LHC Group Inc (LHCG) Q2 2019 Earnings Call Transcript

LHCG earnings call for the period ending June 30, 2019.

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LHC Group Inc (NASDAQ:LHCG)
Q2 2019 Earnings Call
Aug 8, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the LHC Group Second Quarter 2019 Earnings Conference Call. [Operator Instructions] Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]

I would now like to introduce your host for today's conference, Mr. Eric Elliott, Senior Vice President of Finance. You may begin, sir.

Eric Elliott -- Senior Vice President of Finance

Thank you, Norma, and I'd like to welcome everyone to LHC Group's earnings conference call for the second quarter ended July 30, 2019. Everyone should have received a copy of our earnings release last night. I would also like to highlight that we have posted some supplemental information on the quarter and year-to-date for 2019 on the Quarterly Results section of our Investor Relations page. The supplemental deck as well as a copy of our earnings release, the 10-Q, and ultimately a transcript of this call, when available, can be found on this page. Our supplemental deck includes all of our reconciliations and breakdown of adjustments. We will refer to these non-GAAP measures during our call today.

In a moment, we'll have some prepared comments from Keith Myers, Chairman and Chief Executive Officer; Josh Proffitt, Chief Financial Officer; and Don Stelly, President and Chief Operating Officer.

Before we start, I would like to remind everyone that statements included in this conference call and in our press release and in our supplemental financial information may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These statements include, but are not limited to, comments regarding our financial results for 2019 and beyond. Actual results could differ materially from those projected in forward-looking statements because of a number of risk factors and uncertainties, which are discussed in our annual and quarterly SEC filings. LHC Group shall have no obligation to update the information provided on this call to reflect subsequent events.

Now, I'm pleased to introduce the Chairman and CEO of LHC Group, Keith Myers.

Keith G. Myers -- Chairman and Chief Executive Officer

Thank you, Eric, and thank you, everyone, for dialing in and participating in this morning's call. Before I begin, I want to take a moment to directly thank our 32,000 team members serving at locations around the nation. Your collective efforts reflect our unwavering commitment of providing the highest quality and service in our industry. A true hallmark of our LHC Group family. Collectively, you fulfill our commitment to being a 24/7, 365 healthcare organization that never sleeps and is always there for those who place their trust in us. Please know that your efforts are noticed and greatly appreciated.

For 25 years, LHC Group has been a clinically driven company and we reinforced that commitment with a strong addition to our team when Dr. Tricia Nguyen joined us in July as Chief Medical Officer. As a physician and business leader with experience in health systems and managed care, she is already influencing how we think about our care models, our ACO business and other initiatives, that should have an impact on revenue and earnings. We value people here at LHC Group as our greatest asset, along with the culture we have intentionally created. It shows in the high level of quality and patient satisfaction that has consistently outpaced the industry. And it shows in our voluntary turnover rate. The turnover rate at legacy LHC stands at 15.5%, another record low for us.

Our second quarter story is mainly about building on the strong reputation for clinical quality and an exceptionally deep team of clinicians, operators and other professionals, who go out and execute on organic growth, M&A, integration and managed care initiatives. The work we did in the quarter and to date in the third sets us up for a very successful year in 2019 and to continue thriving in 2020.

With a national platform that now extends across 35 states and the District of Columbia, reaching 60% of the population aged 65 and over, we had many opportunities to capture market share through organic growth, [Indecipherable] and acquisitions. With organic growth in legacy LHC performing ahead of our usual annual targets, we believe once we are past the Homecare Homebase conversion, we will be able to drive organic growth with Almost Family as well.

Our target for M&A volume for 2019 has between $100 million and $150 million. To date, we have announced six transactions, which total approximately $81 million in annualized revenue. These transactions include more hospital joint ventures, several tuck-in acquisitions that fill out our tri-level of care strategy in existing markets, and a strategic acquisition of Visiting Nurse Association of Maryland with approximately $35 million in annual revenue.

We have accelerated our pace of acquisitions, both the final phase of Almost Family Integration and following the completion of the two-phase joint venture with Geisinger in April and June, which included home health and hospice locations in Pennsylvania and New Jersey. We announced VNA Home Health of Maryland in late July and expect this transaction to close on September 1st.

On August 1st, we made several more announcements. First, we closed the previously announced joint venture with Capital Regional Medical Center to purchase from SSM Health the assets of three home health and hospice locations in Jefferson City and Mexico and Missouri. Second, we completed a JV with Atmore Community Hospital to purchase a home health provider in Atmore, Alabama. And lastly, we purchased two home- and community-based locations in West Union and Waverly, Ohio from Comfort Home Care. Together, these three represented approximately $7.5 million in annual revenue.

Our opportunity pipeline, managed by our in-house corporate development team, remains robust. We have the experience of Corp Dev infrastructure in-house to be able to capitalize on increased industry consolidation likely on the horizon in 2020. Particularly among the smaller providers, this component of our growth story could potentially take on greater importance in the months to come. We have been saying for some time, but it bears repeating in the content, the focus on PDGM, we expect and believe that any shift of care into the home and any payment models built on delivering value will be a net winner for LHC Group.

Delivering high-quality care in the privacy and comfort of the home, our primary place of residence, is the most appropriate and most efficient setting. Our partners, payers and policy makers recognize this. We've seen it directly in our ACO business, as we manage large patient populations and analyze the claims there [Phonetic] Our many hospital and health system partners recognize this, as do the many payers we work with and again, policy makers in Washington DC. Health care service delivery is moving to the home at a pace that will continue to increase.

