Document
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
 FORM 10-Q
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number: 001-33989
 
LHC GROUP, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
71-0918189
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
901 Hugh Wallis Road South
Lafayette, LA 70508
(Address of principal executive offices including zip code)
(337) 233-1307
(Registrant’s telephone number, including area code)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
  
¨
 
Accelerated filer
 
ý
 
 
 
 
Non-accelerated filer
  
¨  (Do not check if a smaller reporting company)
 
Smaller reporting company  
 
¨
 
 
 
 
Emerging growth company
 
¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.


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¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
Number of shares of common stock, par value $0.01, outstanding as of November 1, 2017: 18,279,658 shares.


Table of Contents

LHC GROUP, INC.
INDEX
 
 
 
Page
Part I. Financial Information
 
Item 1.
 
Condensed Consolidated Balance Sheets — September 30, 2017 and December 31, 2016
Condensed Consolidated Statements of Income — Three and nine months ended September 30, 2017 and 2016
Condensed Consolidated Statement of Changes in Equity — Nine months ended September 30, 2017
Condensed Consolidated Statements of Cash Flows — Nine months ended September 30, 2017 and 2016
Item 2.
Item 3.
Item 4.
Part II. Other Information
 
Item 1.
Item 1A.
Item 2.
Item 6.

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PART I — FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
LHC GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
 
September 30, 
 2017
 
December 31, 
 2016
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash
$
16,922

 
$
3,264

Receivables:
 
 
 
Patient accounts receivable, less allowance for uncollectible accounts of $26,089 and $29,036, respectively
145,508

 
124,803

Other receivables
4,705

 
5,115

Amounts due from governmental entities
830

 
942

Total receivables, net
151,043

 
130,860

Prepaid income taxes
4,879

 

Prepaid expenses
11,437

 
9,821

Other current assets
7,331

 
5,796

Total current assets
191,612

 
149,741

Property, building and equipment, net of accumulated depreciation of $41,876 and $35,226, respectively
47,562

 
43,251

Goodwill
392,689

 
307,317

Intangible assets, net of accumulated amortization of $12,607 and $10,968, respectively
130,779

 
102,006

Other assets
2,411

 
11,756

Total assets
$
765,053

 
$
614,071

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and other accrued liabilities
$
40,355

 
$
26,805

Salaries, wages, and benefits payable
53,289

 
34,265

Self-insurance reserve
9,524

 
10,691

Current portion of long-term debt
261

 
252

Amounts due to governmental entities
4,564

 
4,955

Income tax payable

 
3,499

Total current liabilities
107,993

 
80,467

Deferred income taxes
38,186

 
31,941

Revolving credit facility
119,000

 
87,000

Long-term debt, less current portion
93

 
544

Total liabilities
265,272

 
199,952

Noncontrolling interest — redeemable
13,206

 
12,567

Stockholders’ equity:
 
 
 
LHC Group, Inc. stockholders’ equity:
 
 
 
Common stock — $0.01 par value; 40,000,000 shares authorized; 22,635,322 and 22,429,041 shares issued in 2017 and 2016, respectively
226

 
224

Treasury stock — 4,890,181 and 4,828,679 shares at cost, respectively
(42,226
)
 
(39,135
)
Additional paid-in capital
125,208

 
119,748

Retained earnings
345,967

 
314,289

Total LHC Group, Inc. stockholders’ equity
429,175

 
395,126

Noncontrolling interest — non-redeemable
57,400

 
6,426

Total equity
486,575

 
401,552

Total liabilities and equity
$
765,053

 
$
614,071

See accompanying notes to condensed consolidated financial statements.

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LHC GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except share and per share data)
(Unaudited)
 
 
Three Months Ended  
 September 30,
 
Nine Months Ended 
 September 30,
 
2017
 
2016
 
2017
 
2016
Net service revenue
$
272,872

 
$
230,797

 
$
779,700

 
$
679,380

Cost of service revenue
172,856

 
140,832

 
488,384

 
413,561

Gross margin
100,016

 
89,965

 
291,316

 
265,819

Provision for bad debts
3,194

 
3,275

 
8,238

 
11,658

General and administrative expenses
75,669

 
66,999

 
221,077

 
201,296

(Gain) loss on disposal of assets
(177
)
 
142

 
(23
)
 
1,389

Operating income
21,330

 
19,549

 
62,024

 
51,476

Interest expense
(995
)
 
(816
)
 
(2,615
)
 
(2,167
)
Income before income taxes and noncontrolling interest
20,335

 
18,733

 
59,409

 
49,309

Income tax expense
7,445

 
6,562

 
20,410

 
15,500

Net income
12,890

 
12,171

 
38,999

 
33,809

Less net income attributable to noncontrolling interests
1,984

 
2,555

 
7,321

 
7,043

Net income attributable to LHC Group, Inc.’s common stockholders
$
10,906

 
$
9,616

 
$
31,678

 
$
26,766

Earnings per share attributable to LHC Group, Inc.'s common stockholders:
 
 
 
 
 
 
 
Basic
$
0.61

 
$
0.55

 
$
1.79

 
$
1.53

Diluted
$
0.61

 
$
0.54

 
$
1.77

 
$
1.52

Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
17,740,818

 
17,588,163

 
17,704,561

 
17,546,773

Diluted
18,010,522

 
17,719,473

 
17,931,700

 
17,664,284

 




See accompanying notes to the condensed consolidated financial statements.


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LHC GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(Amounts in thousands, except share data)
(Unaudited)
 
 
Common Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Noncontrolling
Interest Non
Redeemable
 
Total
Equity
Issued
 
Treasury
 
Amount
 
Shares
 
Amount
 
Shares
 
Balance as of December 31, 2016
$
224

 
22,429,041

 
$
(39,135
)
 
(4,828,679
)
 
$
119,748

 
$
314,289

 
$
6,426

 
$
401,552

Net income (1)

 

 

 

 

 
31,678

 
(328
)
 
31,350

Acquired noncontrolling interest

 

 

 

 

 

 
52,492

 
52,492

Noncontrolling interest distributions

 

 

 

 

 

 
(1,472
)
 
(1,472
)
Sale of noncontrolling interest

 

 

 

 
348

 

 
282

 
630

Purchase of additional controlling interest

 

 

 

 
(184
)
 

 

 
(184
)
Nonvested stock compensation

 

 

 

 
4,522

 

 

 
4,522

Issuance of vested stock
2

 
191,463

 

 

 
(2
)
 

 

 

Treasury shares redeemed to pay income tax

 

 
(3,091
)
 
(61,502
)
 

 

 

 
(3,091
)
Issuance of common stock under Employee Stock Purchase Plan

 
14,818

 

 

 
776

 

 

 
776

Balance as of September 30, 2017
$
226

 
22,635,322

 
$
(42,226
)
 
(4,890,181
)
 
$
125,208

 
$
345,967

 
$
57,400

 
$
486,575

 
(1)
Net income excludes net income attributable to noncontrolling interest-redeemable of $7.6 million during the nine months ending September 30, 2017. Noncontrolling interest-redeemable is reflected outside of permanent equity on the condensed consolidated balance sheets. See Note 8 of the Notes to Condensed Consolidated Financial Statements.



See accompanying notes to condensed consolidated financial statements.

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LHC GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
 
 
Nine Months Ended 
 September 30,
 
2017
 
2016
Operating activities:
 
 
 
Net income
$
38,999

 
$
33,809

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization expense
9,680

 
9,024

Provision for bad debts
8,238

 
11,658

Stock-based compensation expense
4,522

 
3,518

Deferred income taxes
6,245

 
6,062

Gain (loss) on disposal of assets
(23
)
 
1,389

    Impairment of intangibles and other
81

 

Changes in operating assets and liabilities, net of acquisitions:
 
 
 
Receivables
(19,569
)
 
(21,175
)
Prepaid expenses and other assets
(3,859
)
 
450

Prepaid income taxes
(4,879
)
 
(2,482
)
Accounts payable and accrued expenses
26,038

 
17,633

Income taxes payable
(3,499
)
 

Net amounts due to/from governmental entities
(279
)
 
(2,043
)
Net cash provided by operating activities
61,695

 
57,843

Investing activities:
 
 
 
Purchases of property, building and equipment
(7,944
)
 
(14,576
)
Cash paid for acquisitions, primarily goodwill and intangible assets
(61,247
)
 
(20,332
)
Other

 
273

Net cash used in investing activities
(69,191
)
 
(34,635
)
Financing activities:
 
 
 
Proceeds from line of credit
63,000

 
38,000

Payments on line of credit
(31,000
)
 
(44,000
)
Proceeds from employee stock purchase plan
776

 
663

Payments on debt
(192
)
 
(156
)
Noncontrolling interest distributions
(8,406
)
 
(6,859
)
Excess tax benefits from vesting of stock awards

 
1,293

Withholding taxes paid on stock-based compensation
(3,091
)
 
(1,931
)
Purchase of additional controlling interest
(184
)
 

Sale of noncontrolling interest
251

 
52

Proceeds from exercise of stock options

 
109

Net cash (used in) provided by financing activities
21,154

 
(12,829
)
Change in cash
13,658

 
10,379

Cash at beginning of period
3,264

 
6,139

Cash at end of period
$
16,922

 
$
16,518

Supplemental disclosures of cash flow information:
 
 
 
Interest paid
$
2,694

 
$
2,329

Income taxes paid
$
22,376

 
$
11,390

See accompanying notes to condensed consolidated financial statements.


