AMEDISYS INC - Annual Report: 2008 (Form 10-K)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

For the fiscal year ended: December 31, 2008

OR

For the transition period from            to            

Commission file number: 0-24260

Amedisys, Inc.

(Exact name of registrant as specified in its charter)

5959 S. Sherwood Forest Blvd.

Baton Rouge, Louisiana 70816

(Address of principal executive offices, including zip code)

(225) 292-2031 or (800) 467-2662

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the issuer is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes  ¨    No  x

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  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

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. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant, based on the last sale price as quoted by the NASDAQ Global Select Market on June 30, 2008 (the last business day of the registrant’s most recently completed second fiscal quarter) was $1,326,155,613. For purposes of this determination shares beneficially owned by officers, directors and ten percent stockholders have been excluded, which does not constitute a determination that such persons are affiliates.

As of February 13, 2009, registrant had 27,247,737 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement for its 2009 Annual Meeting of Stockholders (the “2009 Proxy Statement”) to be filed pursuant to the Securities Exchange Act of 1934 with the Securities and Exchange Commission within 120 days of December 31, 2008 are incorporated herein by reference into Part III of this Annual Report on Form 10-K.

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SPECIAL CAUTION CONCERNING FORWARD-LOOKING STATEMENTS

When included in this Annual Report on Form 10-K or in information incorporated by reference, words like “believes”, “belief,” “expects,” “plans,” “anticipates,” “intends,” “projects,” “estimates,” “may,” “might,” “would,” “should” and similar expressions are intended to identify forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve a variety of risks and uncertainties that could cause actual results to differ materially from those described therein. These risks and uncertainties include, but are not limited to: general economic and business conditions, changes in or our failure to comply with existing Federal and State laws or regulations or the inability to comply with new government regulations on a timely basis, changes in Medicare and other medical payment levels, our ability to find appropriate companies to acquire, to complete acquisitions we announce from time to time, and to secure any financing related thereto, our ability to meet debt service requirements and comply with covenants in debt agreements, demographic changes, availability and terms of capital, our ability to attract and retain qualified personnel, ongoing development and success of new start-ups, our ability to successfully integrate newly acquired agencies, changes in estimates and judgments associated with critical accounting policies and business disruption due to natural disasters or acts of terrorism, and various other matters, many of which are beyond our control.

Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on any forward-looking statement as a prediction of future events. We expressly disclaim any obligation or undertaking and we do not intend to release publicly any updates or changes in our expectations concerning the forward-looking statements or any changes in events, conditions or circumstances upon which any forward-looking statement may be based. For a discussion of some of the factors discussed above as well as additional factors that may affect our results, see Part I, Item 1A. Risk Factors and Part II, Item 7 Critical Accounting Policies within Management’s Discussion and Analysis of Financial Condition and Results of Operations below.

Unless otherwise provided, “Amedisys,” “we,” “us,” “our,” and the “Company” refer to Amedisys, Inc. and our consolidated subsidiaries and when we refer to 2008, 2007 and 2006, we mean the twelve month period then ended December 31, unless otherwise provided.

A copy of this Annual Report on Form 10-K for the year ended December 31, 2008 as filed with the Securities and Exchange Commission (“SEC”), including all exhibits, is available on our internet website at http://www.amedisys.com on the “Investors” page under the “SEC Filings” link.

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PART I

ITEM 1. BUSINESS

Overview

We are a leading provider of high-quality, low-cost home health services to the chronic, co-morbid, aging American population. We were originally incorporated in Louisiana in 1982 by William F. Borne, our founder, Chief Executive Officer and Chairman of the Board; transferred our operations to a Delaware corporation, which was incorporated in 1994; and became a publicly traded company in August of that year. Our common stock is currently traded on the NASDAQ Global Select Market under the trading symbol “AMED”. Our services, which we provide on a nationwide basis, include both home health and hospice services and are primarily paid by Medicare, which represented approximately 87%, 89%, and 93% of our net service revenue in 2008, 2007 and 2006, respectively. As of December 31, 2008, we owned and operated 480 Medicare-certified home health agencies and 48 Medicare-certified hospice agencies and managed the operations of four Medicare-certified home health and two Medicare-certified hospice agencies in 37 states within the United States, the District of Columbia and Puerto Rico. The following is our national geographic footprint. See Item 2, “Properties” for additional detail about the location of our agencies.

Our typical home health patient is Medicare eligible, approximately 82 years old, takes approximately 12 different medications on a daily basis and has multiple co-morbidities. For our home health patients, we typically receive a 60-day episodic-based payment from Medicare. This payment can vary and depends on the type of care provided, acuity (how sick or debilitated a patient is) of the patient’s condition and amount of services required. Some patients require one episode of care to achieve clinical goals, while others require multiple episodes of care based on the acuity of their condition. Our care for each home health patient focuses on improving their quality of life by evaluating their health condition; developing a doctor approved plan of care to achieve certain goals, which can be followed up with additional episodes of care, if deemed necessary; and educating them on how to either maintain or continue to improve upon their health after they leave our care.

During the past three years, we have more than doubled our net service revenue from $541.1 million in 2006 to $1,187.4 million in 2008 and have increased our diluted earnings per share by 87.2% from $1.72 per share in 2006 to $3.22 per share in 2008. Additionally in 2008, we completed the acquisition and conversion of 131 home health and 14 hospice agencies to our operating systems and Point of Care (“POC”) network. These acquisitions include our largest acquisition to-date, TLC Health Care Services, Inc. (“TLC”), which added 92 home health and 11 hospice agencies to our operations.

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Our Philosophy

As one of the leading providers of home health care and hospice services, we strive to maintain our vision, purpose, strategy and mission:

Our Vision. To be the premier home health care company in the communities we serve.

Our Purpose. To assist patients in maintaining and improving their quality of life.

Our Strategy. To offer low-cost, outcome-driven health care at home (see “Our Strategy” below for details on how we intend to achieve this strategy)

Our Mission. To provide cost-efficient, quality health care services to the patients entrusted to our care.

Our Market and Opportunity

Home Health

The United States Census Bureau reported that as of July 1, 2004, there were 36.3 million people in the United States who were Medicare eligible at 65 years of age or older and that it estimates this number will more than double to 86.7 million by 2050, as the baby boomer generation ages and become part of this age demographic beginning in 2011. As the number of Medicare beneficiaries increases, future home health care expenditures are projected to increase to over $65.0 billion through 2017, as reported by the Office of the Actuary of the Center for Medicare and Medicaid Services (“CMS”). This expected increase is projected to result in growth in total health care expenditures outpacing growth in the Gross Domestic Product (“GDP”) of the United States over the next decade, causing such expenditures to increase from 15% of GDP today to 20% by 2016, as reported by CMS. As a result of these factors (increased beneficiaries and increased costs), we believe the Federal and state governments will seek ways to manage/reduce their overall health care expenditures through payment rate reductions and/or continued adjustments to the Home Health Prospective Payment System (“PPS”) (described below), which will lead to an evolution within the industry where home health providers will look to become more efficient through various means, such as incorporating technology within their processes and/or centralizing certain activities. We also believe the Federal and state governments will encourage health care providers to seek care for their patients in the home setting as opposed to facility-based/acute inpatient hospitals, as it typically costs less to provide care in the home. (Given this anticipated evolution, we believe that we are well positioned to address these challenges.) As a nation, we are currently positioning ourselves to better allocate our resources to provide people with access to high-quality care and appropriate services that maintain health and functioning in the face of disease progression and ensure that this care is coordinated across multiple providers and payors, particularly through the end of life.

Additionally, as there were over 9,200 provider numbers issued for home health agencies in the United States as of the end of 2007, as reported by the Medicare Payment Advisory Commission (“MedPAC”), we believe that certain home health providers will leave the industry due to competitive pressures and/or inability to change as the home health industry evolves. We believe this will provide additional acquisition opportunities for us and other home health providers that are able to continue to provide quality care to their patients while remaining profitable.

Hospice

According to the United States’ National Association for Home Care & Hospice, at the end of 2006, there were approximately 3,000 provider numbers issued for hospice agencies in the United States, and, according to CMS, the number of Medicare beneficiaries utilizing hospice services is expected to increase at an average rate of 9% per year through 2015. As a result, we believe that the hospice industry provides us with a growth opportunity that is complementary to our home health growth strategy. With the projected growth in the hospice industry, an increased level of scrutiny is being placed on Medicare and Medicaid hospice payment methodologies. As noted by MedPAC, the hospice industry has not seen dramatic changes to its payment

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structure since its inception, which means that changes to the hospice payment system are likely as more data is collected on the services that are provided to beneficiaries. We believe these changes will most likely result in less efficient providers choosing to leave the industry as they become less competitive, promoting consolidation within the industry. Based on these factors and our growth strategy for our hospice operations, we believe we are in a favorable position to seek out potential acquisition and start-up opportunities as we expand our business.

Our Competitive Strengths

We believe our market share and our ability to grow our business are directly related to the following competitive strengths:

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Our Strategy

Our strategy is to offer low-cost, outcome driven health care at home. To achieve this strategy, we intend to:

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Our Operations

Home Health

We provide low-cost, outcome driven health care to homebound patients we serve within the comfort of their own homes. We believe there is no place like home for a healing, relaxing environment for patients recovering from illness, injury or surgical procedures. The home provides an environment that allows medical

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professionals greater access to family members who can participate in their loved one’s care, while allowing the caregivers to make recommendations based on each individual patient’s needs. In addition to the home being a preferred setting for the patient, we believe by providing care to our patients in their homes we offer a low-cost alternative to hospitals, nursing homes and other health care alternatives.

We are one of the leading providers of home-based care management programs for complex, chronically ill patients. We believe that our proprietary technologies, our “Encore” nurse call center and our evidence-based, best practice clinical algorithms are the right prescription for providing comprehensive, continuous chronic care management to our patients.

