Nov 12, 2013
Executives
Thomas J. Dolan - Senior Vice President of Finance William F.
Borne - Founder, Chairman, Chief Executive Officer, Chief Executive Officer of Amedisys Specialized Medical Services Inc and President of Amedisys Specialized Medical Services Inc Ronald A. LaBorde - President, Chief Financial Officer and Director
Analysts
Kevin Campbell - Avondale Partners, LLC, Research Division Brian Tanquilut - Jefferies LLC, Research Division Kevin K. Ellich - Piper Jaffray Companies, Research Division Darren P.
Lehrich - Deutsche Bank AG, Research Division John W. Ransom - Raymond James & Associates, Inc., Research Division Sheryl R.
Skolnick - CRT Capital Group LLC, Research Division
Operator
Good morning. My name is Kyle, and I'll be your conference operator today.
At this time, I'd like to welcome everyone to the Amedisys Third Quarter Earnings Conference Call. [Operator Instructions] Mr.
Dolan, you may begin your conference.
Thomas J. Dolan
Thank you, Kyle. Good morning, and welcome to the Amedisys investor conference call to discuss the results of the third quarter ending September 30, 2013.
A copy of our press release is accessible on the Investor Relations page on our website. Speaking on today's call from Amedisys will be Bill Borne, Chairman and Chief Executive Officer; and Ronnie LaBorde, President and Chief Financial Officer.
Before we get started with our call, I would like to remind everyone that any statements made on this conference call today or in the press release that expresses a belief, estimation, projection, expectation, anticipation, intent or similar expression, as well as those that are not limited to historical facts, are considered forward-looking statements and are protected under the Safe Harbor of the Private Securities Litigation Reform Act. These forward-looking statements are based on information available to Amedisys today, and the company assumes no obligation to update these statements as circumstances change.
These forward-looking statements may involve a number of risks and uncertainties, which may cause the company's results or actual outcomes to differ materially from such statements. These risks and uncertainties include factors detailed in our SEC filings, including our Form 10-K, 10-Q and 8-K.
The company disclaims any obligation to update information provided during this call other than as required under applicable securities law. Our company website address is amedisys.com.
We use our website as a channel of distribution for important information, including press releases, analyst presentations and financial information regarding the company. We may use our website to expedite public access to time-critical information regarding the company in advance of or in lieu of distributing a press release or filing with the SEC disclosing the same information.
In addition, as required by SEC Regulation G, a reconciliation of any non-GAAP measures mentioned during our call today to the most comparable GAAP measures will be available on our website on the Investor Relations page under the tab Financial Reports, Non-GAAP. Thank you, and now I'll turn the call over to Bill Borne.
William F. Borne
Thanks, Tom. Good morning, and welcome to our third quarter earnings call.
Let me start today's call by commenting on our disclosure relating to a preliminary DOJ settlement. As we stated in our earnings press release, we have reached an agreement, in principle, with the United States Department of Justice, associated with their investigation of the company, which commenced in 2010.
Under this tentative agreement, which is subject to a number of contingencies, including successful negotiation and execution of the final settlement documents, the company would pay $150 million. Amedisys has agreed to this tentative settlement without any admission of wrongdoing in order to resolve these matters and to avoid the uncertainty and expense of ongoing litigation.
In connection with the settlement, Amedisys will enter into a corporate integrity agreement with the Office of Inspector General of the Department of Health and Human Services. We are pleased to see an end to this issue, which has occupied the company's energy and resources over the past few years and limited our flexibility to address the current challenging environment and post-acute health care.
We now look forward to being able to focus without distraction on our mission, providing superior quality care to our patients and referral sources, doing so with the efficiency and leading the industry's transition to comprehensive care management for the post-acute elderly population of this country. To accommodate the preliminary DOJ settlement, we have just completed an amendment to our credit facility.
Ronnie will provide more details on this in his prepared remarks. Moving to third quarter results, Amedisys incurred a loss of $0.01 per share on an adjusted basis, a step-back from the $0.18 earned on an equivalent basis in the second quarter and $0.15 in the first quarter.
Operations were impacted by lower volume and higher cost per visit. On a year-over-year basis, same-store home health admissions were down 2% and same-store hospice admissions were down 7%.
After declining in each of the last 3 quarters, we saw a slight sequential increase in our recertification rate to 31.1 -- 37.1%. Let me add some perspective on the increase in our cost per visit.
A large part of the increase was related to additional holiday pay and an increase in health benefit related cost. Additionally, the volume declines resulted in lower clinical staff productivity, largely associated with salary permissions, which we are addressing.
We have also made incremental investments in our bundle sites. We have shifted certain clinicians from a per-visit to a salary pay structure, with reduced productivity expectations.
In this role, the nurses are taking on patient care management responsibilities. We have also added care coordination and program management positions to bundle locations.
We have made these investments to drive down overall bundle cost, largely related to hospitalizations in order to generate total patient care savings. The bundled structure allows us to share in these savings.
We're seeing some positive signs resulting from this investment. For instance, our 30-day hospitalization rate in home health has continued to trend downward.
In fact, according to OCS data, our rate dipped below the national average in the third quarter and has dropped 130 basis points since the first quarter of 2012 to 15.2%. More specifically, this improvement over the last quarter was largely driven by bundle site care centers that benefited from these investments and our focus.
