I. EXECUTIVE SUMMARY

1.1 Introduction

On January 4, 2006, Gentiva Health Services, Inc. (“Gentiva” or the “Company”) and The Healthfield Group, Inc. (“Healthfield”) entered into a definitive merger agreement whereby a wholly owned subsidiary of Gentiva will merge with and into Healthfield, with Healthfield surviving as a wholly owned subsidiary of Gentiva (the “Merger”). Under the terms of the agreement, Gentiva will pay cash and issue shares of its common stock to Healthfield’s existing securityholders in exchange for all of the outstanding shares, options and warrants of Healthfield, with Healthfield securityholders receiving an aggregate merger consideration of approximately $274.0 million and a total purchase price, excluding transaction costs and subject to post-closing adjustments, of $454.0 million. Pro forma for the Merger, Gentiva would have had net revenues and Adjusted EBITDA of approximately $1.2 billion and $85.2 million, respectively, for the twelve month period ended September 30, 2005. ^(1)(2)(3)

Gentiva is the nation’s largest provider of comprehensive home health services. The Company serves patients through (i) more than 350 direct service delivery units within approximately 250 locations in 35 states, and (ii) CareCentrix, which manages home healthcare services for many major managed care organizations throughout the United States. CareCentrix provides its services in all 50 states through a network of more than 2,500 third-party provider locations, as well as Gentiva locations. For the twelve month period ended October 2, 2005, Gentiva had net revenues of $872.1 million and EBITDA of $35.5 million. ⁽³⁾ Gentiva is listed on the Nasdaq Stock Market’s National Market (ticker: GTIV) and had a market capitalization as of February 1, 2006 of approximately $462.8 million.

Healthfield is a leading provider of home healthcare and hospice with approximately 130 locations primarily in eight southeastern states. Founded in 1986, Atlanta-based Healthfield operates offices in Alabama, Florida, Georgia, Michigan, North Carolina, South Carolina, Tennessee, Virginia and West Virginia. Healthfield also offers a complete range of durable medical and respiratory equipment and infusion therapy. For the twelve month period ended September 30, 2005, Healthfield had revenues of $291.3 million and Adjusted EBITDA of $49.7 million. ⁽²⁾⁽³⁾

In conjunction with the Merger, Gentiva has engaged Lehman Brothers Inc. (“LBI”) as Sole Lead Arranger and Sole Bookrunner to arrange $445.0 million of senior secured credit facilities (the “Credit Facilities”). The Credit Facilities will consist of:

	(i)		a $75.0 million, 6-year Revolving Credit Facility (the “Revolver”); and
	(ii)		a $370.0 million, 7-year Term Loan B Facility (the “Term Loan”).

Proceeds from the Term Loan will be used to: (i) fund the acquisition of Healthfield; (ii) refinance approximately $183.5 million of existing Healthfield indebtedness; and (iii) pay related transaction fees and expenses (together with the Merger, the “Transaction”).

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1.2 Sources & Uses of Funds

The following sets forth the estimated sources and uses of funds for the Transaction.

1.3 Pro Forma Capitalization

The table sets forth Gentiva’s and Healthfield’s capitalization as of September 30, 2005 on an actual basis and as adjusted to reflect the Transaction.

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1.4 Pro Forma Operating Structure

The following chart presents the operating structure of Gentiva pro forma for the Merger. Upon consummation of the Merger, all of Gentiva’s subsidiaries will be wholly owned. Neither Gentiva nor Healthfield operate through any foreign subsidiaries.

1.5 Summary Historical Financial Results

Combined summary financial information of Gentiva and Healthfield for the twelve month period ended September 30, 2005 is provided below. Healthfield results are pro forma for a full year contribution of Capital Health, which was acquired by Healthfield in June 2005, and certain other companies acquired during the period.

Combined Summary Financial Information

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1.6 Summary of Senior Credit Facility

Below are the summary terms and conditions of the Credit Facilities.

Senior Secured Credit Facilities — Summary Terms and Conditions

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1.7 The Merger of Gentiva and Healthfield

A summary comparison of Gentiva and Healthfield is presented below:

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II. INVESTMENT HIGHLIGHTS

2.1 Strong Industry Fundamentals

Since 2000, Medicare has instituted several rate increases and, most recently, increased reimbursements rates by 2.3% effective January 1, 2005. CMS announced on November 3, 2005 a 2.8% increase in home health reimbursement; however, on February 1, 2006, Congress acted to hold constant existing reimbursement rates for 2006 (except for a 5% rural add-on premium reflected in reimbursement rates for specifically defined rural areas of the country for calendar 2006). Similarly, Medicare has also increased rates for hospice services since 2000, with the most recent increase of 3.3% for fiscal year 2005 (bringing the routine care rate to approximately $122 per-patient day); however, there has been increased focus on average length of stay.