When we connect our joint venture strategy, the new payer models and the new value-based environment we're headed to, we're in a vastly different place than before. Whether it's with partners such as Ochsner that are on the full capitations or partners such as Geisinger that have their own health plan, the conversations we are organizing and the solutions we are presenting are more strategic than they've ever been. We've always been known for the highest level of quality. Where these conversations are going is how we look at unnecessary hospitalizations, ED usage and recertification and focused on total cost of care and sharing in those savings in the form of bonus payments. These relationships create more upside for us in the future and we are very excited about where we sit in this environment with national scale, leading quality scores and our differentiated value proposition.

Now, turning to PDGM. As many of you know, the new payment model for Medicare home health services, PDGM, which Congress enacted in 2018, is set to begin January 1st of next year. Our preparations for this change are well under way and ahead of schedule. At the same time, our constructive dialogue with CMS and our work with Congress continues to develop ways to improve PDGM in its current form for the benefit of Medicare beneficiaries; more specifically, to avoid the unintended consequence of forcing patients back in to higher cost settings to access care that could be provided in the home at a fraction of the call.

In July, CMS issued its proposed rule implementing this model increasing to 8.01%, Its proposal on budget-neutral payment adjustments based upon assumed provider behavior. While we are well positioned and well prepared for this change at LHC Group, we do not agree with the prospective cuts and the use of assumptions as opposed to evidence to adjust payment.

As Founder and Chairman of the Partnership for Quality Home Health Care, and as a long-standing active member and former Board Member of the National Association for Home Care and Hospice, I have been heavily involved in the industry's lobbying efforts. I'd like to add some more commentary on PDGM and our collective efforts. Both the Partnership and NAHC are in lockstep, I should say, and were behind priority legislation to refine PDGM and were generating strong bipartisan support in both houses.

Leading into resource -- recess, there are 45 House co-sponsors and 27 co-sponsors for HR 2573 and Senate Bill 433 respectively. Among the close losses are significant and crucial support from key constituencies and many members of the committees of jurisdiction. The bill's momentum is building. The lead sponsors of the PDGM bill; Collins, Stabenow, Sewell

and Buchanan are home health champions with a strong track record and personal knowledge and support for home health. The bill is well positioned with sponsors, who are motivated to deliver for the home health community. This is evidenced by their statements about the bill.

Our strategy is simple, Bill brought congressional support for our targeted legislative approach to eliminate the most onerous component of PDGM, use all of the muscle of the industry collaboratively, share data on the potential impacts and likely consequences of PDGM, and be ready in position for a legislative vehicle as it develops.

Again, the entire home health community is working collaboratively to build support for the PDGM bill. The national associations are working together with every state association in the nation and non-profits, investor-owned, urban, suburban, rural agencies are all speaking with one voice. This effort mirrors the successful HSGM effort that resulted in CMS slowing down and redoing its original plan for payment reform of home health.

The intensity of advocacy includes a heightened push to remove any technical barriers to passage of the bill, especially pressure at all levels to secure a score, which determines the fiscal impact of the bill. Few [Phonetic] healthcare leaders have committed to accelerate a CBO analysis of the bill, which would remove a significant process obstacle that can affect any legislation. Congressional sponsors had been assured that PQHH & NAHC already enable to pivot quickly to make refinements needed to ensure budget neutrality. In addition, an extensive grassroots advocacy effort during the August recess to communicate by email and social media to members of Congress, make personal visits to members of Congress in their district offices, attend town hall meetings and community forums and invite lawmakers on home health visits to experience the power of care in the home. Both the Partnership and NAHC also continue their grassroots media strategy by encouraging independent voices in the field to write letters to the editor and use other social media means to build support for the bill.

While the PDGM bill is well positioned, the focus of Congress immediately after recess will likely be dominated by policy decisions to address tracked events of recent days. However, the business of Congress in the fall must also incorporate action on other must-pass initiatives. Continuation of many provisions, budget items that concluded at the end of the fiscal year. For this reason, it is very likely that PDGM will have potential vehicle on which to ride along before the end of the fiscal year or certainly before Congress adjourns in December.

HealthSTAT have also forecast the availability of a Medicare bill this fall, that would be a vehicle for the PDGM deflation. Given bipartisan action earlier this summer on the budget and debt limits, there may be legislative opportunities in appropriations or other healthcare extender vehicles that offer our bill the chance for legislative action. Despite these opportunities, Congress can, as it has in the past, delay the budget process by passing a continuing resolution flat-lining expenditures temporarily or for a series of months.

Should this happen, other legislation in the healthcare space may still provide good vehicles to advance our bill. So, the bottom line is, we have strong bipartisan support, growing momentum, data and strong policy arguments for our cause and a unified and engaged home health community. I could not be more pleased with our unified industry advocacy efforts. I believe that our coming together as one voice with reasonable evidence-based policy recommendations supported by the majority of providers in the industry and supporting data from reputable third party firms is a recipe for success in our current and future policy assets on behalf of the industry.

And now, here's Josh to provide some color on our financial results and 2019 guidance. Josh?

Joshua L. Proffitt -- Chief Financial Officer

Thank you, Keith, and good morning everyone. Thank you all for joining our call. As always, I'd like to begin my prepared remarks by saying how much I appreciate all of our clinical professionals across the country and what they do each and every day. It is a privilege to serve you as you tirelessly serve others. I would also like to thank our home office support teams, whose level of commitment and service to the field is greatly appreciated. I am so proud to work alongside and support you all. It is because of all of your hard work and execution that we are able to, once again, report another strong quarter of results. Our supplemental financial information posted on the website provides more detail on the breakdown among sector performance, guidance and assumptions.