Our Continuum of Care

Our home health care team works closely with our patients and their physicians to coordinate all aspects of each individual patient’s care. With skill, efficiency and compassion, we strive to provide a seamless transition from an institutional setting or directly from a physician referral to the individual patient’s home, while keeping in mind the needs of our patients. Our care begins with the receipt of a referral, continues with the initial patient assessment and the development of the plan of care, is followed by one or more episodes of care, as deemed necessary by the patient’s physician, and is typically concluded by the discharge of the patient once their treatment goals have been met. In addition to this continuum of care, we continue to contact the patient through our “Encore” nurse call center for a 12 month period following discharge to ensure the patient is continuing to have his/her care needs met. In order to provide this continuum of care, we have the following resources:

Our Care Management Programs for Complex, Chronically Ill Patients

We provide care we believe offers diagnosis-driven, evidenced-based protocols for effective patient management, including the following:

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Our Referral and Admission Process

Our referral process begins with our account executives and agency personnel establishing relationships with physicians and hospital discharge planners in each of the markets that we serve. As we develop these relationships, we focus on educating these referral sources on our ability to care for higher acuity patients, on our comprehensive offering of services and our track record of improving clinical outcomes of our patients. Once we receive a referral, our interdisciplinary care team (inclusive of skilled nurses and home health aides; physical, occupational and/or speech therapists; and medically oriented social workers) coordinates the entire process, by initially evaluating the needs of the referral at the patient’s home. Then, we work with the patient and his/her referring physician to design a plan of care to provide the most optimal outcome. We try to be an advocate for each patient, and accordingly, we review each service that may benefit the patient and improve his/her quality of life.

Our Outcomes

Through our continuum of care, our care management programs for complex, chronically ill patients, our referral process and our commitment to patient care, we strive to achieve the best possible outcome for each of our patients. From our initial evaluation, specified plans of care, final discharge and follow up with patients after discharge through our “Encore” call center, we believe outcomes we achieve for our patients generally exceed those achieved by the patients of our competitors in the markets that we serve. This can be seen in collected and reported quality data from CMS, which show that we exceeded 12 out of 12 measurement categories in the regions we serve and 10 out of the 12 measurement categories when compared to the national average. The 12 measurement categories are tracked by CMS through responses received by home health providers as part of their clinical assessment process.

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Despite our current levels of success, we strive to continue to improve upon our outcomes, which we believe will add to our reputation as one of the leading providers of home health care.

Our Competitors

We compete with local, regional and national home health providers based primarily on the scope and quality of services, geographic coverage and outcome data. The majority of our competition is from hospital-based home health agencies, local home health agencies and visiting nurse associations. We compete based on availability of personnel, quality of services and expertise of visiting staff. In addition, with the exception of states that require certificates of need (“CON”) or permits of approval (“POA”), there are few barriers to entry in the markets in which we operate.

Our Patients, Care Management Strategy and Clinical Value Proposition

Understanding the year over year clinical acuity trends of our patient population is vitally important in enabling us to continually provide a high level of care to our patients, improve their clinical outcomes over time, develop new clinical programs and build out our care management infrastructure. For this reason, we frequently utilize external benchmarking organizations to determine the clinical attributes of our patient population and compare those attributes to external regional and national norms.

We utilize a variety of clinical metrics in order to understand clinical severity levels of our population. These include but are not limited to case mix weights, distribution of patients, predicted risk of hospitalization, poly pharmacy (medication) trends and functional scoring trends.

A home health case mix weight is a single score generated from the clinical assessment information that is used as a summary of a patient’s clinical needs, functional limitations (i.e. how difficult it is for that particular patient to move around) and service requirements. OCS, a third party benchmarking firm that performs clinical comparisons of home health agencies based on case mix weights, determined that during the past three years (2005 to 2007) our patient population has consistently had a higher case mix weight than both the national and southeastern portion of the United States, where we historically have had a significant concentration of our home health locations.

We believe our patients experience a higher case mix weight for several reasons. We were first to market with our care management programs with the onset of the PPS capitated payment system in 2000. Our standardized, comprehensive clinical programs enabled us to understand and care for the clinical resource needs of challenging patients and ask our referral sources for complex patients at a time when the industry appeared leery of servicing that level of patient complexity. Secondly, our team of account executives and agency personnel have continually educated the physician and hospital community about our track record of treating and improving year over year clinical outcomes for the patients we serve. Lastly, we have concentrated significant efforts on obtaining patients from local physicians as opposed to receiving the majority of our admissions from a particular hospital system. Our focus on a strong physician referral base supports our strategy of initiating care interventions as a lower cost provider, with the intent of avoiding potentially unnecessary hospitalization events. Patients being admitted from the physician’s office tend to be more unstable clinically as opposed to patients who have had the benefit of a hospital stay to stabilize their condition.

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We believe that understanding our patients’ predictive hospitalization risk is critical to our ability to provide a high standard of care. For this reason we have embedded many risk stratifying models within our care management platform and have created multiple protocols and processes aimed at identifying and improving the standard of care for this at risk population. To understand how our patients’ hospitalization risk compares to national norms, an independent analysis was conducted by OCS on our patients for the first half of 2008. This analysis illustrates that we service a proportionally larger percentage of patients with a very high and high risk of hospitalization in comparison to national norms.

Additionally, OCS noted that despite our serving a much higher at risk population, we have improved our aggregate level of patient outcomes year over year at a higher rate than national norms. The OCS Standardized Outcome Index (SOI) is a proprietary measure that offers a single number representative of overall quality.

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We cross validate the acuity of our population by studying their pharmaceutical regimen. Polypharmacy (multiple medications) trends are a reliable indicator of patient acuity and increased clinical co-morbidities. Simply stated, the more medications a patient is taking, the more diagnoses the physician is actively treating. In 2006, our patients took on average 8 medications per day; in 2007, the average medications per day increased to 9. In 2008, the average medications per day increased to 12. We also break down episodic categories comparing medication levels in order to ensure that patients requiring extended service levels are those with actual greater co-morbidity clinical needs. For example, in 2008, patients receiving service in one episode of care, took an average of just under 12 medications per day. Patients receiving service in three episodes or greater took an average of almost 15 medications per day. As medications increase, acuity and risk factors increase. As this clinical complexity increases, service level requirements of the patient naturally increase.

Utilizing another layer of cross acuity validation, we also track functional scores (how readily a patient can move about independently) as a metric in understanding population impairment levels. In home care, patients are ranked on functional impairment scores ranging from F0, minimal to no impairment, to F4, meaning maximum impairment (close to bed bound status). From 2005 to 2007, we experienced a year over year increase in patients with functional scores of F3 or F4 and a decrease of patients with functional scores of F2 or lower. This illustrates that the debility of our patient population has increased each year.

Internally and externally validated data reveals that year over year we are treating patients with increasing chronicity, polypharmacy needs and debility. Serving a population with a higher risk of hospitalizations, increasing polypharmacy needs and increasing debility levels has resulted in our patients requiring additional episodes of care. We continually strive to reach the health care goals of our patients as quickly as reasonably possible, providing additional episodes of care only if clinically necessary. Even though our patients generally have a higher risk of hospitalization and higher clinical acuity, approximately 85% of our patients require two or fewer episodes of care.

We strive to differentiate ourselves by working diligently to embed advanced care management protocols into our care delivery platform. We believe that our evidenced-based approach to developing plans of care, documentation of care provided through our POC system and our clinical system infrastructure differentiate our home care services.

With a trend of providing care to sicker patients each year, our plan is to continue to develop our chronic care management systems with a focus on tightly managing the clinical dynamics of the co-morbid patient who requires an intensive level of services. We anticipate the trends of clinical complexity will only increase as the

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baby boomer population ages. Our value proposition depends upon our ability to deliver higher outcome based care in the markets we serve, irrespective of future payment methodologies.

Hospice

We provide care that is designed to provide comfort and support for patients who are facing a terminal illness, such as heart disease, pulmonary disease, dementia, Alzheimer’s and HIV/AIDS. We believe early involvement is beneficial to patients, as well as their loved ones, and we strive to provide compassionate care that promotes patient dignity and supports family members. We develop a relationship of trust, allowing all involved to fully understand the end-of-life needs of each patient and family member, which we believe results in greater comfort and quality of life.

Our Comprehensive Approach

Our specialized team of hospice care professionals works with each patient, family member and attending physician to develop a plan of care we believe will meet the needs of each patient. Teams usually consist of a physician; nurses; home health aides; social workers; therapists; dieticians; volunteers; counselors; chaplains; and bereavement coordinators.

Our Hospice Services

The services that we offer include providing all medicines, medical equipment and supplies related to the hospice diagnosis; medication management to control pain and symptoms; physician services to manage medications; nursing and home health aide visits to provide direct care; social work, counseling and chaplain services to provide support; volunteer services to provide companionship; and bereavement services for a minimum of 13 months following a loss.

Our Competitors

We receive referrals from physicians as well as friends or family members of potential patients who need our services. We compete with local, regional and national hospice providers for such referrals based on scope and quality of services, geographic coverage and pricing. With the exception of states that require a CONs or POAs, there are few barriers to entry in our markets, which means we could be subject to additional competition. We try to differentiate ourselves from our competitors by providing what we believe is the highest level of quality care.

Our Employees

At December 31, 2008, we employed approximately 14,800 employees, consisting of approximately 13,000 home health care employees, 800 hospice care employees and 1,000 corporate employees. We predominately compensate our visiting staff, which includes our home health care and hospice care employees, on a pay per visit model. We believe paying clinicians in this manner maximizes efficiency and is the most equitable means of compensating these employees.

Our Technology and Intellectual Property

Our POC laptop devices, proprietary, Windows™-based clinical software system and electronic physician order system, are used together to collect assessment data, schedule and log patient visits, generate medical orders and monitor treatments and outcomes in accordance with established medical standards. With these integrated technologies, we believe we are able to standardize the care delivered across our network of agencies and we are effectively able to monitor the patients we treat. We believe these integrated technologies and management systems allow us to be efficient, reducing the need for additional administrative staff and related expenses, and contribute to our efforts to be a low-cost provider.

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In addition to our internally developed software, we also rely on other non-proprietary software. This software is primarily used for accounting, human resources, payroll and financial reporting. The software we use is highly scalable. We believe our software and systems are flexible, easy-to-use and allow us to accommodate growth. Technology plays a key role in our ability to expand our operations and maintain an effective system of internal controls. We believe that building and enhancing our information and software systems provides us with a competitive advantage that will allow us to grow our business in a more cost-efficient manner and will result in better patient care.

All strategic platform development activity centers around further enhancing our internal/compliance controls, sustaining successful growth capacity, reducing cost through digitalizing processes and enhancing our care coordination abilities aimed at servicing the more chronic (sicker) population. We will continue to build out these capabilities by embedding further evidenced based protocols, predictive modeling capabilities, advanced patient registry functions and expanded capabilities to interface with multiple care providers via a scalable, secure communication platform.

