Cover Story

Health Care Jackpot

How a tiny homegrown St. Landry Parish health care provider became a regional powerhouse and earned a Wall Street windfall.

A little more than a decade ago, young nurse Ginger Myers was tiring of the 40-mile drive between her home in Palmetto and her job in Lafayette. At the same time, Palmetto mayor Harold Taylor was struggling to find health care providers for the elderly in his sleepy rural village of 188 residents. He approached the road-weary Myers about forming a health care agency to service his constituents, and Myers liked the idea of being closer to home to spend more time with her small children. She sat down at her kitchen table with husband, Keith, and drafted plans for her own home health agency ' St. Landry Home Health Inc.

In September 1994, Ginger started the company with a nurse's aide and a single patient. In the first year, she grew the business to more than 20 patients. Quietly expanding, the company eventually became Louisiana Health Care Group, better known as LHC Group Inc. A post-acute health care company with headquarters on Pinhook Road, LHC Group provides both home and facility-based services in six southern states. Its holdings include 81 home nursing locations, eight long-term acute care hospitals (commonly known as LTAC hospitals) and five hospices. It has more than 3,000 employees, and its patients are primarily Medicare beneficiaries.

Acadiana is headquarters to but a handful of publicly traded companies, mostly banks and oilfield service businesses ' which is why LHC Group Inc. largely flew under the radar when its initial public offering in mid-2005 raised an impressive $67.2 million and was a multi-million dollar windfall for a number of shareholders and prominent local business people.

The money raised in the IPO was used to pay off about $23 million in debt, including a payment to a joint-venture partner. Another $4.7 million went to the IPO's two underwriters, Jefferies & Co. and Legg Mason (now Stifel Nicolaus & Co.). So far, more than $10 million of the proceeds have been used to buy several home health agencies, including A1 Nursing Registry Inc. in Lafayette. Analysts at Jefferies & Co. say the company currently has about $20 million in cash on its balance sheet, funds that can be used for future expansion opportunities.

Shareholders got $16.9 million out of the IPO, with founders Keith and Ginger Myers and former Mayor Taylor pocketing $8.25 million and $2.4 million, respectively, from sales of their shares in the company. Keith Myers is the company's chairman and CEO, and Taylor serves as vice president/director of government affairs.

"I certainly think [the offering] was very well-received," says Arthur Henderson, an equity research analyst in the Nashville office of Jefferies & Co., the investment banking firm that served as lead manager for the IPO. "There was a lot of demand for a new publicly traded home nursing provider," adds Henderson, noting that LHC is in direct competition with only two public company competitors, Amedisys Home Health Services of Baton Rouge and New York-based Gentiva Health Services. LHC Group, however, continues to operate in a highly fragmented sector that includes many private providers.

Although its 2005 earnings report has not been finalized, the company is expected to earn $12 million on revenues of $160-$162 million; in 2004 it earned $8.9 million on revenues of $123 million. Estimated earnings per share for 2005 are 82 to 83 cents, up from about 73 cents in 2004, according to Henderson.

In financial circles, it's considered quite a success.

Henderson, who has followed the home nursing sector for six years, says LHC's rural growth strategy and down-home management style was a winning combination for investors, who are more accustomed to company execs groomed by venture capitalists to become what they think Wall Street wants to see.

"One of the comments a lot of the investors told me is the management team seems down to earth, very honest," Henderson adds. "That kind of impression was lasting on a lot of people. It's a refreshing alternative to what we usually see."

From humble beginnings to one of Acadiana's great stories of entrepreneurial spirit, LHC Group clearly has just begun to tap its growth potential as a public company; however, it is still adjusting to a new life in this open domain. With much trepidation, company officials agreed to an interview after more than a month of attempts to talk with them; during the interview, they were reluctant to discuss insider trade deals, a matter of public record from Securities and Exchange filings.

"It's a different mindset when you move to being a public company," says analyst Henderson. "It takes time to adjust to that."

