INITIATION
Initiation of Home Healthcare Sector
■Initiating coverage of the Home Healthcare sector with a Market Weight.
We believe the home health market is well positioned as the low-cost setting
along the postacute continuum of care. We expect growth in the homecare
market to outpace overall healthcare spending over the next several years,
driven by several underlying macro factors. Our positive outlook is tempered
by a challenging Medicare reimbursement backdrop.
■Focus on home nursing providers. This report focuses on the home
nursing providers, the largest subgroup within home healthcare. We are
initiating coverage of three home nursing companies, Amedisys (AMED),
Gentiva Health Services (GTIV), and LHC Group (LHCG).
■The Good, the Bad, and the Ugly of the Industry
Good. The Centers for Medicare and Medicaid Services (CMS) projects
annual homecare spending growth (+7.5%) to outpace overall healthcare
spending growth (+6.9%), over the next 10 years. Driving this growth are
several macro trends including (1) the cost-effectiveness of care relative to
other postacute settings, (2) a favorable shift in demographics as baby
boomers enter the age 65-plus pool, (3) greater acceptance and patient
preference, and (4) greater consolidation given reimbursement pressures
and a fragmented market.
Bad. Homecare has been the fastest growing sector in healthcare over the
last several years. At the same time, Medicare margins have expanded and
represent the highest margins across all postacute providers. While these
trends may seem positive, we don’t believe they are viewed favorably by
government payors that are constantly looking to keep spending in check.
Ugly. Recent Medicare reimbursement changes will significantly affect home
nursing providers beginning in 2008. On average, we expect 2008 earnings
to be cut by roughly 15% for the three largest publicly traded home nursing
players. Moreover, CMS established a rate cut over the next four years,
essentially acknowledging that some providers have been “upcoding.”
■Valuations reflect discount; visibility key to multiple expansion. The
home nursing group is currently trading at a 13% discount to its historical
average. This reflects the uncertainty over the impact of the updated
payment system to 2008 numbers. Should our estimates prove in-line or
conservative, we believe we could justify average and perhaps premium
valuation levels given the growth outlook for the industry.
■Our stock ratings. We are initiating coverage of three companies: LHC
Group (LHCG) with an Outperform rating and $26 price target; Amedisys
(AMED) with a Neutral rating and $38 price target; and Gentiva (GTIV) with
a Neutral rating and $21 price target.

Table of Contents
Industry Investment Summary 3
Initiating Coverage of the Home Healthcare Sector with a Market Weight 3
The Good, the Bad, and the Ugly of the Industry 3
Group Valuation Reflects Discount; Visibility Is Key to Multiple Expansion 7
Summary of Recommendations 8
Amedisys 8
Gentiva 8
LHC Group 8
Home Healthcare Industry Overview 9
Homecare Piece of the Healthcare Pie 9
Payor Mix 10
Industry Profile 11
Reimbursement 13
Company Views 17
Amedisys Inc. 19
Investment Summary 20
Company Description 21
Investment Positives 25
Investment Risks 30
Financial Performance and Outlook 34
Valuation 37
Financial Models 39
Gentiva Health Services 45
Investment Summary 46
Company Description 47
Investment Positives 54
Investment Risks 58
Financial Performance and Outlook 62
Valuation 65
Financial Models 67
LHC Group 73
Investment Summary 74
Company Description 75
Investment Positives 79
Investment Risks 84
Financial Performance and Outlook 88
Valuation 90
Financial Models 92