Nov 10, 2014
Executives
Jon Foster - CFO Eric Steen - CEO, President and Director Jan Skonieczny - COO, Chief Compliance Officer and Privacy Officer
Analysts
Joseph Munda - Sidoti & Company, LLC Brooks O’Neil - Dougherty & Company Doug Weiss - DSW Investments
Operator
Good morning, everyone, and welcome to InfuSystem Holdings Third Quarter 2014 Conference Call. This is your operator, Paulette.
Let me first give you to Mr. Jonathan P.
Foster, Chief Financial Officer.
Jon Foster
Good morning, everyone. First of all, let me get some administrative matters out of the way.
The company issued a press release this morning. The release is available on most financial websites.
Additionally, a web replay will be available on the company's website for 30 days. Both the press release on Form 8-K and the company's Form 10-Q for the third quarter of 2014 have been filed with the SEC this morning.
During the course of this earnings call, the company will make projections and other forward-looking statements. A detail discussion of the risks and uncertainties that could cause the company's actual results to differ materially from those any forward-looking statements to be found in InfuSystem's SEC filings particularly to risk factors including in our most recent 10-K and as updated in our quarterly reports including a 10-Q filed this morning.
The company's projections and forward-looking statements are based on factors that are subject to change and therefore speak only as of the date they are made. The company has no obligation to update any forward-looking statements made during this earnings call.
The company will refer to certain non-GAAP measures, such as adjusted EBITDA, which is not considered a measure of financial performance under GAAP. A reconciliation of the differences between non-GAAP financial measures, and the most comparable GAAP measure, is contained in the company's press release issued this morning.
With that, I would like to turn the call over to Mr. Eric Steen, Chief Executive Officer.
Eric Steen
Good morning, everyone, and thank you for joining the InfuSystem Holdings Inc. third quarter of 2014 earnings call.
Joining me today are Jan Skonieczny, Chief Operating Officer; and Jon Foster, Chief Financial Officer. For our recent quarter, I'm pleased with the accomplishments of my team especially in the area of information technology development.
I'm encouraged by the continued growth of both our provider and supplier business segments. And I'm thrilled about the outstanding patient satisfaction scores we are getting from both our oncology and co-surgical pain patients and what that will mean for our future.
Before I talk in more detail on these matters, let me first discuss our Q3 financial results. Revenues in the third quarter were $16.6 million up 6% from the third quarter of 2013.
Revenue for the first nine months is up 11% versus prior year. Gross profit for the second quarter is $11.7 million, up 3% from prior quarter.
The gross profit percentage was 71% in Q3. For the first nine months of the year, gross profit dollars are up 11% versus 2013.
Net income was $900,000 in the third quarter or $0.04 per share. Year-to-date, net income is $2.3 million, or $0.10 a share, this compares to $0.04 per share in the first nine months of 2013.
Now I'd like to talk about what the team has accomplished. We are spending money for our future and I want our shareholders to know what they're getting for this investment.
For our key strategic tenant of electronic connectivity, we now have 25 oncology infusion centers connected with our state-of-the-art not only paperless but order entry free electronic medical record integration. In 2013, we have zero.
We are now connected with EMR software systems like EPIC, Altos and Varian, with several new EMR vendors connecting with us in the coming months. As a result of our electronic connectivity efforts, we are receiving over 40% of our third party payer orders electronically through our paperless ordering systems.
The EMR connectivity investment will help us to gain share, process claims more quickly, not loosing revenue to exceeding claim finding limitations and process more claims without increasing staff in our billing department. We already have an annualized $1.6 million of new oncology business in our pipeline as a result of the EMR connectivity.
Our recently launched pump web portal that helps both our customers and our internal operations managed the care and lifecycle of infusion pumps now has thousands of pumps per month being monitored. We now have the data from 100s of postsurgical pain patients and the pain satisfaction scores for our orthopedic surgery customers.
So they can track and trend clinical information that positions them to meet their hospital consumer assessment of healthcare provider and systems or HCAHPS Scores to receive increased reimbursement amounts from Medicare. In the third quarter we also launched our new website and have all the legacy InfuSystem provider business, the legacy first biomedical supplier business, our new pain management service, a convenient online payment mechanism for our payments, and our increasing line of infusion disposable and safety products combined into one site.
We also launched a new asset management software called [Infutrack] (ph) which offers both inventory management and asset tracking. It features an asset retrieval process interface directly to carriers like FedEx and UPS.
It has dashboard reporting and interfaces directly to our pump portal. We will be utilizing the system internally for improved asset management of our own pumps and we are working with data site customers in hospital, home infusion and specialty pharmacy.
With EMR integration pump portal, new website, [infuset] (ph) asset tracking and blocking dashboard, we had five information technology development projects going on at once, a tall order for a small company. But speed to market is important to me.
And I would like to just spend the money necessary to get all of these worthy projects to the marketplace as soon as possible. It is a time of change in the market and a time of change is the time to gain share and these value added software programs are important, as we transition from a pump company to a company with value-added software that helps our clients use our pumps more effectively and efficiently.
Making this investment has impacted our short term results. Most notably our adjusted EBITDA, which is up $200,000 over prior year and with all the expansion paying an IT close to a $1 million.