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LHC GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization
LHC Group, Inc. (the “Company”) is a health care provider specializing in the post-acute continuum of care. The Company provides home health services, hospice services, community-based services, and facility-based services, the latter primarily through long-term acute care hospitals (“LTACHs”). As of September 30, 2017, the Company, through its wholly- and majority-owned subsidiaries, equity joint ventures, controlled affiliates, and management agreements, operated 449 service providers in 27 states within the continental United States.
Unaudited Interim Financial Information
The condensed consolidated balance sheets as of September 30, 2017 and December 31, 2016, and the related condensed consolidated statements of income for the three and nine months ended September 30, 2017 and 2016, condensed consolidated statement of changes in equity for the nine months ended September 30, 2017, condensed consolidated statements of cash flows for the nine months ended September 30, 2017 and 2016 and related notes (collectively, these financial statements and the related notes are referred to herein as the “interim financial information”) have been prepared by the Company. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been included. Operating results for the three and nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted from the interim financial information presented. This report should be read in conjunction with the Company’s consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. The report was filed with the Securities and Exchange Commission (the “SEC”) on March 9, 2017, and includes information and disclosures not included herein.
2. Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported revenue and expenses during the reporting period. Actual results could differ from those estimates.
Critical Accounting Policies
The Company’s most critical accounting policies relate to the principles of consolidation, revenue recognition, and accounts receivable and allowances for uncollectible accounts.
Principles of Consolidation
The interim financial information includes all subsidiaries and entities controlled by the Company through direct ownership of majority interest or controlling member ownership of such entities. Third party equity interests in the consolidated joint ventures are reflected as noncontrolling interests in the Company’s interim financial information.
The following table summarizes the percentage of net service revenue earned by type of ownership or relationship the Company had with the operating entity: 

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Three Months Ended  
 September 30,
 
Nine Months Ended 
 September 30,
Ownership type
 
2017
 
2016
 
2017
 
2016
Wholly-owned subsidiaries
 
50.6
%
 
57.6
%
 
52.1
%
 
57.3
%
Equity joint ventures
 
47.5

 
40.7

 
46.1

 
41.0

Other
 
1.9

 
1.7

 
1.8

 
1.7

 
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
All significant intercompany accounts and transactions have been eliminated in the Company’s accompanying interim financial information. Business combinations accounted for under the acquisition method have been included in the interim financial information from the respective dates of acquisition.
The Company consolidates equity joint venture entities as the Company has controlling interests in the entities, has voting control over these entities, or has ability to exercise significant influence in the entities. The members of the Company's equity joint ventures participate in profits and losses in proportion to their equity interests. The Company also consolidates entities which have license leasing arrangements as the Company owns 100% of the equity of these subsidiaries.
The Company has various management services agreements under which the Company manages certain operations of agencies. The Company does not consolidate these agencies because the Company does not have an ownership interest in, nor does it have an obligation to absorb losses of, or right to receive benefits from the entities that own the agencies.
Revenue Recognition
The Company reports net service revenue at the estimated net realizable amount due from Medicare, Medicaid, and others for services rendered. The Company assesses the patient's ability to pay for their healthcare services at the time of patient admission based on the Company's verification of the patient's insurance coverage under the Medicare, Medicaid, and other commercial or managed care insurance program. Medicare contributes to the net service revenue of the Company’s home health services, hospice services, and facility-based services. Medicaid and other payors contribute to the net service revenue of all Company's services.
The following table sets forth the percentage of net service revenue earned by category of payor for the three and nine months ended September 30, 2017 and 2016:
 
 
Three Months Ended  
 September 30,
 
Nine Months Ended 
 September 30,
Payor:
2017
 
2016
 
2017
 
2016
Medicare
71.0
%
 
74.3
%
 
71.5
%
 
74.7
%
Medicaid
1.8

 
1.9

 
1.8

 
1.8

Managed Care, Commercial, and Other
27.2

 
23.8

 
26.7

 
23.5

 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
Medicare
Home Health Services
The Company’s home nursing Medicare patients are classified into one of 153 home health resource groups prior to receiving services. Based on the patient’s home health resource group, the Company is entitled to receive a standard prospective Medicare payment for delivering care over a 60-day period referred to as an episode. The Company recognizes revenue based on the number of days elapsed during an episode of care within the reporting period.
Final payments from Medicare will reflect base payment adjustments for case-mix and geographic wage differences and 2% sequestration reduction for episodes beginning after March 31, 2013. In addition, final payments may reflect one of four retroactive adjustments to ensure the adequacy and effectiveness of the total reimbursement: (a) an outlier payment if the patient’s care was unusually costly; (b) a low utilization adjustment if the number of visits was fewer than five; (c) a partial payment if the patient transferred to another provider before completing the episode; or (d) a payment adjustment based upon the level of therapy services required. Adjustments outlined above are automatically recognized in net service revenue when

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changes occur during the period in which the services are provided to the patient. Net service revenue and related patient accounts receivable are recorded at amounts estimated to be realized from Medicare for services rendered.
Hospice Services
Hospice services provided by the Company are paid by Medicare under a per diem payment system. The Company receives one of four predetermined daily rates based upon the level of care the Company furnishes. The Company records net service revenue from hospice services based on the daily or hourly rate and recognizes revenue as hospice services are provided.
Hospice payments are subject to an inpatient cap and an overall Medicare payment cap. The inpatient cap relates to individual programs receiving more than 20% of its total Medicare reimbursement from inpatient care services and the overall Medicare payment cap relates to individual providers receiving reimbursements in excess of a “cap amount,” calculated by multiplying the number of beneficiaries during the period by a statutory amount that is indexed for inflation. The determination for each cap is made annually based on the 12-month period ending on October 31 of each year. The Company monitors its limits on a provider-by-provider basis and records an estimate of its liability for reimbursements received in excess of the cap amount. Beginning with the cap year October 1, 2014, Center for Medicare and Medicaid Services ("CMS") implemented a new process requiring hospice providers to self-report their cap liabilities and remit applicable payment by March 31 of the following year.
Facility-Based Services
The Company is reimbursed by Medicare for services provided under the LTACH prospective payment system. Each patient is assigned a long-term care diagnosis-related group. The Company is paid a predetermined fixed amount intended to reflect the average cost of treating a Medicare patient classified in that particular long-term care diagnosis-related group. For selected patients, the amount may be further adjusted based on length of stay and facility-specific costs, as well as in instances where a patient is discharged and subsequently re-admitted, among other factors. The Company calculates the adjustment based on a historical average of these types of adjustments for claims paid. Similar to other Medicare prospective payment systems, the rate is also adjusted for geographic wage differences. Revenue is recognized for the Company’s LTACHs as services are provided.
Medicaid, managed care, and other payors
The Company’s Medicaid reimbursement is based on a predetermined fee schedule applied to each service provided. Therefore, revenue is recognized for Medicaid services as services are provided based on this fee schedule. The Company’s managed care and other payors reimburse the Company based upon a predetermined fee schedule or an episodic basis, depending on the terms of the applicable contract. Accordingly, the Company recognizes revenue from managed care and other payors in the same manner as the Company recognizes revenue from Medicare or Medicaid.
Accounts Receivable and Allowances for Uncollectible Accounts

The Company reports accounts receivable net of estimated allowances for uncollectible accounts and adjustments. Accounts receivable are uncollateralized and consist of amounts due from Medicare, Medicaid, other third-party payors, and patients. To provide for accounts receivable that could become uncollectible in the future, the Company establishes an allowance for uncollectible accounts to reduce the carrying amount of such receivables to their estimated net realizable value. The credit risk for other concentrations of receivables is limited due to the significance of Medicare as the primary payor. The Company believes the credit risk associated with its Medicare accounts, which have historically exceeded 50% of its patient accounts receivable, is limited due to (i) the historical collection rate from Medicare and (ii) the fact that Medicare is a U.S. government payor. The Company does not believe that there are any other concentrations of receivables from any particular payor that would subject it to any significant credit risk in the collection of accounts receivable.