Homecare is more cost effective than facilities-based care and benefits from positive demographic trends (i.e., an aging population). As government payers continue to search for better, more affordable healthcare, the Company believes home health and hospice care will continue to be among the most attractive options. The Company also believes home health and hospice agencies can provide the same, if not better, care than hospitals and skilled nursing facilities. The chart below demonstrates the cost effectiveness of home health and hospice agencies.

Source: National Association for Home Care & Hospice.
(1) Hospital and skilled nursing facility charges per day are based on preliminary data.

As shown in the chart below, CMS has projected significant growth in the demand for home health services. The Company believes the growth is driven by demographic and economic factors, a growing preference of patients to be treated in the comfort of their own homes and technological advances.

Home Healthcare Expenditure Projections (2004 – 2014)

($ in billions)

Source: Centers for Medicare and Medicaid Services.

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“Growth in the home health and hospice segments is further driven by the aging of the population as the baby boom” generation reaches retirement age. As the country’s population continues to age, the need for all forms of healthcare services increases in terms of both frequency and intensity.

By 2000, baby boomers ages ranged between 36 and 54 years old. According to the U.S. Census projections, there will be approximately 70 million elderly people by 2030, doubling the amount in 2000 of approximately 35 million. This fundamental shift in the age of the population should have a positive effect on the number of patients eligible to receive the Company’s services.

Source: U.S. Census Bureau.

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2.2

Largest Comprehensive Home Healthcare Provider in the Nation with Geographic Diversity and Scale

The Merger strengthens and expands Gentiva’s presence in the Southeast, which has favorable demographic trends and provides a platform in important certificate of need states. Pro forma for the Merger, the Company will operate through over 375 facilities in 36 states, employ approximately 18,000 full- and part-time employees and serve over 600,000 patients each year.

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2.3 Diversified Payer Mix

The Merger increases Gentiva’s pro forma Medicare mix, and as a result, improves margins and cash flow. The Merger also reduces both the significance of CIGNA Health Corporation (“CIGNA”) as a payer source as well as the participation in the lower margin Medicaid business.

(1) Based on results for the nine months ended 9/30/05.

2.4 Diversified Business Mix

The Merger expands Gentiva’s product mix into attractive new business segments, including a meaningful platform in hospice. New business lines, including durable medical equipment (“DME”) and respiratory therapy, will also be added to Gentiva’s existing operations as a result of the Merger, while CareCentrix’s proportional contribution to pro forma revenue will be reduced.

(1) Based on results for the nine months ended 9/30/05.
(2) Gentiva entered into certain restrictive covenants in connection with the June 2002 sale of its specialty pharmaceutical services business to Accredo Health which may limit Gentiva’s ability to operate in certain pharmacy product lines.

2.5 Significant Cash Flow and Low Capital Expenditure Requirements

Home healthcare companies are not as capital intensive as facility-based long-term care providers. These modest capital expenditure levels help the Company achieve strong and consistent free cash flows.

Cash Flow and Capital Expenditures

2.6 Moderate Leverage and Significant Equity Cushion

As a result of the Transaction, Gentiva’s total debt increases to $370.0 million and pro forma total debt/Adjusted EBITDA as of September 30, 2005 increases to a moderate level of 4.3x. Based on a closing price of $18.76 per share on February 1, 2006 and pro forma diluted outstanding shares of 27.9 million ¹ , Gentiva had a pro forma market enterprise value of $844.5 million, representing a pro forma enterprise value/Adjusted EBITDA ratio of approximately 9.9x. As a result, pro forma debt currently constitutes less than one half the market enterprise value of the Company.