Keith Myers was raised on a crawfish farm in Palmetto, where he squeezed in schooling between working the fields with his father. "I would get up in the mornings before school, and it was my job to fuel up all the tractors and do all those things, and then get ready to go back and catch the school bus," he recalls. "When I got back in the afternoon, I had 30 minutes to do my homework, and then I had to go and get on a tractor and take someone's place."

After graduation, his father hoped that Myers would study agriculture and take over the farm. But young Keith had other plans. He agreed to return home in 1980 but decided to change the business' focus from farming to processing. At that time, vacuum packaging of seafood was considered cutting-edge. The company started by selling and shipping to retail chains, including Delchamps, and gradually expanded to international markets in Latin America, Asia and Europe.

Eventually, Myers sold the successful business, Louisiana Premium Seafoods, to his partners at a time when his wife's home health agency was gaining ground. While contemplating his next move, Myers paid a visit to attorney Nick Gachassin Jr. of the Gachassin Law Firm, which specializes in health care and had prepared St. Landry Home Health's articles of incorporation. Gachassin, now first assistant attorney general in the state, told him about major legislative changes and opportunities coming about in the sector and advised him to consider health care because of his business background, Myers recounts. "And that's how I ended up here."

Myers devoted his full attention to the business only a couple of years after St. Landry Home Health was founded, and it soon acquired five agencies. Then, as Gachassin predicted, the first major change in the industry occurred ' the passage of the Balanced Budget Act of 1997. The act changed Medicare reimbursement for home health services from a cost basis to an interim payment system.

Needing someone who had a firm grasp of the potential impact, in 1998 LHC Group snared John Indest as its chief operating officer. A registered nurse, Indest had started and sold his own home health agency, Homebound Care Inc., in New Iberia. But he was connected in other ways: Indest had testified before the U. S. House of Representatives' Ways and Means Subcommittee, and his understanding of legislative issues and the new payment system made him invaluable to LHC Group.

In 2000, the BBA's prospective payment system kicked in, which created even more red tape for home health providers. Many smaller agencies, particularly those owned by nurses with no prior business experience, struggled to survive under the new reimbursement system.

"Home health agencies were going out of business at a very rapid pace, and we were able to go in, bring our business background and our experience in health care to the table, and open up locations in communities that didn't have services anymore," Myers says.

"Many times, they came to Johnny and Keith and said they wanted to sell their home health agency because they didn't want to continue in home health with this new prospective payment system," says Chief Financial Officer Barr Brown. "So, that's what really got us some momentum in 2000 for the growth of the company."

In Lafayette LHC Group owns or has a major interest in Louisiana Extended Care Hospital (housed at Lafayette General), Acadian HomeCare, A-1 Nursing Registry, LHC Group Pharmaceutical Services, Louisiana Physical Therapy and Louisiana Private Duty & Staffing.

Part of the company's strategy has been to purchase a home nursing agency or other facility outright or buy a controlling interest. Analyst Henderson says its tactic of buying a majority interest in a home-health division run by a hospital or joint venturing with the hospital to offer these services is rather unique to the industry ' and very effective.

LHC Group operates the service but typically retains the logo and identity of the companies it acquires.

"That's something which is a distinct difference in how we go about compared to our competitors ' it's all about branding, if you will," Brown explains. "Whether it be an outright acquisition or a joint venture, we keep the name of the entity. For us to go in and put LHC Group on top of the name ' we don't feel that's good business. We'd lose a lot of good will that's been built up. So, it's a strategy that serves us well in rural communities."

Also impressive, according to Henderson, is the fact that virtually all of LHC Group's growth was fueled by internal operations. "They started this business basically from scratch and have been very thoughtful and prudent in how they've grown it," he says.

Brown, who joined LHC Group in April 2000 (he had worked with Keith Myers in Palmetto in the early 1990s), was attracted to the opportunity to take it public, though he does not seem to fully grasp the new microscope under which he is operating. (Read "Under the Microscope" below.) "The first thing we talked about when he came to visit with me was about growing this company to a certain mass and being able to possibly go public," Brown says. "And in five years, we hit that mark."