Payment for Our Services

Patient Eligibility

The Medicare home health benefit is available to both patients who need care following discharge from a hospital and patients who suffer from chronic conditions that require ongoing but intermittent care. The services received do not need to be rehabilitative or of a finite duration; however, patients who require full-time skilled nursing care for an extended period of time generally do not qualify for Medicare home health benefits. As a condition of participation under Medicare, beneficiaries must be homebound (i.e. beneficiary is unable to leave his/her home without considerable effort), require intermittent skilled nursing, physical therapy or speech therapy services, and receive treatment under a plan of care established and periodically reviewed by a physician. Qualifying patients may also receive occupational therapy, medical social services and home health aide services if included within the plan of care prescribed by a physician. There is no limit to the number of episodes of care a patient may receive as long as the patient remains eligible. The Medicare hospice benefit is also available to Medicare-eligible patients with terminal illnesses, certified by a physician, where life expectancy is six months or less.

Payors

We are paid by Medicare, our largest payor; Medicaid; and other insurance carriers, including Medicare Advantage programs, for patients who have chosen these plans rather than traditional Medicare benefits. The payments made by each type of payor are described below.

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Home Health Medicare

Medicare rates are based on the severity of the patient’s condition, his or her service needs and other factors relating to the cost of providing services and supplies, bundled into 60-day episodes of care. An episode starts with the first day a billable visit is furnished and ends 60 days later or upon discharge, if earlier. If a patient is still in treatment on the 60^th day, a recertification assessment is completed to determine if the patient needs additional care; and if the physician determines that further care is necessary, another episode begins on the 61^st day (regardless of whether a billable visit is rendered on that day) and ends 60 days later. The first day of a consecutive episode, therefore, is not necessarily the new episode’s first billable visit. Annually the Medicare Program base episodic rates are set through Federal legislation, as follows:

As a result of the final rule, episodes concluded after January 1, 2008 that began in 2007 were paid at the base rate of $2,337, and episodes that began on or after January 1, 2008 and concluded prior to December 31, 2008 were paid at the base rate of $2,270.

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Payments can be adjusted for: (a) an outlier payment if our patient’s care was unusually costly; (b) a low utilization adjustment (“LUPA”) if the number of visits during the episode was fewer than five; (c) a partial payment if our patient transferred to another provider or we received a patient from another provider before completing the episode; (d) a payment adjustment based upon the level of therapy services required (thresholds set at 6, 14 and 20 therapy visits); (e) the number of episodes of care provided to the patient (episodes three or greater are paid at higher rates compared to the first two episodes, even if the episodes of care are provided by different home health providers); (f) changes in the base episode payments established by the Medicare program; (g) adjustments to the base episode payments for case mix, geographic wages and low utilization; and (h) recoveries of overpayments. In addition, Medicare can also make various adjustments to payments received if we are unable to produce appropriate billing documentation or acceptable authorizations.

We pre-bill Medicare a portion of the estimated payment for each 60-day episode of care that is in progress in the form of a request for anticipated payment (“RAP”). For each patient’s initial 60-day episode, we submit and receive 60% of the estimated payment and 50% of the estimated payment for the episode for any subsequent episode of care contiguous with the first. Once the episode is complete or the patient has been discharged and all necessary documentation has been gathered, we bill Medicare for the full amount of the episode and receive the net difference between the final bill and the RAP. If our 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, Medicare will recoup the payment from any other claims in process for that particular provider number, and then the RAP and final claim must be re-submitted.

Home Health Non-Medicare

Payments from Medicaid and other insurance carriers are based on episodic-based rates or per visit rates (non-episodic based) depending upon the terms and conditions established with such payors. Episodic-based rates paid by our non-Medicare payors are paid in a similar manner and subject to the same adjustments as discussed above for Medicare; however, these rates can vary based upon negotiated terms.

Hospice Medicare

Medicare rates are based on standard prospective rates for delivering care over a base 90-day or 60-day period (90-day episode of care for the first two episodes and 60-day episodes of care for any subsequent episodes). Payments are based on daily rates for each day a beneficiary is enrolled in the hospice benefit. Rates are set based on specific levels of care and are established annually through Federal legislation. For instance on August 8, 2008, CMS increased rates for the twelve-month period beginning on November 1, 2008 through October 31, 2009 with a market basket increase of 3.6%. The levels of care include:

We bill Medicare for hospice services on a monthly basis and our payments are subject to two fixed annual caps, which are assessed on a provider number basis. Generally, each hospice agency has its own provider number. However, where we have created branch agencies to help our parent agencies serve a geographic location, the

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parent and branch may have the same provider number. The annual caps per patient, known as hospice caps, are calculated and published by the Medicare fiscal intermediary on an annual basis and cover the twelve month period from November 1 through October 31. The caps can be subject to annual and retroactive adjustments, which can cause providers to owe money back to Medicare if such caps are exceeded. For instance on April 20, 2007, CMS adjusted the overall payment cap amount for fiscal years ended October 31, 2004 and 2003. As a result of the adjustment, the overall payment cap amounts were $18,963 and $18,143 for fiscal years 2004 and 2003, respectively, compared to the prior rates of $19,636 and $18,661 for fiscal years 2004 and 2003, respectively.

The two caps include an inpatient cap and overall payment cap, detailed below:

Our ability to stay within these limitations depends on a number of factors, each determined on a provider number basis, including the average length of stay and mix in level of care.

Hospice Non-Medicare

Non-Medicare payors pay at rates different from established Medicare rates for hospice services, which are based on separate, negotiated agreements. We bill and are paid based on these agreements.

Controls over Our Business System Infrastructure

We establish and maintain processes and controls over coding, clinical operations, billing, compliance and patient recertifications to help ensure that we are compliant with Medicare requirements.

Coding

Specified diagnosis codes are assigned to each of our patients based on their particular health condition and ailment (such as diabetes, coronary artery disease or congestive heart failure). Because coding regulations are complex and are subject to frequent change, we maintain controls surrounding our coding process. In order to reduce associated risk, we provide coding training for new agency directors and clinical managers; provide annual coding update training for agency directors and clinical managers; provide coding training during orientation for new employees; provide monthly specialized coding education; circulate a clinical operations quality newsletter; obtain outside expert coding instruction; utilize coding software in our POC system; and have automated coding edits based on pre-defined compliance metrics in our POC system.

Clinical Operations

Regulatory requirements allow patients to be admitted to home health care if they are considered homebound and require certain clinical services. These clinical services include: educating the patient about their disease; an assessment of observation skills; wound care, administering injections or intravenous fluids; and management

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and evaluation of a patient’s plan of care. In order to help ensure our agencies are following applicable regulatory requirements, we complete audits of patient charts (locally, by line management regional staff, for Sarbanes-Oxley compliance and by Direct line supervisors); we use risk forecasting methodologies; we utilize regulatory “turnaround teams” when problems are identified; we administer survey guideline education; we hold recurrent homecare regulatory education; we utilize outside expert regulatory services; and we have a toll-free hotline to offer additional assistance.

Billing

We maintain comprehensive controls over our billing processes to help ensure accurate and complete billing. We have company-wide annual billing compliance testing; use formalized billing attestations; limit access to billing systems; use risk forecasting methodologies; perform direct line supervisor audits; hold weekly operational meetings; use automated daily billing operational indicators; deploy operational “turnaround teams” when problems are identified; and terminate employees who knowingly fail to follow our billing policies and procedures in accordance with a well publicized “Zero Tolerance Policy”.

Patient Recertification

In order to be recertified for an additional episode of care, a patient must be diagnosed with a continuing medical need. This could take the form of a continuing skilled clinical need or could be caused by changes to the patient’s medical regimen or by modified care protocols within the episode of care. As with the initial episode of care, a recertification requires approval of the patient’s physician. Before any employee recommends recertification to a physician, we conduct an agency level, multidisciplinary care conference. We also use centralized automated compliance recertification indicators to identify and monitor agencies that have relatively high recertification levels.

Compliance

The quality and reputation of our personnel and operations are critical to our success. We develop, implement and maintain comprehensive ethics, compliance and quality improvement programs as a component of the centralized corporate services provided to our home health and hospice agencies. Our ethics and compliance program is administered by our Chief Compliance Officer, a former state prosecutor, and includes a Code of Ethical Business Conduct for our employees, officers, directors and affiliates and a process for reporting regulatory or ethical concerns to our Chief Compliance Officer through a confidential hotline. We promote a culture of compliance within our company through persistent messages from our senior leadership concerning the necessity of strict compliance with legal requirements and company policies and procedures, and through publicizing and enforcing our Zero Tolerance Policy. We also employ a comprehensive compliance training program that includes: annual compliance testing; new hire compliance training; new acquisition compliance training; sales compliance training; new employee orientation—compliance education; billing compliance training; and compliance presentations at all company functions, Our executive compliance committee includes our Chief Executive Officer, Chief Operating Officer and President, Chief Financial Officer, Chief Information Officer and Senior Vice President of Clinical Operations, Chief Compliance Officer, Senior Vice President of Human Resources and Senior Vice President of Internal Audit, and meets on a quarterly basis to establish the agenda for compliance initiatives and review the status of compliance initiatives and audits, as well as the operations of our Compliance Department.

Our Regulatory Environment

We are highly regulated by Federal, state and local authorities. Regulations and policies frequently change, and we monitor changes through trade and governmental publications and associations. We also meet regularly with a group of financial, legal and regulatory consultants to discuss emerging issues that may affect our business. Our home health and hospice subsidiaries are certified by CMS and therefore are eligible to receive payment for services through the Medicare system.

We are also subject to Federal, state and local laws and regulations dealing with issues such as occupational safety, employment, medical leave, insurance, civil rights, discrimination, building codes and other

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environmental issues. Federal, state and local governments are expanding the number of regulatory requirements on businesses.

We have set forth below a discussion of the regulations that we believe most significantly affect our home health and hospice businesses.

Licensure, Certificates of Need and Permits of Approval

Home health and hospice agencies operate under licenses granted by the health authorities of their respective states. Additionally, certain states, including a number in which we operate, carefully restrict new entrants into the market based on demographic and/or competitive changes. In such states, expansion by existing providers or entry into the market by new providers is permitted only where a given amount of unmet need exists, resulting either from population increases or a reduction in competing providers. These states ration the availability of markets through a CON process, which is periodically evaluated. Currently, state health authorities in 17 states and the District of Columbia and Puerto Rico require a CON or, in the State of Arkansas, a POA, in order to establish and operate a home health agency, and state health authorities in 11 states and the District of Columbia require a CON to operate a hospice agency.

We operate home health agencies in the following CON states: Alabama, Arkansas (POA), Georgia, Kentucky, Maryland, Mississippi, New York, North Carolina, South Carolina, Tennessee, Washington and West Virginia, as well as the District of Columbia and Puerto Rico. We provide hospice related services in the following CON states: North Carolina, Tennessee and West Virginia.