As we have stated in the past, we believe referral resources are more tentative than effort to quality and outcomes and believe this will be a key differentiator to drive future volume growth. To address our third quarter performance and to better position the company heading into 2014 reimbursement pressure, we are undertaking the following 3 initiatives.
First, to improve volume growth, we are increasing our business development staffing levels in certain markets, adding over 35 physicians during the third quarter. We are targeting a similar net increase during the fourth quarter.
Second, to improve EBITDA, we are again reviewing the negative contribution care centers within our portfolio. On a combined basis, all care centers with negative contribution in the third quarter generated revenue of almost $40 million and losses of $5 million.
Of these care centers, we have identified 19 that we will close or consolidate in the fourth quarter. In the third quarter, these locations generated revenue of $4 million and losses of $1 million.
With these closures, we expect to end the year with approximately 450 care centers. Additionally, we have identified 35 care centers that are just too small to become profitable in the current reimbursement environment.
There is a need to grow meaningfully or we need to exit the market. For these care centers, we will be making incremental business development investments to drive that growth.
Locations that don't show meaningful positive performance will likely be closed or consolidated in the coming year. We are restructuring our field leadership from 5 to 10 regions.
This will allow us to fatten the structure and better aligned it with our 63 shared service centers. Now leadership of each shared center group will report directly to one of our 10 regional leaders.
We think this will better leverage the shared service center structure and drive improved results. We continue to move forward with our long-term strategic plans.
All our care centers will be organized into 63 shared service centers by December. We are continuing to refine our patient care management process, with the utilization management and review focus to reduce variability of care while improving quality and patient outcomes.
This is imperative for both our bundled sites and company-wide cost initiatives and quality improvement. We are also completing the development of our AMS3 next generation operating system in this quarter.
The rollout will start in the first quarter of 2014. We have elected to go live on January 1 with 2 bundle sites, including 29 of our care centers.
We expect to go live with the remaining 3 sites in April, which will include 28 of our care centers. Finally, we are pursuing other partnerships with hospitals to enhance collaboration and quality patient care in several forms.
An example, of course -- over the course of 2013, we have completed joint ventures with 3 different hospitals or health systems. We anticipate that the home health final rule from CMS will be issued in the next couple of weeks after being delayed due to the governmental shutdown.
With continued budgeting negotiations over spending issues, home health care could be impacted, particularly in the SGR if it's distressed. We're working with our industry partners to communicate our belief that home health reimbursement cuts will negatively impact patient access to care and may have the unintended consequence of driving patients to high-cost settings, ultimately resulting in increased cost to CMS.
In conclusion, I'd like to address our workforce of dedicated employees. This quarter marks a milestone for the company as we move clear of the distraction associated with the DOJ investigation.
Despite some of the headwinds we have faced, our employees have continued with their mission to deliver superior quality care to our patients. Healthcare reform is still largely in front of us, particularly in the case of post-acute care.
Amedisys continues to be in a prime position to lead and benefit from these initiatives and the inevitable industry trends. Thanks.
And I'll now turn the call over to Ronnie for his comments.
Ronald A. LaBorde
Thanks, Bill. Before I review the details of our results, let me clarify changes to previously reported results from continuing operations for our first and second quarters of this year.
Plans to close our divest care centers result in their inclusion in discontinued operations. However, during the third quarter, we moved 6 care centers previously identified as discontinued back into continued operations.
As such, we have restated continuing operations for the first and second quarter to reflect this change and have provided these restated quarters in our press release. All key statistical data has also been revised.
Of note, the 19 care centers Bill identified as planning to close or consolidate in the fourth quarter have not been moved into discontinued operations in our third quarter results. And now for results for the third quarter, Amedisys incurred a loss of $2.89 per share on a GAAP basis.
This was impacted by several one-time items, including a pretax reserve for the $150 million preliminary DOJ settlement. My comments going forward will be on an adjusted continuing operations basis and focused primarily on sequential changes.
In the third quarter, we generated $302 million in revenue, a decline of $15 million, due to lower volumes in both home health and hospice. Adjusted EBITDA for the quarter was $8.7 million, a drop of $11 million.
Approximately half of the shortfall is a result of lower volume with the remainder a function of higher cost of revenue, mainly in our home health division. Our adjusted EBITDA margin fell to 2.9% from 6.1% in the second quarter.
Our adjusted net loss was $202,000 compared to $5.6 million of income for the second quarter. Cash flow from operations for the quarter was $28 million.
Cash flow benefited from a continued drop in DSO to 32 days compared to 34 days at the end of the second quarter and 42 days at the end of 2012. Capital expenditures were $9 million and we reduced debt balances by $4 million during the quarter.
We ended the quarter with $44 million of cash on our balance sheet, up from $30 million at the end of the second quarter. Turning to our business segments.
Home health revenue dropped to $237 million in the third quarter from $251 million in the second quarter, mainly due to lower admissions. Admissions were down 5% sequentially.
Home health division contribution was 6-point -- $16.5 million or 7% of revenue. This is a decline from the $25.5 million or 10% of revenue for the second quarter.