On June 9, 2005, the company went public on the Nasdaq under the symbol LHCG at $14 per share, the high end of its proposed price range, and closed at $17.10. LHC Group offered 4.8 million shares, 800,000 more than originally planned ' 400,000 from both the company and selling shareholders. The stock closed as high as $20.87 on July 18 and as low as $14.10 on Feb. 13 this year. Last week, it was back up to the $15.50 range.

LHC Group is still significantly smaller than its two public company competitors ' it has a market cap of $266 million, compared with Gentiva's $385 million and Amedisys' $533 million, according to the most recent data from Yahoo Finance. But the local company is gaining ground through acquisitions.

"We had some cash on our balance sheet so that we could now actively go out and identify potential targets for acquisitions. And that's what we've been doing since June of 2005," Brown says.

The company has also leaned on the local expertise of corporate/tax attorney Ted Hoyt, co-founder of Omni Geophysical, which later became the publicly traded Omni Energy Services; and retired CPA George A. Lewis, a former Lafayette city auditor. Both serve on the company's board of directors, as do Myers, Indest and Brown. (Another local, current Palmetto Mayor Earline Bihm, served as a director since 1994 and was secretary of the board from June 2002 to July 2004; she got $2.4 million out of the IPO and is no longer listed as a director on the company's Web site.)

Additionally, Senior Vice President Daryl Doise, a former Opelousas General administrator who has an MBA, heads LHC's six-member business development team, whose mission is to find opportunities in 15 southeastern states identified as target growth areas. This region stretches from Texas to Tennessee and encompasses all states southward. LHC Group's current six-state operation includes Louisiana, Texas, Arkansas, Mississippi, Alabama and West Virginia.

In July, the company paid $4.5 million cash for Home Care Plus of Lewisburg, W.Va. In October, it purchased Able Home Health of Mississippi and Alabama and controlling interest in a Hot Springs, Ark.-based home health agency for a combined price of $3.45 million. The year ended with LHC's acquisition of a 67 percent stake in southwestern Alabama's Infirmary Home Health, a company reporting $8 million in revenue for 2005. Most recently, LHC Group announced a deal in January to buy a 67 percent interest in Stanocola Home Health in Baton Rouge, which had $2.2 million in revenue in 2005.

"There is real opportunity for the company to grow without really having to extend themselves," says Henderson, who has a "buy" recommendation on the local company's stock. "It's the only home nursing operation I have a buy on. I have a hold on the others."

For home health and LTAC providers' stock, the year has gotten off to a bit of a bumpy start, mainly because of changes in Medicare reimbursement. A freeze in Medicare cost of living increases for home health agencies in 2006 took effect Jan. 1 (another is proposed for 2007), and on Jan. 19 the U.S. Centers for Medicare and Medicaid Services announced a proposed freeze on payment rates for LTACs. The proposal would leave reimbursements for long-term care patients flat through 2007 and reduce reimbursements for short-term patients.

After the January announcement, LHC's stock fell about $1, or 5.6 percent. "Those are proposed regs; they haven't been finalized yet," says Eric Gommel, an analyst in the Baltimore office of Stifel Nicolaus & Co. The fact that the news is out and adversely affected the stock price only in a small way doesn't necessarily mean the impact has played out; fundamental changes in Medicare payments have the ability to batter the bottom lines of companies like LHC.

"There's some reimbursement uncertainty," Gommel says.

Amedisys took a big hit in late February when Henderson and another analyst at Oppenheimer & Co. downgraded their bullish ratings of the company after a disappointing fourth quarter and the abrupt resignation of the company's CFO. Amedisys' shares fell almost $10, or 24 percent. Henderson says Amedisys has had a hard time integrating the acquisition of Tennessee-based Housecall Medical Resources Inc. and says the CFO's resignation brings into question management's credibility.

LHC Group hasn't had such problems. "They're good operators," Gommel notes.