We have also brought some capabilities in-house including legal with the hiring of Sean Schembri as General Counsel. In addition, tax and internal auditing positions have been brought inside.
Due to recruiting and onboarding, these expense areas are slightly higher than the short term, but I expect significant savings and increase capabilities for the long term. We continue to grow in all business areas, rentals, equipment sales and service and sales of disposable products.
We made a significant investment of $3.7 million in our pump fleet for the first nine months of the year, an increase of $800,000 compared to $2.9 million in the first nine months of prior year. This investment allows us to serve our increasing pain and oncology patient populations, plus the increase in rentals to our provider customers.
In the third quarter, our provider business patient sensors and growth billings were up 5% but our collected revenue was down 2%. The cause of this upside down equation is primarily the impacted Affordable Care Act.
In 2014, we have seen a lot of patients changing insurance plans in mid treatment. Many small employers have turned away from offering health plans as they view the Affordable Care Act exchange marketplace as being more cost effective.
Steve has more experience dealing with Medicaid and other types of plans than we previously had at InfuSystem. Steve and his team are actively pursuing contracts, where we are non-contracted with a focus on the new exchange plans.
Speaking with payers, CMS released the final rule that implements the Affordable Care Act mandate to use competitive bidding rates for adjusting durable medical equipment fee schedule payment amounts. As I said in my first InfuSystem earnings call 18 months ago, I believe that Care Act competitive bidding will help InfuSystem in the long term by further consolidating the market and allowing us to gain share as we implement an electronic connectivity and IT development strategy that will drive cost from our processes and allow us to maintain margins.
With that, I'd like to ask Jan Skonieczny to please give us an update on the competitive bidding final rule. Jan?
Jan Skonieczny
Thank you, Eric. CMS continues to be an active subject.
On October 31, 2014 CMS released a final rule entitled End-Stage Renal Disease Prospective Payment System, Quality Incentive Program and Durable Medical Equipment Prosthetics, Orthotics, and Supplies or more simply the final rule. This lengthy final rule was published in the federal register on November 6, 2014 and as you can imagine, it has taken some time to digest.
The rule finalizes several provisions relating to durable medical equipment, prosthetics, orthotics and supplies or DMEPOS which includes, items and services subject to competitive bid pricing in 10 or fewer Competitive Bidding Areas or CBAs will be subject to payment reductions with Single Payment Amounts or SPAs will be equal to 110% of the unweighted average Single Payment Amounts in those areas outside of the current CBAs. This includes the category for External Infusion Pumps and supplies.
Such adjustments would apply in non-CBAs for items furnished on or after January 1, 2016. CMS has adopted a 6-month phase-in of these adjustments to the payment amounts.
For items and services with dates of service from January 1, 2016 through June 30, 2016, the fee schedule amounts in non-CBAs will be based on 50% of the un-adjusted fee schedule amount and 50% of the adjusted fee schedule amount. Beginning on July 1, 2016, the fully adjusted payment rates will apply.
So what does this mean to InfuSystem. Based on the current mix of revenues and current fee schedules, we estimate that this new rule could reduce revenues in the range of $1 million to $2 million in 2016 and $2 million to $3 million in 2017.
We believe that we are focus on improving our commercial contracts, along with operational and IT improvements, that we could potentially offset some if not all of these reductions inside these years. Eric?
Eric Steen
Thanks for that update Jan. It will be interesting to watch this process unfold.
In other areas, our pain management service continues to grow in both acute care and our patient surgery centers. Block pain dashboard gives hospital and surgery centers, the ability to receive patient satisfaction scores to meet their HCAHPS requirements to enhance their reimbursement from CMS Medicare.
It is a long sales cycle that often requires input from a complex web of decision-makers or clinical and financial. But the good news is once implemented our pain management customers love it.
Return of business in Q3 was least favorable since I've been here. It is compounded by one of our major suppliers deciding to end our life one of the ambulatory pumps in the marketplace.
This doesn't happen very often but when it does it takes a lot of energy and expense to swap everything out. It is expensive when we own thousands of well depreciated pumps generating revenue and then we have to buy new pumps and start the depreciation process all over again.
The most encouraging aspect of our third quarter is not the accomplishments of our hardworking IT team or the growth of patients. It is the off the chart patient satisfaction scores and what that means to our future.
In our Affordable Care Act future, patients will become increasingly important decision-makers. The outstanding patient satisfaction scores and patient pain scores gives me confidence that we are on the right track.
Patients are never more satisfied as when they receive their care in the comfort of their home, the most Affordable Site of Care. As the number of home infusion patients grow, InfuSystem will be well positioned in both our provider business and supplier business.
An important development in home infusion is the recent introduction in the U.S. House of Representatives of the Medicare Site of Care Act.
This will extend the number of home infusion therapies that Medicare reimburses for and will allow our nation senior citizens to have the same coverage as the commercial insurers provide. Approval of the Site of Care Act will provide valuable cost savings at a time when the Medicare program needs them by reducing a number of expensive hospital and skilled nursing facility admissions and protecting our senior citizens from the increased risk of contracting infections that comes with nursing home and hospital stays.
Now I would like to ask Jon Foster to take us through the numbers.
Jon Foster
Thank you, Eric. First, of all let me provide some summary financial comments.
Our revenue we are focused on continuing to grow recurring rental revenue. These revenues traditionally have greater contribution margins than sales.
