Addus HomeCare Corporation (ADUS) Earnings Call Transcript & Summary

Thank you so much for joining. My name is Joanna Gajuk. I'm the analyst here at Bank of America covering some of the HomeCare news for the bank here. And it's my pleasure now to host this session with Addus, one of the largest personal care providers in the U.S., but also growing in other service areas. So that's exciting. A lot to cover. So we have the entire team here. So Dirk Allison, the CEO; Brad Bickham; and also Brian Poff, here, CFO, and we are going to go right into Q&A.

And I guess the first topic is the one that came out of nowhere and everybody is talking about it. So I'm going to also bring it up here on the stage when it comes to this Medicaid proposal, right? Specifically, the element that talks about essentially copying the gross margins for the provider. So what are your expectations? What are the realistic scenarios here when it comes to like how this spread could be finalized? Do you expect to hear back by the end of the year? Or is there a potential that it's going to be completely scratched or put away into future years? Kind of any scenarios you guys have in your mind?

So as you can imagine, since this was announced last Thursday evening, we've talked about this quite a bit now. We start off the answer with a couple of things. One is, first, as a company, we agree with the stated goal, which is to expand coverage of personal care. We think it's a much-needed service. And so we're all for that. I think the other aspect that we agree with is trying to get our caregivers a higher wage. We deal with minimal-wage workers in most states. And so this is an opportunity to try to get them more money for what they do a very valuable service. So we're very much on board with that. The rule itself was very interesting because about a year ago, we were asked to make some comments to CMS as it relates to how can we expand coverage and do some of the things we just talked about. And we thought right up until about the last 24 hours prior to the rule being announced that we were headed in a slightly different direction. And then all of a sudden, this capping of gross margin came out very late. And so one of the things we had to do is sit back at a company and think about it. And the first thing you have to understand is we already do this in 1 state. The state of Illinois, we have a cap, and the key to make it successful, and by the way, Illinois is a very good state for us. The key to making that successful is there was interaction between the state as the payer and the providers. And in the case of Illinois because of the way the market is set up, the union, the SEIU, which we are members of. So all 3 of us together over -- and this was a number of years ago, came together to do something to try to get rid of some of the bad actors in the industry, folks that weren't doing the proper compliance and training and making sure that the patients and consumers were taken care of. And so the concept work -- because we did 3 things in combination with each other. One, we define what revenue was. And it's very important that revenue starts from a certain number, in the case of Illinois, the reason that is successful is because it's collectible revenue. So bad debt is already reduced, and we're not penalized for that. The second aspect is what they call direct care wages expense. And so that's not just salaries and benefits. That includes a number of items in Illinois, that training, criminal background checks, supervisory visits, a number of other things, some of which, by the way, reside below the gross margin line into our corporate expenses. And so we're able to allocate those out and to meet the, in the case of Illinois, it's a 77% cap as opposed to 80% cap. So as we sit through here, while we'd rather not be talking about this, we'd rather done it in a different way. I think the concept can work. I think the problem you have with CMS just making a proposed rule is when your 1 state making this change, you're dealing with 1 set of rules. You've got the same reimbursement rate all across the state. You got the same rules on all the waiver programs. Everything is one almost as if you were -- CMS saying, "I'm going to change Medicare because all the rates of Medicare pretty much the same across the country." The problem with saying it with Medicaid is there's 50 states, of which each state has up to 2 or 3 waiver programs. And each waiver program can have a different reimbursement profile. They can have a different requirement as far as what kind of expenses you operate under that. And so if you think in terms of trying to set just 1 rate, how are you going to do that for a state that maybe reimburses much less than what we see in Illinois. So in Illinois, working off of 23% of a $26 rate, things can work. But if you're in a state with $15, $16 reimbursement rates, that same 23% or in the case of the proposed rule 20% would be devastating to the providers in that state. So what we're saying is our goal is to work with CMS as an industry through all the providers, the association, the payers, others that are affected and say, "Look, if you want to go down this road," we're going to have to set it such that whatever the lowest state is, we can make it work in that state so that we don't [ devastated ] the elderly population and the caregivers in that market." So that's really the struggle that we have out there with one size fits all. So we'll continue to work with them. We've already started the process. It will continue, as you said, for the next 60 days on comment period and longer than that on trying to get to somewhat of a final rule if we get there. But we believe that the rate as currently outlined, there's 2 or 3 problems we have to address.