The amount of the provision for bad debts is based upon the Company’s assessment of historical and expected net collections, business and economic conditions, and trends in government reimbursement. Uncollectible accounts are written off when the Company has determined the account will not be collected.
A portion of the estimated Medicare prospective payment system reimbursement from each submitted home nursing episode is received in the form of a request for anticipated payment (“RAP”). The Company submits a RAP for 60% of the

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estimated reimbursement for the initial episode at the start of care. The full amount of the episode is billed after the episode has been completed. The RAP received for that particular episode is deducted from the final payment. If a final bill is not submitted within the greater of 120 days from the start of the episode, or 60 days from the date the RAP was paid, any RAP received for that episode will be recouped by Medicare from any other Medicare claims in process for that particular provider. The RAP and final claim must then be resubmitted. For subsequent episodes of care contiguous with the first episode for a particular patient, the Company submits a RAP for 50% instead of 60% of the estimated reimbursement.
The Company’s Medicare population is paid at prospectively set amounts that can be determined at the time services are rendered. The Company’s Medicaid reimbursement is based on a predetermined fee schedule applied to each individual service it provides. The Company’s managed care contracts are structured similar to either the Medicare or Medicaid payment methodologies. The Company is able to calculate its actual amount due at the patient level and adjust the gross charges down to the actual amount at the time of billing. This negates the need to record an estimated contractual allowance when reporting net service revenue for each reporting period.
Other Significant Accounting Policies
Earnings Per Share
Basic per share information is computed by dividing the relevant amounts from the condensed consolidated statements of income by the weighted-average number of shares outstanding during the period, under the treasury stock method. Diluted per share information is also computed using the treasury stock method, by dividing the relevant amounts from the condensed consolidated statements of income by the weighted-average number of shares outstanding plus potentially dilutive shares.
The following table sets forth shares used in the computation of basic and diluted per share information:
 
 
Three Months Ended  
 September 30,
 
Nine Months Ended 
 September 30,
 
2017
 
2016
 
2017
 
2016
Weighted average number of shares outstanding for basic per share calculation
17,740,818

 
17,588,163

 
17,704,561

 
17,546,773

Effect of dilutive potential shares:
 
 
 
 
 
 
 
Options

 

 

 
1,146

Nonvested stock
269,704

 
131,310

 
227,139

 
116,365

Adjusted weighted average shares for diluted per share calculation
18,010,522

 
17,719,473

 
17,931,700

 
17,664,284

Anti-dilutive shares

 
20,001

 
137,400

 
214,856

Recently Adopted Accounting Pronouncements
In March 2016, as part of its Simplification Initiative, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation ("ASU 2016-09"), which seeks to reduce complexity in accounting standards. The areas for simplification in ASU 2016-09, involve several aspects of the accounting for share-based payment transaction, including (1) accounting for income taxes, (2) classification of excess tax benefits on the statement of cash flow, (3) forfeitures, (4) minimum statutory tax withholding requirements, (5) classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax withholding purposes, (6) the practical expedient for estimating the expected term, and (7) intrinsic value. The Company adopted the new standard on its effective date on January 1, 2017 and elected to apply this adoption prospectively.
All excess tax benefits and deficiencies in the current and future periods will be recognized as income tax expense in the Company's consolidated financial statements in the reporting period in which they occur. The Company recorded excess tax benefits of $1.0 million in income tax expense for the nine months ended September 30, 2017. Additionally, the Company elected to continue to apply an estimated rate of forfeiture to its compensation expense for share-based awards.
Recently Issued Accounting Pronouncements

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On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, ("ASU 2014-09") which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for reporting periods beginning after December 15, 2017. The standard permits the use of either the full retrospective or cumulative effect transition method. As the Company progresses with evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures, the Company does not expect a material impact on its consolidated financial statements upon implementation on January 1, 2018. Currently, the Company anticipates adopting the new standard using the full retrospective method for all periods presented.
In February 2016, the FASB issued ASU No. 2016-02, Leases, ("ASU 2016-02") which requires lessees to recognize qualifying leases on the statement of financial position. Qualifying leases will be classified as right-of-use assets and lease liabilities. The new standard is effective on January 1, 2019. Early adoption is permitted. ASU 2016-02 mandates a modified retrospective transition method for all entities. The Company anticipates that the adoption of ASU 2016-02 will result in a material increase in total assets and total liabilities. The Company continues to evaluate the effect that ASU 2016-02 will have on its related disclosures.     
3. Acquisitions and Joint Ventures

On January 1, 2017, the Company formed a joint venture with LifePoint Health, Inc. ("LifePoint"). LifePoint contributed 28 home health agencies, 12 hospice agencies, and one inpatient hospice unit to the joint venture during the nine months ended September 30, 2017. The Company acquired majority ownership of the membership interests of these agencies. These providers conduct home health operations in Arizona, Colorado, Louisiana, Michigan, North Carolina, Pennsylvania, Tennessee, Texas, and Virginia; and hospice operations in Michigan, North Carolina, Pennsylvania, Tennessee, and Virginia.

On June 1, 2017, the Company formed a joint venture with Baptist Memorial Health Care ("Baptist"). Baptist contributed three home health agencies and six hospice agencies to the joint venture during the nine months ended September 30, 2017. The Company acquired majority ownership of the membership interests of these agencies. These providers conduct home health and hospice operations in Mississippi and Tennessee.

On September 1, 2017, the Company formed a joint venture with Christus Continuing Care (“Christus”). Christus contributed seven home health agencies, five hospice agencies, one inpatient hospice unit, one community-based agency, and six LTACH agencies to the joint venture during the nine months ended September 30, 2017. The Company acquired majority ownership of the membership interests of these agencies. These providers conduct home health, hospice, and community-based operations in Louisiana and Texas; and LTACH operations in Arkansas, Louisiana, and Texas.

In separate transactions, the Company acquired two home health agencies, two hospice agencies, one inpatient hospice unit, and one pharmacy during the nine months ended September 30, 2017.

The total aggregate purchase price for these transactions was $76.7 million, of which $10.4 million was paid in December 2016 and $61.2 million was primarily paid in cash during the nine months ended September 30, 2017. The purchase prices were determined based on the Company’s analysis of comparable acquisitions and the target market’s potential future cash flows.

Goodwill generated from the acquisitions was recognized based on the expected contributions of each acquisition to the overall corporate strategy. The Company expects its portion of goodwill to be fully tax deductible. The acquisitions were accounted for under the acquisition method of accounting. Accordingly, the accompanying interim financial information includes the results of operations of the acquired entities from the date of acquisition.
    
The following table summarizes the aggregate consideration paid for the acquisitions and the amounts of the assets acquired and liabilities assumed at the acquisition dates, as well as their fair value at the acquisition dates and the noncontrolling interest acquired during the nine months ended September 30, 2017 (amounts in thousands):


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Consideration
 
 
  Cash
 
$
71,677

Fair value of total consideration transferred
 
 
Recognized amounts of identifiable assets acquired and liabilities assumed:
 
 
  Patient accounts receivable
 
6,532

  Trade name
 
13,953

  Certificates of need/licenses
 
16,447

  Other identifiable intangible assets
 
6

  Other assets and (liabilities), net
 
2,121

Total identifiable assets
 
39,059

Noncontrolling interest
 
52,492

Goodwill, including noncontrolling interest of $34,313
 
$
85,110


The Company conducted preliminary assessments and recognized provisional amounts in its initial accounting for the acquisitions of majority ownership of three joint venture partnerships for all identified assets in accordance with the requirements of ASC Topic 805. The Company is continuing its review of these matters during the measurement period. If new information about facts and circumstances that existed at the acquisition date is obtained and indicates adjustments are necessary, the acquisition accounting will be revised to adjust to the provisional amounts initially recognized.

4. Goodwill and Intangibles
The changes in recorded goodwill by reporting unit for the nine months ended September 30, 2017 were as follows (amounts in thousands):
 
 
Home health reporting unit
 
Hospice
reporting unit
 
Community -
based
reporting unit
 
Facility-based
reporting unit
 
Total
Balance as of December 31, 2016
$
210,839

 
$
64,234

 
$
18,820

 
$
13,424

 
$
307,317

Goodwill from acquisitions
29,448

 
15,188

 
4,285

 
1,876

 
50,797

Goodwill related to noncontrolling interests
20,781

 
9,674

 
2,856

 
1,002

 
34,313

Goodwill related to disposals
(80
)
 

 

 

 
(80
)
Goodwill related to prior period net working capital adjustments............................................
(5
)
 

 

 
347

 
342

Balance as of September 30, 2017
$
260,983

 
$
89,096

 
$
25,961

 
$
16,649

 
$
392,689

Intangible assets consisted of the following as of September 30, 2017 and December 31, 2016 (amounts in thousands):
 

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September 30, 2017
 
Remaining useful life
 
Gross
carrying
amount
 
Accumulated
amortization
 
Net
carrying
amount
Indefinite-lived assets:
 
 
 
 
 
 
 
Trade names
Indefinite
 
$
78,590

 
$

 
$
78,590

Certificates of need/licenses
Indefinite
 
49,773

 

 
49,773

Total
 
 
$
128,363

 
$

 
$
128,363

Definite-lived assets:
 
 
 
 
 
 
 