Our brokerage year debt has been quite successful in generating sales year rents. Producing our sales seasonality, I believe this is a new paradigm financial system.
As Jan have stated before in conversations fairly in view, this is not the first [indiscernible] I think the same for InfuSystem. As we saw on this past quarter and year-to-date with the impact of Affordable Care Act becoming clear on our payor units, the transitioning of write-off pumps the first instance occurred in years if not in a decade.
The spend increases in IT and for pain management of $0.5 million along with the unplanned charges of $0.5 million. We will balance this along with the high single digit annual revenue growth project and maintain strong year-to-date adjusted EBITDA.
Lowering net debt balances and our cost of debt however remains a priority, second to supporting growth and revenue, especially our recurring rental revenue base. Lastly on the recent news from CMS.
In 2009, InfuSystem revenues were primarily based on oncology pump rentals with approximate over 30% of our total revenues coming from CMS. Today, that approximate percentage is less than 25%.
This reduction is due to the growth in other revenues out taking the growth and revenue associated with oncology treatment. This trend continues.
Now we will discuss the financial results for the third quarter and year-to-date. Our net revenue for the quarter ended September 30, 2014 was $16.6 million, an increase of $0.9 million or 6% compared to $15.7 million for the quarter ended to September 30, 2013.
During the period, net revenues from rentals were constant. Our net revenues from product sales increased $0.9 million or 69% over the same period in 2013.
The increase in net revenues was primarily related to the addition of larger customers and increased penetration into existing customer accounts and offset by a higher mix of Medicaid and patient payors and our rental fees.
Revenue for the nine months ended September 30, 2014 was $50.2 million, an increase of $5.1 million over the same prior year period. During this year-to-date period, net revenues from rentals were up $2.6 million, while our net revenues from product sales increased $2.5 million over the same period.
Gross profit for the quarter ended September 30, 2014 was $11.7 million, an increase of $0.4 million or 3% compared to gross product of $11.3 million for the quarter ended September 30, 2013. Gross profit as a percentage of revenue represented 71% and 72% for the three months ended September 30, 2014 and 2013 respectively.
The decrease in gross profit as a percentage of revenues for the period is mainly due to the increase in product sales compared to rentals as they have a high gross margin rate. Gross profit for the nine months ended September 30, 2014 was up $3.6 million, or 11% compared to the same prior year period.
Gross profit as a percentage of revenue represented 71% for the nine months ended September 30, 2014, and 2013 respectively. Provision for doubtful accounts for the quarter ended for the third quarter was $1.3 million, a decrease of $0.5 million or 29% compared to $1.8 million for the quarter ended September 30, 2015.
The provision for doubtful accounts was 8% of revenues at September 30, 2014 down from 11% for the same period in the prior year. This decrease during the quarter is a result of our focus on patient collections.
A focus we discussed for some time and new would take time to see results. We believe the specific quarter will be the high end water mark and we’re excited that we saw such a decrease in the third quarter.
Provision for doubtful accounts for the nine months ended September 30, 2014 was $4.8 million consistent with the same prior year period. The provision for doubtful accounts is 10% of revenue at September 2014 compared to 11% of revenue in the same prior year period.
During the quarter ended September 30, 2014 selling and marketing expenses were $2.5 million, an increase of $0.1 million or 4% compared to $2.4 million for the quarter ended September 30, 2013. Selling and marketing expenses for the nine months ended September 30, 2014 was $7.8 million compared to $7.3 million for the same prior year period, an increase of $0.5 million or 7%.
These increases were largely attributable to increase conditions based on higher revenue for the comparable periods. As a percentage of revenues, we're seeing some year-to-date leverage and selling is a lower percentage of revenues, 15.4% versus 16.1% last year.
During the quarter ended September 30, 2014, our general and administrative or G&A expenses were $4.9 million to slightly up from the $4.6 million for the quarter ended September 30, 2014. The increase in G&A expense versus the same prior year period was mainly attributed to increases in spending on information technology and pain management initiatives of $0.2 million, charge-off for pumps of 0.1%, and increases in compensation and headcount was $0.5 million offset by savings and professional fees of $0.4 million.
The company has brought some services in-house previously performed by outside contractors, including tax, legal, information technology and internal audit. G&A expenses for the nine months ended September 30, 2014 were $14.7 million compared to $14.6 million for the same prior year period.
This slight increase in G&A expense versus the same prior year period was mainly attributed to increase in spending on IT and pain management for $0.5 million; a write-off of pumps was $0.3 million, severance of $0.2 million and increases in compensation and benefits, including increased headcount of $0.9 million all offset by savings of $1.2 million in professional fees and $0.4 million in stock-based compensation. During the quarter ended September 30, 2014 we reported income expense of $0.8 million compared to a tax expense of $0.4 million versus quarter ended September 30, 2013.
During the nine months ended in September 30, 2014, income tax expense was $1.9 million compared to $0.3 million in the same prior year period. The increase in income tax expense is primarily due to increase profitability during the quarter and year-to-date periods.
This effective tax rate of 45.1% was higher than U.S. Federal tax rate primarily due to the impact of state and NOL taxes and income tax on the company's Canadian operation.