In every state where required, our locations possess a license and/or CON or POA issued by the state health authority that determines the local service areas for the home health or hospice agency. In general, the process for opening a home health or hospice agency begins by a provider submitting an application for licensure and certification to the state and Federal regulatory bodies, which is followed by a testing period of transmitting data from the applicant to CMS. Once this process is complete, the agency receives a provider agreement and corresponding number and can begin billing for services that it provides. For those states that require a CON or POA, the provider must also complete a separate application process before billing can commence. In addition, states with CON and POA laws place limits on the construction and acquisition of health care facilities and operations and the expansion of existing facilities and services. In these states, approvals are required for capital expenditures exceeding amounts above the prescribed thresholds.

State CON and POA laws generally provide that, prior to the addition of new capacity, the construction of new facilities or the introduction of new services, a designated state health planning agency must determine that a need exists for those beds, facilities or services. The process is intended to promote comprehensive health care planning, assist in providing high-quality health care at the lowest possible cost and avoid unnecessary duplication by ensuring that only those health care facilities and operations that are needed will be built and opened.

Medicare Participation

As we expect to continue to receive the majority of our revenue from serving Medicare beneficiaries, our agencies must comply with regulations promulgated by the Department of Health and Human Services in order to participate in the Medicare program and receive Medicare payments. Among other things, these regulations, known as “conditions of participation,” relate to the type of facility, its personnel and its standards of medical care, as well as its compliance with state and local laws and regulations. CMS has indicated that it will be revising the current home health conditions of participation but a publication date of such revisions has not been established.

Federal and State Anti-Fraud and Anti-Kickback Laws

As a provider under the Medicare and Medicaid systems, we are subject to various anti-fraud and abuse laws, including the Federal health care programs’ anti-kickback statute and, where applicable, its state law counterparts. These laws prohibit any offer, payment, solicitation or receipt of any form of remuneration to

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induce or reward the referral of business payable under a Federal health care program or in return for the purchase, lease, order, arranging for, or recommendation of items or services covered by any Federal health care program or any health care plans or programs that are funded by the United States government (other than certain Federal employee health insurance benefits) and certain state health care programs that receive Federal funds under various programs, such as Medicaid. A related law forbids the offer or transfer of any item or service for less than fair market value, or certain waivers of co-payment obligations, to a beneficiary of Medicare or a state health care program that is likely to influence the beneficiary’s selection of health care providers. Violations of the anti-fraud and abuse laws can result in the imposition of substantial civil and criminal penalties and, potentially, exclusion from furnishing services under any Federal health care program. In addition, the states in which we operate generally have laws that prohibit certain direct or indirect payments or fee-splitting arrangements between health care providers where they are designed to obtain the referral of patients from a particular provider.

Stark Laws

Congress adopted legislation in 1989, known as the “Stark Law,” that generally prohibits a physician from ordering clinical laboratory services for a Medicare beneficiary where the entity providing that service has a financial relationship (including direct or indirect ownership or compensation relationships) with the physician (or a member of his/her immediate family), and further prohibits such entity from billing for or receiving payment for such services, unless a specified exception is available. Additional legislation, known as “Stark II,” became effective January 1, 1993. That legislation extends the Stark Law prohibitions to services under state Medicaid programs and beyond clinical laboratory services to all “designated health services,” which include home health services. Violations of the Stark Laws result in payment denials and may also trigger civil monetary penalties and program exclusion. Accordingly, physicians who are compensated by us are prohibited under Stark II from making referrals to us for designated health services, including home health services covered by Medicare or Medicaid, unless an exception applies. One such exception we rely upon is for certain personnel service arrangements, which allows us to contract with certain physicians at fair market value to provide consulting work to our agencies. Another exception that we rely upon is a safe harbor allowing us to lease office space from certain physicians at fair market value for legitimate and commercially reasonable business purposes. Several of the states in which we conduct business have also enacted statutes similar in scope and purpose to the Federal fraud and abuse laws and the Stark Laws. These state laws may mirror the Federal Stark Laws or may be different in scope. The available guidance and enforcement activity associated with such state laws varies considerably.

HIPAA

The Health Insurance Portability and Accountability Act (“HIPAA”) was enacted on August 21, 1996, to assure health insurance portability, reduce health care fraud and abuse, guarantee the security and privacy of health information and enforce standards for health information. Organizations were required to be in compliance with certain HIPAA provisions relating to security and privacy beginning April 14, 2003 and we are subject to significant fines and penalties if found not to be compliant with the provisions outlined in the regulations.

Regulations issued pursuant to HIPAA impose ongoing obligations relative to training, monitoring and enforcement. We have implemented processes and procedures to ensure continued compliance with these regulations.

Pursuant to the provisions of HIPAA, covered health care providers are required to be compliant with the regulations’ electronic Health Care Transactions and Code Sets Requirements. In conformity with these Federal regulations, we are capable of transmitting data in the required format.

The False Claims Act

The Federal False Claims Act gives the Federal government an additional way to police false bills or requests for payment for healthcare services. Under the False Claims Act, the government may fine any person who knowingly submits, or participates in submitting claims for payment to the Federal government which are false

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or fraudulent, or which contain false or misleading information. Any person who knowingly makes or uses a false record or statement to avoid paying the Federal government may also be subject to fines under the False Claims Act. Under the False Claims Act, the term “person” means an individual, company, or corporation. The Federal government has widely used the False Claims Act to prosecute Medicare and other governmental program fraud in areas such as violations of the Federal anti-kickback statute or the Stark Laws, coding errors, billing for services not provided, and submitting false cost reports. The False Claims Act has also been used to prosecute people or entities which bill services at a higher reimbursement rate than is allowed and billing for care that is not medically necessary. The penalty for violation of the False Claims Act is a minimum of $5,500 for each fraudulent claim plus three times the amount of damages caused to the government as a result of each fraudulent claim.

In addition to the False Claims Act, the Federal government may use several criminal statutes to prosecute the submission of false or fraudulent claims for payment to the Federal government. Many states have similar false claims statutes that impose liability for the types of acts prohibited by the False Claims Act. As part of the Deficit Reduction Act of 2005 (the “DRA”), Congress provided states an incentive to adopt state false claims acts consistent with the Federal False Claims Act. Additionally, the DRA required providers who receive $5 million or more annually from Medicaid to include information on Federal and state false claims acts, whistleblower protections and the providers’ own policies on detecting and preventing fraud in their written employee policies. These relatively new requirements are intended to expand the number and scope of false claims cases in the health care industry.

Civil Monetary Penalties

The United States Department of Health and Human Services (“HHS”) may impose civil monetary penalties upon any person or entity who presents, or causes to be presented, certain ineligible claims for medical items or services. The amount of penalties varies, depending on the offense, from $2,000 to $50,000 per violation. In addition, persons who have been excluded from the Medicare or Medicaid program and still retain ownership in a participating entity, or who contract with excluded persons, may be penalized. Penalties also are applicable in certain other cases, including violations of the Federal anti-kickback statute, payments to limit certain patient services, and improper execution of statements of medical necessity.

Available Information

Our company website address is www.amedisys.com. We use our website as a channel of distribution for important company information. Important information, including press releases, analyst presentations and financial information regarding our company is routinely posted on and accessible on the “Investor Relations” subpage of our website, which is accessible by clicking on the tab labeled “Investors” on our website home page. We also use our website to expedite public access to time-critical information regarding our company in advance of or in lieu of distributing a press release or a filing with the SEC disclosing the same information. Therefore, investors should look to the “Investor Relations” subpage of our web site for important and time-critical information. Visitors to our website can also register to receive automatic e-mail and other notifications alerting them when new information is made available on the “Investor Relations” subpage of our website. In addition, we make available on the Investor Relations subpage of our website (under the link “SEC filings”) free of charge our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, ownership reports on Forms 3, 4 and 5 and any amendments to those reports as soon as practicable after we electronically file such reports with the SEC. Further, copies of our Certificate of Incorporation and Bylaws, our Code of Ethical Business Conduct and the charters for the Audit, Compensation and Nominating and Governance Committees of our Board are also available on the Investor Relations subpage of our website (under the link “Corporate Governance”).

Additionally, our filings can also be obtained at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at (800) SEC-0330. Our electronically filed reports can also be obtained on the SEC’s internet site at http://www.sec.gov.

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ITEM 1A.  RISK FACTORS

The risks described below could have a material adverse effect on our business and consolidated financial condition, results of operations and cash flows and the actual outcome of matters as to which forward-looking statements are made in this Form 10-K. The risk factors described below are not the only risks faced by Amedisys. Our business and consolidated financial condition, results of operations and cash flows may also be materially adversely affected by factors that are not currently known to us, by factors that we currently consider immaterial or by factors that are not specific to us, such as general economic conditions.

If any of the following risks are actually realized, our business and consolidated financial condition, results of operations and cash flows could be materially adversely affected. In that case, the trading price of our common stock could decline.

You should refer to the explanation of the qualifications and limitations on forward-looking statements under “Special Caution Concerning Forward-Looking Statements.” All forward-looking statements made by us are qualified by the risk factors described below.

Risks Related to Our Business

Because our revenue is substantially derived from Medicare, reductions in Medicare rates, rate increases that do not cover cost increases and/or significant changes to the Medicare payment methodology could have a material adverse effect on our business and consolidated financial condition, results of operations and cash flows.

Our net service revenue is primarily derived from Medicare, which accounted for 87%, 89% and 93% of our revenue during 2008, 2007 and 2006, respectively. Payments received are subject to changes made through Federal legislation. These changes, as further detailed in Item 1, “Payment for Our Services,” can include changes to base episode payments for home health services and changes to cap limits and per diem rates for hospice services. When such changes are implemented, we must modify our internal billing processes and procedures accordingly, which can require significant time and expense. Any such changes, including retroactive adjustments, adopted in the future by Center for Medicare and Medicaid Services (“CMS”) could have a material adverse effect on our business and our consolidated financial condition, results of operations and cash flows.

Because we are limited in our ability to control rates received for our services, our business and consolidated financial condition, results of operations and cash flows could be materially adversely affected if Medicare or any of our other payors reduce the amounts that are paid for our services and/or we are not able to maintain or improve upon our costs to provide such services.

As Medicare is our primary payor and rates are established through Federal legislation, we have to manage our costs of providing care. Additionally, non-Medicare rates are difficult for us to negotiate as such payors are under pressure to reduce their own costs. As a result, our profitability is dependent on our ability to manage our costs including, but not limited to, centralization of various processes, the use of technology and management of the number of employees utilized. If we are not able to continue to streamline our processes and reduce our costs, our business and consolidated financial condition, results of operations and cash flows could be materially adversely affected.