Trade names
2 months — 9 years
 
$
9,291

 
$
(7,184
)
 
$
2,107

Non-compete agreements
2 month — 2 years
 
5,732

 
(5,423
)
 
309

Total
 
 
$
15,023

 
$
(12,607
)
 
$
2,416

Balance as of September 30, 2017
 
 
$
143,386

 
$
(12,607
)
 
$
130,779

 
 
December 31, 2016
 
Remaining useful life
 
Gross
carrying
amount
 
Accumulated
amortization
 
Net
carrying
amount
Indefinite-lived assets:
 
 
 
 
 
 
 
Trade names
Indefinite
 
$
64,672

 
$

 
$
64,672

Certificates of need/licenses
Indefinite
 
33,327

 

 
$
33,327

Total
 
 
$
97,999

 
$

 
$
97,999

Definite-lived assets:
 
 
 
 
 
 
 
Trade names
8 months — 9 years
 
$
9,294

 
$
(5,991
)
 
$
3,303

Non-compete agreements
2 months — 3 years
 
5,681

 
(4,977
)
 
704

Total
 
 
$
14,975

 
$
(10,968
)
 
$
4,007

Balance as of December 31, 2016
 
 
$
112,974

 
$
(10,968
)
 
$
102,006

Intangible assets of $87.8 million, net of accumulated amortization, were related to the home health services segment, $31.8 million were related to the hospice services segment, $9.0 million were related to the community-based services segment, and $2.2 million were related to the facility-based services segment as of September 30, 2017. The Company recorded $1.6 million and $1.8 million of amortization expense during the nine months ended September 30, 2017 and 2016, respectively. This was recorded in general and administrative expenses.
5. Debt
Credit Facility
On June 18, 2014, the Company entered into a Credit Agreement (the “Credit Agreement”) with Capital One, National Association, which provides a senior, secured revolving line of credit commitment with a maximum principal borrowing limit of $225.0 million and a letter of credit sub-limit equal to $15.0 million. The expiration date of the Credit Agreement is June 18, 2019. Revolving loans under the Credit Agreement bear interest at, as selected by the Company, either a (1) Base Rate, which is defined as a fluctuating rate per annum equal to the highest of (a) the Federal Funds Rate in effect on such day plus 0.5% (b) the Prime Rate in effect on such day and (c) the Eurodollar Rate for a one month interest period on such day plus 1.0%, plus a margin ranging from 0.75% to 1.5% per annum or (2) Eurodollar rate plus a margin ranging from 1.75% to 2.5% per annum. Swing line loans bear interest at the Base Rate. The Company is limited to 15 Eurodollar borrowings outstanding at the same time. The Company is required to pay a commitment fee for the unused commitments at rates ranging from 0.225% to 0.375% per annum depending upon the Company’s consolidated Leverage Ratio, as defined in the Credit Agreement. The Base Rate at September 30, 2017 was 5.25% and the Eurodollar rate was 3.24%.
As of September 30, 2017 and December 31, 2016, respectively, the Company had $119.0 million and $87.0 million drawn and letters of credit totaling $11.0 million outstanding under its credit facilities with Capital One, National Association.

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As of September 30, 2017, the Company had $95.0 million available for borrowing under the Credit Agreement with Capital One, National Association.

6. Stockholder’s Equity
Equity Based Awards
The 2010 Long Term Incentive Plan (the “2010 Incentive Plan”) is administered by the Compensation Committee of the Company’s Board of Directors. A total of 1,500,000 shares of the Company’s common stock were reserved and 391,414 shares are currently available for issuance pursuant to awards granted under the 2010 Incentive Plan. A variety of discretionary awards for employees, officers, directors, and consultants are authorized under the 2010 Incentive Plan, including incentive or non-qualified statutory stock options and nonvested stock. All awards must be evidenced by a written award certificate which will include the provisions specified by the Compensation Committee of the Board of Directors. The Compensation Committee determines the exercise price for non-statutory stock options. The exercise price for any option cannot be less than the fair market value of the Company’s common stock as of the date of grant.
Share Based Compensation
Nonvested Stock
During the nine months ended September 30, 2017, the Company’s independent directors were granted 11,700 nonvested shares of common stock under the Second Amended and Restated 2005 Non-Employee Directors Compensation Plan. The shares were drawn from the 1,500,000 shares of common stock reserved for issuance under the 2010 Incentive Plan. The shares vest 100% on the one year anniversary date. During the nine months ended September 30, 2017, employees were granted 139,310 nonvested shares of common stock pursuant to the 2010 Incentive Plan. The shares vest over a period of five years, conditioned on continued employment. The fair value of nonvested shares of common stock is determined based on the closing trading price of the Company’s common stock on the grant date. The weighted average grant date fair value of nonvested shares of common stock granted during the nine months ended September 30, 2017 was $48.52.
The following table represents the nonvested stock activity for the nine months ended September 30, 2017:
 
 
Number of
shares
 
Weighted
average grant
date fair value
Nonvested shares outstanding as of December 31, 2016
574,711

 
$
31.61

Granted
151,010

 
$
48.52

Vested
(191,463
)
 
$
28.91

Forfeited
(3,793
)
 
$
39.30

Nonvested shares outstanding as of September 30, 2017
530,465

 
$
37.35

As of September 30, 2017, there was $14.9 million of total unrecognized compensation cost related to nonvested shares of common stock granted. That cost is expected to be recognized over the weighted average period of 3.13 years. The total fair value of shares of common stock vested during the nine months ended September 30, 2017 was $5.5 million. The Company records compensation expense related to nonvested stock awards at the grant date for shares of common stock that are awarded fully vested, and over the vesting term on a straight line basis for shares of common stock that vest over time. The Company recorded $4.5 million and $3.5 million of compensation expense related to nonvested stock grants in the nine months ended September 30, 2017 and 2016, respectively.
Employee Stock Purchase Plan
In 2006, the Company adopted the Employee Stock Purchase Plan whereby eligible employees may purchase the Company’s common stock at 95% of the market price on the last day of the calendar quarter. There were 250,000 shares of common stock initially reserved for the plan. In 2013, the Company adopted the Amended and Restated Employee Stock Purchase Plan, which reserved an additional 250,000 shares of common stock to the plan.


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The table below details the shares of common stock issued during 2017: 
 
Number of
shares
 
Per share
price
Shares available as of December 31, 2016
189,611

 
 
Shares issued during the three months ended March 31, 2017
5,891

 
$
43.42

Shares issued during the three months ended June 30, 2017
4,152

 
$
51.21

Shares issued during the three months ended September 30, 2017..........................................................
4,775

 
$
64.49

Shares available as of September 30, 2017
174,793

 
 
Treasury Stock
In conjunction with the vesting of the nonvested shares of common stock, recipients incur personal income tax obligations. The Company allows the recipients to turn in shares of common stock to satisfy minimum tax obligations. During the nine months ended September 30, 2017, the Company redeemed 61,502 shares of common stock valued at $3.1 million, related to these tax obligations.
7. Commitments and Contingencies
Contingencies
The Company provides services in a highly regulated industry and is a party to various proceedings and regulatory and other governmental and internal audits and investigations in the ordinary course of business (including audits by Zone Program Integrity Contractors ("ZPICs") and Recovery Audit Contractors ("RACs") and investigations resulting from the Company's obligation to self-report suspected violations of law). Management cannot predict the ultimate outcome of any regulatory and other governmental and internal audits and investigations. While such audits and investigations are the subject of administrative appeals, the appeals process, even if successful, may take several years to resolve. The Department of Justice, CMS, or other federal and state enforcement and regulatory agencies may conduct additional investigations related to the Company's businesses in the future. These audits and investigations have caused and could potentially continue to cause delays in collections and recoupments from governmental payors and may subject the Company to sanctions, damages, extrapolation of damage findings, additional recoupments, fines, and other penalties (some of which may not be covered by insurance), which may, either individually or in the aggregate, have a material adverse effect on the Company's business and financial condition.
The Company is involved in various legal proceedings arising in the ordinary course of business. Although the results of litigation cannot be predicted with certainty, management believes the outcome of pending litigation will not have a material adverse effect, after considering the effect of the Company’s insurance coverage, on the Company’s interim financial information.
Joint Venture Buy/Sell Provisions
Most of the Company’s joint ventures include a buy/sell option that grants to the Company and its joint venture partners the right to require the other joint venture party to either purchase all of the exercising member’s membership interests or sell to the exercising member all of the non-exercising member’s membership interest, at the non-exercising member’s option, within 30 days of the receipt of notice of the exercise of the buy/sell option. In some instances, the purchase price is based on a multiple of the historical or future earnings before income taxes and depreciation and amortization of the equity joint venture at the time the buy/sell option is exercised. In other instances, the buy/sell purchase price will be negotiated by the partners and subject to a fair market valuation process. The Company has not received notice from any joint venture partners of their intent to exercise the terms of the buy/sell agreement nor has the Company notified any joint venture partners of its intent to exercise the terms of the buy/sell agreement.
Compliance
The laws and regulations governing the Company’s operations, along with the terms of participation in various government programs, regulate how the Company does business, the services offered and its interactions with patients and the public. These laws and regulations, and their interpretations, are subject to frequent change. Changes in existing laws or regulations, or their interpretations, or the enactment of new laws or regulations could materially and adversely affect the Company’s operations and financial condition.