Gommel also says LHC has an advantage over its competitors on the reimbursement front in that it gets more rural add-on payment, the federal government's mechanism for compensating providers for offering services to rural communities. Like Henderson, he also has a "buy" recommendation on the company's stock.

Myers says the freeze may actually create some acquisition opportunities, much like reimbursement changes of the past. "It is good for us along those lines," the executive says. "And, it was the right thing to do from a fiscal standpoint given where our country is right now with the war and the two hurricanes. I don't like it, and I would prefer that it had not happened. But, I understand it; we accept that, and we are going to look for the opportunity rather than complain about the freeze in reimbursement."

In the meantime, the Lafayette company is continuing to scout prospects. Brown confirms that a couple of deals worth around $20 million each are in the works.

"There are just a little over 7,200 Medicare-certified home health agencies in the United States, and less than 5 percent of those are owned by LHC, Gentiva or Amedisys," Myers says. "It's a big playing field, and the consolidation really has just begun."

One way LHC Group intends to check Congress' pulse when it comes to health care issues is through its lead independent director, W. J. "Billy" Tauzin. The former congressman, who serves as president and CEO of the trade group Pharmaceutical Research and Manufacturers of America, is a close family friend of CEO Myers. Tauzin has served as an LHC board member since January 2004.

"What Billy does for us now is he really helps to give us a vision of what lawmakers in Washington say about our industry, and where they think we need to be 10 or 20 years from now," Myers explains. "That's huge in a boardroom where you're trying to plan the future of a company."

Ask CFO Barr Brown about anything but LHC Group insider trades

LHC Group's Chief Financial Officer Barr Brown may be finding the transition from a private to a public company official a bit bumpy. Upset that The Independent Weekly planned to include information on insider trading activity (all publicly available) in this story, Brown threatened in a voice mail message that publishing such data might affect his company's advertising decisions.

"I think the thing that really caught Keith [Myers, LHC Group's CEO] off guard is, you know â?¦ we were pleased that y'all were running the story from the beginning â?¦ on how the company's grown and all the employees and how we have such great retention. It's really a great company," Brown said. "I think that what threw him is that, while it is a matter of public record, you're talking about a feel good story and then all of a sudden ' boom ' you list what Ginger and Keith got, and it just kind of puts it, kind of even though it's certainly the truth, it just seems to be a little out of character maybe, to do a little story like that."

The CFO continued, "If y'all do run [the article] it really will have an adverse effect on our decision in all the advertising that we place in Gannett newspapers. So, again, please understand that's in no way any type of threat. It's just factual, and if we can avoid it, and if your editor can see fit not to do that, we would certainly appreciate that very much."

The Independent Weekly is "independently" owned and is in no way affiliated with Gannett, which owns The Daily Advertiser and Times of Acadiana.

"We would never advise a company to threaten the press with withholding advertising," says Louis M. Thompson, president and CEO of the Virginia-based National Investor Relations Institute and a former assistant white house press secretary to President Gerald Ford. Almost four decades old, NIRI is an association of corporate investor relations officers responsible for communication among corporate management, the investing public and the financial community. Its members are from large and small publicly held corporations listed on the Nasdaq and the New York Stock Exchange.

Brown is listed as LHC Group's principal investor relations contact. According to public records, so far he's sold $536,000 worth of stock in the company and still controls 228,454 shares, valued last week at about $3.5 million. His annual salary is $334,000. He's been with the company since 2000 and also is the local franchisee for Doe's Eat Place, a steak and tamale restaurant located close to LHC's headquarters on Pinhook Road.

Stifel Nicolaus analyst Eric Gommel would not address Brown's comments and declined an opportunity to read the transcript of the voice mail message he left. Arthur Henderson of Jefferies & Co. says it will take time for Brown to adjust to the new mindset of being a publicly traded company. Both Gommel's and Henderson's companies served as underwriters for the IPO.

For his part, Thompson doesn't understand Brown's reasoning or why he would discourage the release of information that's easily accessible. "[Insider] stock sales have to be reported within 48 hours, and that's fully public," Thompson says. ' LT