I will reference that supplemental deck in my summary remarks this morning. For the second quarter financial results, here are the big takeaways. First, our guidance for the year, it's for 21% growth in adjusted earnings per share at the midpoint and we are on track with that outlook with in $1.07 of adjusted EPS in the second quarter. That's a significant improvement of 27.4% year-over-year and also up 9.2% sequentially from the first quarter. Second, we realized a total of approximately $7.8 million in pre-tax cost synergies in the second quarter, which now brings the realized cost synergies to an annual run rate of $31.2 million from the Almost Family acquisition. Next, incremental margin improvement has continued across all of our segments on a year-over-year and sequential quarter-over-quarter basis. Fourth, with organic growth of 9.1% in home health and 9.6% in hospice for the quarter, our organic growth was strong in both home health and hospice yet again, as we maintained our industry-leading quality and patient satisfaction scores. And lastly, revenue across all segments for the quarter met or exceeded our expectations.

Turning to Page 9 of the supplemental deck. I would note that our adjusted consolidated gross margin of 37.6% in Q2 was a 130 basis point improvement year-over-year and a 50 basis point improvement over the first quarter. Consolidated adjusted G&A expense as a percent of revenue was 27.3% in the second quarter, which was down 50 basis points from 27.8% in the same period a year ago and in the first quarter of this year. Our adjusted consolidated EBITDA was 10.2%, which is up 160 basis points year-over-year and 100 basis points from Q1 of this year.

As part of our ongoing strategy to optimize the portfolio, we also closed 13 locations that represented a total of $11.2 million in annual revenue. In addition, we incurred some severance costs, lease termination fees and impairment costs related to these closures. All of these costs were accounted for in our adjustments. The details of those adjustments are on Page 10 of the supplemental deck. However, in addition to optimizing the portfolio through certain closures, we also continue our strategic growth efforts through not only same-store organic growth and new joint ventures and acquisitions that Keith described, but also through the opening and planning for opening additional de novos across the portfolio.

So far, year-to-date, we have opened five de novos, two in home health, and three in HCBS segment. And we are currently under way in process or evaluating an additional 30 de novo locations to open throughout the balance of this year as we head into 2020. Our improvement across all metrics continues to be broad based. Pages 8 through 15 of the supplemental deck highlight the results, and Page 7 notes the key stats by segment.

Turning to Page 21 of the supplemental deck. We've outlined a number of our debt and liquidity metrics, including the fact that adjusted free cash flow was $61.9 million for the six months ended June 30, 2019.

DSOs have improved to 48 days, down from 51 days in the second quarter of 2018, as we continue to improve our collections on managed care receivables and receivables from the Almost Family acquisition. Recall that we are expecting DSOs to remain close to this range, if not slightly below for the balance of 2019. Our balance sheet remains strong with a net leverage at 0.94 times adjusted estimated EBITDA for 2019. With $248 million available on our credit facility and an accordion feature that can provide an additional 200 million of capacity, we are well positioned to remain in growth mode on the joint venture and acquisition front for the foreseeable future and to take advantage of the M&A momentum we have year-to-date and the opportunities we are currently evaluating in our pipeline.

We are reaffirming our guidance issued on May, the 9th. The details of this guidance are on Page 17 of the supplemental deck. At the midpoint of this range, we're expecting adjusted EPS growth of 21.1%, net service revenue growth of 16.9% and adjusted EBITDA growth of 34% as compared to 2018. In summary, the quarter's results reinforce our growth thesis built on strong organic growth, differentiation in quality and patient satisfaction scores, the ability to move from cost to revenue synergies with Almost Family as we complete the Homecare Homebase integration by year-end, incremental margin improvement with additional levers yet to be pulled and significant momentum on the M&A front. Should there be a disruption among smaller providers due to PDGM in 2020, we will be well positioned to gain market share, both organically and inorganically. That concludes my prepared remarks and I'm happy to further answer any questions during the Q&A section.

I'm now pleased to turn the call over to Don.

Donald D. Stelly -- President and Chief Operating Officer

Thank you, Josh, and good morning, everyone. As both Keith and Josh alluded, we are where we are today because of the hard work and commitment from our team; a team that care for patients and families that we truly are privileged to serve each and every day. I, too, sincerely thank you.

I do want to focus my time this morning on some quick updates on the Almost Family integration, our growth, quality scores and how we prepared for PDGM. First, on Almost Family. While our KPIs continue to trend in the right direction, the contribution margin increase and the quality star ratings of Almost Family agencies up ,the pace of improvement is going to accelerate further when we are past the Homecare Homebase conversion and round out our modeling, both of which will happen by year-end.

Turning to organic growth for the quarter, we were well above our usual 5% to 7% annual target range with home health admissions up 9.1% and hospice admissions up 9.6%. In hospice, in particular, we clearly are seeing the benefit from the sales and operational leadership changes that we made and discussed last year.

In that similar vein, you can see the early benefits in our home- and community-based services from the changes in the structure we made last quarter. From our segment results on Page 15 of the supplemental deck, you can see that our home- and community-based service segment adjusted EBITDA margin was up 200 basis points from last year and up a 150 basis points from the first quarter. We expect more improvement in this business as the year progresses, as we drive both gross margin and G&A efficiency.

Our quality scores, which are outlined on Page 19 of the supplemental, we continue to see improvement with same-store LHC quality scores up in July from 4.65 from 4.61 in April. Almost Family improved as well, with a quality score of 3.78 in July as compared to 3.76 in April. As a reminder, CMS did change the calculation for patient satisfaction from April to the July release, but we, again, continue to outpace the industry on those scores as well.

Looking ahead to the balance of the year-end to 2020, of course, PDGM is front and center on everyone's mind. At LHC Group, we have fully incorporated the new reimbursement model in the work streams, clinical staffing models and our operating reviews. We also have several pilots that are going on, which have allowed us to test [Phonetic] and we're pleased with these responses. Even if we assume the behavioral assumptions ultimately remain, which operationally we are, we are ready with adjustments to offset the higher reimbursement cuts.