Our growth strategy depends on our ability to open agencies, acquire additional agencies on favorable terms and integrate and operate these agencies effectively. If our growth strategy is unsuccessful or we are not able to successfully integrate newly acquired or opened agencies into our existing operations, our business and consolidated financial condition, results of operations and cash flows could be materially adversely affected.

We expect to continue to open agencies in existing and new markets. Our new agency growth, however, will depend on several factors, including our ability to:

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We focus significant time and resources on acquisitions of agencies, or on some of their assets, in targeted markets. Not only do we face competition for acquisition candidates, but we may also be unable to identify, negotiate and complete suitable acquisition opportunities on favorable terms. As we continue to add acquisition-related revenue and expand our markets, our growth could strain our resources, including management, information systems, regulatory compliance, logistics and other controls. This could require us to incur expenses for hiring additional qualified personnel, retaining professionals to assist in developing the appropriate control systems and expanding our information technology infrastructure. Additionally, acquisitions involve significant risks and uncertainties, including difficulties in recouping partial episode payments and other types of misdirected payments for services from the previous owners; difficulties integrating acquired personnel and business practices into our business; the potential loss of key employees or patients of acquired agencies; the delay in payments associated with change in ownership, control and the internal process of the Medicare fiscal intermediary; and the assumption of liabilities and exposure to unforeseen liabilities of acquired agencies. We may not be able to fully integrate the operations of the acquired businesses with our current business structure in an efficient and cost-effective manner. The failure to effectively integrate any of these businesses could have a material adverse effect on our business and consolidated financial condition, results of operations and cash flows.

We are subject to extensive government regulation. Any changes to the laws and regulations governing our business, or to the interpretation and enforcement of those laws or regulations, could have a material adverse effect on our business and consolidated financial condition, results of operations and cash flows.

Extensive Federal and state laws and regulations regulate our industry. See Item 1, “Our Regulatory Environment” for additional information on such laws and regulations. Federal and state laws and regulations impact how we conduct our business, the services we offer and our interactions with patients and the public and impose certain requirements on us such as:

These laws and regulations, and their interpretations, are subject to change. Changes in existing laws and regulations, or their interpretations, or the enactment of new laws or regulations could have a material adverse effect on our business and consolidated financial condition, results of operations and cash flows by:

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Additionally, we are subject to various routine and non-routine reviews, audits and investigations by the Medicare and Medicaid programs and other Federal and state governmental agencies, which have various rights and remedies against us if they assert that we have overcharged the programs or failed to comply with program requirements. Violation of the laws governing our operations, or changes in interpretations of those laws, could result in the imposition of fines, civil or criminal penalties, and the termination of our rights to participate in Federal and state-sponsored programs and/or the suspension or revocation of our licenses. If we become subject to material fines or, if other sanctions or other corrective actions are imposed on us, our business and consolidated financial condition, results of operations and cash flows could be materially adversely affected.

If an agency fails to comply with the conditions of participation in the Medicare program, that agency could be terminated from the Medicare program.

Each of our agencies must comply with required conditions of participation in the Medicare program. If we fail to meet the conditions of participation at an agency, we may receive a notice of deficiency from the applicable state surveyor. If that agency then fails to institute an acceptable plan of correction to remediate the deficiency within the correction period provided by the state surveyor, that agency could be terminated from the Medicare program. Any termination of one or more of our agencies from the Medicare program for failure to satisfy the program’s conditions of participation could have a material adverse effect on our business and consolidated financial condition, results of operations and cash flows. CMS has announced that it is currently revising the Medicare conditions of participation for home health agencies across the industry, with an unknown publication date. We do not know at this time what effect the revisions will have on our operations, and there can be no assurances that the revisions will not have a material adverse effect on our business and consolidated financial condition, results of operations and cash flows.

Our industry is highly competitive, with few barriers to entry.

There are few barriers to entry in home health markets which do not require certificates of need (“CON”) or permits of approval (“POA”). Our primary competition comes from local privately-owned and hospital-owned health care providers. We compete based on the availability of personnel; the quality, expertise and value of our services; and in certain instances, on the price of our services. Increased competition in the future may limit our ability to maintain or increase our market share.

Further, the introduction of new and enhanced service offerings by others, in combination with industry consolidation and the development of strategic relationships by our competitors, could cause a decline in revenue or loss of market acceptance of our services or make our services less attractive. Additionally, we compete with a number of non-profit organizations that can finance acquisitions and capital expenditures on a tax-exempt basis or receive charitable contributions that are unavailable to us.

Managed care organizations and other third-party payors continue to consolidate to enhance their ability to influence the delivery of health care services. Consequently, the health care needs of patients in the United States are increasingly served by a smaller number of managed care organizations. These organizations generally enter into service agreements with a limited number of providers. Our business and consolidated financial condition, results of operations and cash flows could be materially adversely affected if these organizations terminate us as a provider and/or engage our competitors as a preferred or exclusive provider. In addition, should private payors, including managed care payors, seek to negotiate additional discounted fee structures or the assumption by health care providers of all or a portion of the financial risk through prepaid capitation arrangements, our business and consolidated financial condition, results of operations and cash flows could be materially adversely affected.

If we are unable to react competitively to new developments, our operating results may suffer. We cannot assure you that we will be able to compete successfully against current or future competitors, which competitive pressures could have a material adverse effect on our business and consolidated financial condition, results of operations and cash flows.

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Possible changes in the case mix of patients, as well as payor mix and payment methodologies, could have a material adverse effect on our business and consolidated financial condition, results of operations and cash flows.

Our revenue is determined by a number of factors, including our mix of patients and the rates of payment among payors. Changes in the case mix of our patients, payment methodologies or the payor mix among Medicare, Medicaid and private payors could have a material adverse effect on our business and our consolidated financial condition, results of operations and cash flows.

Our estimated revenue adjustments may not be adequate to adjust our Medicare net service revenue and associated patient accounts receivable to their net realizable amounts.

As part of our Medicare revenue recognition process, we estimate the impact of payment adjustments based on our historical experience, which primarily includes a historical collection rate of over 99% on Medicare claims, and record this estimate during the period in which services are rendered as an estimated revenue adjustment and a corresponding reduction to patient accounts receivable. Our estimated revenue adjustments may underestimate actual amounts ultimately collected for various reasons, including:

If our estimated revenue adjustments are insufficient to net our service revenue and patient accounts receivable to the realizable amounts, our business and consolidated financial condition, results of operations and cash flows could be materially adversely affected.

Our allowance for doubtful accounts may not be sufficient to cover uncollectible amounts.

We estimate the amount of Medicaid and private insurance receivables that we will not be able to collect, on an ongoing basis. Our estimated allowance for doubtful accounts may underestimate actual amounts ultimately collected for various reasons, including:

If our allowance for doubtful accounts is insufficient to cover losses on our receivables, our business and consolidated financial condition, results of operations and cash flows could be materially adversely affected.

A write off of a significant amount of intangible assets or long-lived assets could have a material adverse effect on our business and consolidated financial condition, results of operations and cash flows.

Because we have grown in part through acquisitions, goodwill and other acquired intangible assets represent a substantial portion of our assets. Goodwill was approximately $733.9 million as of December 31, 2008. If we make additional acquisitions, it is likely that we will record additional intangible assets to our consolidated financial statements. We also have long-lived assets consisting of property and equipment and other identifiable intangible assets of $121.6 million as of December 31, 2008, which we review both on a periodic basis as well as when events or circumstances indicate that the carrying amount of an asset may not be recoverable. If a determination that a significant impairment in value of our unamortized intangible assets or long-lived assets

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occurs, such determination could require us to write off a substantial portion of our assets. A write off of these assets could have a material adverse effect on our business and consolidated financial condition, results of operations and cash flows.

If we are unable to maintain relationships with existing patient referral sources or to establish new referral sources, our business and consolidated financial condition, results of operations and cash flows could be materially adversely affected.

Our success depends on referrals from physicians, hospitals and other sources in the communities we serve and on our ability to maintain good relationships with existing referral sources. Our referral sources are not contractually obligated to refer patients to us and may refer their patients to other providers. Our growth and profitability depends, in part, on our ability to establish and maintain close working relationships with these patient referral sources and to increase awareness and acceptance of the benefits of home health and hospice care by our referral sources and their patients. Our loss of, or failure to maintain, existing relationships or our failure to develop new referral relationships could have a material adverse effect on our business and consolidated financial condition, results of operations and cash flows.

A shortage of qualified registered nursing staff and other caregivers, such as therapists, could materially impact our ability to attract, train and retain qualified personnel and could increase operating costs.

We compete for qualified personnel with other providers of home health and hospice services. Our ability to attract and retain caregivers depends on several factors, including our ability to provide these caregivers with attractive assignments and competitive benefits and salaries. We cannot assure you we will succeed in any of these areas. In addition, there are shortages of qualified health care personnel in some of our markets. As a result, we may face higher costs of attracting caregivers and providing them with attractive benefit packages than we originally anticipated, which could have a material adverse effect on our business and consolidated financial condition, results of operations and cash flows. In addition, if we expand our operations into geographic areas where health care providers historically have unionized, negotiating a collective bargaining agreement may have a negative impact on our ability to timely and successfully recruit qualified personnel. Generally, if we are unable to attract and retain caregivers, the quality of our services may decline and we could lose patients and referral sources, which could have a material adverse effect on our business and consolidated financial condition, results of operations and cash flows.

We are subject to Federal and state laws that govern our financial relationships with physicians and other health care providers, including potential or current referral sources; certain agencies acquired by us from Home Health Corporation of America (“HHCA”) are operating under a Corporate Integrity Agreement (“CIA”).

We are required to comply with Federal and state laws, generally referred to as “anti-kickback laws,” that prohibit certain direct and indirect payments or other financial arrangements between health care providers that are designed to encourage the referral of patients to a particular provider for medical services. In addition to these anti-kickback laws, the Federal government has enacted specific legislation, commonly known as the “Stark Law,” that prohibits certain financial relationships, specifically including ownership interests and compensation arrangements, between physicians (and the immediate family members of physicians) and providers of designated health services, such as home health agencies, to whom the physicians refer patients. Some of these same financial relationships are also subject to additional regulation by states. Under both anti-kickback laws and the Stark Law, there are a number of safe harbors and exceptions that permit certain carefully constructed relationships. To the extent feasible, we avail ourselves of these safe harbors. With respect to the Stark Law, compliance with an applicable exception is mandatory and we have contractual relationships with potential referral sources, including physicians. For example, we currently have contractual relationships with certain physicians who provide consulting services to our company. Many of these physicians are current or potential referral sources. In addition, in some of our local markets, we lease office space from physicians who may also

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be referral sources. We cannot assure you that courts or regulatory agencies will not interpret state and Federal anti-kickback laws and/or the Stark Law and similar state laws regulating relationships between health care providers and physicians in ways that will implicate our practices. Violations of these laws could lead to fines or sanctions that could have a material adverse effect on our business and consolidated financial condition, results of operations and cash flows.

