlined above are automatically recognized in net service revenue when changes occur during the period in which the services are provided to the patient. Net service revenue and related patient accounts receivable are recorded at amounts estimated to be realized from Medicare for services rendered. Hospice Services Hospice services provided by the Company are paid by Medicare under a per diem payment system. The Company receives one of four predetermined daily rates based upon the level of care the Company furnishes. The Company records net service revenue from hospice services based on the daily 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. Beginning with cap year ended October 1, 2014, Center for Medicare and Medicaid Services (“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. Notes to Consolidated Financial Statements Form 10-K Part I V F-7 05759-LHC.indd 7 4/4/18 4:23 PM LHC GROUP 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. The Company’s managed care and other payors reimburse the Company based upon a predetermined fee schedule or on an episodic basis, depending on the terms of the applicable contract. Accordingly, the Company recognizes revenue from managed care and other payors in the same manner as the Company recognizes revenue from Medicare or Medicaid. Accounts Receivable and Allowances for Uncollectible Accounts The Company reports accounts receivable net of estimated allowances for uncollectible accounts and adjustments. Accounts receivable are uncollateralized and 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. The credit risk associated with receivables from other payors is limited due to the signiﬁcance of Medicare as the primary payor. The Company believes the credit risk associated with its Medicare accounts, which have historically exceeded 55.0% 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. 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 RAP received for that episode will be recouped by Medicare from any other Medicare claims in process for that particular provider. The RAP and ﬁnal claim must then be resubmitted. For subsequent episodes of care contiguous with the ﬁrst episode for a particular patient, the Company submits a RAP for 50% instead of 60% of the estimated reimbursement. The Company’s services to the Medicare population are paid at prospectively set amounts that can be determined at the time services are rendered. The Company’s Medicaid reimbursement is based on a predetermined fee schedule applied to each individual service it provides. The Company’s managed care contracts and contracts with other payors provide for payments based upon a predetermined fee schedule or an episodic basis, depending on the terms of the applicable contract. The Company is able to calculate its actual amount due at the patient level and adjust the gross charges down to the actual amount at the time of billing. This negates the need to record an estimated contractual allowance when reporting net service revenue for each reporting period. F-8 Form 10-K Part I V Notes to Consolidated Financial Statements 05759-LHC.indd 8 4/4/18 4:23 PM LEADING THE CHANGE National Growth – Community Focus Business Combination The Company accounts for its acquisitions in accordance with ASC 805, “Business Combinations” (“ASC 805”) using the acquisition method of accounting. Assets typically acquired consist primarily of Medicare licenses, trade names, certiﬁcates of need, and/or non-compete agreements. 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. Goodwill represents the excess of the cost of an acquired entity over the net amounts assigned to assets acquired and liabilities assumed. The operations of the acquisitions are included in the consolidated ﬁnancial statements from their respective dates of acquisition. Acquisition transactions that occurred in 2017 are further described in Note 3 and goodwill and intangible assets are discussed in Note 4. Goodwill and Intangible Assets In accordance with ASC 350, “Intangibles – Goodwill and Other” (“ASC 350”) goodwill and intangible assets with indeﬁnite lives are reviewed by the Company at least annually for impairment. The Company performs its annual impairment review of goodwill at November 30, and when a triggering event occurs between annual impairment tests. For 2017, 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 2017, 2016 or 2015 related to the annual impairment testing. Components of the Company’s reporting units are represented by individual subsidiaries or joint ventures with individual licenses to conduct operations within geographic markets as limited by the terms of each license. The Company considers each component as individual businesses, as discrete ﬁnancial information is available and management regularly reviews the operating results of those businesses. During the year ended December 31, 2017, the Company recognized a disposal of $1.5 million related to goodwill associated with the closure of underperforming locations. The impairment was calculated using a market approach. 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 ten years. The Company also has indeﬁnite-lived assets that are not subject to amortization expense such as trade names, certiﬁcates of need, and Medicare 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 lives 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, 2017 and 2016, the Company did not record an impairment charge related to indeﬁnite-lived intangible assets. During the twelve months ended December 31, 2015, the Company recorded impairment charges related to indeﬁnite-lived intangible assets of $0.6 million. 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. Notes to Consolidated Financial Statements Form 10-K Part I V F-9 05759-LHC.indd 9 4/4/18 4:23 PM LHC GROUP Property, Building and Equipment Property, building and equipment are recorded at cost. Property and equipment acquired in connection with business combinations are recorded at estimated fair value in accordance with the acquisition method of accounting in accordance with ASC 805. 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. 