Now, I don't think you've heard anyone from our business at this point, who believes they can fully offset these behavioral assumptions on day one. That could adversely impact patient care. But we believe firmly that PDGM is manageable, just as all other reimbursement changes we've seen the industry give us. For instance, there are modifications that we can make to care delivery where we could achieve more patients, such as use a different skill mix of clinicians in the field to do that more efficiently. And the larger providers like us, we believe PDGM has the potential to accelerate an industry consolidation, unlike any we've seen in recent memory. We will be ready.

Thank you again to all of my fellow colleagues around this country and company, and thank you for listening in on our call today.

Operator, we're now ready to open the floor for Q&A.


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Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Brian Tanquilut of Jefferies. Your line is open.

Brian Tanquilut -- Jefferies -- Analyst

Hey. Good morning, guys. Keith and Don, thanks for all the color on the operations. I wanted to ask, Don, on the AFAM side first. As we think about the roll-out of Homecare Homebase and what that's doing to the agencies, I mean if you can just give us some more color on the disruption, clinician turnover and then where do you think the same-store growth for that portfolio of assets actually inflects?

Donald D. Stelly -- President and Chief Operating Officer

Great question, Brian. First of all, let me just give a little color on where we are on completion. And even before that, Homecare Homebase in the conversion, for the one instance, is really the mainstay, but there are tangential things that happened. For example, we're [Phonetic] 88% complete, we had put in one instance in the portfolio; with 64% complete, putting the payroll processes that coordinate with Lawson and actually track the time and attendance. So I just wanted to be giving that example and color to talk about the disruption. But when you use the word disruption or how it affects it, the first thing is you're running parallel [Phonetic] for essentially all new admits in a research. So that takes that clinician going into two systems. So quite candidly, when you look at the flatness of that growth and you also look back on pre-merger that AFAM one growing at all, considering this disruption, a lot it sounds maybe a little oxymoronic, we're very pleased with where we are with that. It's -- We see it as a win because we are really putting this into place with the model of STI short-term incentives, some of the other parameters of how we route plan; we are building this out to get to that same -- And I would come out with a 5% to 7% annual number next year. We're in the middle of budget process right now. I'm going to color that in on next call. But I would look at the last half of 2020 being extremely similar to what we're seeing inside of LHC Group right now.

That's what we're going to budget, and that's what we're going to hold our team accountable for.

Brian Tanquilut -- Jefferies -- Analyst

Got it. And then, Keith, you talked about the partnerships you had with some of these very innovative or progressive hospital systems. I saw that Ochsner, for example, is rolling out of home hospitalization program. I'm guessing you guys will be the partner there. So if you don't mind just talking to us about what that does or where do you see that going in your ability to roll that out with other partners going forward?

Keith G. Myers -- Chairman and Chief Executive Officer

Sure. That's a great question. So let's start with Ochsner. So that is very much in the developmental stage, I would say, I mean we've been involved with them in this initiative for probably a little over a year. Now, Don, you can probably give a little more specific, but really incorporating nurse practitioners and moving patients out of the hospital into the home quicker is what the whole initiative is. They refer to it as hospital at home. So we are doing the piloting now. We're creating the value. Obviously, the next step for us before we roll that out is to determine what the economic model is going to look like, how do we share in those savings as their partner. And I think that's going to be our reality for the next several years as we move to value-based care with payers or with hospitals. Is -- And by that, I mean piloting a specific product and a model that's well documented and that can be replicated and then determining how we score it and then determining how we share in the savings that are created. Because there are, obviously, additional costs that go far above and beyond what we provide in traditional home health, i.e. nurse practitioners, telemonitoring and those type things. Don, maybe you can expand a little bit on that.

Donald D. Stelly -- President and Chief Operating Officer

You know, Keith, I think you framed it up well. The add-on there, Brian, is the reason nurse practitioners are so important is because then you take the burden of the homebound and the medical necessity inside of Part A benefit away, but [Indecipherable] the hospitals don't care if that patient can drive sporadically or they don't exactly meet that criteria. But there is a huge cost in that, because you can only build Part B and [Indecipherable] offset the whole cost. That's why Keith is alluding to how does the economics work in a little bit more complex, but I got to tell you, I think Josh would echo later, our partners are really starting to, quote-unquote, get that. And so, Keith, you laid it out very well.

Brian Tanquilut -- Jefferies -- Analyst

Got it. And then just last question for me really quickly, Josh. As I think about the Innovations business, there was a notable sequential drop in revenue. Is there anything to call out there and how should we be modeling that going forward.

Joshua L. Proffitt -- Chief Financial Officer

Yeah, Brian. Great question and thanks for the questions up to this point. On the HCI, really the revenue reduction is around the closure of the asset that was formerly referred to as Ingenios. if you recall, in the HCI segment that we acquired from Almost Family, there were four different really completely separate books of business. You've got Imperium, which is the ACO business; you've got the nurse practitioner business; you've got a long-term care business that does primarily assessment for long-term insurance companies and then you had Ingenios. We sold the Ingenios asset back earlier this year, so that would explain it. And then as far as the run rate goes, I would factor in the same that you saw for this quarter on a go-forward basis with a little bit of incremental growth because we are bringing in some new revenue on the PMPM side for Imperium and we have a few new opportunities with the LTS business. But don't forget, in Q3, we give the MSSP, the Medicare Shared Savings Payment, from Imperium that will give a little bit more revenue in the third quarter that would be out of the norm run rate.

Brian Tanquilut -- Jefferies -- Analyst

Awesome. Thanks, guys.

Operator

Thank you. And our next question comes from Joanna Gajuk of Bank of America. Your line is open.