The impact to state tax and Canadian rates attributable to the growth for business in areas were, we do not have any NOLs. As of September 30, 2014 we had cash and cash equivalents of $1.9 million and $3.6 million of net availability on the revolver, compared to $1.1 million to cash and cash equivalents, and $5.9 million availability under the revolver as of December 31, 2013.
Cash provided by operating activities for the nine months ended September 30, 2014 was $4.2 million, compared to $4.8 million for the nine months ended September 30, 2013. The decrease in cash is due to the cash flow effects of the change in accounts payable and other accruals.
Cash used in investing activities was $2.0 million for the nine months ended September 30, 2014, compared to $0.6 million for the nine months ended September 30, 2013. The increase in cash used was due to $3.2 million increase in spending on non-pump assets, which is a direct result of significant ongoing investment and information technology, and a preparation of new facility in Kansas and other warehouse sites.
Offset by a decrease in cash yields were $0.7 million related to proceeds from medical equipment sold. Cash used in financing activities for the nine months ended September 30, 2014 was $1.5 million compared to $5.6 million for the nine months ended September 30, 2013…….
This change was primarily attributable to the decision to pay out multiple leases in 2013, for as this year we may require to print some payments on all outstanding leases. Our availability in the future will be impacted, both negatively and positively at different times, as we deal with transitioning at approximately 2,000 pumps that are nearing end of life in May of 2015 with a certain manufacturer.
For the nine months ended September 30, 2014 this results in additional capital purchases of $1.9 million. Not all of these pumps will need to be replaced as we are focused on, and have already improved upon increased field utilization.
As we take advantage of rebate programs offered by many manufacturers for this certain pump, additional purchases will occur at a discounted rate. At this time we do not believe this transition will negatively impact our results of operations, as current rebates exceed the net book value of these pumps.
Comparing our networking capital base as of June 30, 2014 to this time last year, we ended the quarter with accounts receivable days outstanding, or DSO of 62 days, slightly higher than this time last year of 53 days, and up slightly from the last fiscal quarter of 59 days. The increase in DSO was due to more billings coming later in the quarter than this time last year for the previous period.
Our day sales and inventory, including our medical equipment held for sale or rental, or DSI, decreased from 25 days for last year's Q3 to 21 reflecting the success broker dealer proceeds. Day sales and accounts payable remain constant with prior year's Q3 of 25 days.
Overall, networking capital days of 59 was up from Q3 of last year 53. One of the efficiency measures that I've mentioned in prior calls is our turnover ratio or as I sometime referred to as our rental revenue ratio.
Taking just our rental revenue over our medical equipment and rental service at historical cost, the ratio in the current quarter was 1.47, adjusted for the end of life pumps compared to the year ago quarter of 1.57 and the previous quarter of 1.50, on an annualized basis. The decrease in this ratio reflects recent purchases of our rental fleet required to serve current and future rental customers.
The increase in our overall - we look to increase customer service levels by increasing prior levels at our service centers and impact on revenues by the ACA as I previously discussed. Offsetting this we've seen a significant increase in our utilization deal in our oncology business.
And with that, I’ll turn it back over to Eric.
Eric Steen
Thanks John. Going forward, our investment and accomplishments in information technology will continue to see growth generating the cash necessary to pay down debt.
Our patient growth and revenue growth will continue but profit remains the focus. We're not going to be chasing any big revenue, low profit deals and we’ll not be cannibalizing any of our long term rental business just because we had a huge one time brokerage sale in the fourth quarter of 2013.
That said, I am continuing our guidance of high single digit growth through the end of 2015. With that, I’d like to open up the lines for any questions that you may have.
Operator
(Operator Instructions) And our first question comes from Joe Munda from Sidoti & Company. Please go ahead.
Joseph Munda - Sidoti & Company, LLC
Good morning, guys. Thanks for taking the question.
Can you hear me, okay?
Eric Steen
Good morning, Joe.
Joseph Munda - Sidoti & Company, LLC
First of, I'd like to touch on the rental business, Jon, Eric, it seems like revenues there kind of stagnating through last couple of consecutive quarters. Can you talk a little bit about what's going on there?
I know you touched on a little bit of the mix as far Medicare is concerned. Is this a new ceiling for the company?
And how does the impact of these end of life pumps really impact that rental business going forward? Thank you.
Eric Steen
Yeah Joe, the rental business, I talked a bit about it. We've had three consecutive quarters on increased patient growth, but as I said this last quarter, our patient growth in the third-party payor business grew 5%, but revenue collections were down 2%.
The Affordable Care Act created - I'd say new challenges for the company. A lot of Americans changed the insurance plan, we're not electronic yet.
The business I inherited that was a fax machine business, although we’re making progress in getting 40% of our business electronically, there's still lot of paper shuffling, and when patients are changing insurance plans, we’ve got to catch up to them. It's not in this ceiling, no way.
One thing we've learned a lot about Medicaid plans and exchange plans, that in the past what is important in InfuSystem. And that’s what I talked about, Jan has a new hire, Steve Marcus and I am very impressed with.
And there are buckets of money out there that we’re not tapping. I'd call Steve the rain maker, because I know he’s going to make it rain and there are considerable amounts of money that with his contracting expertise we’re going to harvest more money.
So, the Affordable Care Act was implemented once. And it created a lot of new challenges which I think met in a good way but we need to give better.