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Table of Contents

The Company is subject to various routine and non-routine governmental reviews, audits and investigations. In recent years, federal and state civil and criminal enforcement agencies have heightened and coordinated their oversight efforts related to the health care industry, including referral practices, cost reporting, billing practices, joint ventures and other financial relationships among health care providers. Violation of the laws governing the Company’s operations, or changes in the interpretation of those laws, could result in the imposition of fines, civil or criminal penalties and/or termination of the Company’s rights to participate in federal and state-sponsored programs and suspension or revocation of the Company’s licenses. The Company believes that it is in material compliance with all applicable laws and regulations.
8. Noncontrolling interest
Noncontrolling Interest-Redeemable
A majority of the Company’s equity joint venture agreements include a provision that requires the Company to purchase the noncontrolling partner’s interest upon the occurrence of certain triggering events, such as death or bankruptcy of the partner or the partner’s exclusion from the Medicare or Medicaid programs. These triggering events and the related repurchase provisions are specific to each individual equity joint venture; if the repurchase provision is triggered in any one equity joint venture, the remaining equity joint ventures would not be impacted. Upon the occurrence of a triggering event, the Company would be required to purchase the noncontrolling partner’s interest at either the fair value or the book value at the time of purchase, as stated in the applicable joint venture agreement. The Company has never been required to purchase the noncontrolling interest of any of its equity joint venture partners, and the Company believes the likelihood of a triggering event occurring is remote. According to authoritative guidance, redeemable noncontrolling interests must be reported outside of permanent equity on the consolidated balance sheet in instances where there is a repurchase provision with a triggering event that is outside the control of the Company.
The following table summarizes the activity of noncontrolling interest-redeemable for the nine months ended September 30, 2017 (amounts in thousands):
Balance as of December 31, 2016
$
12,567

Net income attributable to noncontrolling interest-redeemable
7,649

Noncontrolling interest-redeemable distributions
(6,933
)
Sale of noncontrolling interest-redeemable
(77
)
Balance as of September 30, 2017
$
13,206

9. Allowance for Uncollectible Accounts
The following table summarizes the activity in the allowance for uncollectible accounts for the nine months ended September 30, 2017 (amounts in thousands):
 
Balance as of December 31, 2016
$
29,036

Additions
8,238

Deductions
(11,185
)
Balance as of September 30, 2017
$
26,089


The allowance for uncollectible accounts declined to 15.2% from 18.9% of patient accounts receivable over the nine months ended September 30, 2017. This was due to a reduction in provision of bad debts due to more timely cash collections and an increase in amounts collected. Patient accounts receivable over 180 days decreased 17% during the nine months ended September 30, 2017 due to the Company's continued process improvements. The maturity of the Company's back office and field operations, the use of the point-of-care platform, and the use of other technology advancements in reporting and analytics were the drivers of improved collections.
10. Fair Value of Financial Instruments
The carrying amounts of the Company’s cash, receivables, accounts payable and accrued liabilities approximate their fair values because of their short maturity. The estimated fair value of intangible assets acquired was calculated using level 3 inputs

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based on the present value of anticipated future benefits. For the nine months ended September 30, 2017, the carrying value of the Company’s long-term debt approximates fair value as the interest rates approximate current rates.
11. Segment Information
The Company’s reportable segments consist of home health services, hospice services, community-based services, and facility-based services. The accounting policies of the segments are the same as those described in the summary of significant accounting policies, as described in Note 2 of the Notes to Condensed Consolidated Financial Statements.
The following tables summarize the Company’s segment information for the three and nine months ended September 30, 2017 and 2016 (amounts in thousands):
 
Three Months Ended September 30, 2017
 
Home health services
 
Hospice services
 
Community-based services
 
Facility-based services
 
Total
Net service revenue
$
198,978

 
$
41,291

 
12,146

 
$
20,457

 
$
272,872

Cost of service revenue
123,204

 
27,441

 
8,971

 
13,240

 
172,856

Provision for bad debts
2,661

 
234

 
30

 
269

 
3,194

General and administrative expenses
55,980

 
11,263

 
2,387

 
6,039

 
75,669

(Gain) loss on disposal of assets
20

 
13

 

 
(210
)
 
(177
)
Operating income
17,113

 
2,340

 
758

 
1,119

 
21,330

Interest expense
(746
)
 
(149
)
 
(50
)
 
(50
)
 
(995
)
Income before income taxes and noncontrolling interest
16,367

 
2,191

 
708

 
1,069

 
20,335

Income tax expense
5,703

 
931

 
338

 
473

 
7,445

Net income
10,664

 
1,260

 
370

 
596

 
12,890

Less net income (loss) attributable to noncontrolling interests
1,759

 
273

 
(21
)
 
(27
)
 
1,984

Net income attributable to LHC Group, Inc.’s common stockholders
$
8,905

 
$
987

 
$
391

 
$
623

 
$
10,906

Total assets
$
515,562

 
$
156,296

 
$
44,621

 
$
48,574

 
$
765,053

 

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Table of Contents

 
Three Months Ended September 30, 2016
 
Home health services
 
Hospice services
 
Community-based services
 
Facility-based services
 
Total
Net service revenue
$
167,529

 
$
35,322

 
$
11,793

 
$
16,153

 
$
230,797

Cost of service revenue
100,057

 
21,243

 
9,100

 
10,432

 
140,832

Provision for bad debts
2,049

 
797

 
190

 
239

 
3,275

General and administrative expenses
50,293

 
9,491

 
2,263

 
4,952

 
66,999

Loss on disposal of assets
20

 
5

 

 
117

 
142

Operating income
15,110

 
3,786

 
240

 
413

 
19,549

Interest expense
(612
)
 
(90
)
 
(41
)
 
(73
)
 
(816
)
Income before income taxes and noncontrolling interest
14,498

 
3,696

 
199

 
340

 
18,733

Income tax expense
5,133

 
1,275

 
83

 
71

 
6,562

Net income
9,365

 
2,421

 
116

 
269

 
12,171

Less net income attributable to noncontrolling interests
1,853

 
553

 

 
149

 
2,555

Net income attributable to LHC Group, Inc.’s common stockholders
$
7,512

 
$
1,868

 
$
116

 
$
120

 
$
9,616

Total assets
$
425,923

 
$
119,906

 
$
33,549

 
$
34,075

 
$
613,453

 
 
Nine Months Ended September 30, 2017
 
Home health services
 
Hospice services
 
Community-based services
 
Facility-based services
 
Total
Net service revenue
$
575,180

 
$
116,249

 
$
33,807

 
$
54,464

 
$
779,700

Cost of service revenue
352,896

 
75,187

 
24,905

 
35,396

 
488,384

Provision for bad debts
5,796

 
1,393

 
404

 
645

 
8,238

General and administrative expenses
165,153

 
32,404

 
6,957

 
16,563

 
221,077

(Gain) loss on disposal of assets
39

 
21

 

 
(83
)
 
(23
)
Operating income
51,296

 
7,244

 
1,541

 
1,943

 
62,024

Interest expense
(1,961
)
 
(393
)
 
(130
)
 
(131
)
 
(2,615
)
Income before income taxes and noncontrolling interest
49,335

 
6,851

 
1,411

 
1,812

 
59,409

Income tax expense
16,712

 
2,439

 
602

 
657

 
20,410

Net income
32,623

 
4,412

 
809

 
1,155

 
38,999

Less net income (loss) attributable to noncontrolling interests
6,053

 
1,038

 
(7
)
 
237

 
7,321

Net income attributable to LHC Group, Inc.’s common stockholders
$
26,570

 
$
3,374

 
$
816

 
$
918

 
$
31,678



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Table of Contents

 
Nine Months Ended September 30, 2016
 
Home health services
 
Hospice services
 
Community-based services
 
Facility-based services
 
Total
Net service revenue
$
492,090

 
$
100,051

 
$
32,823

 
$
54,416

 
$
679,380

Cost of service revenue
294,359

 
61,836

 
24,656

 
32,710

 
413,561

Provision for bad debts
8,122

 
2,364

 
488

 
684

 
11,658

General and administrative expenses
150,948

 
27,787

 
6,557

 
16,004

 
201,296

Loss on disposal of assets
811

 
329

 
46

 
203

 
1,389

Operating income
37,850

 
7,735

 
1,076

 
4,815

 
51,476

Interest expense
(1,640
)
 
(232
)
 
(106
)
 
(189
)
 