Joanna Gajuk -- Bank of America Securities-Merrill Lynch -- Analyst

Hi. Good morning. Thank you for taking the questions here. So you started quite confident in the -- in your ability, I guess, to grow next year [Indecipherable] about the PDGM and also these other, I guess, avenues of growth in terms of AFAM and what they [Phonetic] should be. But in terms of the PDGM, I know -- I understand that you're saying you are not saying that you can offset all of it. But can you just maybe flush out a little bit in terms of your ability to attack that 8% in terms of the different avenues of assets and how quickly you can kind of act upon those?

Keith G. Myers -- Chairman and Chief Executive Officer

Sure. Don, do you want to take that?

Donald D. Stelly -- President and Chief Operating Officer

Yes, Keith. I'll take the first part and then turn it over to Josh to talk specifically about the numbers. But, Joanna, it's a very good question. Remembering also alluded to it in my prepared comments about the initial way that we've got to do that in the first quarter would look quite differently as we model it out going toward specifically into Q3 and Q4 of next year, and let me explain at briefly. Of course, the biggest component is how do you take the restorative diagnosis in PDGM and work through providing therapy-type services with a different skill mix.

You can't just flip a switch going between November and December. So we expect the first quarter to have a little less steam and move in that way as we go through the year, of course, Q3 and Q4 being fully modeled. Josh would talk about the way we think through that in the offset on the financials, but I would fully expect that by Q3 and Q4, that any of those effects go away because we're fully deployed into our model, which [Indecipherable] just can't be pushed out near January 1st. Josh?

Joshua L. Proffitt -- Chief Financial Officer

Yes. Great frame-up, Don. And Joanne, to get more into the details of the financial implication. So, as I think we've said previously, just reground everyone, base PDGM has about a 1.9% reduction to LHC Group, which is almost entirely offset by the market basket adjustment. So, I would refer to PDGM as flat for us going into 2020. Then, you've got the 8% behavioral adjustment that Keith mentioned and Don just referred to. I want to maybe take opportunity to describe it in dollar terms, that I don't think we've done before, which is when you look at the new 30-day rates for a new 30-day payment period within the 60-day episode and you apply the 8%, that represents about $140 per 30-day period.

So when you think about all the frames that Don just described and the operational preparedness efforts that we'll put into place and some of the learning's that we've already obtained through the pilots, that's where we get our confidence, Joanna. That -- We feel like throughout the balance of next year, we should be able to offset and mitigate the majority of that $144 every 30-day period. So, therein lies kind of the financial side of it, if you will.

Donald D. Stelly -- President and Chief Operating Officer

And Joanna, I have not said this before but I think I need to, the color in what I just told you. Remember, of course, of the 432 different diagnostic groups, our preparedness in the aggregate of the patient population mirroring next year's patient population, if we were able to flip that switch I alluded, no doubt we could mitigate that effect. But what I cannot predict right now, until we get further into our pilots, which I also alluded, is what is the effect on quality rehospitalization and so as this year the end [Phonetic] is through, I would expect us to give you a lot more clarity even on the next call, because we'll have those pilots fully matured.

Joanna Gajuk -- Bank of America Securities-Merrill Lynch -- Analyst

Great. So on those pilots. So what are some of the things you're testing out. So I guess you mentioned you guys still watching the quality and rehospitalization rates. But are you testing out things like labor and the utilization of, say, visits per episode? Are you already making these changes across the board, or you're first kind of testing it out in some centers to see how you can calculate a PDGM payment versus the current payment? Any color there in terms of what kind of adjustments you're trying to make?

Donald D. Stelly -- President and Chief Operating Officer

It sounds like you've been in my meetings, Joanne. Absolutely. We are kind of pertaining [Phonetic] if you would. We're outlaying the financial aspect by different episode right now to see that if we actually got to build on the PDGM what it would look like. We're also looking at BPE skill mix as well as the quality on our SHP. And that's exactly what we're doing. And that gives us the confidence [Indecipherable] we just started it. So we haven't been through a full 30 and 30 yet. But we're also looking to see how the different [Indecipherable] rates would be affected based on our visit patterns our clinicians have made and really starting to break that in into a product that takes into quality, the financial parameters and honestly, employee satisfaction, because they've got to really understand that we're going to provide greater touches, greater satisfaction and a greater quality product than [Phonetic] it is new rule.

Joanna Gajuk -- Bank of America Securities-Merrill Lynch -- Analyst

Thank you. I'll go back to the queue, thanks.

Operator

Thank you. And our next question comes from Kevin Ellich of Craig-Hallum. Your line is open.

Kevin Ellich -- Craig-Hallum Capital Group -- Analyst

Hey, good morning. Thanks for taking the questions. Just wanted to continue on PDGM. Two questions here. As you do your preparation and you've gone through your pilots, I'm wondering how much cost savings you might be able to attain from using extenders like PTAs and coders? And then the second part, maybe for Keith or Don, is with the changes to wrap payments, what sort of impact do you think that will have on your business and what opportunities do you think that could drive from how much it will hurt some of the smaller home health providers?

Keith G. Myers -- Chairman and Chief Executive Officer

All right. Thank you. That's two good questions. I think, Don, you take the first part. And Josh, I think actually you should take the wrap piece.

Donald D. Stelly -- President and Chief Operating Officer

Sounds good. Kevin, so I will jump in. You mentioned the extenders, specifically PTA and coders. I'm going to actually take that a step deeper. We've been very prescriptive in analyzing roughly 850,000 episodes on in that patient diagnostic group that maps over to one of the 432. What was done -- and that's what we looked at first and said-- just for a second, forget what discipline did it, what intervention, what actual procedure, what teaching and training was done by that person and who now, in the new world, could do it?