And I guess on the flip side, can you talk about any other elements of this [ rate ], that are either positive or negative? And when you think that makes sense and it should stay or it should be changed?

Sure. I think if you read through the rule, one of the things you see is it's requiring a greater transparency from states to CMS. And I think that's very -- it's a valid comment. We need data. In other words, states need to report. What are you paying per hour? What is your average caregiver rate per hour? What is your backlog? How many patients in fact or consumers are you taking care of? So there's a lot of things around that we support. There's some rules to make it a little -- I want to say, a more professional service line. In other words, if you think of home health and hospice, there's a lot of quality metrics and things, certifications that you go through whereas on personal care, it's kind of grown up in this mom-and-pop industry. And so we think the rule does some things in a way of solidifying the professionalism of the industry and requiring certain things of providers that are going to operate in that market, and we agree with that. We think those make sense.

And also obviously, this Medicaid proposal, there's going to be some pushback, but I was just writing it down here for myself. There are a couple of these other legislations out there that have been put in Congress over the last couple of months. And one of them most recently in April, it's called Expanding Care in Home Care Act. And it sounds like it has bipartisan support and it specifically talks about actually very interesting. They talk about creating a new Medicare benefit that would allow certain people that are not eligible for Medicaid to actually get access to essentially personal care because they talk about, say, 12 hours a week of home health worker access. So can you talk about -- and I know there's a bunch of other small things floating there in Congress. So can you talk about like the support and kind of traction? And what do you expect eventually is going to come out of these things that we're hearing in Congress?

Sure. We would have said prior to CMS making a proposed rule that the Biden administration was very much behind the personal care industry, home community-based care, wanting to expand coverage, they probably still are. It's just that the proposed rule was a little bit of a shock. That being said, the fact that they're now talking about potentially adding personal care services to Medicare fee-for-service. A few years ago, 4, 5 years ago, they allowed Medicare Advantage to add to the service, but it was done in such a way it was supplemental benefit, went a lot of hours. I think Brad has said before, and it's a good example. It's someone comes out of the hospital from surgery, and they need a few extra hours of, not clinical care necessarily, but helping them do certain things, bathe, dress, do all those things that you might have difficulty with after surgery. That was great, but we think we need to get to more of a medical benefit. And that's what I think when you're talking about 12 hours a week, we probably averaged 15 or so, a little more than 15 on our normal personal care consumer. So we think it's a great movement towards our industry. The question is, can we get -- will they get both sides of the aisle to agree that they want to spend money to take care of the elderly.

So yes, what would need to happen for them to kind of step on the pedal and actually allocate some money towards this benefit because we've been -- obviously Biden ran on it. I mean he came out with these huge numbers, but I'm not talking about this huge number but like just incrementally adding these things. So what is to happen for them to actually act on that?

Well, I think one of the things we've talked about is that's what CMS is trying to do with this proposed rule. In essence, if you think about it, CMS can't really spend money on its own that has to be appropriated through Congress. But if you say you've got to have a minimum or a maximum gross margin than low wage states, low reimbursement rate, states are going to have to raise their rates significantly for providers to stay in business in that state. And I don't think those states are going to want the elderly population to no longer be able to be cared for in a home because most of our patients, if they're not cared for it in the home by a company like Addus, and if there's not a care -- a family caregiver that can step in, they're going to be at risk of going to SNFs, spending a lot more money that the state will be responsible for. So we're a little concerned that you're not going to really be able to get the Republicans and the Democrats to agree to spend. I think Biden onetime want to spend $400 billion. That may be a difficult thing to be today. But the one thing I do want to leave it with this, even with the challenge of this potential rule is, it does appear that the administration is very supportive of home and community-based care, which we think is a positive long term.