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. In accordance with ASC 360, “Property, Plant, and Equipment”, the Company evaluates its long-lived assets for possible impairment whenever events or changes in circumstances occur that indicate that the carrying amount of the asset may not be recoverable. There were no impairment charges recognized during the periods ended December 31, 2017, 2016 and 2015. The following table describes the Company’s components of property, building and equipment for the years ended December 31, 2017 and 2016 (amounts in thousands): Land Building and improvements Transportation equipment Fixed equipment Ofﬁce furniture and medical equipment Less accumulated depreciation 2017 2016 $ 2,033 14,166 11,363 780 61,676 90,018 43,565 $ 46,453 $ 2,033 11,363 11,220 1,090 52,771 78,477 35,226 $ 43,251 Depreciation expense for the years ended December 31, 2017, 2016 and 2015 was $13.4 million, $12.2 million and $12.0 million, respectively, which was recorded in general and administrative expenses. Amortization expense related to deﬁnite-lived intangible assets is included in depreciation expense. Noncontrolling Interest The Company classiﬁes noncontrolling interests of its joint venture parties based upon a review of the legal provisions governing the redemption of such interests. In each of the Company’s joint ventures, those provisions are embodied within the joint venture’s operating agreement. For joint ventures with operating agreement provisions that establish an obligation for the Company to purchase the third party partners’ noncontrolling interests other than as a result of events that lead to a liquidation of the joint venture, such noncontrolling interests are classiﬁed as redeemable noncontrolling interests in temporary equity. For joint ventures with operating agreement provisions that establish an obligation that the Company purchase the third party partners’ noncontrolling interests, but which obligation is triggered by events that lead to a liquidation of the joint venture, such noncontrolling interests are classiﬁed as nonredeemable noncontrolling interests in permanent equity. Additionally, for joint ventures with operating agreement provisions that do not establish an obligation for the Company to purchase the third party partners’ noncontrolling interests (e.g., where the Company has the option, but not the obligation, to purchase the third party partners’ noncontrolling interests), such noncontrolling interests are classiﬁed as nonredeemable noncontrolling interests in permanent equity. The Company’s equity joint ventures that are classiﬁed as redeemable noncontrolling interests are subject to operating agreement provisions that require the Company to purchase the noncontrolling partner’s interest upon the occurrence of certain triggering events, which are deﬁned as the bankruptcy of the partner or the partner’s exclusion from the Medicare or Medicaid programs. These triggering events and the related repurchase provisions are speciﬁc to each redeemable equity joint venture, since the triggering of a repurchase obligation for any one redeemable noncontrolling interest in an equity joint venture does not necessarily impact any of the other redeemable noncontrolling interests in other equity joint ventures. Upon the occurrence of a triggering event requiring the purchase of a redeemable noncontrolling interest, the Company would be required to purchase the noncontrolling partner’s interest based upon a valuation methodology set forth in the applicable joint venture agreement. F-10 Form 10-K Part I V Notes to Consolidated Financial Statements 05759-LHC.indd 10 4/4/18 4:23 PM LEADING THE CHANGE National Growth – Community Focus Redeemable noncontrolling interests and nonredeemable noncontrolling interests are initially recorded at their fair value as of the closing date of the transaction establishing the joint venture. Such fair values are determined using various accepted valuation methods, including the income approach, the market approach, the cost approach, and a combination of one or more of these approaches. A number of facts and circumstances concerning the operation of the joint venture are evaluated for each transaction, including (but not limited to) the ability to choose management, control over acquiring or liquidating assets, and control over the joint venture’s strategy and direction, in order to determine the fair value of the noncontrolling interest. Subsequent to the closing date of the transaction establishing the joint venture, recorded values for both redeemable and nonredeemable noncontrolling interests are adjusted at the end of each reporting period for (a) comprehensive income (loss) that is attributed to the noncontrolling interest, which is calculated by multiplying the noncontrolling interest percentage by the comprehensive income (loss) of the joint venture’s operations during the reporting period, (b) dividends paid to the noncontrolling interest partner during the reporting period, and (c) any other transactions that increase or decrease the Company’s ownership interest in the joint venture, as a result of which the Company retains its controlling interest. If the Company determines based upon its analysis as of the end of each reporting period in accordance with authoritative accounting guidance, that it is not probable that an event would occur to otherwise require the redemption of a redeemable noncontrolling interest (i.e., the date for such event is not set or such event is not certain to occur), then the Company does not adjust the recorded amount of such redeemable noncontrolling interest. The carrying amount of each redeemable equity instrument presented in temporary equity for the twelve months ended December 31, 2017 is not less than the initial amount reported for each instrument. The activity of noncontrolling interest-redeemable for the twelve months ended December 31, 2017 is summarized in the Company’s Statements of Changes in Equity. Based upon the Company’s evaluation of the redemption provisions concerning redeemable noncontrolling interests as of December 31, 2017, the Company determined in accordance with authoritative