(2,167
)
Income before income taxes and noncontrolling interest
36,210

 
7,503

 
970

 
4,626

 
49,309

Income tax expense
11,026

 
2,484

 
413

 
1,577

 
15,500

Net income
25,184

 
5,019

 
557

 
3,049

 
33,809

Less net income (loss) attributable to noncontrolling interests
5,002

 
1,368

 
(57
)
 
730

 
7,043

Net income attributable to LHC Group, Inc.’s common stockholders
$
20,182

 
$
3,651

 
$
614

 
$
2,319

 
$
26,766


ITEM 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains certain statements and information that may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements relate to future plans and strategies, anticipated events or trends, future financial performance, and expectations and beliefs concerning matters that are not historical facts or that necessarily depend upon future events. The words “may,” “should,” “could,” “would,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “potential,” and similar expressions are intended to identify forward-looking statements. Specifically, this report contains, among others, forward-looking statements about:
 
our expectations regarding financial condition or results of operations for periods after September 30, 2017;
our critical accounting policies;
our business strategies and our ability to grow our business;
our participation in the Medicare and Medicaid programs;
the reimbursement levels of Medicare and other third-party payors;
the prompt receipt of payments from Medicare and other third-party payors;
our future sources of and needs for liquidity and capital resources;
the effect of any regulatory changes under the new presidential administration;
the effect of any changes in market rates on our operations and cash flows;
our ability to obtain financing;
our ability to make payments as they become due;
the outcomes of various routine and non-routine governmental reviews, audits and investigations;

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Table of Contents

our expansion strategy, the successful integration of recent acquisitions and, if necessary, the ability to relocate or restructure our current facilities;
the value of our proprietary technology;
the impact of legal proceedings;
our insurance coverage;
our competitors and our competitive advantages;
our ability to attract and retain valuable employees;
the price of our stock;
our compliance with environmental, health and safety laws and regulations;
our compliance with health care laws and regulations;
our compliance with SEC laws and regulations and Sarbanes-Oxley requirements;
the impact of federal and state government regulation on our business; and
the impact of changes in future interpretations of fraud, anti-kickback, or other laws.
The forward-looking statements included in this report reflect our current views about future events, are based on assumptions, and are subject to known and unknown risks and uncertainties. Many important factors could cause actual results or achievements to differ materially from any future results or achievements expressed in or implied by our forward-looking statements. Many of the factors that will determine future events or achievements are beyond our ability to control or predict. Important factors that could cause actual results or achievements to differ materially from the results or achievements reflected in our forward-looking statements include, among other things, the factors discussed in the Part II, Item 1A. “Risk Factors,” included in this report and in our other filings with the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2016 (the “2016 Form 10-K”), as updated by our subsequent filings with the SEC. This report should be read in conjunction with the 2016 Form 10-K, and all of our other filings made with the SEC through the date of this report, including quarterly reports on Form 10-Q and current reports on Form 8-K.
You should read this report, the information incorporated by reference into this report, and the documents filed as exhibits to this report completely and with the understanding that our actual future results or achievements may differ materially from what we expect or anticipate.
The forward-looking statements contained in this report reflect our views and assumptions only as of the date this report is filed with the SEC. Except as required by law, we assume no responsibility for updating any forward-looking statements.
We qualify all of our forward-looking statements by these cautionary statements. In addition, with respect to all of our forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
Unless the context otherwise requires, “we,” “us,” “our,” and the “Company” refer to LHC Group, Inc. and its consolidated subsidiaries.
OVERVIEW
We provide quality, cost-effective post-acute health care services to our patients. As of September 30, 2017, we have 449 service providers in 27 states. Our services are classified into four segments: (1) home health services, (2) hospice services, (3) community-based services, and (4) facility-based services offered through our long-term acute care hospitals (“LTACHs”). We intend to increase the number of service providers within each of our four segments that we operate through continued acquisitions, joint ventures, and organic development.
Through our home health services segment, we offer a wide range of services, including skilled nursing, medically-oriented social services, and physical, occupational, and speech therapy. As of September 30, 2017, we operated 324 home health services locations, of which 166 are wholly-owned, 152 are majority-owned through equity joint ventures, three are under license lease arrangements, and the operations of the remaining three locations are only managed by us.

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Through our hospice services segment, we offer a wide range of services, including pain and symptom management, emotional and spiritual support, inpatient and respite care, homemaker services, and counseling. As of September 30, 2017, we operated 92 hospice locations, of which 46 are wholly-owned, 44 are majority-owned through equity joint ventures, and two are under license lease arrangements.
Through our community-based services segment, services are performed by skilled nursing and paraprofessional personnel, and include assistance with activities of daily living to the elderly, chronically ill, and disabled patients. As of September 30, 2017, we operated 12 community-based services locations: 10 are wholly-owned and two are majority-owned through an equity joint venture.
We provide facility-based services principally through our LTACHs. As of September 30, 2017, we operated 11 LTACHs with 15 locations, of which all but one are located within host hospitals. Of these facility-based services locations, three are wholly-owned, 11 are majority-owned through equity joint ventures, and one location is managed by us. We also wholly-own and operate a family health center, two pharmacies, a rural health clinic, and two physical therapy clinics.
The Joint Commission is a nationwide commission that establishes standards relating to the physical plant, administration, quality of patient care, and operation of medical staffs of health care organizations. Currently, Joint Commission accreditation of home nursing and hospice agencies is voluntary. However, some managed care organizations use Joint Commission accreditation as a credentialing standard for regional and state contracts. As of September 30, 2017, the Joint Commission had accredited 299 of our 324 home health services locations and 61 of our 92 hospice agencies. Those not yet accredited are working towards achieving this accreditation. As we acquire companies, we apply for accreditation 12 to 18 months after completing the acquisition.
The percentage of net service revenue contributed from each reporting segment for the three and nine months ended September 30, 2017 and 2016 was as follows:
 
 
 
Three Months Ended  
 September 30,
 
Nine Months Ended 
 September 30,
Reporting segment
 
2017
 
2016
 
2017
 
2016
Home health services
 
72.9
%
 
72.6
%
 
73.8
%
 
72.5
%
Hospice services
 
15.1

 
15.3

 
14.9

 
14.7

Community-based services
 
4.5

 
5.1

 
4.3

 
4.8

Facility-based services
 
7.5

 
7.0

 
7.0

 
8.0

 
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
Recent Developments
Home Health Services
On April 14, 2015, legislation was passed which limits any increase in home health payments to 1% for fiscal year 2018 and extended the 3% rural home health safeguard for two years through December 31, 2017.
On October 31, 2016, CMS released a Final Rule (effective January 1, 2017) regarding payment rates for home health services provided during calendar year 2017. The national, standardized 60-day episode payment rate increased to $2,989.97 for 2017. The rural rate is $3,079.67. The Final Rule implements the final year of the four year phase-in of the rebasing adjustments to the national, standardized 60-day episode payment rate and the decrease of 0.97% to account for nominal case-mix growth between calendar year 2012 and calendar year 2014, which was not accounted for in the rebasing adjustments finalized in calendar year 2014. The Final Rule also contains minor adjustments to the Home Health Value-Based Purchasing ("HHVBP") program and to the home health quality reporting program. CMS estimates the overall economic impact of the proposed rule's policy changes and payment rate update is an estimated aggregate decrease of 0.7% in payments to home health agencies, which decrease will vary based on each agency's wage index and patient mix weight.
In addition, CMS finalized its proposal to implement a HHVBP program that is intended to incentivize the delivery of high-quality patient care. The HHVBP program would withhold 3% to 8% of Medicare payments, which would be redistributed to participating home health agencies depending on their performance relative to specified measures. The HHVBP would apply

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to all home health agencies in Arizona, Florida, Iowa, Massachusetts, Maryland, Nebraska, North Carolina, Tennessee, and Washington, effective January 1, 2018.
On November 1, 2017, CMS released the Final Rule (effective January 1, 2018) regarding payment rates for home health services provided during calendar year 2018. The national, standardized 60-day episode payment rate will increase to $3,039.64 in 2018. The Final Rule estimates an impact of 0.5% reduction in payments due to the expiration of the rural add-on provision, a 1% home health payment update percentage, and 0.97% adjustment for case mix (the third year of a three year adjustment). CMS also estimates a reduction in regulatory reporting due to the removal of a number of quality measures and OASIS items. CMS estimates the overall economic impact of the Final Rule's changes and payment rate update is an estimated decrease of 0.4% in payments to home health agencies. In addition, CMS decided not to finalize its rule on the Home Health Groupings Model ("HHGM") as was proposed, but instead will take additional time to further engage with stakeholders to move towards a system that shifts the focus from volume of services to a more patient-centered model.
Hospice Services
On July 29, 2016, CMS issued a Final Rule updating Medicare payment rates and the wage index for hospices for fiscal year 2017, which resulted in a 2.1% increase in payment rates. The 2.1% increase is based on 2.7% inpatient hospital market basket update, reduced by a 0.3% productivity adjustment, and a 0.3% adjustment set by the Patient Protection and Affordable Care Act ("PPACA"). The hospice cap amount for the 2017 hospice cap year will be $28,404.99. The following table shows the hospice Medicare payment rates for fiscal year 2017, which began on October 1, 2016 and ended September 30, 2017:
Description
Rate per patient day
Routine Home Care days 1-60
$
190.55