The increase in our cost per visit added $5 million of cost for the quarter. The components of this increase include the additional third quarter holiday of $1.5 million, health benefit cost of $500,000 and investments we made in our bundle sites of approximately $500,000.
As Bill mentioned in his remarks, the remainder is due in part to a drop in productivity as our volume declined. Hospice revenue declined $1 million to $64 million for the quarter.
Hospice division contribution was $12.2 million or 19% of revenue, a decline from $12.8 million or 20% of revenue in the second quarter. We are seeing an impact in admission volume from the removal of debility and failure to thrive diagnosis per CMS guidelines.
Although its effective implementation by CMS has been delayed until October 1, 2014, we have already changed our processes and discontinued to signing these primary diagnoses to patients in May of this year. As a result of this, we no longer are admitting patients with these diagnoses, which accounted for almost 20% of our admits.
In the third quarter, no patients were admitted with these diagnoses, compared to approximately 900 in the first quarter of this year. Overall, admissions were down approximately 600 from the first to the third quarter.
Ultimately, we believe that many of the patients previously assigned these primary diagnoses are eligible for the hospice benefit and can be appropriately admitted with another primary diagnosis. Turning to the financing of the preliminary DOJ settlement.
We anticipate making 2 payments, one payment of $115 million once the agreement is finalized and the remaining $35 million payment to follow 6 months thereafter. These payments will be funded through a combination of cash on hand and our revolving credit facility.
Our credit facility has been amended to accommodate this settlement. The facility size remains the same.
While there are tighter restrictions on the use of capital, we think the facility fits well with our near-term strategic plan. Finally, in connection with the credit facility amendment, we repaid our $20 million of senior notes that were scheduled to mature in March of 2014.
We continue to proceed with our divestiture plan announced on the first quarter call. As of today, 6 of those care centers are being retained, 6 had been sold, 11 have been or will be closed by the end of the fourth quarter and the remaining 11 are either under a letter of intent or definitive agreement and will be divested by the end of the fourth quarter.
Finally, we are updating guidance for -- our guidance for 2013. Our guidance is adjusted for one-time items, but does include legal cost associated with certain legal proceedings, which are $4.5 million year-to-date, and we expect these costs to be in the $5 million to $6 million range for the year.
On this basis, which is inclusive of legal cost, we lost $0.02 for the quarter and earned $0.23 for the year, year-to-date. Therefore, we are reducing our 2013 EPS guidance to $0.20 to $0.25 per share.
We are also adjusting our revenue guidance to a range of $1,240,000,000 to $1,250,000,000. This concludes our prepared remarks.
Operator, please open up the call for questions.
Operator
[Operator Instructions] Your first question comes from the line of Kevin Campbell from Avondale Partners.
Kevin Campbell - Avondale Partners, LLC, Research Division
I just wanted to follow up on the last comment you had about the guidance. So you earn -- I want to make sure I understand it, with all the changes, $0.23 year-to-date based on your guidance, and your guidance is $0.20 to $0.25.
So we should take that to mean for the fourth quarter, you're looking at a loss of $0.03 to a gain of $0.02?
Ronald A. LaBorde
That's correct, Kevin, that's correct. It's essentially a break-even quarter with that kind of range around.
Kevin Campbell - Avondale Partners, LLC, Research Division
Okay. That's what I wanted to make sure I understood.
So help me understand the deterioration in home health results when you look at admissions and recertifications through -- sequentially throughout this year after all the seasonal adjustments you've made here. Why is it that those are going down sequentially from Q1 to Q2 to Q3 sort of across the board?
William F. Borne
Kevin, a lot of these are associated with underperforming care centers. We find in markets that we're doing well, we're doing well in markets that we're struggling.
It's more of a challenge to grow that business. So that basically is the driving force, there's a lot of pressure out there.
One of the things that we've done, as I mentioned, to offset that, is added business development staff. In these low-performing care centers, I think that management was historically more inclined to hold back on expenses instead of spending money on business developments there.
Over the next quarter, we really want to ramp that up, as I mentioned, and we think can get some of that volume back. If we can't, then we need to make other decisions.
Kevin Campbell - Avondale Partners, LLC, Research Division
So instead of thinking of it like a bell curve, it's almost like a barbell, where you have a lot of underperforming on the one end and the rest are high-performing on the other end?
William F. Borne
You could look at it that way, but you have to understand kind of the DNA of the company. Over the years, we did a lot of acquisitions, small, medium and large.
We did a lot of startups. So we had agencies that just entered into markets before we started with the reimbursement cuts.
So that's kind of what we have if you look at it that way. And again, where we see a lot of struggles is in the smaller markets where we haven't been there a long time, where we're up against players that are more ingrained in the community.
So one of the reasons why we put all of the strategy of bundles and post-acute care management, because hospitals seem to be paying more attention now to readmissions, which is why we focus on that quality as well. And we think over the long term that our strategy would help us to establish good relations, not only in the smaller markets, but also our midsized and larger markets.
Kevin Campbell - Avondale Partners, LLC, Research Division
Okay. And I know you guys had made some cuts sort of on the G&A line in 2Q.
Were those -- do we have a full impact to that in the third quarter? Or are there still some other benefits to come from that in Q4 and beyond?
