L E A D I N G T H E C H A N G E
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OUR PUR POSE
It’s all about helping people.
OUR MISSION
We provide exceptional care and unparalleled service
to patients and families who have placed their trust in us.
OUR VISION
We will improve the quality of life in the United States
by transforming the delivery of healthcare services.
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OUR PUR POSE
It’s all about helping people.
OUR MISSION
We provide exceptional care and unparalleled service
to patients and families who have placed their trust in us.
OUR VISION
We will improve the quality of life in the United States
by transforming the delivery of healthcare services.
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Keith G. Myers
Chairman and
Chief Executive Officer
TO OUR VALUED STAKEHOLDERS:
In 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.
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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
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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
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“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
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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.
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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.
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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
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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
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•
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.
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“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
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FINANCIAL HIGHLIGHTS
(in thousands, except share and per share data)
Net service revenue
Cost of service revenue
Gross margin
Provision for bad debts
General and administrative expenses
Impairment of intangibles and other
Loss on disposal of assets
Operating income
Interest expense
Non-operating income
Income 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
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L E A D I N G T H E C H A N G E
2017 Form 10-K
05759-LHC.indd 1
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
3 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(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.
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LHC GROUP, INC.
Table of Contents
PART I.
Cautionary Statement Regarding Forward-Looking Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II.
Item 5.
Item 6.
Item 7.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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
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LHC GROUP, INC.
Table of Contents
PART I.
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II.
Item 5.
Item 6.
Item 7.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV.
Item 15.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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.
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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
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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.
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Form 10-K Part I
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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
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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.
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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
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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.
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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
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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“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.
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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.
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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.
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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
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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.
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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.
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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.
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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.
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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.
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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.
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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
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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
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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
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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
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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
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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
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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.
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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
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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
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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
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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
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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
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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.
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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.
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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
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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.
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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
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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.
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Borrowings accrue interest under the Credit Agreement at either the Base Rate or Eurodollar rate are subject to the applicable margins as
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
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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.
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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
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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.
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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
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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
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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
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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
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Item 9B. Other Information.
None noted.
LEADING THE CHANGE National Growth – Community Focus
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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
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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.
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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
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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
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LHC GROUP
LHC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
As of December 31,
ASSETS
Current assets:
Cash
Receivables:
Patient accounts receivable, less allowance for uncollectible accounts
of $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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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901 HUGH WALLIS ROAD SOUTH
LAFAYETTE, LA 70508
1.866.LHC.GROUP
LHCgroup.com
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