And some of those can be done by nurses, some can be done by CNAs. Of course, we want to use the lower cost disciplines on PTAs and coders. But it's what I just kind of described in that scenario, as added to what I was talking to Joanna about, that these pilots are doing. So, no doubt we call it practicing at the type of your license, no doubt we will see the extender use be a real big lever to pull. But again, it has to be based on the interventions which lead to the quality, and that's what I am testing right now with our teams and these pilots. JP?

Joshua L. Proffitt -- Chief Financial Officer

Yes. Kevin, I want to maybe take some of what Don has described and pick some numbers around it for you, that might be helpful. So when you think about the current regulatory parameters around providing -- and I'll just use therapy as an example [Indecipherable] Don's referred to PTAs and therapy techs. In the current home health environment, you've got to send either a physical therapist or a physical therapy assistant out to make those visits. And that runs anywhere, you can call it a PT, somewhere around $80 a visit, give or take, and a PTA is somewhere in the $55 to $60 a visit of direct costs of just the labor, right? In the new environment, under PDGM, you're now allowed to provide services through a therapy tech or a much lower cost delivery, and a lot of the pilots and the models that Don and Tricia and the team are working on from a clinical perspective are again ensuring equal or higher quality outcomes and patient satisfaction.

But those therapy techs would likely be half the hourly cost of a PTA, for example. So you can really see just on a per-visit level when I refer to the $144 roughly on average per 30 days that the 8% would represent. How many visits that you might even be able to modify from a PT or a PTA to a tech and still generate the outcomes that reduce that the direct cost infrastructure. So kind of wanted to give you that framework.

Donald D. Stelly -- President and Chief Operating Officer

And Kevin, one more thing that I would hope everybody sees, that I know I'm trying to do to date. That is the framework Josh just alluded to beginning in January. But we still have expectations that we put out for all of you and our shareholders for this year. So we've got to operate within this environment and then you've got [Indecipherable] 32,000 people that we talked about, you've got a short window to make sure that they understand how to get this done. And that's why I'm trying to make sure you all really grasp the full effect will begin to consummate somewhere around Q2 -- late Q2/early Q3 next year, because we've got to get all of this product cascaded almost like a wave across the United States.

Kevin Ellich -- Craig-Hallum Capital Group -- Analyst

Got it. And what about the RAP payment [Phonetic]?

Keith G. Myers -- Chairman and Chief Executive Officer

Yeah, Josh, the RAP.

Joshua L. Proffitt -- Chief Financial Officer

Yeah. Kevin, I guess, from our perspective, it's not that big of an issue. You'll have some slower cash flows from the way we're doing our cash flow modeling, Don referred to our budget process already under way for next year. The cash flows will slowdown from January through March and then kind of correct themselves April-May. So kind of call it June forward, for the rest of the year, you won't see really any difference than what we've experienced historically.

But I will say, although the larger providers like ourselves that are in the situation that I've just described, when we refer to market opportunities and consolidation, the impact on cash flow of a smaller, more regional player is going to be much more dramatic. And that's one of the reasons why the industry is hiding it so hard, because those folks that are in the smaller, more regional size are going to have a much more burden caused by the RAP disruption.

Kevin Ellich -- Craig-Hallum Capital Group -- Analyst

Got it. That's helpful. And then, Keith, just going back to M&A side of the deal that you guys announced of VNA, just wondering does that kind of open the door for further discussions and maybe more opportunities given the size of their network and presence nationwide?

Keith G. Myers -- Chairman and Chief Executive Officer

Sure.

Kevin Ellich -- Craig-Hallum Capital Group -- Analyst

Hello?

Keith G. Myers -- Chairman and Chief Executive Officer

Okay. I'm sorry. The [Technical Issues]

Unidentified Speaker

Keith, we've lost you.

Keith G. Myers -- Chairman and Chief Executive Officer

Okay. Now, I'm here. So with regard to VNA, I'm sorry I did mute [Indecipherable] With regard to the VNA, I think it certainly opens a door. VNA was started -- Everyone's aware, this was started back in 1895 as a group of civic leaders got together to provide for the needs of the community and that's what started this whole movement. And when we -- There was a separate VNA Association and there was almost no connection back when we started in this business between VNAs and what were referred to as, quote-unquote, for-profit agencies.

Now, with all of the changes, the lines have been blurred. Especially with LHC and our culture and our history of joint venturing with so many non-profit hospitals and health systems, that becomes pretty seamless for us. So I mean, the short answer is yes. And I'd have to say that a couple of weeks ago when I was there with the rest of the team for the announcement and the initial integration, it was amazing how much of an immediate fit there was between our team and their team culturally. And so, really excited about it. The other thing that's, I think, worthy -- worth mentioning here is there was no process in that transaction. The current owner of the VNA that's owned it for the last 16 years was an incredible gentleman in the name of Barry Ray. He lives in Chicago, but he was -- he felt like he had inherited the mission of the VNA and had been its custodian and shepherd for 16 years. And it mattered to him where that agency went. So he had selected us and came to the table with us to negotiate a transaction.

So it was quite a surprise to others in the market, because there was no process of no bankers or middlemen involved. So I think that's a credit to our entire organization and I do think it opens a lot of doors that we may have previously thought would have been closed to us.

Kevin Ellich -- Craig-Hallum Capital Group -- Analyst

Sounds good. Thanks, guys.

Operator

Thank you. And our next question comes from Matt Larew of William Blair. Your line is open.

Matt Larew -- William Blair & Company -- Analyst

Hi. Good morning. I wanted to ask about the comments on de novos. Josh, I think you mentioned as many as 30 planned for the back half of the year. Could you maybe just give us a sense for how the shakeout in terms of home health, hospice versus home- and community-based services, are these all co-location targets. And then in terms of timing, any sense for how those might progress in terms of opening?