Routine Home Care days 60+
$
149.82

Continuous Home Care
$
964.63

Full Rate = 24 hours of care
 
$40.19 = hourly rate
 
Inpatient Respite Care
$
170.97

General Inpatient Care
$
734.94


On August 1, 2017, CMS issued a Final Rule updating Medicare payment rates and the wage index for hospices for fiscal year 2018. The result will be in a 1.0% increase in payment rates due to the provisions of Section 411 (d) of the Medicare Access and CHIP Reauthorization Act of 2015 (Pub. L. 114-10) ("MACRA"). The hospice cap will be $28,689.04, which is a 1% increase. The Final Rule finalizes eight measures from Consumer Assessment of Healthcare Providers and Systems ("CAHPS") Hospice Survey data already submitted by hospices. The rule also finalizes the extension of the exception for quality reporting purposes from 30 calendar days to 90 calendar days after the date that an extraordinary circumstance occurred. CMS will begin public reporting Hospice Quality Reporting Program ("HQRP") data via a Hospice Compare Site in August 2017 to help customers make informed choices. Hospices that fail to meet quality reporting requirements will receive a two percentage point reduction to their payments.
The following table shows the hospice Medicare payment rates for fiscal year 2018, which began on October 1, 2017 and will end September 30, 2018:
Description
Rate per patient day
Routine Home Care days 1-60
$
192.78

Routine Home Care days 60+
$
151.41

Continuous Home Care
$
976.42

Full Rate = 24 hours of care
 
$40.68 = hourly rate
 
Inpatient Respite Care
$
172.78

General Inpatient Care
$
743.55


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Community-Based Services
Community-based services are in-home care services, which are primarily performed by skilled nursing and paraprofessional personnel, and include assistance with activities of daily living to the elderly, chronically ill, and disabled patients. Revenue is generated on an hourly basis and our current primary payors are TennCare Managed Care Organization and Medicaid. Approximately 70% of our net service revenue in this segment was generated in Tennessee for the nine months ended September 30, 2017.
Facility-Based Services
On December 26, 2013, President Obama signed into law the Bipartisan Budget Act of 2013 (Public Law 113-67). This law prevents a scheduled payment reduction for physicians and other practitioners who treat Medicare patients from taking effect on January 1, 2014. Included in the legislation are the following changes to LTACH reimbursement:
 
Medicare discharges from LTACHs will continue to be paid at full LTACH PPS rates if:
the patient spent at least three days in a short-term care hospital (“STCH”) intensive care unit (“ICU”) during a STCH stay that immediately preceded the LTACH stay, or
the patient was on a ventilator for more than 96 hours in the LTACH (based on the MS-LTACH DRG assigned) and had a STCH stay immediately preceding the LTACH stay.
Also, the LTACH discharge cannot have a principal diagnosis that is psychiatric or rehabilitation. 
All other Medicare discharges from LTACHs will be paid at a new “site neutral” rate, which is the lesser of the ("IPPS") comparable per diem amount determined using the formula in the short-stay outlier regulation at 42 C.F.R. § 412.529(d)(4) plus applicable outlier payments, or 100% of the estimated cost of the services involved.
The above new payment policy will be effective for LTACH cost reporting periods beginning on or after October 1, 2015, and the site neutral payment rate will be phased-in over two years.
For cost reporting periods beginning on or after October 1, 2015, discharges paid at the site neutral payment rate or by a Medicare Advantage plan (Part C) will be excluded from the LTACH average length-of-stay (“ALOS”) calculation.
For cost reporting periods beginning in fiscal year 2016 and later, CMS will notify LTACHs of their “LTACH discharge payment percentage” (i.e., the number of discharges not paid at the site neutral payment rate divided by the total number of discharges).
For cost reporting periods beginning in fiscal year 2020 and later, LTACHs with less than 50% of their discharges paid at the full LTACH PPS rates will be switched to payment under the IPPS for all discharges in subsequent cost reporting periods. However, CMS will set up a process for LTACHs to seek reinstatement of LTACH PPS rates for applicable discharges.
MedPAC will study the impact of the above changes on quality of care, use of hospice and other post-acute care settings, different types of LTACHs and growth in Medicare spending on LTACHs. MedPAC is to submit a report to Congress with any recommendations by June 30, 2019. The report is to also include MedPAC’s assessment of whether the 25 Percent rule should continue to be applied.
On August 2, 2016, CMS released the final rule to update fiscal year 2017 LTACH reimbursement and policies under the LTACH PPS, which affects discharges occurring in cost reporting periods beginning on or after October 1, 2016. CMS projects that overall LTACH PPS spending would decrease by 7.1% compared to fiscal year 2016 payments. This estimated decrease is attributable to the statutory decrease in payment rates for site neutral LTACH PPS cases that do not meet the clinical criteria to qualify for higher LTACH rates in cost reporting years beginning on or after October 1, 2016. Cases that do qualify for higher LTACH PPS rates will see a payment rate increase of 0.7% (including a market basket update of 2.8% reduced by a multi-factor productivity adjustment of 0.3%, minus an additional adjustment of 0.75 percentage point in accordance with the PPACA, for a net market basket of 1.75%). The LTACH PPS standard federal payment rate for fiscal year 2017 is $42,476.41 (increased from $41,762.85 in fiscal year 2016). Site-neutral discharges will have a 23% reduction in payments. CMS also proposes to begin enforcement of the 25 Percent rule which will cap the number of patients treated at an LTACH who have been referred from all locations of a hospital. Grandfathered LTACH facilities are exempt from the 25 Percent rule, while rural LTACHs will have a threshold of 50% and MSA-dominant hospitals will have a threshold between 25% and 50%. The 25 Percent rule will apply to discharges occurring after October 1, 2016. CMS will have two separate outlier pools and thresholds

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for LTACH-appropriate patients and for site-neutral patients. For 2017, CMS finalized an increase of its fixed-loss threshold to $21,943 from 2016’s $16,423, to limit outlier spending at no more than 8% of total LTACH spending (2016 outlier payments may reach 9.0%). CMS is applying the proposed inpatient fixed-loss threshold of $23,570 for site neutral patients. CMS also finalized four new measures for the LTACH Quality Reporting Program to meet the requirements of the Improving Medicare Post-Acute Care Transformation (IMPACT) Act. For the fiscal year 2018 LTACH Quality Reporting Program, CMS added quality measures for Medicare spending per beneficiary, discharge to community and potentially-preventable 30-day post-discharge readmissions. For the fiscal year 2020 LTACH Quality Reporting Program, CMS adopted a new drug regimen review measure.
On December 7, 2016, Congress passed the 21st Century Cures Act ("Cures"), which boosts funding for medical research, eases the development and approval of experimental treatments and reforms federal policy on mental health care. Included in the bill was relief for LTACHs under a one year moratorium on the 25 Percent Rule, which would otherwise penalize LTACHs that admit more than 25% of their patients from a particular acute care hospital. As modified by Cures, implementation of the 25 Percent Rule will be suspended during federal fiscal year 2017 (October 1, 2016 through September 30, 2017).
On August 2, 2017, CMS posted a display copy of its final rule for the annual update to Medicare payment rates and policies for the Fiscal Year 2018 inpatient hospitals prospective payment system and the LTACH PPS. CMS estimates the impact of the proposed rule will result in a 2.4% overall reduction in LTACH spending. The LTACH standard federal rate is reduced to $41,430.56 from $42,476.41. CMS is also proposing a 12 month administrative moratorium on application of the 25 Percent Rule beginning with the expiration of the statutory moratorium after September 30, 2017. The 25 Percent Rule will not be applied to LTACHs for discharges occurring on or before September 30, 2018. CMS also adopted certain adjustments to high cost outlier and short stay outlier policies. CMS finalized its proposal for a new severe wound exception to be paid at standard Federal LTACH rates instead of site neutral payments for grandfathered LTACHs. CMS changed the separateness and control restrictions for certain co-located IPPS-exempt hospitals. The Final Rule also adds three new quality measures and discontinues two quality measures. CMS also finalized its proposal to implement collection of standardized patient assessment data under the IMPACT Act on functional status, cognitive function, cancer treatments, respiratory treatments, transfusions and other special services effective for admissions on/after April 1, 2019.
None of the aforementioned estimated changes to Medicare payments for home health, hospice, and LTACHs include the deficit reduction sequester cuts to Medicare that began on April 1, 2013, which reduced Medicare payments by 2% for patients whose service dates ended on or after April 1, 2013.
RESULTS OF OPERATIONS
Three months ended September 30, 2017 compared to three months ended September 30, 2016
Consolidated financial statements
The following table summarizes our consolidated results of operations for the three months ended September 30, 2017 and 2016 (amounts in thousands, except percentages which are percentages of consolidated net service revenue, unless indicated otherwise):
 