And then – now I'll switch and talk recently about the end of life, I've been in the infusion business most of life, over 30 years, and there's not any pumps that get end of life in the U.S. market.
I think the most popular pump in the United States today is a pump that I sold when I was a boy sales rep. It’s still in the marketplace.
But I would say with some increased FDA scrutiny, one of the manufacturers decided to end of life in ambulatory pump that we have thousands in the marketplace. And when you have thousands of pumps out there, many of them well depreciated, generating revenue when you have to take the effort of swapping out pumps, the sales reps are involved, they’re not selling new accounts there, they’re working on business we already have.
So, it takes a little bit of steam out of it, but we've got behind this for the most part. We've taken those pumps and got in trading value and upgraded and enhanced our fleet.
I was about to say it's a good news or bad news, perhaps some of the new pumps we have will allow us to go to accounts that aren't on the InfuSystem model yet and attracting more clients. All though I think longer term, electronic medical record is going to be the real thing combined with competitive bidding this market is consolidating and we will consolidate further and we're the market leader.
So I think, some of those things that don't look like good news in the short term were in the long term position as to be successful.
Jon Foster
If I may add to that Eric, in our rental revenue base, as Eric mentioned in the call, in our oncology business, our base business is up. The number of patients we're serving is up.
The Affordable Care Act is impacting that. With the investments we’ve made in IT, we can now focus on the profitability and the net cash collected by facility by payor which now gives Steve Marcus as Eric mentioned, the tools he needs to know exactly which plans will benefit the company the most, and of course you can prioritize which plans you've been working on and Jan.
And that is certainly the granular part we're so focused and also to be quite honest excited about Steve, that he now has the tools to know where he needs to go to work. Within that rental number, also - we also have direct pay rentals, that we're going directly to the facility and that base businesses are.
Why it looks a little bit flat, is as we mentioned as the ACA and I think we'll solve that as we move forward with Steve. From a standpoint as Eric talked about on the end of life pumps, from a - there is no quality issue of care to the patients from a financial - from the P&L point of view, it’s not going to have the impact.
It’s just basically purely a cash flow, liquidity, and buying and selling those pumps, right now where net book value is greater lapsed than the rebates being offered. And so that's just going to be probably a six month to year timeframe as we digest those pumps and pull them out of service with our customers.
But we currently have quite a number, much more than 1,000 leased pumps still out to customer being used and we’re very happy, and so we’ll have to transition those as we move forward.
Joseph Munda - Sidoti & Company, LLC
I am sorry, so what exactly, I mean - so we’re expecting material impact to gross margin? Is gross margin…
Jon Foster
Yes.
Joseph Munda - Sidoti & Company, LLC
Okay.
Jon Foster
You have to remember, when we’re talking 2,000 pumps, this is out of rental fleet of over 40,000.
Joseph Munda - Sidoti & Company, LLC
Okay, that's helpful. As far as the pump sales are concerned, it's very all over the place, $1.2 million to - now its $2.1 million.
How should we look at pump sales for modeling purposes going forward? Are we expected to have it, be $1 million to $2 million quarterly going forward, let's say through 2016, how should we look at that?
Eric Steen
I think we should look at pump sales, the big $1.2 million sale we had that was a one time event, it could happen again, yeah, when it will happen again, I don't know. They're opportunistic things based on demands in the marketplace and peaks and swings in the marketplace.
That's a business, that's a patient business, [indiscernible]. You've got to have patience to see opportunities to buy comps in the marketplace that you think will be of greater value downstream.
And so, that's our core business is a focused on recurring revenue. Panels, leases, disposable sales, that's our focus.
But if we see opportunities to have a big one time sale, that's all we need to do.
Joseph Munda - Sidoti & Company, LLC
Okay. That's helpful.
Eric, you talked about pain management and the push there. Can you give me color - did you guys book any revenue from pumps that were utilized on pain management in the quarter?
And if so, can you give us some indication of possibly percentage of revenue?
Eric Steen
We did book revenue for pain patients in the quarter and the book revenue for pain patients in every quarter. Currently we have two models that we build hospitals for pain.
We have both a provider model where we’re collecting from insurance and we also have a supplier model where we're doing rentals to directly to our surgery center or hospital customers. We haven't reported that number directly and it's blended in and at this point, I am not as focused on it, what I am really focused on is, getting the patients and getting the reference accounts and getting the patient population growing and at some point downstream, I’ll get more interested in what the revenue is.
But right now my mind is just on growing the concept and improving the model.
Joseph Munda - Sidoti & Company, LLC
Okay. And then I guess my final question, as far as the CapEx is concerned, you talked about $3.7 million being used for pump purchases.
I am showing $7.2 million through nine months. Can you fill us in on where the GAAP is between $7.2 million and $3.7 million, you guys talk about for pump purchases?
Jon Foster
Yeah Joe, this relates back to the change in our cash flow statement back - for year end 2012 that we went through and other people in the industry went through as well. That $7.2 million includes pumps that are sold through cost of sale as well so they include not only what you would call CapEx pumps, the cost of good sold pump, that’s a new requirement by GAAP that we look at that way.
So, the net cash used in investing in activities, the net net is to be after CapEx and your change in inventory. But that's just a requirement that kind of came down upon us and others in the industry in 2012.