accounting guidance that it was not probable that an event otherwise requiring redemption of any redeemable noncontrolling interest would occur (i.e., the date for such event was not set or such event is not certain to occur). Therefore, none of the redeemable noncontrolling interests were identiﬁed as mandatorily redeemable interests at such times, and the Company did not record any values in respect of any mandatorily redeemable interests. Stock-Based Compensation The Company accounts for its stock-based awards in accordance with provisions of ASC 718, “Compensation – Stock Compensation” (“ASC 718”). The Company grants restricted stock or restricted stock units to employees and members of its Board of Directors as a form of compensation. In accordance with ASC 718, 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, 2017, 2016 and 2015: Weighted average number of shares outstanding for basic per share calculation Effect of dilutive potential shares: Options Nonvested restricted stock 2017 2016 2015 17,715,992 17,559,477 17,405,379 — 245,026 863 122,480 3,663 138,489 Adjusted weighted average shares for diluted per share calculation 17,961,018 17,682,820 17,547,531 Antidilutive shares — 219,855 200,525 Notes to Consolidated Financial Statements Form 10-K Part I V F-11 05759-LHC.indd 11 4/4/18 4:23 PM LHC GROUP Recently Adopted Accounting Pronouncements In March 2016, as part of its Simpliﬁcation Initiative, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (“ASU 2016-09”), which 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 transactions, including (1) accounting for income taxes, (2) classiﬁcation of excess tax beneﬁts on the statement of cash ﬂow, (3) forfeitures, (4) minimum statutory tax withholding requirements, (5) classiﬁcation of employee taxes paid on the statement of cash ﬂows when an employer withholds shares for tax withholding purposes, (6) the practical expedient for estimating the expected term, and (7) intrinsic value. The Company adopted the new standard on its effective date of January 1, 2017 and elected to apply this adoption prospectively. All excess tax beneﬁts and deﬁciencies in the current and future periods will be recognized as income tax expense in the Company’s consolidated ﬁnancial statements in the reporting period in which they occur. The Company recorded excess tax beneﬁts of $1.0 million in income tax expense for the twelve months ended December 31, 2017. Additionally, the Company elected to continue to apply an estimated rate of forfeiture to its compensation expense for share-based awards. Recently Issued Accounting Pronouncements On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, (“ASU 2014-09”) which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace the majority of existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for reporting periods beginning after December 15, 2017. The standard permits the use of either the full retrospective or cumulative effect transition method. As the Company progresses with evaluating the effect that ASU 2014-09 will have on its consolidated ﬁnancial statements and related disclosures, the Company has determined that it will not create a material impact to its consolidated ﬁnancial statements upon implementation on January 1, 2018. Currently, the Company anticipates adopting the new standard using the full retrospective method for all periods presented. Upon adoption, in applying the retrospective method, the Company expects to present the amounts that are currently included in the provision for bad debts as a reduction to net service revenue related to an implicit price concession. In February 2016, the FASB issued ASU No. 2016-02, Leases, (“ASU 2016-02”) which requires lessees to recognize qualifying leases on the statement of ﬁnancial position. Qualifying leases will be classiﬁed as right-of-use assets and lease liabilities. The new standard is effective on January 1, 2019. Early adoption is permitted. ASU 2016-02 mandates a modiﬁed retrospective transition method for all entities. The Company anticipates that the adoption of ASU 2016-02 will result in a material increase in total assets and total liabilities. The Company continues to evaluate the effect that ASU 2016-02 will have on its related disclosures. 3. Acquisitions and Joint Ventures 2017 Acquisitions On January 1, 2017, the Company formed a joint venture with LifePoint Health, Inc. (“LifePoint”). LifePoint contributed 28 home health agencies, 12 hospice agencies, and one inpatient hospice unit to the joint venture during the twelve months ended December 31, 2017. The Company acquired majority ownership of the membership interests of these agencies. These providers conduct home health operations in Arizona, Colorado, Louisiana, Michigan, North Carolina, Pennsylvania, Tennessee, Texas, and Virginia; and conduct hospice operations in Michigan, North Carolina, Pennsylvania, Tennessee, and Virginia, and conduct inpatient hospice operations in North Carolina. On June 1, 2017, the Company formed a joint venture with Baptist Memorial Health Care (“Baptist”). Baptist contributed three home health agencies and six hospice agencies, and one inpatient hospice unit to the joint venture during the twelve months ended December 31, 2017. The Company acquired majority ownership of the membership interests of these agencies. These providers conduct home health and hospice operations in Mississippi and Tennessee, and conduct inpatient hospice operations in Tennessee. On September 1, 2017, the Company formed a joint venture with CHRISTUS Continuing Care (“CHRISTUS”). CHRISTUS contributed seven home health agencies, ﬁve hospice agencies, one inpatient hospice unit, one community-based agency, and six LTACH agencies to the joint venture during the twelve months ended December 31, 2017. The Company acquired majority ownership of the membership interests of these agencies. These providers conduct home health and hospice operations in Louisiana and Texas, conduct inpatient hospice operations in Texas, conduct community-based operations in Texas; and conduct LTACH operations in Arkansas, Louisiana, and Texas. F-12 Form 10-K Part I V Notes to Consolidated