We acquired certain assets and assumed certain liabilities of HHCA on October 1, 2008, which was subject to a five-year CIA with the Office of Inspector General for the United States Department of Health and Human Services (“OIG”) as of the date of the transaction. HHCA entered into the CIA in 2005 as a result of the settlement of claims arising out of an alleged kickback scheme dating from February 1997 through May 1998. Although the ownership of the HHCA agencies has changed, the provisions of the CIA remain binding on us as HHCA’s successor and remain in effect until May 17, 2010, or until such time thereafter as the OIG reviews the final annual report submitted. Based on our review of the CIA and discussions with both outside counsel and representatives of the OIG, we believe these contractual obligations and the associated risks are applicable solely to the six home health agencies acquired from HHCA in Pennsylvania, Maryland and Delaware. The CIA requires that we maintain HHCA’s existing compliance program and provides for additional training requirements for certain staff involved in business development functions, the implementation of certain tracking and reporting processes related to financial relationships with referral sources, an annual, independent review of financial relationships with referral sources, and regular reporting to the OIG. The CIA also provides for stipulated penalties in the event of non-compliance by us, including the possibility of exclusion from the Medicare program. Although we believe that we are currently in compliance with the CIA, any violations of that agreement could have a material adverse effect on our business and consolidated financial condition, results of operations and cash flows.

The economic downturn, or any deepening of the economic downturn, and continued deficit spending by the Federal government and state budget pressures may result in a reduction in payments and covered services.

Adverse developments in the United States and global economies and continued deficit spending due to adverse developments in the United States and global economies, bailout programs directed at specific industries or other governmental measures, could lead to a reduction in Federal government expenditures, including governmentally funded programs in which we participate, such as Medicare and Medicaid. Reductions in expenditures for these programs could have a material adverse effect on our business and our consolidated financial condition, results of operations and cash flows.

Historically, state budget pressures have translated into reductions in state spending. Given that Medicaid outlays are a significant component of state budgets, we can expect continuing cost containment pressures on Medicaid outlays for our services. In addition, continued unfavorable economic conditions may affect the number of patients enrolled in managed care programs and the profitability of managed care companies, which could result in reduced payment rates and could have a material adverse effect on our business and consolidated financial condition, results of operations and cash flows.

Future cost containment initiatives undertaken by private third-party payors may limit our future revenue and profitability.

Our non-Medicare revenue and profitability are affected by continuing efforts of third-party payors to maintain or reduce costs of health care by lowering payment rates, narrowing the scope of covered services, increasing case management review of services and negotiating pricing. There can be no assurance that third-party payors will make timely payments for our services and there is no assurance that we will continue to maintain our current payor or revenue mix. Any changes in payment levels from third-party payors could have a material adverse effect on our business and consolidated financial condition, results of operations and cash flows.

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Our hospice operations are subject to two annual Medicare caps calculated by Medicare. If such caps were to be exceeded by any of our hospice providers, our business and consolidated financial condition, results of operations and cash flows could be materially adversely affected.

With respect to our hospice operations, overall payments made by Medicare to each provider number are subject to an inpatient cap amount and an overall payment cap, which are calculated and published by the Medicare fiscal intermediary on an annual basis covering the period from November 1 through October 31. If payments received by any one of our hospice provider numbers exceeds either of these caps, we may be required to reimburse Medicare for payments received in excess of the caps, which could have a material adverse effect on our business and consolidated financial condition, results of operations and cash flows.

Start-up agencies can be delayed from opening in a timely manner due to processing of regulatory approvals.

There can be delays associated with opening a start-up agency. These delays are the result of processing delays with the state regulatory bodies as well as processing delays by the associated fiscal intermediaries that serve as billing liaisons between the agency and CMS. In order to initiate operations at a start-up agency we must submit the necessary applications along with the required documentation to the appropriate state and Federal regulatory bodies. However, CMS has issued a memorandum which prioritizes the initial surveys for new Medicare providers as lowest priority for the state regulatory bodies. Moreover, depending on state requirements the fiscal intermediary may need to receive the state license before the approval process can move forward. Once the necessary application and documentation has been submitted to the state and Federal regulatory bodies there is a testing period of transmitting data from the applicant to CMS. Once complete, the agency receives a provider agreement and corresponding number and can begin billing. If we are unable to obtain regulatory approval for our start-up agencies in a timely manner such delays could have a material adverse effect on our business and our consolidated financial condition, results of operations and cash flows.

The volatility and disruption of the capital and credit markets and adverse changes in the United States and global economies could impact our ability to access both available and affordable financing, and without such financing, we may be unable to achieve our objectives for strategic acquisitions and internal growth.

The United States and global capital and credit markets have been experiencing extreme volatility and disruption at unprecedented levels. Significant declines in the United States housing market during the prior year, including falling home prices, the increasing number of foreclosures and higher unemployment rates, have resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities and major commercial and investment banks. These write-downs have caused many financial institutions to seek additional capital, to merge with larger and stronger institutions and, in some cases, to fail. Many lenders and institutional investors have reduced, and in some cases, ceased to provide funding to borrowers, including other financial institutions or have increased their rates significantly compared to the prior year.

While we intend to finance strategic acquisitions and internal growth with cash flows from operations and borrowings under our revolving credit facility, we may require sources of capital in addition to those presently available to us. Due to the existing uncertainty in the capital and credit markets, our access to capital may not be available on terms acceptable to us (i.e. at attractive/affordable rates) or at all, and this may result in our inability to achieve present objectives for strategic acquisitions and internal growth. Further, in the event we need additional funds, and we are unable to raise the necessary funds on acceptable terms, our business and consolidated financial condition, results of operations and cash flows could be materially adversely affected.

Our indebtedness could impact our financial condition and impair our ability to fulfill other obligations.

As of December 31, 2008, we had total outstanding indebtedness of approximately $328.6 million, comprised mainly of indebtedness incurred in connection with the TLC acquisition. This is compared to outstanding indebtedness at December 31, 2007 of approximately $24.0 million. Our level of indebtedness could

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have a material adverse effect on our business and consolidated financial position, results of operations and cash flows and impair our ability to fulfill other obligations in several ways, including:

In the event we incur additional indebtedness, the risks described above could increase.

The agreements governing our indebtedness contain various covenants that limit our discretion in the operation of our business and our failure to satisfy requirements in these agreements could have a material adverse effect on our business and consolidated financial condition, results of operations and cash flows.

The agreements governing our indebtedness (the “Debt Agreements”) contain restrictive covenants that require us to comply with or maintain certain financial tests and ratios and restrict our ability to:

In addition, events beyond our control could affect our ability to comply with and maintain the financial covenants and ratios. Any failure by us to comply with or maintain all applicable financial covenants and ratios and to comply with all other applicable covenants could result in an event of default with respect to the Debt Agreements. If we are unable to obtain a waiver from our lenders in the event of any non-compliance, our lenders could accelerate the maturity of any outstanding indebtedness and terminate the commitments to make further extensions of credit (including our ability to borrow under our revolving credit facility). Any failure to comply with these covenants could have a material adverse effect on our business and consolidated financial condition, results of operations and cash flows.

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Our operations could be impacted by natural disasters or terrorist acts.

The occurrence of natural disasters in the markets in which we operate could not only impact the day-to-day operations of our agencies, but could also disrupt our relationships with patients, employees and referral sources located in the affected areas and, in the case of our corporate office, our ability to provide administrative support services, including billing and collection services. In addition, any episode of care that is not completed due to the impact of a natural disaster will generally result in lower revenue for the episode. For example, our corporate office and a number of our agencies are located in the southeastern United States and the Gulf Coast Region, increasing our exposure to hurricanes. Future hurricanes or other natural disasters may have a material adverse effect on our business and consolidated financial condition, results of operations and cash flows.

In addition, the occurrence of terrorist acts and the erosion to our business caused by such an occurrence, could have a material adverse effect on our business and consolidated financial condition, results of operations and cash flows. In the affected areas, our agencies and corporate office could be forced to close for limited or extended periods of time.

Our business depends on our information systems. Our inability to effectively integrate, manage and keep our information systems secure and operational could disrupt our operations.

Our business depends on effective, secure and operational information systems to assist us in, among other things, monitoring utilization and other cost factors, processing claims, reporting financial results, measuring outcomes and quality of care, managing regulatory compliance controls and maintaining operational efficiencies. These systems include software that is developed in-house and systems provided by external contractors and other service providers. To the extent these external contractors or other service providers become insolvent or fail to support the software or systems we have licensed from them, our operations could be materially adversely affected. Our agencies also depend upon our information systems for accounting, billing, collections, risk management, quality assurance, payroll and other information. If we experience a reduction in the performance, reliability, or availability of our information systems, our operations and ability to produce timely and accurate reports could be materially adversely affected.

Our information systems and applications require continual maintenance, upgrading and enhancement to meet our operational needs. Our acquisition activity requires transitions and integration of various information systems. We regularly upgrade and expand our information systems’ capabilities. If we experience difficulties with the transition and integration of information systems or are unable to implement, maintain, or expand our systems properly, we could suffer from, among other things, operational disruptions, regulatory problems and increases in administrative expenses.

We may be required to expend significant capital and other resources to protect against the threat of security breaches or to alleviate problems caused by breaches, including unauthorized access to patient data stored in our information systems, and the introduction of computer viruses to our systems. Our security measures may be inadequate to prevent security breaches and our business operations could be materially adversely affected by cancellation of contracts and loss of patients if security breaches are not prevented.

We have installed privacy protection systems and devices on our network and Point of Care (“POC”) laptops in an attempt to prevent unauthorized access to information in our database. However, our technology may fail to adequately secure the confidential health information we maintain in our databases. In such circumstances, we may be held liable to our patients and regulators, which could result in litigation or adverse publicity that could have a material adverse effect on our business and consolidated financial condition, results of operations and cash flows. Even if we are not held liable, any resulting negative publicity could harm our business and distract the attention of management.

Further, our information systems are vulnerable to damage or interruption from fire, flood, power loss, telecommunications failure, break-ins and similar events. A failure to restore our information systems after the

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occurrence of any of these events could have a material adverse effect on our business and consolidated financial condition, results of operations and cash flows. Because of the confidential health information we store and transmit, loss of electronically stored information for any reason could expose us to a risk of regulatory action, litigation, possible liability and loss.