So, that's why we try to let you know - the best way for you to understand, what's happened in our company is going back to the footnote number two, medical equipment and property, and that's all we added at that time, the detail on a historical cost basis or medical equipment and rental service to help people to understand what we would exactly done with our medical fleet.
Joseph Munda - Sidoti & Company, LLC
Okay. Thanks, guys.
Operator
And our next question comes from Brooks O'Neil from Dougherty & Company. Please go ahead.
Brooks O’Neil - Dougherty & Company
Good morning. I was hoping, Eric, you might just talk a little bit more about what it is you’re doing to drive those really strong patient satisfaction scores?
Eric Steen
I would say there's two things, first thing is on our pain program, where we've got a nice offering that utilizes the electro mechanical pumps to follow up patients after orthopedic surgery home with a pump instead of having their own narcotics. We actually – in addition to the pain scores we collect, we have these little post cards, we give the patients and say, tell us what do you think.
Now, I have – and some of these post cards say, where patients have handwritten in saying, this is my second knee surgery, the first one, I was given oral narcotics and that made me sick and I was sleepy and I couldn’t do things. Now I went home and I did a conference call from work after my surgery.
Thank you InfuSystem, this has really made a difference in my life. So, I think a lot of the pain scores, and then I think on oncology, it's a – for our oncology patients, it's a changing world, there is higher patient coppice and deductibles that patients have to make.
So our patient revenues have increased. But one of the situations is, sometimes a cancer patient might be the breadwinner for the family.
And now we're still a compassionate company and we need to work with people, and in some case we've got them on payment plans, and I think the patients appreciate that how we've worked with them in their new plans. And so, our patient satisfaction score is very high.
And I've been in this business for 36 years. And one thing I’ve learned is that, if you put the patient at the top of your organization chart, the rest of the stuff unfolds as it should.
And I think the combination of both our clinical and financial treatment of our patients is what is driving our patient scores to be the highest in our segment.
Brooks O’Neil - Dougherty & Company
That's great. So, I was just curious about the other thing you talked about – one other thing you talked about, despite the surface opportunity with Medicare, could you just talk a little bit more about how significant opportunity you see that and sort of what you think the timing might be?
Eric Steen
Yes. I think I can do the opportunity better than the timing but thank you for this question, it's something I love talking about.
Reimbursement is changing, and we're going away from fee-for-service and insurance including Medicare are getting different objectives for hospitals or home cares and one of the big changes I talked about was the healthcare consumer surveys – in the industry people refer to them as HCAHPS, and HCAHPS scores will drive reimbursement rates. And one of the areas that's important in HCAHPS are patients pain scores, and patients satisfaction with pain.
And so I mentioned the IT expenditures that we've done to come up with our product that's called block pain dashboard, and so for all the patients that go home on our pain management service, we’re calling those patients, and we’re collecting their scores, and we call them immediately after surgery when they first get home, we call them to follow up, and it's obvious from the comments we're getting back, the patients like it. They like the fact that someone is following up on them, and the electro mechanical pumps are a better clinical option than either the disposable elastomeric pumps, or the oral narcotics, and there’s been so many stories in the media on oral narcotics, I don’t think I need to go on about why oral narcotics are not a good choice, but peripheral nerve block is.
Peripheral nerve block is part of regional anesthesia, regional anesthesia continues to grow, continuous peripheral nerve block at home continues to go, and with block pain dashboard we can now go to a hospital, and say not only can we save your money, but we’re going to give you a tour that's going to help you increase your revenues. And on the timing of when hospitals will all have programs in place to be able to address it, I am not sure about that, but I know that the forward thinking hospitals are looking at that and we find customers who see our product offering, our value added software block pain dashboard, and they are so happy to run the administration so they can be the hero that helped the hospital positioned for increased reimbursement.
Brooks O’Neil - Dougherty & Company
That's great. Thank you very much.
Eric Steen
Thanks for the questions, Brooks.
Operator
(Operator Instructions) And our next question comes from Doug Weiss from DSW Investments. Please go ahead.
Doug Weiss - DSW Investments
Hey, good morning.
Eric Steen
Good morning, Doug.
Doug Weiss - DSW Investments
So, I just wanted to clarify little bit on the census on private pay, a 5% census growth, the 2% revenues decline, how much of that is - when you said that people are switching plans with HCA, how much of that is their switching to lower reimbursement levels? And how much is they’re switching the plans where you're not covered, and so you just don’t get reimbursed at all?
Eric Steen
Well, it's a combination of both, and sometimes in switching plans makes it difficult for our current system to follow the change in the information that we need. For example, one payor might have different requirements than other payors.
So, I am not sure of all the details, Jan, do you have any thoughts on that? Do you want to speak to that a bit?
Jan Skonieczny
Sure Eric, I'd be happy to. I actually think it's a combination of both, the one big change that we're seeing is, patients are now being enrolled in plans that are high deductible.
So although the allowable's in the fee schedule may still be strong, we're dependent on a larger portion of that reimbursement coming from the patient, which as you know can be difficult in segment where we're talking about oncology patients who have months and months of other medical bill. So, that's the challenging piece of it.
And then the other piece obviously would be dealing with new plans with respect to the Affordable Care Act, where we hadn't put as much contracting focus. And so now we’re in the process with Steve's team of gaining additional contract and making sure that we're in – work with all of these new Medicaid managed care plans.