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2.7 Experienced Management Team Augmented by Additions from Healthfield

Upon closing, Rod Windley, Healthfield’s Chairman and CEO, will join Gentiva’s Board of Directors and serve as Vice Chairman, and Tony Strange, Healthfield’s President and COO will join Gentiva’s senior leadership team. Both Mr. Windley and Mr. Strange have a wealth of experience in the healthcare services industry. Mr. Windley has served in his current capacity as Chairman and CEO of Healthfield since he founded the Company in 1986. He has also held various leadership roles for the National Association for Homecare. Mr. Strange has been with Healthfield since 1990 and has risen from the position of a General Manager to President and Chief Operating Officer of the Company. Both Mr. Windley and Mr. Strange also bring a significant amount of transaction experience, as both have successfully integrated over 15 home health, hospice and home infusion acquisitions into Healthfield since 1996.

Gentiva’s senior management team, including Ron Malone and John Potapchuk, has significant experience in the healthcare services industry. In recent years, the management team has streamlined and focused the Company through the divestiture of its specialty pharmaceutical services business to Accredo Health in 2002 and through exiting underperforming markets. The management team has also improved operations, developed specialty programs and diversified its payer mix.

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III. TERM SHEET

See the Commitment Letter, dated January 4, 2006, among Gentiva Health Services, Inc., Lehman Commercial Paper Inc. and Lehman Brothers Inc. filed on Company’s Form 8-K dated January 31, 2006.

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IV. GENTIVA HEALTH SERVICES, INC.

4.1 Company Overview

Headquartered in Melville, NY, Gentiva is the nation’s largest provider of comprehensive home health services, based on revenues derived from the provision of skilled home nursing and therapy services to patients. The Company’s services can be delivered across the United States 24 hours a day, 7 days a week. The Company’s operations involve servicing patients and customers through its two business segments: Home Healthcare Services and CareCentrix®.

Home Healthcare Services (62% of LTM 10/2/05 Revenues)

The Home Healthcare Services segment is comprised of direct home nursing and therapy services operations, including specialty programs, Gentiva Rehab Without Walls® and Gentiva Consulting. The Company’s Home Healthcare Services segment conducts its business through more than 350 direct service delivery units operating from more than 250 locations under its Gentiva brand.

The Company’s direct home nursing and therapy services operations are conducted through licensed and Medicare-certified agencies located in 35 states, substantially all of which are currently accredited by the Joint Commission on Accreditation of Healthcare Organizations (“JCAHO”). Gentiva’s direct home nursing and therapy operations are organized into five geographic regions, each staffed with clinical, operational and sales teams. Regions are further separated into operating areas. Each operating area includes branch locations through which home healthcare agencies operate. Each agency is led by a director and is staffed with clinical and administrative support staff as well as clinical associates who deliver direct patient care. The clinical associates are employed on either a full-time basis or are paid on a per visit, per shift, per diem or per hour basis.

The Company’s direct home nursing and therapy services operations also deliver services to its customers through focused specialty programs that include:

	u		Gentiva Orthopedics, which provides individualized home orthopedic rehabilitation services to patients recovering from joint replacement or other major orthopedic surgery;
	u		Gentiva Safe Strides SM , which provides therapies for patients with balance issues who are prone to injury or immobility as a result of falling; and
	u		Gentiva Cardiopulmonary, which helps patients and their physicians manage heart and lung health in a home-based environment.

Gentiva Rehab Without Walls® provides home and community-based neurorehabilitation therapies for patients with traumatic brain injury, cerebrovascular accident injury and acquired brain injury, as well as a number of other complex rehabilitation cases.

The Company also provides consulting services to home health agencies through its Gentiva Consulting unit. These services include billing and collection activities, on-site agency support and consulting, operational support and individualized strategies for reduction of days sales outstanding.

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CareCentrix® (38% of LTM 10/2/05 Revenues)

The CareCentrix segment encompasses Gentiva’s ancillary care benefit management and coordination of integrated homecare services for managed care organizations and health benefit plans through a network of more than 2,500 third-party provider locations, as well as Gentiva locations. CareCentrix operations provide an array of administrative services and coordinate the delivery of home nursing services, acute and chronic infusion therapies, DME, and respiratory products and services for managed care organizations and health plans. These administrative services are coordinated through regional centers and are delivered through Gentiva direct home nursing and therapy locations as well as through an extensive nationwide network of third-party provider locations in all 50 states.

CIGNA has historically constituted a significant customer of Gentiva’s CareCentrix group. As Gentiva announced on October 24, 2005, CareCentrix ended its coordination of respiratory therapy and certain DME services to CIGNA members as of January 31, 2006. On October 27, 2005, the Company announced the amendment of its contract and extension of its national relationship with CIGNA through January 31, 2009. Under the amended contract, CareCentrix will continue to coordinate the provision of direct home nursing and related services through the CareCentrix network of credentialed, third-party providers or through Gentiva’s own home healthcare locations, as well as home infusion services and certain other specialty medical equipment solely through the CareCentrix network. The Company recently further expanded its relationship with CIGNA to include the New England States.