Financial Statements 05759-LHC.indd 12 4/4/18 4:23 PM LEADING THE CHANGE National Growth – Community Focus In separate transactions, the Company acquired ﬁve home health agencies, two hospice agencies, and one pharmacy during the twelve months ended December 31, 2017. The total aggregate purchase price for these transactions was $80.2 million, of which $10.4 million was paid in December 2016 and $64.6 million was paid in cash during the twelve months ended December 31, 2017. The difference between the total aggregate purchase price and cash payments relates to acquired liabilities for each business combination. The purchase prices were determined based on the Company’s analysis of comparable acquisitions and the target market’s potential future cash ﬂows. The fair values assigned to certain assets acquired and liabilities assumed in relation to the Company’s acquisition that occurred during the third and fourth quarters of 2017 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 2018. 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 Patient account receivable 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 $34,409 $ 75,028 75,028 5,679 14,238 20,207 6 2,143 42,273 53,657 $ 86,412 Trade names, certiﬁcates of need and licenses are indeﬁnite-lived assets and, therefore, not subject to amortization. Acquired trade names that are not being used actively are amortized over the estimated useful life on the straight line basis. Trade names are valued using the relief from royalty method, a form of the income approach. Certiﬁcates of needs are valued using the replacement cost approach based on registration fees and opportunity costs. Licenses are valued based on the estimated direct costs associated with recreating the asset, including opportunity costs based on an income approach. In the case of states with a moratorium in place, the licenses are valued using the multi period excess earnings method. The other identiﬁable assets include non-compete agreements that are amortized over the life of the agreements, ranging from one to three years. Noncontrolling interest is valued at fair value by applying a discount to the value of the acquired entity for lack of control. The Company conducted preliminary assessments and recognized provisional amounts in its initial accounting for the acquisitions of majority ownership of two joint venture partnerships for all identiﬁed assets in accordance with the requirements of ASC 805. The Company is continuing its review of these matters during the measurement period. If new information about facts and circumstances that existed at the acquisition date is obtained and indicates adjustments are necessary, the acquisition accounting will be revised to adjust to the provisional amounts initially recognized. Notes to Consolidated Financial Statements Form 10-K Part I V F-13 05759-LHC.indd 13 4/4/18 4:23 PM LHC GROUP The following table contains unaudited pro forma consolidated income statement information assuming the 2017 acquisitions closed January 1, 2016 (amount in thousands, except earnings per share): Net service revenue Operating income Net income Basic earnings per share Diluted earnings per share 2017 2016 1,126,909 78,317 52,300 2.95 2.91 1,043,166 73,779 38,520 2.19 2.18 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. 2016 Acquisitions The total aggregate purchase price for the Company’s acquisitions, which closed in the twelve months ended December 31, 2016, was $24.1 million, of which $23.1 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. 4. Goodwill and Other Intangibles, Net The following table summarizes changes in goodwill by reporting unit during the twelve months ended December 31, 2017 and 2016 (amounts in thousands): Home Health Reporting Unit Hospice Reporting Unit Community-Based Facility-Based Reporting Unit Reporting Unit 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 Goodwill from acquisitions Goodwill related to noncontrolling interests Goodwill related to impairment on disposals Goodwill related to prior year adjustments Balance as of December 31, 2017 $ 202,995 6,760 580 504 $ 210,839 30,623 21,469 (1,470) (5) $ 261,456 $ 58,136 7,460 355 (1,717) $ 64,234 15,000 9,580 — — $ 88,814 $ 17,972 848 — — $ 18,820 6,220 3,501 — — $ 28,541 $ 11,591 1,493 340 — $ 13,424 160 (141) — 347 $ 13,790 Total $ 290,694 16,561 1,275 (1,213) $ 307,317 52,003 34,409 (1,470) 342 $ 392,601 The Company determined that there was no impairment for the goodwill of any reporting units as of December 31, 2017, 2016 and 2015 based on the Company’s annual impairment testing; however, the Company did record $1.5 million of disposal of goodwill during the year ended December 31, 2017 due to the closure of underperforming locations. The amount of disposal of goodwill was determined using prices of comparable business in the market. This was recorded in impairment of intangibles and other on the Company’s consolidated statements of income. 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, 2017. F-14 Form 10-K Part I V Notes to Consolidated Financial Statements 05759-LHC.indd 14 4/4/18 4:23 PM The following tables summarize the changes in intangible assets during the twelve months ended December 31, 2017 and 2016 (amounts in thousands): LEADING THE CHANGE National Growth – Community Focus Indeﬁnite-lived assets: Trade names Certiﬁcates of need/licenses Total Amortizing assets: Trade names Non-compete agreements Total Balance at December 31, 2017 Indeﬁnite-lived assets: Trade names Certiﬁcates of need/licenses Total Amortizing assets: Trade names Non-compete agreements Total Balance at December 31, 2016 Remaining Useful Life Indeﬁnite Indeﬁnite 4 months – 10 years 2 months – 2 years Remaining Useful Life Indeﬁnite Indeﬁnite 8 months – 9 years 2 months – 3 years December 31, 2017 Gross Carrying Amount $ 78,299 53,493 131,792 10,127 5,732 15,859 $ 147,651 Accumulated Amortization $ — — — (7,547) (5,494) (13,041) $ (13,041) 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) Net Carrying Amount $ 78,299 53,493 131,792 2,580 238 2,818 $ 134,610 Net Carrying Amount $ 64,672 33,327 $ 97,999 $ 3,303 704 4,007 $ 102,006 Intangible