And we're – it's just a process, but we've made a lot of progress and we’ll continue to do so.
Doug Weiss - DSW Investments
So, wouldn't you see a spike up every short term in bad debt expense? It's because of the - what you're describing with the higher patient pay?
Jon Foster
This is Jon. We did, and we did see that in the first half of this year.
As I mentioned in the call for the third quarter we came down, and that is result of Jan's Group really focusing on patient pay, we've now setup this year specific group that deals with patients, we have a special process for identifying those that are in need, that will provide free care So, we've got little more granular on the side of patient collections that in the past because of the reimbursement wasn’t entirely focused on as it should have been.
Doug Weiss - DSW Investments
So, I mean, I guess – bigger picture, how quickly do you think that you'll have the new processes in place and the growth in census will flow through the revenue growth?
Jon Foster
I think what's very key is in Jan's comments, when she's talking about CMS and the range of customers we digest, what was in the 500 page document that was released, Thursday afternoon of last week, that we'll be able to still in those holds, some or all. And from our standpoint, from the looking at all the things we’re talking about that Eric has mentioned from IT improvement, operational improvements, contract improvements that we have more on our chart board potential revenue or cost enhancements that are greater than those numbers in the CMS call.
We were talking about by 2016, 2017.
Eric Steen
But certainly, we're going to have additional payor contracts even this year that will help us capture more money from these exchange plans.
Jan Skonieczny
Right. So, the focus has been really just - has been three fold.
New contracts, enhancing the terms of existing contracts, and pricing, adding more staff to focus on assisting patients with payment plans to bring their dollars in the door quicker.
Doug Weiss - DSW Investments
All right. Okay.
And then, going to the CMS announcement, you said $1 million to $2 million hit in 2016, and $2 million to $3 million hit in 2017, was that your comment?
Jan Skonieczny
That was correct. Yeah.
Doug Weiss - DSW Investments
So, is that cumulative or is that – in other words, is that a cumulative hit of $3 million to $5 million or in the $1 million to $2 million number?
Jan Skonieczny
No. The $1 million to $2 million in the first year is because it's going to be phased in, so for the first half of the year we’re only going to realize 50% of the impact.
Doug Weiss - DSW Investments
Yeah, I see. So that's the total - $3 is the total impact?
Jan Skonieczny
Correct.
Jon Foster
Let me just also say that, these revenue statements are very forward-looking statements. There's a long way to go.
There are made in the spirit that more disclosure is better, so, I don’t know what the number will be, it will probably be our estimate though, and there’s a lot of things that are going to change in our operation organization before we get there.
Doug Weiss - DSW Investments
Yeah. But I actually – my senses is that, let's take your high end of estimates, $3 million hit on what is presumably a larger revenue base with that point in time is actually a pretty good outcome for you.
I think people, for year's I was thinking that number to be larger.
Eric Steen
It's a great outcome for us. I don't want to look silly celebrating a revenue cut that the estimates were much higher, the marketplace is littered with the carcasses of D&E companies out there, and we just had our highest net income ever, and we’re continuing to gain patients.
Our patients love us. Our customers love us, for me it's good news.
And I know people working t through quarter-to-quarter adjusted EBITDA, probably don’t think that way, but I always run a business like it’s my own, and look at it for long term and for the long term, I am still very bullish on what we’re doing.
Doug Weiss - DSW Investments
Yeah. Okay, can you say what pain is at this point as a percentage of your revenue mix?
Eric Steen
It's tiny compared to our total revenue. It's a tiny amount, in the perspective of all things.
But, it's growing, we’ve just three new accounts, I think the last week - so it’s going to ramp up, and when it gets to be more significant, I am going really, make – I’ll be honest with you, I don’t know what the pain revenue is, right now. And I don’t care, I care how many doctors, how many surgeons, how many anesthesiologist, how many pharmacist that we're saving big money in their budget by not buying these elastomeric.
So, when we get a big number of accounts, I’ll start looking at the revenue and tell you what it is.
Doug Weiss - DSW Investments
Okay. And that tends to be a little over margin, is that right?
Eric Steen
Not necessarily.
Doug Weiss - DSW Investments
Okay. So, we shouldn’t expect a mix in fact is that ramps?
Eric Steen
Not for the pain program. I think some of these new disposable offerings we have are lower margin.
I think, when I came to InfuSystem and they were evaluating new product opportunities, what I always heard was, it doesn't make the 70% margin that we have here. You got to be kidding me, this work for 70% margin deals year-over-year, I'm pretty sure, it’s going to be pretty narrow, and that's not my threshold, I want to grow the business, I want to really grow the revenue and get things ramped up here.
So, we're definitely going to be looking at some things that have margins less than 70% as we go forward.
Doug Weiss - DSW Investments
Okay. And then, just following up a little more on your comment on quality and the quality metrics, did those improve your payment rates from Medicare and Medicaid?
Is there some tangible flow through in terms of the reimbursement rates on those?
Eric Steen
I’ll let Jan, who is reimbursement expert to answer that one.
Jan Skonieczny
And the answer to that in the short term is not directly. But what it does is it gives us documentation and data to go back to CMS with to explain the benefits of the program as we encourage them to broaden their level of coverage.