4.2 Products and Services

Gentiva’s agencies provide various combinations of skilled nursing and therapy services, paraprofessional nursing services and homemaker services to pediatric, adult and elder patients. Reimbursement sources include government programs, such as Medicare and Medicaid, and private sources, such as health insurance plans, managed care organizations, long term care insurance plans and personal funds.

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The table below presents Gentiva’s referral flow through its Home Healthcare and CareCentrix segments.

Home Healthcare (62% of LTM 9/30/05 Revenues)

u Gentiva Home Healthcare

	–		Skilled nursing
	–		Skilled therapies – physical, occupational, speech
	–		Medical social work
	–		Assistance with daily living
	–		Disease management
	–		Gentiva Consulting

•

Consulting, application service provider, billing and accounts receivable solutions for home health agencies and other companies

u National population served

	–		Adult, older adult and pediatric patients
	–		Other home health agencies through Gentiva Consulting

u Specialty Programs

–

Gentiva Orthopedics

•

Rehabilitation following joint replacement surgery

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•

Reimbursed under Medicare and commercial insurance programs

–

Gentiva Safe Strides SM

	•		Therapies for patients with balance problems who are prone to falling
	•		Treatment minimizes causes of falls
	•		Reimbursed under Medicare and commercial insurance programs

–

Gentiva Cardiopulmonary

	•		Prevent progression of heart- and lung-related diseases
	•		Limit or eliminate need for institutional care
	•		Reimbursed under Medicare and commercial insurance programs

–

Gentiva Rehab Without Walls®

	•		Home and community-based neurorehabilitation
	•		Reimbursed by managed care and workers compensation insurers

CareCentrix ® (38% of LTM 9/30/05 Revenues)

u Integrated Managed Homecare Solutions

–

Focus on improving access, quality, service and information and controlling costs related to home healthcare services

u Core Capabilities

–

Central access, care coordination, utilization management and claims processing

u Services to Managed Care Members

–

Direct home health nursing, chronic and acute infusion services, home medical equipment, respiratory products and devices

u Service Delivery Network

	–		More than 2,500 nationwide third-party provider locations
	–		Gentiva branch operations

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4.3 Payer Mix

As the table below highlights, Gentiva’s payer mix has shifted in the last four years as the Company has increased its exposure to higher margin Medicare business and has de-emphasized its reliance on CIGNA and Medicaid. This decrease resulted, in part, from a change to a lower cost DME delivery model as well as lower membership in CIGNA plans. As a result of the Merger, Gentiva will further reduce the significance of CIGNA as a payer source.

On October 27, 2005, the Company announced the amendment of its contract and extension of its national relationship with CIGNA through January 31, 2009. Under the amended contract, CareCentrix is continuing to coordinate the provision of direct home nursing and related services through the CareCentrix network of credentialed, third-party providers or through Gentiva’s own home healthcare locations, as well as home infusion services and certain other specialty medical equipment solely through the CareCentrix network. Among the specialty equipment to be provided to CIGNA members through CareCentrix are insulin pumps, wound suction devices and other products. As Gentiva announced on October 24, 2005, CareCentrix ended its coordination of respiratory therapy and certain DME services to CIGNA members as of January 31, 2006.

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Senior Management

Ron Malone – CEO and Chairman of the Board – Ron joined Gentiva in 2000 as Executive Vice President. In 2001, he was named President of Gentiva’s Home Health Care Services Division. He assumed his current position in 2002 following the sale of Gentiva’s Specialty Pharmaceutical Services business.

Prior to Gentiva, Ron served for more than a decade with Olsten Corporation, a major provider of professional and temporary staffing, home healthcare and information technology services. He held a number of management positions with the company’s staffing division and rose to become President of North American Staffing. Previously, he was an executive with Emery Worldwide, an international air freight company, where he held sales, customer service management and operations management positions.

Ron currently serves on the board of directors of the American Association for Homecare and the National Association for Homecare and Hospice. He holds a bachelor’s degree from Furman University.