William F. Borne
Kevin, we still have some benefits to come as we take -- we close the care centers targeted for divestiture. So all of that's not out yet.
And so we still think we can make some headway there.
Kevin Campbell - Avondale Partners, LLC, Research Division
And the -- sorry, I'm sort of jumping around a bit, the settlement with the DOJ, does that also include any review by the SEC? Or is the SEC still -- there's still some overhang from that group?
Ronald A. LaBorde
Yes, it doesn't include anything with the SEC, but the SEC inquiries have been quite quiet for some time. And hopefully, this will help to bring that to the end as well, but we can't speak for that at this time.
Kevin Campbell - Avondale Partners, LLC, Research Division
All right. And then last question, I just want to make sure I heard you, Bill, maybe you could repeat, in your prepared remarks the financial impact that the 19 centers that you've identified here for additional closures or consolidation.
What was their financial impact in the quarter?
William F. Borne
Right. They had $4 million of revenue and about $1 million of negative EBITDA.
Operator
Your next question comes from the line of Brian Tanquilut from Jefferies.
Brian Tanquilut - Jefferies LLC, Research Division
Bill, first question for you. This settlement that you guys entered with the DOJ, or you're about to sign with the DOJ, does this cover everything, including hospice?
And basically, is this every single DOJ investigation out there for the company?
William F. Borne
No, Brian. The Department of Justice doesn't work that way.
This is really instigated around the 2010 initiative, kind of following the Senate finance inquiry. So they limit that.
But again, as a reminder, the settlement is without admission of any wrongdoing. So we can hopefully move on.
We will still have compliance issues from time to time that we'll address independently, but we don't have any reason to believe that there will be any more investigations.
Brian Tanquilut - Jefferies LLC, Research Division
Okay. And then for me, Ronnie, from a sort of an EBITDA run rate perspective, I mean, you guys outlined a lot of moving parts between the reduced legal expenses, I'm guessing, going forward, but you're spending more on the sales force.
I mean, how should we think about what the different moving parts are? If you don't mind just outlining that for us.
Ronald A. LaBorde
No. We do think, if we get to this settlement, which we're hopeful to bring -- to consummate here, there will be reduced legal costs with that.
There are other kind of ancillary costs associated with that whole process that we think will help improve EBITDA. We haven't quantified that previously, but -- and we'll do that as soon as we can.
But that's a benefit. With the added BD staff, we're trying to be very kind of surgical with that, but really in an intense way.
And when we do that, there's really probably easy say, hard do, but it's fairly low threshold or admit quotas required, better said, to pay for themselves, and that would take about 15 admits a month to be cost-neutral. And of course, generally, for our business development staff, after kind of a ramp-up period, we certainly set objectives and quotas at a higher level than that.
So we think it can be value added when we do it right. We get into the right markets and realize market potential.
So it should be, while it'd be plenty of cost, we think we can get them -- and the plan would be to get them productive at a level that would certainly make them breakeven in fairly short order, but we'll try to phase this in and be smart about it.
Brian Tanquilut - Jefferies LLC, Research Division
And then Ronnie, with your amended credit facility, what sort of EBITDA limitations are we looking at? And how are the banks looking at this on a leverage basis, just kind of what levels are they looking at?
Ronald A. LaBorde
Sure. Well, the kind of the kickoff leverage it will have, it's going to be about 2x, 2.7x, coming out.
And when we -- after we pay off, I guess, reflecting in the fourth quarter this reduction from the senior note payment, it will be a little bit below that. So the bank EBITDA, it's on a trailing 12 months.
And from a bank definition, we do add back -- we do have certain add backs such as noncash comp related to equity compensation and also the benefit of adding back restructuring charges and disc ops to get to that.
Brian Tanquilut - Jefferies LLC, Research Division
Got it. And then, Bill, last question for you.
I mean, you talked about the DNA of the company, and having followed you guys for a long time, you were very acquisitive at one point. So with the changing environment in home health with upcoming rate cuts and likely consolidation, how does that change your view on M&A, when you're closing down presumably acquired locations from the past?
William F. Borne
All right. So Brian, if you think about that we're looking at a certain amount of shared service center in groups, these are the markets that we're focused on and we want to go deep there.
You probably won't see the company doing small acquisitions, nor would you see us doing acquisitions that are scattered across the board. Our interest and appetite would be more for condensed larger home health agencies, maybe a home health agency that a large health system or hospital owns as well where we can partner and not only bring home care to them, but bring their ability to manage post-acute care, which will be increasingly more important as we get new changes from regulations and policy as well as an opportunity to work with managed care.
So that's where we spend our resources. And where we find a wonderful opportunity, we think we can access the finance to do that.
Ronald A. LaBorde
Brian, thanks for your question. And listen, this is Ronnie, let me follow up a little bit because there may be other questions surrounding the credit facility.
But the leverage is limited to 3.5x EBITDA in the facility. So certainly, from a calculation, we'll come out, kickoff leverage will be less than that.
And some of you may be thinking that well, on a run rate, there'll be a higher leverage profile, and that is true. So we'll, certainly, as we build in to next year, we need to rebuild that run rate.
We do get some relief, we think. While we haven't forecast this going forward yet, but we are anticipating generally lower CapEx expenditures in 2014 with the completion of the AMS redevelopment call.