Eric Steen
And I think Jan wouldn't it also help you get payor contracts when you come here and show new payors that information.
Jan Skonieczny
Absolutely, it definitely helps us in the commercial market as well. So, any time we have additional information that we can get in front of the payors with to help their level of understanding on the benefits, because the focus in the payor world is just definitely to reduce cost and the way they're going to do see cost savings is through treating patients in the home.
Doug Weiss - DSW Investments
Right. So, in terms of broadening the coverage, that means broadening Medicare and Medicaid payments on the pain side, is that correct?
Jan Skonieczny
Correct.
Doug Weiss - DSW Investments
Okay. Got it.
Eric Steen
In broadening, there are also oncology patients that we're currently non-contracted for. So, I just want to mention that we’re broadening our payor contracts for our oncology patients as well.
Doug Weiss - DSW Investments
Okay. So, just in terms of modeling gross margin, and this I guess goes back a little bit to how quickly you're implementing these changes that you discussed.
So you had a bit of sequential dip in gross margin - do you think that's going to improve sequentially going forward?
Eric Steen
I think on our organic business, it will improve. And I would say we're going to collect more - we’re going to be collecting more money from our outstanding payor contracts, and we’re going to be doing things more efficiently.
So for organic growth, I think it will improve, we'll get back where we were before. But I think to more rapidly grow the business, I am looking to doing new things, and some of those things that more rapidly complement our business and create a attractive package of offerings for the different segments we’re in, some of those new opportunities maybe less than 70% gross margin we currently enjoy.
Jon Foster
Let me just follow along with that, as I mentioned, the trend has been that sales are increasing faster than rentals, and sales are traditionally a lower gross margin, and I think the increase in sales were outpaced with the increase in rentals. So you have an ex issue there.
Doug Weiss - DSW Investments
I see. And then on, G&A, you said you had $500,000 roughly in investment in new equipment and technology.
Is that going to continue next quarter and into 2015, or does that drop right out?
Jon Foster
Now, the investment in IT and thing will continue, where other unexpected charges on the pump charge also moves severance, that shouldn't be repeatable as we move forward, I think we’ve gotten through the majority of that.
Doug Weiss - DSW Investments
And how large was that?
Jon Foster
Pardon.
Doug Weiss - DSW Investments
How large was the non-recurring charges?
Jon Foster
Roughly $0.5 million year-to-date.
Doug Weiss - DSW Investments
Okay. And how much was in this quarter?
Jon Foster
I think roughly $200,000 to $300,000.
Doug Weiss - DSW Investments
Okay. And then last question, just on taxes, could you just explain a little more clearly why the GAAP rate was so high?
Your cash taxes are similar or considerably lower?
Jon Foster
Well with the expansion of our business over the last few years was expanded into states where we don't have any NOLs, so we do have a tax rate there and also we have Canadian taxes, or Canadian operations or profitable. We have no NOLs there, and so I think you'll see that rate slow down where we’ve already done some Canadian tax planning, we’ll continue to do more.
So, I will look to that rate to go down as we go into 2016.
Doug Weiss - DSW Investments
What's a good normalized tax rate is?
Jon Foster
Something less than we have today, I would say looking at it, - looking at it, I would say between 40 and 45. In fact 40 number, as we get going.
Doug Weiss - DSW Investments
That's your actual cash taxes? Or that's more just –
Jon Foster
Book taxes. We have $14.3 million in Federal State and we’ll carry forward.
But they have different state. If we go into state that we had didn’t do business in before or is a much business, we didn't have an NOL than we're paying tax on it, and that impacts the calculation, the effective tax rate on our books.
Doug Weiss - DSW Investments
Right. It seems awkwardly high, NOL is actually skewing the tax rate up in some - kind of intuitive way?
Jon Foster
Well, that in also the Canadian.
Doug Weiss - DSW Investments
Yeah. Okay.
So, I mean – all right, I guess will be more time to discuss that.
Jon Foster
But as we said, we came down for that from the 45 write down to the 40.
Doug Weiss - DSW Investments
Okay. And just, one last question on where - on cash flow and seasonality of cash collection and so forth, do you have some targets for where you think you can get debt to over the next year?
Jon Foster
That all depends, I mean, as we’ve mentioned before, our priority is first growing our recurring rental revenue base which involves investing in our rental fleet. So, first and foremost where you have a 1.5x return on investment and rental revenue over the CapEx we're spending.
We got to take it, that's too much below hanging fruit. And then we also have this variable package as we trade in and we place the end of life pumps that will be available, but will go up and down but we’ll manage, and then after that, its pain down and reducing our cost to debt.
So, those are the priorities as we bring on, we have 250 pump accounts that as sales force brings to us, we’re going to take a 250 pump as up. So that just increases our incremental revenue and that's ultimately was the cash flow concern.
Doug Weiss - DSW Investments
Right. Okay, all right.
Great, we'll talk to you next quarter.
Jon Foster
Thanks Doug for asking questions.
Operator
I will now turn the call over to Eric Steen for closing comments.
Eric Steen
Okay. We want to thank everyone for joining our call today and look forward to seeing you and talking to you soon.
Bye, bye.
Operator
Thank you, ladies and gentlemen. This concludes today's conference.
Thank you for participating. You may now disconnect.