assets of $88.1 million, net of accumulated amortization, related to the home health services segment, $32.0 million related to the hospice segment, $9.5 million related to the community-based services segment and $5.0 million related to the facility-based services segment as of December 31, 2017. Amortization for the years ended December 31, 2017, 2016 and 2015 was $2.1 million, $2.5 million and $1.9 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, 2017 is as follows (amounts in thousands): Year 2018 2019 2020 2021 2022 Total Amortization Amount $ 1,467 448 236 105 100 $ 2,356 Notes to Consolidated Financial Statements Form 10-K Part I V F-15 05759-LHC.indd 15 4/4/18 4:23 PM LHC GROUP 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, 2017 and 2016 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 2017 2016 $ 5,224 4,147 663 2,157 2,064 1,299 21 — — 91 12 $ 9,735 5,532 1,004 2,762 1,781 1,880 38 63 90 155 154 (44) (44) $ 15,634 $ 23,150 (35,955) (5,988) (623) (534) (43,100) $ (27,466) (45,622) (8,397) (817) (255) (55,091) $ (31,941) 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 2017 2016 2015 $ 12,798 2,621 15,419 (6,273) 1,798 (4,475) $ 10,944 $ 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 F-16 Form 10-K Part I V Notes to Consolidated Financial Statements 05759-LHC.indd 16 4/4/18 4:23 PM 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: LEADING THE CHANGE National Growth – Community Focus Federal statutory tax rate State income taxes, net of federal beneﬁt Nondeductible expenses Uncertain tax position TCJA Enactment Excess Tax Beneﬁt Credits and other Effective tax rate 2017 35.0% 4.4 3.2 — (22.9) (1.6) (0.1) 18.0% 2016 35.0% 3.8 2.6 (3.3) — — (0.4) 37.7% 2015 35.0% 3.9 2.5 — — — — 41.4% 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, 2013. On December 22, 2017, the U.S. enacted signiﬁcant changes to U.S. tax law following the passage and signing of “Tax Cuts and Jobs Act” or the “TCJA”. The TCJA is complex and signiﬁcantly changes the U.S. corporate income tax system by, among other things, reducing the Federal corporate income tax rate from 35% to 21%. Given the signiﬁcant changes resulting from the TCJA, the estimated ﬁnancial impacts for fourth-quarter and full-year 2017 are provisional and subject to further analysis, interpretation and clariﬁcation of the TCJA, which could result in changes to these estimates during 2018. The reduction in the corporate tax rate under the TCJA will require a one-time revaluation of certain deferred tax-related assets and liabilities to reﬂect their value at the lower corporate tax rate of 21%. As such, the Company experienced a reduction in the value of these assets and liabilities of approximately $14.0 million. This reduction in value is based on balances as of December 31, 2017. Solely based on this reduction in deferred tax assets and liabilities, the Company experienced a decrease in the provision for income taxes of approximately $14.0 million for the fourth quarter of 2017, which reduced the effective tax rate by 22.9%. No material uncertain tax positions exist as of December 31, 2017. 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. The settlement was paid in the second quarter of 2017. No other material uncertain tax positions exist as of December 31, 2017. A reconciliation of the total amounts of unrecognized tax beneﬁts follows (amounts in thousands): Total unrecognized tax beneﬁts as of December 31, 2016 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, 2017 $ 1,315 (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, 2017, the Company recognized an increase of $0.02 million in interest expense due to the ﬁnal settlement paid related to the overall uncertain tax position. During the years ended December 31, 2016 and 2015, the Company recognized $0.2 million each year in interest expense, and recorded an accrued liability of interest payments related to uncertain tax positions. Notes to Consolidated Financial Statements Form 10-K Part I V F-17 05759-LHC.indd 17 4/4/18 4:23 PM LHC GROUP 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, 2017 was 5.50% and the Eurodollar rate was 3.57%. As of December 31, 2017, the interest rate on outstanding borrowings was 3.43%. As of December 31, 2017 the Company had $144.0 million drawn and letters of credit in the amount of $9.6 million outstanding under the credit facility. At 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. The scheduled principal payments on long-term debt for each of the ﬁve years subsequent to December 31, 2017 is as follows (amounts in thousands): Year 2018 2019 2020 2021 2022 Total 7. Stockholders’ Equity Equity Based Awards Principal Payment Amount $ 286 144,000 — — — $ 144,286 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 391,737 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 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. F-18 Form 10-K Part I V Notes to Consolidated Financial Statements 05759-LHC.indd 18 4/4/18 4:23 PM LEADING THE CHANGE National Growth – Community Focus During 2017, 2016 and 2015, respectively, 139,310, 220,800 and 182,865 nonvested shares were granted to employees pursuant to the 2010 Incentive Plan. The Company also issues nonvested stock to its independent directors of the Company’s Board of Directors. During 2017, 2016 and 2015, respectively, 11,700, 15,300 and 16,200 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 vest 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, 2017, 2016 and 2015 were $48.52, $37.99 and $34.06, respectively. The following table represents the nonvested stock activity for the year ended December 31, 2017: Nonvested shares outstanding at January 1, 2017 Granted Vested Forfeited Nonvested shares outstanding at December 31, 2017 Number of Shares 574,711 151,010 (192,463) (3,793) 529,465 Weighted Average Grant Date Fair Value $ 31.61 48.52 28.95 39.30 $ 37.34 As of December 31, 2017, there was $13.4 million of total unrecognized compensation cost related to non-vested shares granted. That cost is expected to be recognized over the weighted average period of 2.99 years. The total fair value of shares vested in the year ended