So that's some of the dynamics around the credit facility I thought I might add. Thanks for your questions, Brian.
Operator
Your next question comes from the line of Kevin Ellich from Piper Jaffray.
Kevin K. Ellich - Piper Jaffray Companies, Research Division
Bill, I was wondering if you could -- other than the SEC investigation, could you give us an update as to what else are you guys looking at? And how confident are you that this DOJ settlement is going to lead to conclusion to some of these other investigations?
William F. Borne
Well, it's kind of hard, Kevin, to comment on what the government may or may not do. Everything that's going on is stated in our Q and we're pretty explicit about that.
We think -- we hope, since the DOJ is going to be done without any admission of wrongful doing, that we'll be able to bring that to a close, but it can't be predicted. And what we're trying to do is obviously reduce the distractions that are against the company, and this is one of them.
So it's the biggest one, right, and we think it's kind of the leader. So hopefully, with this going away, some of the other residual tag-alongs will go away.
We've resolved some suits associated in that area, like derivative suits and that type of activity as well. You should see some of that in the following.
So most of it is there.
Kevin K. Ellich - Piper Jaffray Companies, Research Division
Okay. We'll look for that.
And then, Ronnie, I just wanted to clarify. Did you say you have $5 million to $6 million of legal expense for the remainder of the year that's included in guidance?
Ronald A. LaBorde
Not for the remainder. We expect that to be for the year.
Kevin K. Ellich - Piper Jaffray Companies, Research Division
For the year, $5 million to $6 million is the total amount?
Ronald A. LaBorde
Yes. It's $4.5 million year-to-date, $5 million to $6 million for the year.
Kevin K. Ellich - Piper Jaffray Companies, Research Division
Got it. Okay.
And then Bill, you talked about adding business developments staff as a way to offset some of those soft volumes, and strategically, I think that's a good idea. I'm just wondering, are these guys going to be out mainly looking for new business with hospital partners?
Or are they actually going to be looking for acquisitions, kind of going back to Brian's question? Any color on that front?
William F. Borne
Yes. I think it's everything, Kevin.
We're in a position where we're adding both account executives, which focus on physicians and groups like that, also facilities. We're adding Care Transition coordinators that begin our Care Transition process that are typically based in hospitals.
So we're adding a mix of both. We have an enterprise sales division that goes and has those high-level relationships with facilities for joint ventures and potential risk-related activity.
We're being very cautious of that. We want to make sure that we get these bundles right.
And we think if we do that, that will open up many opportunities for us.
Kevin K. Ellich - Piper Jaffray Companies, Research Division
Got it. And then going back to Ronnie, I think you made a comment that you moved 6 centers back from discontinued ops to continuing this quarter.
Just wondering, I guess, why did you guys keep those centers or decide to do this? And how often does that happen?
Ronald A. LaBorde
It doesn't happen very often. These were -- the 6 we're talking about were actually productive and had positive performance that we thought strategically we were going to go ahead and divest with them.
We did not receive the interest that we had hoped on these care centers, and so we brought them back into operations. And they're positive contributors, but it's a general comment.
This doesn't happen often.
Kevin K. Ellich - Piper Jaffray Companies, Research Division
Okay. So they weren't losing money though?
Ronald A. LaBorde
No.
Kevin K. Ellich - Piper Jaffray Companies, Research Division
They were EBITDA positive? Okay.
Got it. And then, last question on my end, just financial.
Your share count guidance went up just a little bit, but that does imply about a 1 million share increase in Q4 sequentially from Q3. Just wondering, is that related to auction grants or is there something else in that increase?
Ronald A. LaBorde
Kevin, good question. I think that has to be the case.
If it's different than that, we'll let you know.
Operator
The next question comes from the line of Darren Lehrich from Deutsche Bank.
Darren P. Lehrich - Deutsche Bank AG, Research Division
So just a few things here. As far as the settlement goes, can you just inform us what period of time it covered?
Ronald A. LaBorde
Yes. Darren, we're not disclosing that.
But as a reminder, the investigation started in 2010, so it'd be years prior to that.
Darren P. Lehrich - Deutsche Bank AG, Research Division
Okay. So years prior to 2010, and does it include years after 2010?
William F. Borne
Kevin (sic) [Darren], we're not going to get into that detail. We still are working on the document.
We don't want to do anything that could trip the opportunity to resolve this in an amicable way. We feel very comfortable that we can, and we're just not going to provide those details.
Darren P. Lehrich - Deutsche Bank AG, Research Division
Okay. And then just so I'm clear, I think a prior questioner had asked, but you said in response to what the matters were, I guess, a focus in the investigation, it was stemming from 2010 and post incentive [ph] finance.
So what -- can you just confirm that it was limited to your home health division? Is that an accurate statement?
William F. Borne
Yes.
Darren P. Lehrich - Deutsche Bank AG, Research Division
Okay, all right. As far as the corporate integrity agreement goes, I guess, what kind of incremental costs would be associated with building out that capability and whatever requirements you have under the CIA?
William F. Borne
Well, Darren, right now, our compliance programs, it meets all the requirements of the OIG. And -- so we don't really see any additional cost, and we feel very comfortable that we'll be able to get an agreement that we can manage in line with our current expenditures and processes.