And staying on that business outside of this regulation, but the traction you guys have been gaining in the business has been pretty good. Census growing sequentially. So can you kind of talk about how you expect this to play out going forward when it comes to census thinking about -- I know you don't give guidance for the year, but kind of big picture where you think you're going to kind of exit the year? And what does it do with the volume growth outlook, I guess, going forward in the future?

Well, I mean, I think the volume growth starts from hiring, and we saw that pick up last year around March. And that probably most of that due to kind of the elimination of a lot of the stimulus package, the enhanced unemployment benefits, advanced childcare credit. People needed to come back to work. I think the high inflationary environment also encourage people to take on work more hours or get that second job. And the type of service we provide, we're perfect for that. It's part-time primarily. We have a lot of flexibility in hours. So from those hiring trends, the positive trends we saw in Q2 of last year have continued. And we started out the year with some really nice hiring numbers. We saw that translate into hours growth. I think when you look at the census side, some of that is a function of us being able to hire more, but also a function of a lot of our kind of referral sources that we work with on the personal care side. They were impacted pretty heavily by COVID. So there's a lot of disruption in their labor force. And I think they've started to gain traction. So I would see that sequentially, I mean, I think we should continue to see that sequential growth in hours just as a function of our hiring and just the increased volume of referrals that we're getting.

And I guess when it comes to kind of the long-term growth outlook for that business. So in the past, you were talking about 3% to 5%. I guess you've been growing much faster. Obviously, a lot of that has been bait. But once things normalize, should -- is there something else that happened that would make this long-term growth outlook change after, say, like we normalize?

We stated 3% to 5% was our goal, and that came about 7 years ago when things were before the pandemic, before some of the changes we've seen. And at the time, we saw about 60% or so volume and the rest were rate growth. During the pandemic, as we talked about, things changed, we almost saw all rate growth. As you know, our hours weren't growing, states were having to raise rates or were raising rates, which was very helpful. For some of the reasons that Brad mentioned with them not even -- states not even being able to hire enough people, put them out there during the pandemic to qualify people. We saw our hours drop. That started changing about a year ago. So we're coming back around on the year. So now the question that you asked to get to your question, is what happens to that 3% to 5%? And as a management team, we try to be pretty conservative so that we don't disappoint you and others when we're out there. So right now, we're still up to 3% to 5%. We like to look at that through in 2023. We do believe we exceeded that in the first quarter. We'll probably be on the high end of that in the second quarter. We will look and see it structurally after the fact things have changed such that, that needs to be adjusted somewhat. I think the thing that would change, I think the hours will get back to where they're growing nicely. I think the change we will have to see is do the states continue what they did the last 3 years, giving us those nice increases each year to help offset some of the costs that are flowing through mainly as it relates to the caregiver wages. So we'll wait and see and maybe towards the end of the year, we'll be able to have a better look at what that long-term growth rate should be.

And just talking about things that are happening now, I guess, already, and the state's ability to, I guess, continue to do these rate increases? And specifically, what I'm asking is the rate determinations of some states started, I guess, last month in April and then 14, I guess, started in May. So can you walk us through your thought process, how that could impact your business if at all, whether positive or negative? And kind of what are you doing to kind of prepare for what's happening?

Yes. On the redeterminations, I mean, if you think about our typical client elderly fixed income. We don't expect really any material impact at all on the redeterminations. We didn't get really any benefit when Medicaid was expanded to a younger population. So no material change. We may have certainly additional work just as kind of getting clients and making sure that they stay enrolled in the process. So there'll probably be some movement there, but nothing of any type of material nature.

And also, you mentioned briefly the hiring trends improving on the personal care level. So can you talk about the other side of the business in hospice and home health, I guess, which is smaller. But there's obviously different types of challenges, more clinical workforce-related challenges in those businesses. So kind of how things are tracking in those? And what do you expect specifically when it comes to, when we look at going forward for these wage increases because now obviously, seems like these providers were forced to do high single digits wage increases last year and maybe this year, a lot of people talk about 4 to 5. But now the question is like, what does it do for the next year, would you have to continue to increase at this, say, mid-single-digit wages to kind of continue to attract labor and create a stable work environment. So can you talk about your expectations how this -- you expect this to play out?