December 31, 2017 was $5.6 million and the total fair value of shares vested in the years December 31, 2016 and 2015 was $4.5 million and $4.1 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 $6.0 million, $4.9 million and $4.2 million in compensation expense related to non-vested stock grants in the years ended December 31, 2017, 2016 and 2015, 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 2017, 2016 and 2015 under the Employee Stock Purchase Plan: Shares available as of December 31, 2014 Shares issued in 2015 Shares issued in 2016 Shares issued in 2017 Shares available as of December 31, 2017 Treasury Stock Weighted Average Per Share Price $ 34.37 $ 37.79 $ 55.40 Number of Shares 236,483 22,723 24,149 18,542 171,069 Notes to Consolidated Financial Statements Form 10-K Part I V F-19 05759-LHC.indd 19 4/4/18 4:23 PM LHC GROUP 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 61,825, 52,119 and 42,197 shares of common stock related to these tax obligations during the years ended December 31, 2017, 2016 and 2015, respectively. 8. Leases 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 $25.1 million, $20.8 million and $20.7 million for the years ended December 31, 2017, 2016 and 2015, 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 $1.2 million, $5.3 million and $7.2 million for the years ended December 31, 2017, 2016 and 2015, respectively. The ﬂeet program was terminated during the year ended December 31, 2017. Future minimum rental commitments under non-cancelable operating leases are as follows (amounts in thousands): Year 2018 2019 2020 2021 2022 Thereafter 9. Employee Beneﬁt Plan Deﬁned Contribution Plan Total $ 23,119 16,408 12,120 8,881 5,514 7,172 $ 73,214 The Company sponsors a 401(k) plan for all eligible employees. The plan allows participants to contribute up to $18,000 in 2017, 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 $7.9 million, $6.3 million and $5.4 million in the years ended December 31, 2017, 2016 and 2015, respectively. 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. While such audits and investigations are the subject of administrative appeals, the appeals process, even if successful, may take several years to resolve. The Department of Justice, CMS, or other federal and state enforcement and regulatory agencies may conduct additional investigations related to the Company’s businesses in the future. These audits and investigations have caused and could potentially continue to cause delays in collections, recoupments from governmental payors. Currently, the Company has recorded $16.9 million in other assets, which are from government payors related to the disputed ﬁnding of pending ZPIC audits. Additionally, these audits may F-20 Form 10-K Part I V Notes to Consolidated Financial Statements 05759-LHC.indd 20 4/4/18 4:23 PM LEADING THE CHANGE National Growth – Community Focus subject the Company to sanctions, damages, extrapolation of damage ﬁndings, additional 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. On January 18, 2018, Jordan Rosenblatt, a purported shareholder of Almost Family, Inc. (“Almost Family”) ﬁled a complaint for Violations of the Securities Exchange Act of 1934 in the United States District Court for the Western District of Kentucky, styled Rosenblatt v. Almost Family, Inc., et al., Case No. 3:18-cv-40-TBR (the “Rosenblatt Action”). The Rosenblatt Action was ﬁled against the Company, Almost Family, Almost Family’s board of directors, and Hammer Merger Sub. The complaint in the Rosenblatt Action (“Complaint”) asserts that the Form S-4 Registration Statement (“Registration Statement”) ﬁled on December 21, 2017 contains false and misleading statements with respect to the Merger. The Complaint asserts claims against Almost Family and its board of directors for violations of Section 14(a) of the 1934 Act in connection with the dissemination of the Registration Statement, and asserts claims against the Almost Family board of directors and the Company for violations of Section 20(a) of the 1934 Act as controlling persons of Almost Family. The Rosenblatt Action seeks, among other things, an injunction enjoining the Merger from closing and an award of attorneys’ fees and costs. In addition to the Rosenblatt Action, two additional complaints were ﬁled against Almost Family in the United States District Court for the District of Delaware alleging similar violations as the Rosenblatt Action. While the Company is not named as a party in either of these additional complaints, these additional complaints also seek, among other things, an injunction enjoining both the vote of the Almost Family stockholders with respect to the Merger and the closing of the Merger, monetary damages and an award of attorneys’ fees and costs from Almost Family. The Company believes that the claims asserted in these lawsuits are entirely without merit and intend to defend these lawsuits vigorously. The Company is involved in various legal proceedings arising in the ordinary course of business. Although the results of litigation cannot be predicted with certainty, management believes the outcome of pending litigation will not have a material adverse effect, after considering the effect of the Company’s insurance coverage, on the Company’s consolidated ﬁnancial information. Joint Venture Buy/Sell Provisions Most of the Company’s joint ventures include a buy/sell option that grants to the Company and its joint venture partners the right to require the other joint venture party to either purchase all of the exercising member’s membership interests or sell to the exercising member all of the non-exercising member’s membership interest, at the non-exercising member’s option, within 30 days of the receipt of notice of the exercise of the buy/sell option. In some instances, the purchase price is based on a multiple of the historical or future earnings before income taxes and depreciation and amortization of the equity joint venture at the time the buy/sell option is exercised. In other instances, the buy/sell purchase price will be negotiated by the partners and subject to a fair market valuation process. The Company has not received notice