Joshua L. Proffitt -- Chief Financial Officer

Yeah, absolutely. Thanks, Matt. Great question. So as I mentioned, we've gone live with five; two are home health, three are HCBS. And we -- When I refer to the 30, about 20 I would put in the category of truly in process and in-process would refer to seeking and down the road of obtaining whatever legal or regulatory approvals are needed to go live; and then another 10 that are currently in our pipeline for evaluation. And I would say that we've really matured over this last 12 to 18 months and developed a real pipeline of activity around de novo growth as we've continued to try to optimize the portfolio.

The way those spread, Matt, across the segments are across all three. So about 11 of those, 10 or 11 are at home health; probably 3 or 4, I believe, are in hospice; and the lion share of those, so I'd call it maybe about 12 to 15, are in HCBS. The real exciting aspect to that is this delivering on what we've been discussing around the bi-level and tri-level strategy . So, the lion share of HCBS and the hospice build-outs are in co- or tri-located markets as we continue to put gas to that effort.

Matt Larew -- William Blair & Company -- Analyst

Okay, thanks. And then, Josh, just in terms of the Almost Family closures. I think you mentioned in the past that [Indecipherable] closing facilities if they were making money. So I guess were these also a drag on EBITDA? And then do you have a sense now, now that you're a little more than a year out from formally closing the deal, as to whether the number of facility closures is going to start to slow down?

Joshua L. Proffitt -- Chief Financial Officer

Yeah. Great questions. And yes and yes are the answers, Matt. So on your first piece around were they a drag. For the locations that we've closed year-to-date in 2019, they represented around $1 million/$1.5 million of drag dollar, if you will. So you see that manifesting in our quarter-over-quarter margin improvement.

And then on the second piece. The pace in which we've been closing, I think you will see significantly decelerate. We had a pretty good number of closures this quarter and year-to-date. But what I'll tell you is, probably, you'll continue to see a couple here and there. And then as we do every year, varying the budget process and through the fourth quarter, you may see a few more. But I wouldn't say that there is a lot left from the Almost Family acquisition; I would say that's just in the ordinary course.

The other thing, Matt, I'd like to do is highlight on the closures as several of those closures are not just home health and overlapping markets or hospice and overlapping markets, but we've closed several IPUs that were dragging almost $3.5 million. We closed the legacy DME holdover asset that we had had for years up in West Virginia that was dragging a significant amount of dollars. So, we've been real targeted in what we've been closing and that's candidly helping us deliver that 10.2% consolidated EBITDA margin.

Matt Larew -- William Blair & Company -- Analyst

Okay, thanks. And then the last one here is just for Keith then. Keith, just maybe if you could address it all, [Indecipherable] a disconnect between CMS and some of the broader support you've had within Congress and frankly just throughout the healthcare space in terms of the move from care into the home, is there a possibility here that CMS makes a change in their final rule. Just given your position in throughout [Phonetic] the industry, where do you sense the dialogue and thought process is with CMS in terms of the way they're handling PDGM and the behavioral cuts?

Keith G. Myers -- Chairman and Chief Executive Officer

Sure. It's a great question. Let me start with maybe [Indecipherable] leads a little bit with the recent information. So, Joanne Cunningham is our Executive Director for the Partnership and others. I don't remember all of the others that we were with her recently, but this is within the last couple of weeks. There was a meeting at CMS. We have a great relationship. We sit across the table. I'm there periodically and we have great conversations. But they are very -- they seem very entrenched and unwilling to move in their policy positions most of the time, more so in the last several years than in the past. It's just my impression. But at the last meeting that I was not present at, they said that there were comments made by the CMS team in Baltimore that they weren't confident that they were prepared to implement -- to manage the implementation of PDGM. I granted this is in July that they're saying that. So that doesn't necessarily mean that they won't -- they don't think they'll be ready by January.

But the team that was there, viewed those comments as significant. And there has been quite a bit of discussion among the Board about that. So I don't really know what that means and I don't want to -- I don't want anyone to take that further than just a comment that was reported back to me. But what is noticeable for me is the distance between the conversations we have in Baltimore and the conversations we have when we visit HHS in Washington, DC. The distance is far greater than the distance to drive between the two offices. It's as if you're talking to two foreign countries.

The career people in Baltimore seem to develop policies that the current administration doesn't -- isn't in alignment with, let's just say. And so that opens a door for us to open questions. And I think it also helps us with our arguments on the [Indecipherable] I don't think they are bad people; they're just people that have a career job there and they have a view. And their views are informed by outside parties they contract with to do actuarial work, and they generate a mathematical model with no understanding of how you would practically implement it. I think it just comes down to that and they're -- it's very hard to get them to open up and accept comments and constructive criticisms, anything they produce from industry leaders.

I think we are tearing those walls down slowly by providing honest, accurate third-party data to push back on their assumptions. But it is a marathon. I'll just close with this. In our world, especially where many of us, we're on the phone like this quarter to quarter and we tend to think of progress that way. Chairman Tauzin, Lead Independent Director, said to me was when I was in my 30s and started working in DC and started advocacy efforts, I would get frustrated when I couldn't see results and I would -- not even a year, I wanted immediate results when I'd make a trip up there, I'd be honest. And he said-- if you're going to survive in this game, he says, you need to accept that sometimes you have to measure success in decades.

And when I look at the home health industry and where we had come from the '90s to today, that's very true. It's not something I'd like to hear when I was 30, but -- and I'm suggesting that it will take us decades to move CMS, but that is the truth. I mean, that's where the conversation is and there is a definite disconnect between the two.

Matt Larew -- William Blair & Company -- Analyst

Okay. Thanks for the perspective.

Operator

Thank you. And our next question comes from Matthew Gillmor of Baird. Your line is open.