Darren P. Lehrich - Deutsche Bank AG, Research Division
Okay. All right.
And then Ron, you mentioned a number of things that you've done with the amendment. You gave us the MAC leverage, just can you confirm restricted payment baskets, how much you could have for M&A, for CapEx and for buyback?
I'm assuming none, but can you just lay those out for us?
Ronald A. LaBorde
Yes. There are baskets for that.
On acquisition limitation, it's $10 million, and we have a CapEx -- I have to look at CapEx limitation. Then I have to think back to what it is, but it's something certainly we can operate within looking forward.
And so that's the -- we have some other baskets around just the flexibility of doing certain things to disrupt the -- that could potentially change the profile here, but all -- and that all be detailed when this is filed with our filings.
Darren P. Lehrich - Deutsche Bank AG, Research Division
Okay. So I guess you made the statement in your prepared remarks that the amendment fits within the company's strategy.
And so, I guess, at a $10 million M&A limit per annum -- I guess the message here is that strategy is you're not going to be consolidating much going forward. Is that a fair statement?
Ronald A. LaBorde
It is fair. And again, I think it fits with our view here in the near term.
And so the obvious is that we'll still consider opportunities. And if there's an appropriate opportunity we want to act on that doesn't fit within this credit facility, we'll seek to find the capital to respond to that.
Darren P. Lehrich - Deutsche Bank AG, Research Division
Okay, that's helpful. And then just the last thing, we're obviously looking at an adjusted EBITDA margin that is very low.
And even if I make the adjustments for the incremental labor costs that you've identified, we're still talking about a 4% margin. You're making some investment in sales and marketing.
So just when you think about your margin structure on a go-forward basis, what would you think is a reasonable target based on what you're doing with your center of branch consolidations and whatever else you have in store to adjust to the new revenue dynamics that you're seeing? Can you just help us think about margin?
Because it looks like, to me, that your EBITDA is about half of what consensus is for 2014 on a run-rate basis. So any way to bridge that outlook would be helpful at this point.
Ronald A. LaBorde
Yes. Darren, one of the things that's happening of course is we've had a step-back here in the third quarter, but we really haven't changed our view to where our targets are, and that's to certainly get in line with what our peers are doing.
We think that is very achievable. We stepped back some.
And when we talked about that before, one of the things that -- I should say, the things that we focus on that will help is volume, and we've kind of lost a little momentum in our admits, they've turned negative this quarter, flat the second quarter in home health to negative this quarter, a lower recert rate that's impacted volume. So we think, and are still focused on, especially with the BD staff investments, to improving our volumes and recapturing that momentum.
So that needs to happen and we're focused on that. The thing that happened in this quarter was a little bit -- that impacted was the increase in the cost per visit.
And so we think we still have gross margin expansion opportunities certainly from the third quarter. And then so we'll get that back, I think, on track, probably back in a channel of where we've been and what we think will be appropriate here.
We'll be focused on that and then it's the cost outside of gross margin and more the G&A line. We'll do -- and what we're talking about here besides those specific, I want to say those specific, those general areas of focus, of course, it's to help bring up margins.
We'll look at the lower performing care centers. And either improve them or we'll make decisions about those.
And so Bill commented on those. We've got 19 identified that will close or consolidate in the third quarter -- fourth quarter, excuse me, and then another 35 that we're focused on.
So that focus on those care centers, the portfolio in general and then specifically our operating kind of metrics still guide us till we think we can get back in line with our peers despite the step-back here in the third quarter.
William F. Borne
And Darren, just to add some color, if you take a look at the $15 million shortfall that we had over the portfolio, and you divide that by 450 care centers, that's not a heavy lift. And our initial response is not to go and eliminate as much cost as possible because sometime that's damaging.
We really are going to focus on getting some of that revenue back and making sure our patients get care the right way. We believe we can do that.
If we can't, then we're going to take the next step and make additional cuts. And most of that are going to come to actual operating units that are underperforming, while materializing efficiencies from the -- brought on by AMS3, and we've talked about that as well, as well as the shared service centers, having some aggregated efficiencies by grouping these agencies together.
Consolidations will allow us to eliminate a lot of additional overhead. So our expectation, as Ronnie said, is to get up to where our peers are.
There's no reason why we can't do that, and we have that focus in the midterm range.
Operator
Your next question comes from the line of John Ransom from Raymond James.
John W. Ransom - Raymond James & Associates, Inc., Research Division
As we look forward, when do you think the acute pressure from the recertification slowdown is going to elapse?
William F. Borne
John, we mentioned that we've put a patient care management process in place, and we put that kind of in place at the beginning of the second quarter. And that's a central overview of all the activities that are going on clinically, and we do that through exceptions.
And what we find is that the patient acuity and mix has not changed. Then what we really equate the drop of recertifications to is kind of behavioral.
That started in the third quarter last year, when we made a pretty big reduction in force to cut costs. And as we did that and reduced some of the clinical staff, we saw a pretty significant drop in recerts.
And due to the centralized oversight, we see that inching back. But again, it's behavior, it's education.
We want to make sure that every patient gets the care that they need. So we can't tell you where that's ultimately going to go.