We believe we have all of the necessary licenses from third parties to use technology and software that we do not own. A third party could, however, allege that we are infringing on rights and we may not be able to obtain licenses on commercially reasonable terms from the third party, if at all, or the third party may commence litigation against us. In addition, we may find it necessary to initiate litigation to protect our trade secrets, to enforce our intellectual property rights and to determine the scope and validity of any proprietary rights of others. Any such litigation, or the failure to obtain any necessary licenses or other rights, could materially and adversely affect our business.

Failure of, or problems with, our clinical software system could have a material adverse effect on our business and consolidated financial condition, results of operations and cash flows.

We have developed and use a proprietary Windows-based clinical software system with our POC system to collect assessment data, schedule and log patient visits, generate medical orders and monitor treatments and outcomes in accordance with established medical standards. The system integrates billing and collections functionality; accounting; human resources; payroll; and employee benefits programs provided by third parties. Problems with, or the failure of, our technology and systems or any system upgrades or programming changes associated with such technology and systems that have problems or fail to function properly could have a material adverse effect on data capture, billing, collections, assessment of internal controls and management and reporting capabilities. Any such problems or failures and the costs incurred in correcting any such problems or failures, could have a material adverse effect on our business and consolidated financial condition, results of operations and cash flows.

Delays in payment may cause liquidity problems.

Our business is characterized by delays in payment from the time we provide services to the time we receive payment for these services. If we have difficulty in obtaining documentation, such as physician orders, experience information system problems or experience other issues that arise with Medicare or other payors, we may encounter additional delays in our payment cycle. For example, we currently have $7.8 million in Medicare claims that we submitted between November 3, 2008 and December 2, 2008 that are being held in a “pending” status as of December 31, 2008. We have been notified by our fiscal intermediary that these claims received a duplicate document control number by CMS which created a processing error on their end. Per our latest communication with our fiscal intermediaries, the issue is national in scope and the fiscal intermediaries, the Fiscal Intermediary Shared System (FISS) maintainer, and the data centers are working together to correct this issue. These delays caused an increase in our days revenue outstanding of 2 days at December 31, 2008, and could have a material adverse effect on our business and our consolidated financial condition, results of operations or cash flows if the error goes unresolved for an extended period of time.

In addition, timing delays may cause working capital shortages. Working capital management, including prompt and diligent billing and collection, is an important factor in achieving our financial results and maintaining liquidity. It is possible that documentation support, system problems, Medicare or other provider issues or industry trends may extend our collection period, which may materially adversely affect our working capital, and our working capital management procedures may not successfully mitigate this risk.

Additionally, our hospice operations may experience payment delays. We have experienced payment delays when attempting to collect funds from state Medicaid programs in certain instances. Delays in receiving payments from these programs may also materially adversely affect our working capital.

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State efforts to regulate the establishment or expansion of health care providers could impair our ability to expand our operations.

Some states require health care providers (including skilled nursing facilities, hospice agencies, home health agencies and assisted living facilities) to obtain prior approval, known as a CON or POA. See Item 1, “Our Regulatory Environment” for additional information on CONs and POAs. If we are not able to obtain such approvals, our ability to expand our operations could be impaired, which could have a material adverse effect on our business and consolidated financial condition, results of operations and cash flows.

Our insurance liability coverage may not be sufficient for our business needs.

As a result of operating in the home health industry, our business entails an inherent risk of claims, losses and potential lawsuits alleging incidents involving our employees that are likely to occur in a patient’s home. We maintain professional liability insurance to provide coverage to us and our subsidiaries against these risks. However, we cannot assure you claims will not be made in the future in excess of the limits of our insurance, nor can we assure you that any such claims, if successful and in excess of such limits, will not have a material adverse effect on our business and consolidated financial condition, results of operations and cash flows. Our insurance coverage also includes fire, property damage and general liability with varying limits. We cannot assure you that the insurance we maintain will satisfy claims made against us or that insurance coverage will continue to be available to us at commercially reasonable rates, in adequate amounts or on satisfactory terms. Any claims made against us, regardless of their merit or eventual outcome, could damage our reputation and business.

We may be subject to substantial malpractice or other similar claims.

The services we offer involve an inherent risk of professional liability and related substantial damage awards. In addition, we employ direct care workers on a contractual basis to support our existing workforce. Due to the nature of our business, we, through our employees and caregivers who provide services on our behalf, may be the subject of medical malpractice claims. These individuals could be considered our agents, and, as a result, we could be held liable for their medical negligence. We cannot predict the effect that any claims of this nature, regardless of their ultimate outcome, could have on our business or reputation or on our ability to attract and retain patients and employees. While we maintain malpractice liability coverage that we believe is appropriate given the nature and breadth of our operations, any claims against us in excess of insurance limits could have a material adverse effect on our business and consolidated financial condition, results of operations and cash flows.

We depend on the services of our executive officers and other key employees.

Our success depends upon the continued employment of members of our senior management team, including our Chairman and Chief Executive Officer, William F. Borne, our President and Chief Operating Officer, Larry R. Graham, our Chief Financial Officer, Dale E. Redman, our Chief Information Officer and Senior Vice President of Clinical Operations, Alice A. Schwartz, and our Chief Compliance Officer, Jeffrey D. Jeter. The loss or departure of any one of these executive officers could have a material adverse effect on our business and consolidated financial condition, results of operations and cash flows.

Risks Related to Ownership of Our Common Stock

The price of our common stock may be volatile.

The price at which our common stock trades may be volatile. The stock market has from time to time experienced significant price and volume fluctuations that impact the market prices of securities, particularly those of health care companies. The market price of our common stock may be influenced by many factors, including:

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In addition, the stock market in general, and the NASDAQ Global Select Market in particular, has experienced price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of health care provider companies. These broad market and industry factors may materially reduce the market price of our common stock, regardless of our operating performance. In the past, securities class-action litigation has often been brought against companies following periods of volatility in the market price of their respective securities.

The activities of short sellers could reduce the price or prevent increases in the price of our common stock. “Short sale” is defined as the sale of stock by an investor that the investor does not own. Typically, investors who sell short believe the price of the stock will fall, and anticipate selling at a price higher than the price at which they will buy the stock.

Sales of substantial amounts of our common stock or preferred stock, or the availability of those shares for future sale, could materially impact our stock price and limit our ability to raise capital.

The following table presents information about our outstanding common and preferred stock and our outstanding securities exercisable for or convertible into shares of common stock:

In addition, we have a shelf registration statement (declared effective by the Securities and Exchange Commission (“SEC”) on August 31, 2007) with availability for the issuance of up to $250.0 million of any combination of preferred and common stock. In the event that we issue equity securities under this shelf registration statement, or a separate registration statement, to raise additional capital for future acquisitions, or otherwise, these equity issuances may dilute our existing stockholders.

If we were to sell substantial amounts of our common stock in the public market or if there was a public perception that substantial sales could occur, the market price of our common stock could decline as a result of such sales. These sales or the perception of substantial future sales may also make it difficult for us to sell common stock in the future to raise capital.

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Our board of directors may use anti-takeover provisions or issue stock to discourage a change of control.

Our certificate of incorporation currently authorizes us to issue up to 60,000,000 shares of common stock and 5,000,000 shares of undesignated preferred stock. Our board of directors may cause us to issue additional stock to discourage an attempt to obtain control of our company. For example, shares of stock could be sold to purchasers who might support our board of directors in a control contest or to dilute the voting or other rights of a person seeking to obtain control. In addition, our board of directors could cause us to issue preferred stock entitling holders to:

The issuance of additional shares may, among other things, dilute the earnings and equity per share of our common stock and the voting rights of common stockholders.

We have implemented other anti-takeover provisions or provisions that could have an anti-takeover effect, including: (1) advance notice requirements for director nominations and stockholder proposals and (2) a stockholder rights plan, also known as a “poison pill.” These provisions, and others that our board of directors may adopt hereafter, may discourage offers to acquire us and may permit our board of directors to choose not to entertain offers to purchase us, even if such offers include a substantial premium to the market price of our stock. Therefore, our stockholders may be deprived of opportunities to profit from a sale of control.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Our corporate headquarters are located in Baton Rouge, Louisiana in a 110,000 square feet building that we own. As of December 31, 2008, we had adequate space to accommodate our corporate staff located in the Baton Rouge area; however, we believe this headquarters facility may not be adequate in the future as we continue to grow. We are currently evaluating how best to meet our growing needs, which may include adding to our corporate offices and/or leasing additional office space.

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In addition to our corporate headquarters, we also lease facilities for our home health and hospice agencies. Generally, these leases have the initial term of three years, but range from one to seven years. Most of these leases also contain an option to extend the lease period as deemed necessary. The following table shows the location of our 480 Medicare-certified home health and 48 Medicare-certified hospice agencies at December 31, 2008:

ITEM 3. LEGAL PROCEEDINGS

See Part IV, Item 15, “Note 9, Commitments and Contingencies” for information concerning our legal proceedings.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of our stockholders in the fourth quarter of 2008.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information and Holders

Our common stock trades on the NASDAQ Global Select Market (“NASDAQ”) under the trading symbol “AMED.” The following table presents the range of high and low sales prices for our common stock for the periods indicated as reported on NASDAQ:

As of February 13, 2009, there were approximately 595 holders of record of our common stock.

Dividend Policy

We have not declared or paid any cash dividends on our common stock or any other of our securities and do not expect to pay cash dividends for the foreseeable future. We currently intend to retain our future earnings, if any, to fund the development and growth of our business. Future decisions concerning the payment of dividends will depend upon our results of operations, financial condition, capital expenditure plans and debt service requirements, as well as such other factors as the board of directors, in its sole discretion, may consider relevant. In addition, our outstanding indebtedness restricts, and we anticipate any additional future indebtedness may restrict our ability to pay cash dividends.

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Purchases of Equity Securities

The following table provides the information with respect to purchases made by us of shares of our common stock during each of the months during the twelve-month period ended December 31, 2008:

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Stock Performance Graph

The Performance Graph below compares the cumulative total stockholder return on our common stock, $0.001 par value per share, for the five-year period ended December 31, 2008, with the cumulative total return on the NASDAQ composite index and an industry peer group over the same period (assuming the investment of $100 in our common stock, the NASDAQ composite index and the industry peer group) on December 31, 2003 and the reinvestment of dividends. The peer group we selected is comprised of: Gentiva Health, Inc. (“GTIV”), LHC Group, Inc. (“LHCG”) and Almost Family, Inc. (“AFAM”). The cumulative total stockholder return on the following graph is historical and is not necessarily indicative of future stock price performance. No cash dividends have been declared on our common stock.

