Executive summary
Initiating coverage on the home nursing and home respiratory
With this report we are adding coverage on six home health companies:
􀂄 Amedisys (NASDAQ: AMED) – Buy and $40 target price. Our target price equates to
8.2x 2008 EV/EBITDA. Historically, AMED has traded at 8.5x EV/EBITDA over the last
three years.
􀂄 Gentiva (NASDAQ: GTIV) – Hold and $21 target price. Our target price equates to
8.1x 2008 EV/EBITDA and is consistent with valuations for other specialty healthcare
service companies with similar risk profiles.
􀂄 LHC Group (NASDAQ: LHCG) – Hold and $27 target price. Our target price equates to
8.3x 2008 EV/EBITDA and is consistent with valuations for other specialty healthcare
service companies with similar risk profiles.
􀂄 Pediatric Services of America (NASDAQ: PSAI) – Hold and $15 target price. Our
target price equates to 7.1x 2008 EV/EBITDA and is in-line with the company’s three-year
historical average of 7.0x.
􀂄 Apria Healthcare (NYSE: AHG) – Sell and $24 target price. Our target price equates to
8.4x 2009 EV/EBITDA discounted back to 2008. We use the 2009 EBITDA because it
takes into consideration the Medicare cuts from the 36-month oxygen capped rental and
discount to 2008 using AHG’s WACC of 8%. Historically, the sector has traded around
8x EV/EBITDA.
􀂄 Lincare Holdings (NASDAQ: LNCR) – Hold and $37 target price. Our target price
equates to 8.3x 2009 EV/EBITDA discounted back to 2008. We use the 2009 EBITDA
because it takes into consideration the Medicare cuts from the 36-month oxygen capped
rental and discount to 2008 using LNCR’s WACC of 7.5%. Historically, the sector has
traded around 8x EV/EBITDA.
Key investment points
Home nursing segment. We consider the $47.5 billion home health nursing segment to be a
highly cost-effective means of managing the post-acute care and homebound patient
population. Per day costs for Medicare patients average roughly $40 per day (during a 60-day
home health episode) versus $350-$400 per day in skilled nursing facilities. Furthermore,
home health patients are able to receive skilled nursing and therapy services in the comfort
of their home. The long-term growth characteristics for the home nursing segment are
especially appealing due to favorable demographics (aging of the U.S. population) and
significant industry fragmentation with over 8,000 home health agencies (HHAs) and the
major chains controlling just 11% of the industry’s capacity. CMS projects home health
nursing expenditures to grow 7.8% during the next decade, which is amongst the fastest
growth outlook within the health care services sector.

Net-net, while we are initiating research coverage of the home nursing segment with a
slightly more guarded view over the near-term due to the impending Medicare PPS
refinement, we are establishing a positive long-term outlook on the sector and will be
opportunistic in reevaluating our ratings (Holds on GTIV and LHCG, Buy on AMED) as we gain
further visibility on the Medicare PPS refinement. In the context of a Medicare PPS
refinement, we acknowledge the significant earnings risk and share price volatility inherent in
AMED, but we consider the risk/reward to be appealing at current levels. We will reassess
our 2008 estimates when we have a rule to respond to, but we believe we will have the tools
to analyze the companies’ specific therapy exposures when it is proposed.
Home respiratory segment. We consider the $16.5 billion home respiratory segment ($8
billion for respiratory, $6 billion for infusion and $2.5 billion for DME) to be an important part
of the health care delivery system. Home respiratory providers supply services and
equipment to patients suffering primarily from chronic lung diseases such as chronic
obstructive pulmonary disease (COPD), asthma, and obstructive sleep apnea (OSA). Since
most chronic lung disease patients require oxygen and/or other inhalation drugs to sustain
life, respiratory services are highly recurring over the duration of the illness. The major home
respiratory providers also offer value-added infusion services for chronically ill patients that
require specialty pharmaceuticals, as well as durable medical equipment (DME) to patients
that require assist and mobility devices such as hospital beds and scooters.
Similar to the home nursing segment discussed above, the long-term growth characteristics
for the home respiratory segment are quite attractive due to favorable demographics and
modest industry fragmentation. We estimate the four major home respiratory chains control
in excess of 50% of the industry’s capacity. CMS projects home respiratory expenditures to
grow 4.3% during the next decade, although we expect the roll-out of Medicare competitive
bidding (CB) to have some dampening effect on growth during the next 10-years.
Furthermore, new reimbursement rules passed in the Deficit Reduction Act of 2005 will have
a dramatic effect on industry-wide oxygen reimbursement beginning in 2009 – potentially
reducing home respiratory providers’ revenues in excess of 10%.
Net-net, we are initiating research coverage of the home respiratory segment with a cautious
near-term and long-term outlook due to a generally tough reimbursement backdrop. Hence,
our ratings (Hold on LNCR, Sell on AHG) reflect our more guarded view.

Table of Contents
Executive summary ........................................................................... 3
Executive summary: Amedisys, Inc. ................................................ 5
Executive summary: Gentiva Health Services, Inc. ........................ 9
Executive summary: LHC Group, Inc. ............................................ 12
Executive summary: Pediatric Services of America, Inc. ............. 15
Executive summary: Apria Healthcare Group, Inc. ....................... 18
Executive summary: Lincare Holdings, Inc.................................... 21
Industry Overview – Home Health ................................................. 23
Home nursing: industry overview.................................................. 27
Home respiratory: Industry overview............................................ 38
Amedisys (NASDAQ: AMED) .......................................................... 64
Gentiva Health Services, Inc. (NASDAQ: GTIV) ............................ 74
LHC Group (NASDAQ: LHCG)......................................................... 84
Pediatric Services of America (NASDAQ: PSAI) ........................... 94
Apria Healthcare (NYSE: AHG) ..................................................... 104
Lincare Holdings (NASDAQ: LNCR) ............................................. 112