John Potapchuk – Senior Vice President, Chief Financial Officer and Treasurer – John has served as Senior Vice President and Chief Financial Officer of Gentiva since June 2002. He served as Vice President of Finance and Controller of the Company from March 2000 to June 2002. He joined Gentiva in 1991 and served in various corporate financial management positions, including Vice President and Operations Controller and Vice President of Finance. Prior to joining Gentiva, John served in senior management positions at two major independent public accounting firms — PricewaterhouseCoopers,

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LLP and Deloitte & Touche. John holds a BA in mathematics from Boston College. He is a certified public accountant.

Bob Creamer – Senior Vice President, Home Healthcare Operations – Bob oversees Gentiva’s day-to-day home healthcare operations and works with the field leadership teams to ensure that the extensive branch network is moving in the proper strategic direction. He’s dedicated to empowering caregivers and associates with the appropriate tools, framework and technology to help each branch excel in what is a very local business. Bob is a CPA and a member of the Health Care Finance Management Association. He received his BBA in Accounting from Hofstra University.

Mary Morrisey-Gabriel – Senior Vice President and Chief Marketing Officer – Mary oversees Gentiva’s company-wide sales and marketing initiatives. She has served as Senior Vice President and Chief Marketing Officer of the Company since February 2005, focusing on the development of the Company’s strategic plan and new branding strategy to better reflect Gentiva’s mission, vision and values. From July 2002 to February 2005, she served as Senior Vice President, Sales of the Company. Mary attended Rutgers University.

Steve Paige – Senior Vice President, General Counsel & Secretary – Steve is responsible for Gentiva’s legal affairs, providing advice to the Company’s senior management team, business associates and Board of Directors. He also oversees the Company’s Contracts Department and Corporate Licensure Department. Steve is a graduate of Georgetown University Law Center.

John Camperlengo – Vice President, Deputy General Counsel and Chief Compliance Officer – John is responsible for overseeing Gentiva’s compliance program, regulatory affairs, HIPAA management, privacy, billing compliance review, real estate, policy development and the Company’s Contracts Department. In addition, John is the Deputy General Counsel of Gentiva’s Law Department. John holds degrees from St. John’s University and Seton Hall University. He also holds the rank of Lieutenant Colonel in the Marine Corps Reserves.

4.5 Employees

As of October 2, 2005, Gentiva’s workforce consisted of approximately 4,300 full-time associates, including 1,200 salaried clinical associates. The average number of non-salaried clinical associates employed on a weekly basis in the home health services business was approximately 9,700.

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V. THE HEALTHFIELD GROUP, INC.

5.1 Company Overview

Based in Atlanta, GA, Healthfield is a leading provider of comprehensive home healthcare in the Southeast. Through its operating subsidiaries, Healthfield offers a comprehensive suite of services to a broad patient base ranging from neonatal to geriatric. Healthfield’s largest payer is Medicare; however, Healthfield also receives payment from Medicaid, commercial insurers and self-pay individuals. Healthfield is organized into four operating divisions offering (i) home based nursing and related care, (ii) hospice care, (iii) DME, and (iv) pharmacy services. The following chart presents revenue by division for the twelve month period ended September 30, 2005.

Note: Does not include intercompany revenues.

During June 2005, Healthfield acquired Capital Health Management Group (“Capital Health”), a home health service provider in six states in the Southeast for approximately $70 million. Pro forma for a full year contribution, Capital Health represented approximately 30% of Healthfield’s total home health net revenue for the twelve month period ended September 30, 2005. During July 2004, Healthfield acquired certain assets of Wiregrass Hospice, Inc, (“Wiregrass”), a hospice and homecare service provider in Alabama, Florida, and Georgia, including voting control of Hospice of the Emerald Coast, a not-for-profit membership corporation providing hospice services in Florida, for approximately $77 million. Wiregrass represented approximately 90% of the total hospice care revenue for the twelve month period ended September 30, 2005.

Healthfield has grown through a series of other home health agency acquisitions in recent years, including the acquisition of Total Care for $17.3 million in June 2003 and eight smaller acquisitions (each for less than $3.0 million).

