The LHC Group: A Financial Analysis

Financial Decision-Making: OMM 622

Martin Cain September 29, 2014

The LHC Group: A Financial Analysis The LHC Group is a nationally preferred post-acute care partner for hospitals, physicians, and families, providing quality and cost-effective home health, hospice, and long-term acute care that empower patients to manage their health from home. The LHC Group has historically enjoyed a strong marketplace presence within the healthcare industry by the early establishment of joint venture relationships with hospitals, by the cost-effective participation in accountable care organizations; proving that innovation in the delivery of health care is not only achievable, but also profitable. The group continues to identify and evaluate opportunities for strategic acquisitions in both new and existing markets that will enhance their current marketplace advantage and satisfy the nearly three hundred registered stockholders and other investors. In an effort to aid future potential investors, this financial analysis has designed to evaluate the past performance of the LHC Group in order to predict future financial success or risk.
The LHC Group: The Industry, Economy & Outlook The LHC Group explains their success in the tremendous growth opportunities they took advantage of in advance of the wave of reform currently taking place in the industry. In fact, as of December 31, 2013, the group reports that
Of the 300 home-based service locations, 162 are wholly-owned by us, 128 are majority-owned or controlled by us through joint ventures, seven locations are operated through license lease arrangements, and we manage the operations of three home nursing agencies where no there is no ownership interest ("LHC Group annual report 2013," 2014, p. 16).
This wave of industry reform, as mentioned above, has also been instrumental in cuts to the Medicare home health funding by 3.5% each year from 2014 to 2017. These numbers, orginially proposed in draft form within the Home Health Prospective Payment System (HHPPS) rule, has now been formally approved as a final ruling in early April 2014 by the Centers for Medicare and Medicaid Services (CMS). This cut eventually results in a 14% cut to the Medicare home health benefit. Furthermore, according to detailed analyses using Medicare cost reports, the proposed 14% cut in Medicare funding would cause nearly three-quarters of all home health agencies nationwide to experience net operating losses, the national average Medicare margin will drop to -9.77%, and the sector will experience negative Medicare margins in 47 of 50 U.S. States by the year ending of 2017. Subsequently low Medicare margins, in addition to the devastating impact on this nation’s elderly, vulnerable, and underserved patients, will negatively affect the healthcare jobs market. Medicare cuts to the home health benefit impact the future health of the LHC Group in a possible reduction of revenue approximating nearly five million dollars. This amount is critical to operations as the organization exists to provide the delivery of patient care to nearly 3.5 million seniors and disabled individuals who are the patients depending on the skilled nursing care, physical therapy, speech-language pathology, and occupational therapy services LHC Group provides (Home Health Agency (HHA) Center, 2013). In response to the challenges posed by the impending Medicare cuts The LHC Group vows to their stakeholders and investors that they will “continue operations as they have always done-by developing and innovating new processes that meet the uncertain future with resiliency, flexibility, and resolve”("LHC Group annual report 2013," 2014, p. 8).
Short-Term Liquidity The short-term liquidity of a business is determined by the use of common liquidity ratios, including the current ratio, the quick ratio and the operating cash flow ratio. As different analysts