from any joint venture partners of their intent to exercise the terms of the buy/sell agreement nor has the Company notiﬁed any joint venture partners of its intent to exercise the terms of the buy/sell agreement. Compliance The laws and regulations governing the Company’s operations, along with the terms of participation in various government programs, regulate how the Company does business, the services offered and its interactions with patients and the public. These laws and regulations, and their interpretations, are subject to frequent change. Changes in existing laws or regulations, or their interpretations, or the enactment of new laws or regulations could materially and adversely affect the Company’s operations and ﬁnancial condition. The Company is subject to various routine and non-routine governmental reviews, audits and investigations. In recent years, federal and state civil and criminal enforcement agencies have heightened and coordinated their oversight efforts related to the health care industry, including referral practices, cost reporting, billing practices, joint ventures and other ﬁnancial relationships among health care providers. Violation of the laws governing the Company’s operations, or changes in the interpretation of those laws, could result in the imposition of ﬁnes, civil or criminal penalties, and/or termination of the Company’s rights to participate in federal and state-sponsored programs and suspension or revocation of the Company’s licenses. The Company believes that it is in material compliance with all applicable laws and regulations. Notes to Consolidated Financial Statements Form 10-K Part I V F-21 05759-LHC.indd 21 4/4/18 4:23 PM LHC GROUP 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, 2017, 2016 and 2015 (amounts in thousands): Net service revenue Cost of service revenue Provision for bad debts General and administrative expenses Impairment of intangibles and other Loss (gain) on disposal of assets Operating income Interest expense Non-operating income Income before income taxes and noncontrolling interests Income tax expense Net income Less net income (loss) attributable to noncontrolling interests Home Health Services $ 783,507 482,179 5,924 229,264 1,511 101 64,528 (2,906) 360 61,982 9,509 52,473 9,102 Year Ended December 31, 2017 Hospice Services $ 159,197 103,969 1,910 45,516 — 22 7,780 (582) 71 7,269 1,057 6,212 1,248 Community- Facility- Based Services Based Services Total $ 46,909 35,244 750 9,946 — — 969 (194) 3 778 156 622 $ 82,473 54,418 900 25,813 — (63) 1,405 (194) 90 1,301 222 1,079 $ 1,072,086 675,810 9,484 310,539 1,511 60 74,682 (3,876) 524 71,330 10,944 60,386 (111) 35 10,274 Net income attributable to LHC Group, Inc.’s common stockholders Total assets $ 43,371 $ 534,385 $ 4,964 $ 155,230 733 $ $ 48,216 $ 1,044 $ 55,871 50,112 $ $ 793,702 Year Ended December 31, 2016 Community- Facility- Based Services Based Services Total 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 before income taxes and noncontrolling interests Income tax expense Net income Less net income (loss) attributable to noncontrolling interests Home Health Services $ 665,896 398,450 9,609 203,418 — 857 53,562 (2,216) 422 51,768 16,505 35,263 6,876 Hospice Services $ 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 Net income attributable to LHC Group, Inc.’s common stockholders Total assets $ 28,387 $ 427,782 $ 4,999 $ 116,090 $ 934 $ 33,520 $ 2,263 $ 36,679 $ 36,583 $ 614,071 F-22 Form 10-K Part I V Notes to Consolidated Financial Statements 05759-LHC.indd 22 4/4/18 4:23 PM LEADING THE CHANGE National Growth – Community Focus 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 $ 76,122 46,146 689 22,426 — 45 6,816 (207) 19 $ 816,366 480,878 19,243 247,919 1,273 710 66,343 (2,302) 457 1,756 787 6,628 2,347 64,498 22,848 969 4,281 41,650 (144) 958 9,315 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 before income taxes and noncontrolling interests Income tax expense Net income Less net income attributable to noncontrolling interests Net income attributable to LHC Group, Inc.’s common stockholders Total assets $ 24,303 $ 394,392 $ 3,596 $ 101,641 $ 1,113 $ 31,235 $ 3,323 $ 38,786 $ 32,335 $ 566,054 12. Fair Value of Financial Instruments 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, 2017, 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, 2017, 2016 and 2015 (amounts in thousands): Year 2017 2016 2015 14. Concentration of Risk Beginning of Year Balance Additions Deductions $ 29,036 26,712 18,582 $ 9,484 14,790 19,243 $ 14,964 12,466 11,113 End of Year Balance $ 23,556 29,036 26,712 The Company’s facilities in Louisiana, Mississippi, Alabama, Arkansas, and Tennessee accounted for approximately 55.0%, 58.4% and 61.1% of net service revenue during the years ended December 31, 2017, 2016 and 2015, respectively. Any material change in the current economic or competitive conditions in these states could have a disproportionate effect on the Company’s overall business results. Notes to Consolidated Financial Statements Form 10-K Part I V F-23 05759-LHC.indd 23 4/4/18 4:23 PM LHC GROUP 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 2017 $ 246,618 92,248 9,467 $ $ 0.54 0.53 Second Quarter Third Quarter Fourth Quarter 2017 2017 2017 $ $ $ 260,210 99,052 11,304 $ 272,872 100,016 10,906 $ 292,386 104,960 18,435 0.64 0.63 $ $ 0.61 0.61 $ $ 1.04 1.02 17,643,463 17,817,880 17,728,567 17,964,387 17,740,818 18,010,522 17,749,872 18,043,297 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 Because of the method used to calculate per share amounts, quarterly per share amounts may not necessarily total to the per share amounts for the entire year. F-24 Form 10-K Part I V Notes to Consolidated Financial Statements 05759-LHC.indd 24 4/4/18 4:23 PM LEADING THE CHANGE National Growth – Community Focus 16. Proposed Merger with Almost Family On November 15, 2017, the Company announced the execution of an Agreement and Plan of Merger (the “Merger Agreement”) entered into among the Company, Almost Family, Inc. (“Almost Family”), and Hammer Merger Sub, Inc. (“Merger Sub”), a wholly owned subsidiary of the Company, providing for a “merger of