 

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Company and Merger History:

 

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5.2 Products and Services

The Company’s programs and services include:

u		Skilled Nursing Care
u		Home Health Aides
u		Physical Therapy
u		Occupational Therapy
u		Enterostomal Therapy
u		Oncology Services
u		Chemotherapy
u		IV Therapy
u		Speech Therapy
u		Nutritional Guidance
u		Medical Equipment
u		Pediatrics
u		Catheter Care
u		Medications
u		Injections
u		Cardiac Monitoring
u		AIDS Education
u		Respiratory Therapy
u		Patient Teaching
u		Physical Assessment
u		Case Management
u		Family Support Services
u		Special Education

Home Health Division (65% of Healthfield LTM 9/30/05 Revenue)

The Home Health division is a Medicare / Medicaid certified homecare provider with 92 locations in nine states. Through the Home Health division, Healthfield maintains a position as one of the top providers of home health services in key states such as Alabama, Florida, Georgia, North Carolina, and South Carolina. The home health division offers services including: (i) registered nurses, who provide skilled nursing care, (ii) physical therapists, who help patients restore strength and range of motion, (iii) occupational therapists, who assist in the performance of daily living activities, (iv) speech therapists, who retrain patients to overcome speech impairments, (v) social workers, who help patients and their families deal with issues and concerns that arise from health problems, and (vi) home health aides, who provide personal care such as bathing or assistance with walking.

Hospice Division (23% of Healthfield LTM 9/30/05 Revenue)

Healthfield’s hospice division serves patients through 24 locations in three states. Healthfield maintains a position as one of the top providers of hospice care in the states of Alabama, Florida and Georgia. The hospice division offers comprehensive management of the healthcare services and products needed by hospice patients and their families through the use of an interdisciplinary team. Each hospice patient is assigned an interdisciplinary team comprised of a physician, nurse(s), home health aide(s), medical social worker(s), a chaplain, as well as other care professionals.

 

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Durable Medical Equipment and Respiratory Therapy Division (“DME”) (8% of Healthfield LTM 9/30/05 Revenue)

Healthfield provides DME and respiratory therapy to patients at home through 31 locations in five states. The DME division offers patients a broad portfolio of products and services that serve as an adjunct to traditional home health nursing and hospice care. Particularly, the division provides respiratory therapy services to patients who suffer from a variety of conditions including asthma, chronic obstructive pulmonary diseases, cystic fibrosis and other respiratory conditions. Home medical equipment includes hospital beds, wheelchairs, ambulatory aids, bathroom aids, patient lifts and rehabilitation equipment.

Infusion Therapy (Pharmacy) Division (4% of Healthfield LTM 9/30/05 Revenue)

The infusion therapy division prescribes home infusion therapy to patients at home through 15 locations in four states. Infusion therapy serves as a complement to Healthfield’s traditional service offering, providing clients with a comprehensive home health provider while diversifying Healthfield’s revenue base. Services provided include: (i) enteral nutrition, (ii) antibiotic therapy, (iii) total parenteral nutrition, (iv) pain management, (iv) chemotherapy, (v) patient education and training, and (vi) nutrition management.

5.3 Payer Mix

As the table below highlights, Healthfield is a dominant Medicare provider in the Southeast, particularly in home health and hospice. Healthfield is also the primary provider for Blue Cross Blue Shield patients across Healthfield’s geographic coverage area in the Southeast.

 

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5.4 Retained Management

5.5 Employees

Healthfield currently has approximately 2,700 full-time employees and 1,300 non-salaried clinical associates.

 

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VI. INDUSTRY OVERVIEW

6.1 Industry Overview

From 1990 to 1997, home healthcare was among the fastest growing segments of national healthcare expenditures because, among other things, it provided low-cost healthcare services to many homebound patients. During this period, home healthcare expenditures rose from $3.7 billion to $17.8 billion. The Balanced Budget Act of 1997 (“BBA”), however, was drafted to substantially decrease Medicare expenditures over five years and targeted the home healthcare industry to generate approximately 14% of the total savings—a number that exceeded the industry’s percentage of total Medicare spending.

Medicare-certified (Part A) home health nursing agencies and providers of respiratory therapy to Medicare patients were most impacted by BBA’s cuts. In the two years following BBA’s passage, a significant number of nursing and home oxygen providers closed nationwide.

Precipitating the impact of the BBA were media reports highlighting fraud at many levels of the industry. The government’s declarations that as much as 40% (later shown to be less than 3%) of all home health billing claims might be fraudulent only exacerbated regulatory scrutiny. Legislative attention was gained when the rapid increase in Medicare home health expenditures was shown to be disproportionate due to an increase in the number of home health visits provided to each patient as opposed to an increase in the number of beneficiaries receiving services. From 1990 to 1996, Medicare beneficiaries receiving home health services increased from 1.9 million to 3.6 million, or 89%, while the number of home health visits provided to each beneficiary increased from 36 to 79, or 119%.