But when we look at the industry averages, we find our sales below the averages, with acuity levels that are at least equal to that. So hopefully, with the processes we put in place, we'll find the right spot for our research and patient care.
John W. Ransom - Raymond James & Associates, Inc., Research Division
Do you think you were at the right level of research before and now you're being overly conservative or were you being a little too aggressive on recerts before and now you're about right? Now, that's what I'm trying to figure out.
William F. Borne
John, I think that we were probably closer to the right level before and it's not about being conservative. It's about education.
It's about staff and availability of resources, and that's why we're targeting add staff [ph] in approaching some of that differently, and we want to be able to grow our way back into the profitability, not just necessarily cut it. It has to be two-sided.
So as Ronnie mentioned, we're being very surgical about where we add staff and where we add business development. And if we think we do both concurrently with the right timing, that we'll get positive results.
And then hopefully, our recert rate will move back into -- probably the industry average, but it has to be the right care for all patients.
John W. Ransom - Raymond James & Associates, Inc., Research Division
And my other question is your sales force, I mean, do you have -- given some of the investigations and some of the issues around research, do you think that -- has this started to affect your brand name a little bit, when you go out and market for referrals from hospitals? And have you had any unusual sales force turnover, anything like that, that would indicate that?
William F. Borne
Yes. John, when the investigation first got announced, we had some pretty good noise around that.
That has subsided. We haven't seen any with that.
With this disclosure, what we found is that most of the sophisticated health systems or providers have kind of have been there before and understand the process. So -- but it has created a distraction.
There's no denying that. And we hope that now that we have this behind us that everybody can focus on the proper perspective, which is growing market and taking care of our patients in the right way.
Operator
Your final question comes from the line of Sheryl Skolnick from CRT Capital.
Sheryl R. Skolnick - CRT Capital Group LLC, Research Division
Can we go back to this -- the question of the patient care coordinators, the implementation of best practices. I'm very confused by your commentary on this call as I compare it to what you said in the second quarter, and I do have the transcript, but I'm not going to insult you by reading it back to you.
I'm sure you know what you said, so maybe you can help me to understand the transition, or if there's a transition in that thought process. At that point, you went through the history -- you were kind enough to go through the history, Bill, with me about how it began with Humana, how you ended up looking at your recerts and finding out, implicitly, that even though you had fewer recerts, you had better quality and you were doing better things for the patient.
It was clearly making the important customer happy by having these programs in place. And you decided third quarter of last year it was such a good idea, you're going to roll it out to everyone.
And we talked about the decline in recerts in the second quarter in the context of that, and you suggested that it was such a good idea to improve the quality in patients, what they needed in a more consistent way that you'd be rolling it out. Now you're beginning to tell us, "Well, wait a minute, now we think our recerts were actually fine before.
They're not so fine now. And yes, it's very patient-dependent."
And so now are you going to go out and reeducate those clinicians you just spent time educating not to do a recert unless it's absolutely in line with clinical best practices and patient needs? Or are you now going to go back to them and say, "Oh, it's okay for you to go ahead and do that recert."
I'm very confused. And then I have a follow-up.
William F. Borne
So Sheryl, what's your question?
Sheryl R. Skolnick - CRT Capital Group LLC, Research Division
So my question is, what's right? You said before that the reason your recerts were down was because you were doing these reviews using evidence-based practices and it came out that recerts are down and quality is up.
Now you're saying your recerts are too low and you need to get them back up to where they were. What's the right answer?
William F. Borne
Well, Sheryl, I thought I said that the recerts were down as a result of behavioral issues from the cuts and reimbursement. I think that's been pretty consistent.
But I don't want you to confuse patient care management, which is a central focus, with care management, care coordinators that you mentioned at the beginning. The care coordinators were focused into the bundle site and its additional staff to focus on delivering care in a much more comprehensive way, and we're seeing some pretty good results.
If we get good benefits there, we think that we can take some of that, once we get it as efficient as our current system into the rest of the organization. I think the question John asked was that I feel that it was too high then, and it's low now, and the answer was that if you look at the patient acuity and how acuity hasn't changed.
And if you look at the industry averages, it's higher than where we're at. And if you look at the patients that are discharged with activity, that could justify the need for another recert.
This is what our patient care management, which is our centralized profit group is focusing on. So I think that's kind of what I said, and I understand your confusion.
I'd be happy to talk to you about it offline, if you'd like.
Sheryl R. Skolnick - CRT Capital Group LLC, Research Division
Okay. All right.
So let me move on to another question. So, as you look at your portfolio, I am a bit concerned that with each sequential quarter, there are additional units that need to be divested.
And I would imagine it's very difficult to manage a business from a corporate cost perspective and investment in strategic initiatives perspective when the base units of operations are constantly changing. So can you walk me through what the advantage is of the constant or seemingly frequent or every quarterly reduction in number of agencies as opposed to taking a look at your entire portfolio, forecasting out 12 to 24 months what your reimbursement environment is likely to look like, what your business model is likely to look like and then taking preemptive action instead of this, what's colloquially called death by a thousand cuts.
William F. Borne
Yes. That's probably a good way to look at it, Sheryl.
The bottom line is that we put a lot of money in resources and getting these providers and numbers established, getting approval with CMS. And what we find that even in the low-margin businesses, sometimes, it's 1 or 2, 3 people that you need to make a change in and you get the volume that you need.