equals” business combination of the Company and Almost Family. The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, Merger Sub will be merged with and into Almost Family (the “Merger”), with Almost Family continuing as the surviving corporation and as a wholly-owned subsidiary of the Company. Under the terms of the Merger Agreement, which was unanimously approved by both our board of directors and the Almost Family board of directors, the stockholders of Almost Family will be entitled to receive 0.9150 shares of our common stock for each share of Almost Family common stock, plus the cash equivalent of any fractional share. Upon the closing of the Merger, the Company stockholders will own approximately 58.5% and the Almost Family stockholders will own approximately 41.5% of the combined company. On February 22, 2018, the Company and Almost Family issued a joint press release announcing that the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, with respect to the Merger, has expired, satisfying one of the important conditions to the proposed Merger. The Merger Agreement contains certain termination rights for both the Company and Almost Family, including if the Merger is not consummated on or before July 1, 2018 (subject to extension to October 1, 2018 in certain circumstances) and if the required approval of the stockholders of either the Company or Almost Family is not obtained. The Merger Agreement further provides that, upon termination of the Merger Agreement under speciﬁed circumstances, including the termination of the Merger Agreement by the Company or Almost Family as a result of an adverse change in the recommendation of the other party’s board of directors, the Company may be required to pay to Almost Family, or Almost Family may be required to pay to the Company, as applicable, a termination fee of $30 million. Further, if the Merger Agreement is terminated as a result of the stockholders of either the Company or Almost Family failing to approve the transaction, the Company may be required to reimburse to Almost Family, or Almost Family may be required to reimburse to the Company, the other party’s expenses in connection with the proposed transaction, up to a maximum of $5 million. The transaction, which is expected to be completed on April 1, 2018, is subject to the receipt of stockholder approvals and other customary closing conditions. For additional information concerning the proposed transaction is included in the ﬁnal proxy statement/ prospectus, which was ﬁled with the SEC on February 13, 2018 and can be accessed on the SEC’s website. Notes to Consolidated Financial Statements Form 10-K Part I V F-25 05759-LHC.indd 25 4/4/18 4:23 PM 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 1, 2018 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 /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/ RONALD T. NIXON Ronald T. Nixon /s/ W.J. “BILLY” TAUZIN W.J. “Billy” Tauzin /s/ KENNETH E. THORP Kenneth E. Thorpe /s/ BRENT TURNER Brent Turner /s/ DAN S. WILFORD Dan S. Wilford Chief Executive Ofﬁcer and Chairman of the Board of Directors March 1, 2018 Executive Vice President, Chief Financial Ofﬁcer, Principal Accounting Ofﬁcer March 1, 2018 Director Director Director Director Director Director Director Director March 1, 2018 March 1, 2018 March 1, 2018 March 1, 2018 March 1, 2018 March 1, 2018 March 1, 2018 March 1, 2018 F-26 Form 10-K Part I V Signatures 05759-LHC.indd 26 4/4/18 4:23 PM LEADING THE CHANGE National Growth – Community Focus EXHIBIT INDEX Exhibit Number Description of Exhibits 2.1 Agreement and Plan of Merger, dated as of November 15, 2017, by and among LHC Group, Inc., Hammer Merger Sub, Inc., and Almost Family, Inc. (incorporated by reference to Exhibit 2.1 to LHC Group’s Form 8-K ﬁled on November 16, 2017). 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 10-Q 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. Exhibit Index Form 10-K Part I V F-27 05759-LHC.indd 27 4/4/18 4:23 PM LHC GROUP Exhibit Number Description of Exhibits 31.1 Certiﬁcation of Keith G. Myers, Chief Executive Ofﬁcer pursuant to Rule 13a- 14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certiﬁcation of Joshua L. Profﬁtt, Chief Financial Ofﬁcer pursuant to Rule 13a- 14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1* Certiﬁcation of 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.” + Indicates a management contract or compensatory plan. * 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. F-28 Form 10-K Part I V Exhibit Index 05759-LHC.indd 28 4/4/18 4:23 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 23, 2018, the company had a total of approximately 9,850 shareholders, including stockholders of record and approximately 9,600 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 12/31/2012 and tracks it through 12/31/2017. 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 12/12 12/13 12/14 12/15 12/16 12/17 LHC Group Inc. NASDAQ Composite Peer Group 12/12 $100.00 $100.00 $100.00 12/13 $112.86 $141.63 $127.71 12/14 $146.39 $162.09 $176.80 12/15 $212.63 $173.33 $212.02 12/16 $214.55 $187.19 $245.14 12/17 $287.56 $242.29 $265.87 *$100 invested on 12/31/12 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 Corporate Governance Committee Monica F. Azare Chair - Compensation Committee Clinical Quality Committee John B. Breaux Co-Chair - Regulatory Affairs and Public Policy Committee Corporate Development Committee John L. Indest Chair - Clinical Quality Committee Corporate Development Committee Ronald T. Nixon Chair - Corporate Development Committee Audit Committee Nominating and Corporate Governance Committee Kenneth E. Thorpe, PhD Clinical Quality Committee Regulatory Affairs and Public Policy Committee Brent Turner Chair - Audit Committee Compensation Committee Corporate Development Committee Dan S. Wilford Chair - Nominating and Corporate Governance Committee Audit Committee Clinical Quality Committee Compensation Committee 05759-Cvr-R1.indd 4 4/10/18 12:57 PM 901 HUGH WALLIS ROAD SOUTH LAFAYETTE, LA 70508 1.866.LHC.GROUP LHCgroup.com 05759-Cvr-R1.indd 1 4/10/18 12:56 PM

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