 
2017
 
2016
 
Increase
(Decrease)
Net service revenue
$
272,872

 
 
 
$
230,797

 
 
 
$
42,075

Cost of service revenue
172,856

 
63.3
 %
 
140,832

 
61.0
%
 
32,024

Provision for bad debts
3,194

 
1.2

 
3,275

 
1.4

 
(81
)
General and administrative expenses
75,669

 
27.7

 
66,999

 
29.0

 
8,670

(Gain) loss on disposal of assets
(177
)
 
(0.1
)
 
142

 
0.1

 
319

Interest expense
(995
)
 
 
 
(816
)
 
 
 
179

Income tax expense
7,445

 
41.1

(1
)
6,562

 
40.6

(2)
883

Noncontrolling interest
1,984

 
 
 
2,555

 
 
 
(571
)
Net income attributable to LHC Group, Inc.’s common stockholders
$
10,906

 
 
 
$
9,616

 
 
 
$
1,290



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(1)
Effective tax rate as a percentage of income from continuing operations attributable to LHC Group, Inc.’s common stockholders, excluding the excess tax benefits realized during the three months ended September 30, 2017 of $0.09 million. For a discussion on the excess tax benefits, see Note 2 of the Notes to Condensed Consolidated Financial Statements, which is incorporated herein by reference.
(2)
Effective tax rate as a percentage of income from continuing operations attributable to LHC Group, Inc.'s common stockholders.
Net service revenue
The following table sets forth each of our segment’s revenue growth or loss, admissions, census, episodes, patient days, and billable hours for the three months ended September 30, 2017 and the related change from the same period in 2016 (amounts in thousands, except admissions, census, episode data, patient days and billable hours):
 
 
Same
Store(1)
 
De
Novo(2)
 
Organic(3)
 
Organic
Growth
(Loss) %
 
Acquired(4)
 
Total
 
Total
Growth
(Loss) %
Home health services
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
$
184,467

 
$
327

 
$
184,794

 
10.3
 %
 
$
14,184

 
$
198,978

 
18.8
%
Revenue Medicare
$
133,597

 
$
283

 
$
133,880

 
4.9

 
$
9,267

 
$
143,147

 
12.1

Admissions
43,122

 
73

 
43,195

 
6.2

 
4,646

 
47,841

 
17.7

Medicare Admissions
27,207

 
61

 
27,268

 
1.7

 
2,696

 
29,964

 
11.8

Average Census
39,893

 
50

 
39,943

 
3.7

 
3,507

 
43,450

 
12.8

Average Medicare Census
27,599

 
40

 
27,639

 
(1.2
)
 
2,052

 
29,691

 
6.1

Home Health Episodes
50,123

 
75

 
50,198

 
2.0

 
3,805

 
54,003

 
9.7

Hospice services
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
$
33,581

 
$
517

 
$
34,098

 
(3.5
)
 
$
7,193

 
$
41,291

 
16.9

Revenue Medicare
$
31,680

 
$
451

 
$
32,131

 
(2.9
)
 
$
5,785

 
$
37,916

 
14.6

Admissions
2,451

 
47

 
2,498

 
(2.2
)
 
940

 
3,438

 
34.6

Medicare Admissions
2,140

 
40

 
2,180

 
(3.8
)
 
787

 
2,967

 
30.9

Average Census
2,651

 
37

 
2,688

 
(1.8
)
 
420

 
3,108

 
13.6

Average Medicare Census
2,466

 
34

 
2,500

 
(1.9
)
 
388

 
2,888

 
13.4

Patient days
244,061

 
3,307

 
247,368

 
(1.7
)
 
38,603

 
285,971

 
13.6

Community-based services
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
$
11,338

 
$

 
$
11,338

 
(3.9
)
 
$
808

 
$
12,146

 
3.0

Billable hours
339,569

 

 
339,569

 
(1.4
)
 
30,131

 
369,700

 
7.3

Facility-based services
 
 
 
 
 
 
 
 
 
 
 
 
 
LTACHs
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
$
15,712

 
$

 
$
15,712

 
4.5

 
2,561

 
$
18,273

 
21.6

Patient days
12,506

 

 
12,506

 
(7.4
)
 
2,093

 
14,599

 
8.1


(1)
Same store — location that has been in service with us for greater than 12 months.
(2)
De Novo — internally developed location that has been in service with us for 12 months or less.
(3)
Organic — combination of same store and de novo.
(4)
Acquired — purchased location that has been in service with us for 12 months or less.
Total organic revenue and patient metrics increased in our home health services segment due to the successful execution of same store growth strategies. Total organic revenue and patient metrics decreased in our hospice services segment due to the lower admissions during the third quarter of 2017. Total organic revenue increased in the facility-based services segment due to patients that meet the new LTACH criteria payment model.
Organic growth is primarily generated by population growth in areas covered by mature agencies, agencies five years old or older, and by increased market share in acquired and developing agencies. Historically, acquired agencies have the highest

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growth in admissions and average census in the first 24 months after acquisition, and have the highest contribution to organic growth, measured as a percentage of growth, in the second full year of operation after the acquisition.
Cost of service revenue
The following table summarizes cost of service revenue (amounts in thousands, except percentages, which are percentages of the segment’s respective net service revenue):
 
 
Three Months Ended
September 30,
 
2017
 
2016
Home health services
 
 
 
 
 
 
 
Salaries, wages and benefits
$
112,117

 
56.3
%
 
$
90,393

 
53.9
%
Transportation
6,271

 
3.2

 
5,624

 
3.4

Supplies and services
4,816

 
2.4

 
4,040

 
2.4

Total
$
123,204

 
61.9
%
 
$
100,057

 
59.7
%
Hospice services
 
 
 
 
 
 
 
Salaries, wages and benefits
$
19,523

 
47.3
%
 
$
14,695

 
41.5
%
Transportation
1,588

 
3.8

 
1,329

 
3.8

Supplies and services
6,330

 
15.3

 
5,219

 
14.8

Total
$
27,441

 
66.5
%
 
$
21,243

 
60.1
%
Community-based services
 
 
 
 
 
 
 
Salaries, wages and benefits
$
8,820

 
72.6
%
 
$
8,967

 
76.1
%
Transportation
92

 
0.8

 
69

 
0.6

Supplies and services
59

 
0.5

 
64

 
0.5

Total
$
8,971

 
73.9
%
 
$
9,100

 
77.2
%
Facility-based services
 
 
 
 
 
 
 
Salaries, wages and benefits
$
9,644

 
47.1
%
 
$
6,987

 
43.2
%
Transportation
81

 
0.4

 
60

 
0.4

Supplies and services
3,515

 
17.2

 
3,385

 
21.0

Total
$
13,240

 
64.7
%
 
$
10,432

 
64.6
%
Consolidated cost of service revenue for the three months ended September 30, 2017 was $172.9 million, or 63.3% of net service revenue, compared to $140.8 million, or 61.0% of net service revenue, for the same period in 2016. Consolidated cost of service revenue variances were as follows:

Home Health Segment -- Cost of service revenue increased as a percentage of net service revenue due in part to 2.0% Medicare reimbursement cuts recognized in 2017. Additionally, acquisitions accounted for $11.9 million of the $23.1 million increase, with the remaining difference caused by the growth in our same store agencies.

Hospice Segment -- Acquisitions accounted for $5.6 million of the $6.2 million increase, with the remaining difference caused by the growth in our same store agencies. Cost of service increased as a percentage of net service revenue due to the decline in admissions associated with our same store agencies.

Community-Based Services Segment: Cost of service revenue decreased as a percentage of net service revenue due to the utilization of contract labor in the prior year, which was used to service a higher level of care in our 2016 patient mix.

Facility-Based Segment -- Acquisitions accounted for $2.7 million of the $2.8 million increase. Cost of service - salaries, wages, and benefits increased as a percentage of net service revenue due to lower revenue per patient day for the period caused by patient criteria changes that went into effect September 2016.

Provision for bad debts

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Consolidated provision for bad debts for the three months ended September 30, 2017 was $3.2 million, or 1.2% of net service revenue, compared to $3.3 million, or 1.4% of net service revenue, for the same period in 2016. The Company continues to have more timely cash collections and an increase in amounts collected. The continued maturity of our back office and field operations, use of our point-of-care platform, and use of other technology advancements in reporting and analytics are drivers of collection improvements.
General and administrative expenses
The following table summarizes general and administrative expenses (amounts in thousands, except percentages, which are percentages of the segment’s respective net service revenue):
 
 
Three Months Ended September 30,
 
2017
 
2016
Home health services
 
 
 
 
 
 
 
General and administrative
$
53,753

 
27.0
%
 
$
48,282

 
28.8
%
Depreciation and amortization
2,227

 
1.1

 
2,011

 
1.2

Total
$
55,980