So what we have is an ongoing focus on these underperforming care centers being very clear and surgical, as Ronnie mentioned earlier, on how we're adding resources. So in the past, I don't think we were necessarily putting all the resources that could have been put.
And before we close or consolidate these agencies, we want to give them a chance with some resource to see if they can be successful. We hate to close agencies that can be successful, so we're being very methodical about that.
But I can tell you that the focus of reducing these agencies is not going to go probably past the second quarter. So we hopefully will bring that chapter to an end.
Sheryl R. Skolnick - CRT Capital Group LLC, Research Division
Okay. And then, I guess we'll figure out why the second quarter is right, but I would imagine it had something to do with reimbursement changes that are coming in the fourth quarter and first and a better visibility as to the exposure on the tax thesis [ph].
But now sort of going back to what you just said, which is clearly, and I would agree, that building volume has got to be a priority as opposed to acquiring, because it doesn't seem like you've got a stable base of operation. So acquiring to me would be an anathema, but that's just me.
So if I look at your internal growth efforts to build the volumes, you went -- you listed a number of initiatives, the enterprise-wide sales, the business development. Some of these initiatives were announced on calls like this over time.
Can you give us -- given that research are down [ph], given that admissions haven't gotten traction to be steadily growing or even stable, can you give us an assessment of how well these things are functioning, how much more money it's going to cost for you to build your volume growth initiatives to a level that they'll actually be successful and how long it's going to take?
William F. Borne
I think, Sheryl, that Ronnie mentioned in his comments that if we add BD staff, it's a relatively low threshold to get them paying for themselves. So it becomes cost neutral.
And I think that reflected in the guidance that we've given and the guidance that we will give, those costs will be anticipated. So we're looking at markets that we think could be viable because of the demographics being population and population growth.
We'll also look at the competitive analysis, and then we're taking a hard look at local leadership and business development to make sure they have the resources and support they need. And once we do that and we're comfortable that we've done as much of that as we can, let me make the very difficult decision to either consolidate, close or sell some of these care centers.
What we're dealing with is people and their jobs who have been devoted and dedicated to the company and are working their heart out to allow us to be successful. So we want to give them a chance.
The resources that we want to put into getting these to turn around are not going to be meaningful in the big picture. And I think that we'll have a pretty decent success rate on these.
And for the agencies, we can save, I think in the long term, it will help our growth. So there's kind of a method to the madness, for lack of a better term.
And again, we have time frame that we want to stop this rising. We want to get this behind us and move forward with a totally profitable portfolio.
Sheryl R. Skolnick - CRT Capital Group LLC, Research Division
Okay, and then just one final question. The bundled initiatives, obviously, are very interesting and timely.
A lot of people have talked about in the past you're making a significant investment in being a capable partner on that score. Are there any contracts or partnerships that you have today, have any upstream providers have yet engaged you to be a post-acute care manager for them?
William F. Borne
In the bundles, we have to have contracts with hospitals. So we have a lot of that activity going on.
And there's a lot of interest in dialogue talking about post-acute, not just in the bundles, but in DC and the legislative side of it. So we think that this exercise and this practice in developing these infrastructure will pay off, and we're getting a lot of interest in post-acute care management and not only looking at home health, but looking at the whole post-acute care continuum.
And we will have an opportunity, I think we have around -- I can't give you an exact number, but about 8 or 10 partners that we'll have an opportunity to move into the full post-acute care continuum beginning of October of next year, should we choose to move forward. Of course, we want to see some success in this current bundle program before we buy the bigger piece of the asset.
Sheryl R. Skolnick - CRT Capital Group LLC, Research Division
Okay, and just to put on the guidance, fourth quarter admissions and episodes will -- assuming that we ever get a final rule, would typically be affected by the rebasing amount, correct? Is that in your guidance?
Ronald A. LaBorde
It is not, Sheryl, in our guidance. So rebase is not reflective, nor, I might add, that nor the 19 that we talked about divesting the debt moving into the discontinued ops, effective has not reflected also in our guidance.
So no rebasing.
Sheryl R. Skolnick - CRT Capital Group LLC, Research Division
Okay. And those 19 are currently profitable or no?
Ronald A. LaBorde
No. No.
Sheryl R. Skolnick - CRT Capital Group LLC, Research Division
No, that's right. Those are the ones that have the loss, okay.
And so we...
Ronald A. LaBorde
So Sheryl, the reason for that, it was $4 million revenue and $1 million loss for the third quarter.
Sheryl R. Skolnick - CRT Capital Group LLC, Research Division
That's right. Okay, those are the ones with the $4 million plus and the $1 million minus.
And so we still don't have rebase.
Ronald A. LaBorde
We mentioned the ones that were unprofitable has about a $40 million run rate for the third quarter with about a $5 million loss that quarter. So that's some additional opportunities.
But we really would like to see these guys go profitable.
William F. Borne
Well, thank you for your questions, Sheryl. And with that, I think that concludes our conference call for today.
We truly appreciate you guys calling in and we look forward to chatting with you all in our year-end conference call. Thanks.
Operator
This concludes today's conference call. You may now disconnect.