Matthew Gillmor -- Robert W. Baird & Company -- Analyst

Hey. Thanks for the question. I wanted to ask about the volume performance on the home health side. So overall volumes were quite strong again. The Medicare fee-for-service volumes were again a little bit softer versus some of the recent trends. And can you provide some sort of color or view in terms of what's driving the recent divergence. And secondarily, are you increasingly indifferent between fee-for-service and non fee-for-service, given some of the changes you all have made?

Donald D. Stelly -- President and Chief Operating Officer

So I'll start it.

Go ahead. Keith, I'm sorry.

Keith G. Myers -- Chairman and Chief Executive Officer

Yeah. Now [Indecipherable] Let me just start off by saying it depends on the reimbursement model. Today, fee-for-service doesn't mean per visit; we get paid episodically for home health and we are managing patients for a set amount of reimbursement for a 60-day period today and we have certain outcome expectations we have to hit. So we're very comfortable in that model. We are less comfortable in the preferred historical model of managed care companies where they want to pay on a per-visit model, which really ties our hands to provide service to patients without getting pre-approved to go out and make a visit, not to mention it's incredibly inefficient from a G&A perspective. So those are my comments. And Don, maybe you could elaborate on that in addition to your other comments.

Donald D. Stelly -- President and Chief Operating Officer

Yeah. We actually -- I guess we've been together so long. You said exactly where I was going with that in different note. Certainly, with what Josh and the team has done and he has alluded to it twice already with these contracts, it becomes OK to take that and we've been able to marginalize that. But the fact is, as we all know in this industry, that traditional Medicare fee-for-service environment is shifting. You couple that with LHC Group's quarter-over-quarter. Year-over-year, we have been leading inorganic growth. That 2% number is what we factored in. So that when we continue to grow that [Indecipherable] clip, add those contracts, that's that 9% to 10% you're seeing this quarter. Josh?

Joshua L. Proffitt -- Chief Financial Officer

Yeah. I don't think I'd add -- No doubt, agree with everything Keith and Don said. But the non-Medicare growth is the healthiest non-Medicare growth that we've experienced. And my reason for saying that I've shared on calls over the last year, our incremental improvements we've been making in the managed care side. One is just on the rate. So yes, we're not indifferent. And yes, we do not prefer the per-visit, but our rate per visit, due to a lot of hard work and effort through our team here at the home office that does hand-to-hand combat with the payers to get the new contracts, we have increased our rates by almost 9% on just a rate-per-visit level.

We've also done a lot of things both in the back-office, in the field as well as in our revenue cycle management to reduce our bad debt expense and otherwise, where we've reduced our cost per visit by about 200 basis points. So over the past few years, as we've seen this, not only make [Phonetic] shift but opportunity before us. We've really hunkered down here and got more rigorous and as we get those admissions in the door, we're a lot more laser-focused on getting the right admissions in the door.

Matthew Gillmor -- Robert W. Baird & Company -- Analyst

That's helpful. And, Josh, if I could ask you one more on the revenue performance. I think you mentioned that results are in line with expectations. Did you mention the revenue impact from agencies that you closed? And then also could you give us a sense for where the revenue dollars are for AFAM, just so we can model that a little bit better.

Joshua L. Proffitt -- Chief Financial Officer

Yes, sure. So on the ones that have closed year-to-date. In home health, that represents about $17.5 million in annual revenue. So what is that -- $4.25 million or so per quarter; and then on the -- in the LTACHs, where we had most closures, the annual run rate is, call it, $8 million, so about $2 million per quarter; and then in Ingenios, which I referred to earlier in the HCI, I'm just trying to [Indecipherable] my head, go down by segment, was about $5 million in revenue annualized. So $17.5 million in home health, call it another $8 million in LTACH and the facility-based division and another $5 million in the HCI division. If you take those numbers and divide it by 4, that would give you your quarterly impact.

For -- What was your second question?

Matthew Gillmor -- Robert W. Baird & Company -- Analyst

Yeah, I guess -- Maybe I can follow up if you don't have that number handy, but just curious sort of where the Almost Family agencies are in terms of the quarterly revenue or annual. And I guess I ask as we -- I think the Street keeps probably modeling that number a little bit too high. So if you could level-set us on where Almost Family asset is, that might help us model better.

Joshua L. Proffitt -- Chief Financial Officer

Well, I got you. So the consolidated Almost Family on a quarterly basis is call it right at $200 million in revenue with about $140 million to $145 million of that in home health, about $40 million or so in CVS, call it $8 million to $10 million in hospice and around $7 million in the healthcare innovation segment.

Matthew Gillmor -- Robert W. Baird & Company -- Analyst

Okay, got it. Thanks very much.

Operator

Thank you. And I'm currently showing no other questions in the queue. I would like to turn the call back over to Mr. Keith Myers for closing comments.

Keith G. Myers -- Chairman and Chief Executive Officer

Okay. Thanks, operator, and thanks everyone for dialing in this morning to the call. As always, we want to make ourselves available to you. If you have any follow-up questions or need to reach us between earnings calls, please reach out to Eric Elliott, and Eric will assist you. And if you need to speak to either -- any of us on the management team, we will make ourselves available for you. Thank you again for joining us, and thanks for your support of our LHC Group family.

Operator

[Operator Closing Remarks]

Duration: 64 minutes

Call participants:

Eric Elliott -- Senior Vice President of Finance

Keith G. Myers -- Chairman and Chief Executive Officer

Joshua L. Proffitt -- Chief Financial Officer

Donald D. Stelly -- President and Chief Operating Officer

Unidentified Speaker

Brian Tanquilut -- Jefferies -- Analyst

Joanna Gajuk -- Bank of America Securities-Merrill Lynch -- Analyst

Kevin Ellich -- Craig-Hallum Capital Group -- Analyst

Matt Larew -- William Blair & Company -- Analyst

Matthew Gillmor -- Robert W. Baird & Company -- Analyst

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