This stock performance information is “furnished” and shall not be deemed to be “soliciting material” or subject to Regulation 14A, shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”) or otherwise subject to the liabilities of that section, and shall not be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, whether made before or after the date of this report and irrespective of any general incorporation by reference language in any such filing, except to the extent we specifically incorporate the information by reference.

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ITEM 6. SELECTED FINANCIAL DATA

The following selected consolidated financial data presented below is derived from our audited consolidated financial statements for the five-year period ended December 31, 2008. The financial data for the years ended December 31, 2008, 2007 and 2006 should be read together with our consolidated financial statements and related notes included in Part IV, Item 15 “Exhibits and Financial Statement Schedules” and the information included in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included herein.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis in conjunction with our audited financial statements included in Part IV, Item 15, “Exhibits and Financial Statement Schedules” and Part I, Item 1, “Business” of this Annual Report on Form 10-K. The following analysis contains forward-looking statements about our future revenues, operating results and expectations. See “Cautionary Statement Regarding Forward-Looking Stagements” for a discussion of the risks, assumptions and uncertainties affecting these statements as well as Part I, Item 1A, “Risk Factors.”

Overview

We are a leading provider of high-quality, low-cost home health services to the chronic, co-morbid, aging American population. Our services include home health and hospice services and approximately 87%, 89%, and 93% of our revenue was derived from Medicare for 2008, 2007 and 2006, respectively. During 2008, we had $1.2 billion in net service revenue, exceeding the billion dollar level for the first time and recorded earnings per diluted share of $3.22 per share. Additionally, we completed our largest acquisition with our purchase of TLC Health Care Services, Inc. (“TLC”) which had 92 home health and 11 hospice agencies in 22 states. The following details our owned and operated Medicare-certified agencies, which are located in 37 states within the United States, the District of Columbia and Puerto Rico. The agencies closed were consolidated with agencies servicing the same areas.

Recent Developments

During 2008, the following events occurred that will impact the rates we are paid during 2009 by Medicare for both our home health and hospice services.

Payment

During 2008, the case-mix adjustment policy established a reduction in the market basket index of 2.75% for each of the years 2008 through 2010 and a decrease of 2.71% for 2011. Then, on October 30, 2008, the Centers for Medicare & Medicaid Services (“CMS”) gave a home health market basket index update of 2.9%. As a result of these two rate changes, the 2009 base episode rate will be $2,272 compared to $2,270 in 2008 and $2,339 in 2007.

On August 8, 2008, CMS changed the Medicare hospice wage index for fiscal year 2009 and gave a 3.6% market basket increase to Medicare hospice rates for fiscal year 2009. CMS also issued a phase out of the Medicare hospice budget neutrality adjustment over three years and clarified wage index issues pertaining to the definition of rural and urban areas and multi-campus hospital facilities.

We do not expect these changes to have a material impact on our consolidated financial statements.

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Results of Operations

Our operating results are not comparable for the years presented, primarily as a result of our acquisition and start-up agencies.

When we refer to “base business”, we mean home health and hospice agencies that we have operated for at least the last twelve months; when we refer to “acquisitions”, we mean home health and hospice agencies that we acquired within the last twelve months; and when we refer to “start-ups”, we mean any home health or hospice agency opened by us in the last twelve months. Once an agency has been in operation for a twelve month period, the results for that particular agency are included as part of our base business from that date forward. When we refer to episodic-based revenue, admissions, recertifications or completed episodes, we mean revenue, admissions, recertifications or completed episodes of care for those payors that pay on an episodic-basis, which includes Medicare and other insurance carriers including Medicare Advantage programs.

Year Ended December 31, 2008 Compared to the Year Ended December 31, 2007

Net Service Revenue

We are dependent on Medicare for a significant portion of our revenue. Approximately 87% and 89% of our net service revenue was derived from Medicare for 2008 and 2007, respectively. The following table summarizes our net service revenue growth (amounts in millions):

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Our net service revenue increased $489.5 million from 2007 to 2008 and consisted of an increase of $177.4 million in our base/start-up agencies and $312.1 million from our acquisition agencies. The $177.4 million increase in our base/start-up agencies was primarily related to our internal episodic-based revenue, which increased by $175.1 million or 28% from 2007 to 2008. Our internal episodic-based revenue growth consisted of the following:

Our average episodic-based revenue per completed episode increased from $2,660 to $2,854 from 2007 to 2008 and was due primarily to the development of our therapy intensive specialty programs; the focus of the new Medicare payment system on providing more payment for home health agencies that have patients with a higher acuity mix and multiple co-morbidities that require more intensive services; and the inclusion of the TLC agencies, which have had historically higher average revenue per completed episode primarily due to their presence in higher wage index areas (i.e. the Western and Northeastern part of the United States).

Home Health Statistics

The following table summarizes our growth in home health patient admissions:

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The following table summarizes our growth in home health patient recertifications:

Our recertifications increased 76,310 from 2007 to 2008, with 28,057 from our base/start-up agencies and 48,253 from our acquisition agencies. The increase in our base/start-up agencies was primarily related to a 25% internal episodic-based recertification growth as a result of (a) the increasing acuity of our patients, (b) the impact of our acquisition agencies moving into our base agency classification after being owned for more than 12 months, (c) our opening of start-up agencies and (d) our admissions growth. See Item 1, “Our Operations – Home Health – Our Patients, Care Management Strategy and Clinical Value Proposition” for further details on the acuity of our patients.

The rate has decreased over the past years, from 39% in 2006 to 33% in 2007 to 25% in 2008. This trend does not necessarily indicate that we anticipate our internal episodic-based recertification rate to decrease in the future nor is it a metric that we regularly use to measure growth within our organization. This rate varies based on the clinical acuity of our patients. We focus our efforts on providing the medically necessary care for our patients to achieve their desired clinical outcomes. Prior to providing additional episodes of care, we require the approval of an agency level, multidisciplinary care conference and the approval of the patients’ attending physician.

The following table summarizes our home health completed episodes:

Cost of Service, excluding Depreciation and Amortization

Our cost of service consists of the following expenses incurred by our clinical and clerical personnel in our agencies:

We have reclassified certain costs (primarily health care insurance) from our general and administrative expenses to our cost of service. As a result of this reclassification, we have conformed the prior period results to the current year presentation and thus have reclassified $20.3 million for 2007 from general and administrative expenses to cost of service.

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The following summarizes our cost of service, visit and cost per visit information:

Of the $233.6 million increase in cost of service, $69.5 million is related to increased costs from our base/start-up agencies and $164.1 million is related to acquisitions. The $69.5 million increase in base/start-up expenses consisted primarily of $67.6 million related to salaries, taxes and benefits and $1.7 million related to travel and training.

Our base or mature agencies are primarily concentrated in the southeastern part of the United States, as compared to our recent acquisitions, which include states outside of our southeastern concentration. These other states have a higher wage index compared to our base agencies, which results in higher labor costs. Additionally, often the agencies we acquire pay visiting staff on a salary basis compare to a per visit basis. As part of the process of converting acquired agencies to our operations, we convert our visiting staff from salary to a pay per visit model, which we believe promotes labor efficiencies and lowers cost. Typically, acquired agencies take up to 18 to 24 months to reach the labor efficiencies of existing operations.

General and Administrative Expenses, Provision for Doubtful Accounts, Depreciation and Amortization and Other (Expense) Income, Net

The following table summarizes our general and administrative expenses, provision for doubtful accounts, depreciation and amortization expense and other (expense) income, net (amounts in millions):

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Salaries and benefits increased $113.0 million due primarily to increased personnel costs for our field administrative staff necessitated by our internal growth and acquisitions. Of the $113.0 million increase, $53.1 million related to our acquisitions, which included an increase of $5.2 million for TLC corporate staff and $1.9 million related to certain TLC severance costs. TLC had 103 employees at their corporate office in Lake Success when we acquired them on March 26, 2008 and as of December 31, 2008, 8 remained employed by us.

Non-cash compensation expense increased $3.2 million due to additional employee share-based awards made in 2008.

Other general and administrative expenses increased $60.4 million, which consisted of $29.4 million in acquisition agency expenses, $22.6 million in base agency expenses and $8.4 million in start-up agency expenses. The increase in acquisition expenses was primarily related to $7.2 million in rent expense and $7.1 million in supplies expense and the increase in base agency expenses was primarily related to $8.5 million in travel and training expense and $7.2 million in purchased services expense and $2.1 million for certain costs associated with the conversion of the acquired TLC agencies to our operating systems including our Point of Care network.

Provision for doubtful accounts increased $12.0 million primarily as a result of the increase in our non-Medicare net service revenue during 2008 compared to 2007. For additional information on our provision for doubtful accounts see “Liquidity and Capital Resources – Outstanding Patient Accounts Receivable.”

Depreciation and amortization expense increased $6.7 million primarily due to additions in our equipment and furniture and computer software, which are depreciated over three to seven years. Additionally, due to finalization of our TLC purchase accounting, we reduced depreciation expense by $1.0 million, which had been recorded in previous quarters, as the basis of TLC property and equipment was adjusted.

Other (expense) income, net changed $22.6 million from 2007 to 2008. The change was primarily attributable to an increase of $15.8 million in interest expense as a result of outstanding debt incurred in connection with our TLC acquisition and the $4.2 million conclusion of the Alliance bankruptcy in 2007.

Income Tax Expense

The following table summarizes our income tax expense and estimated income tax rate (amounts in millions, except for estimated income tax rate):

The increase in income tax expense of $16.4 million is attributable to an increase in income before income taxes and minority interests and an increase in the estimated income tax rate. The increase in the estimated income tax rate was primarily attributable to the reversal of the Alliance liabilities during 2007 resulting from the conclusion of the Alliance Bankruptcy, which was a nontaxable event and caused the 2007 rate to be lower. For both 2008 and 2007 we benefited from Federal income tax credits created as a result of Hurricanes Katrina, Rita and Wilma and continued by The Emergency Economic Stabilization Act of 2008.

Year Ended December 31, 2007 Compared to the Year Ended December 31, 2006

Net Service Revenue

Approximately 89% and 93% of our net service revenue was derived from Medicare for 2007 and 2006, respectively. The change in concentration of our net services revenue was primarily due to Medicare patients transitioning to other insurance carriers, including Medicare Advantage programs.

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The following table summarizes our net service revenue growth (amounts in millions):