These statistics, pointing to an overutilization of services, moved Congress and the Health Care Finance Administration (“HCFA”) to overhaul the Medicare home health payment system. The payment reform imposed per beneficiary cost caps in addition to existing per visit cost-limit caps. This modified payment methodology—also known as the Interim Payment System (“IPS”) negatively impacted the industry as well. Medicare home health nursing expenditures decreased from $16 billion in 1997 (pre-IPS) to approximately $7 billion in 1999.

Congress mandated the move to a prospective payment system (“PPS”) effective October 1, 2000. PPS compensates providers by paying on a 60-day episodic or prospective basis for homecare and on a per-patient day for hospice care. It allows providers to keep any profits collected from maintaining costs below a prospective rate schedule. Since 2000, Medicare has instituted several rate increases and most recently, increased reimbursements rates by 2.3% effective January 1, 2005. The Centers for Medicare and Medicaid Services (“CMS”) announced on November 3, 2005 a 2.8% increase in home health reimbursement; however, on February 1, 2006, Congress passed legislation to hold existing reimbursement rates constant for 2006 (except for a 5% rural add-on premium reflected in reimbursement rates for specifically defined rural areas of the country for calendar 2006).

Similarly, Medicare has also increased rates for hospice services since 2000, with the most recent increase of 3.3% for fiscal year 2005 (bringing the routine care rate to approximately $122 per-patient day); however, there has been increased focus and concern on average length of stay.

A key driver of the anticipated growth in the home health and hospice industries is the aging population. As the country’s population continues to age and as the “baby boom” generation reaches retirement age, the need for all forms of healthcare services increases in terms of both frequency and intensity.

By 2000, baby boomers’ ages ranged between 36 and 54 years old. According to U.S. Census projections, there will be approximately 70 million elderly people by 2030, double the elderly

 

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population in 2000. This fundamental age shift in the population should have a positive effect on the number of patients eligible to receive the Company’s services.

Source: U.S. Census Bureau.

In addition to positive demographic trends, home healthcare can be significantly more cost effective than facilities-based care. The chart below demonstrates the cost effectiveness of home health and hospice agencies.

Source: National Association for Home Care & Hospice.

As shown in the chart below, CMS has projected significant growth in the demand for home health services. The Company believes the growth is driven by demographic and economic factors, a growing preference of patients to be treated in the comfort of their own homes and technological advances.

 

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6.2 Competition

The home healthcare and hospice fields are highly competitive and fragmented in each state in which the Company operates. Gentiva and Healthfield compete with numerous other licensed as well as certified home healthcare agencies in each of the markets they serve. Healthfield also competes against several hospice providers in the Southeast. In addition, each company competes with home healthcare agencies that, in addition to providing home health aide and skilled nursing services, also provide pharmaceutical products and other homecare services that can generate additional referrals. Beyond the scope of services, competition also involves the quality of services provided and the pricing for such services. As a result of changes in Medicare reimbursement, competitive pressures of managed care, and the highly fragmented nature of both industries, the home healthcare and hospice industries continue to experience consolidation.

 

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Number of Medicare-Certified Agencies: 1990 – 2003

 

Source: Centers for Medicare and Medicaid Services.

In addition to competition for customers, the home healthcare and hospice sectors also are experiencing intense competition for qualified personnel. Among other ways, the Company recruits personnel through newspaper advertisements, job fairs, solicitations on websites and referrals from existing personnel to meet the growing staffing needs.

 

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VII. FINANCIAL OVERVIEW

7.1 Gentiva Historical Financial Performance and Discussion

The following tables and management discussion provide a summary of Gentiva’s audited financial statements for the 2002, 2003 and 2004 fiscal periods and its unaudited financial statements for the nine month periods ended September 26, 2004 and October 2, 2005 and the last twelve months ended October 2, 2005. Investors should refer to Gentiva’s annual, quarterly and current reports, proxy statements and other information filed with the Securities and Exchange Commission (the “SEC”) for a more comprehensive description of its business. Gentiva’s filings are available at the SEC’s website at http://www.sec.gov and its common stock is listed and traded on the Nasdaq Stock Market’s National Market under the trading symbol GTIV.

Gentiva Historical Statements of Operations

(1)		Period includes 53 weeks of activity.
(2)		See Notes A through E to Supplemental Information provided in the Appendix.

      

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