Addus HomeCare Corporation ($ADUS)

Hello, everyone. Thanks so much for joining us for the conference and for this session. My name is Joanna Gajuk, I cover healthcare providers at Bank of America. It's my pleasure now to host this session with Addus -- Addus HomeCare, that sounds even better. And today, with us, we have an entire team. So I'm happy to have Dirk Allison, the Chairman and CEO; and Brian Poff, CFO; and Heather Dixon, President and COO. So thanks so much for agreeing to just go right into Q&A.

All right. So there's, I guess, a lot of things to cover. But maybe first, I'd like to start in terms of your volumes, right? And I guess the first quarter, while you saw some volatility around weather and such, but I guess trends were pretty good when it comes to the volumes, especially exiting the quarter, sounds like it. So can you kind of talk about maybe the progression through the quarter to kind of get a sense of how things were going through the quarter, and then as you exited, and maybe any updates in terms of how the April or maybe even early May is tracking when it comes to census?

Sure. I'll jump in on that. You're right. As we moved from Q4 into Q1, we had a little bit of an impact from weather. And that was really the end of January -- right at the end of January, it was a prolonged impact of weather, and it was across a lot of states that aren't really used to having that kind of winter weather. We saw that. And then as we came out of February moving into March, we saw census growth. And so that sequential growth from February to March is exactly what we're focused on, focusing on a month-by-month sequential growth. So we exited the quarter in a really good spot versus where we had sort of expected to be. We felt good about where we were exiting. And actually, as we've -- to your question, as we've moved into Q2, we're still really, really pleased with what we're seeing as far as the trajectory for our census numbers there. It's probably little too early to talk about May, but certainly thinking about the quarter. It's -- what we're seeing is really exactly what we thought we would see as we exited Q1. So that sequential growth on a month-by-month basis is what we're focused on, that will lead to, obviously, year-over-year growth, but we're -- right now, we're focused on each month showing improvement.

And I want to say that on the call, you talked specifically about Illinois experience being pretty good. Can you flesh out maybe your other key markets when it comes to census?

Yes. We called out Illinois because there have been questions about Illinois and certainly, it's our largest market, and we [ took ] questions about it. We were pleased with what we saw there as well. We actually saw across the board -- in our 3 largest markets, we saw that same trend of moving from February to March, we saw improvement. We added a little bit more color in terms of Illinois and talked about our starts of care exceeding our discharges from census during the quarter, and that was just a little bit more just to give an indicator because it is our largest market on how it's going. We are seeing positive trends similarly whenever you think about New Mexico. New Mexico has been 1 of our markets -- largest markets for a while. And obviously, Texas is a little bit newer, but seeing the same trend of census improving as you move throughout the quarter.

But I want to say in Texas you said something about some softness in January. So is there something to call out? Was it weather? Was it something else happening in that market?

Yes. If you think about Texas, Texas was certainly one of the recipients of that winter weather and Texas as a rule are not used to having that type of winter weather for such a prolonged period. We're based there, and we know that there were -- there was probably a good period of about a week in many locations where people just really couldn't get out because of the ice basis that was there that didn't melt.

Right. And then when we think about volumes, right, you always kind of bring it back because you talk about like 2 drivers, right? So 1 is the more hours per consumer, right? And then the census we just talk about. So I guess can you frame for us how we should think about as you exit Q1 on these 2 metrics and kind of how much more there is in terms of these hours per consumer or your customer?

Sure. And I'll make -- focus around those 3 largest markets as well because they typically tell the story. And as they go is really going to drive the outcomes that you'll see. In terms of hours, we did see nice hours growth. We saw about 2.2%, and that's another consistent quarter of very nice growth right in the range that we have messaged that we would be targeting right in the middle of that 2%, 2.5% range of growth that we'd like to see. We did see that continue. Now part of that, from an hours perspective is based on some of the very intentional work that we've been doing, focused specifically on the technology of the app that we've put in place, the caregiver app that is out there. That app has been out in Illinois for over a year now, and we're seeing some maturity with that. We're seeing very good uptake. We're seeing consistent utilization of that by our caregivers. And that is really helping us to drive an improvement in the percentage of hours that we actually use and build versus the authorization for the hours. And that, of course, drives the year-over-year growth in billable hours that we report. If you think about where we're going next with that, we've been talking about deploying it in Texas and New Mexico as well. We did that during Q1. We deployed in Texas towards the end of Q1. So it's a little early for you to see anything actually coming through in the numbers. That said, we can see the uptake of that. So the app was available. We saw a measurement of ours is to look and see how many of our caregivers downloaded the app, registered for it and are actually interacting with it on a regular basis. And we saw almost 10% of our caregivers pull that up and actually start to interact with it within the first week that it was available. So we're expecting to see some benefit there in Texas as well, similar to what we've seen some trends in Illinois. We also deployed for a portion of New Mexico. Part of New Mexico is required to use a specified aggregator. And so the app needs to interact differently there. So we haven't deployed that part yet. But for the rest of New Mexico, we have deployed it, and we'll have some benefit from that uptake as well.

And to that end, how long does it take to see like a material impact of that app from the, I guess, time when you launch or maybe kind of there's probably some phases, right? So maybe talk about the experience in Illinois and kind of is there a way to measure sort of the ROI on this app, like how much, I guess, it generates in terms of incremental, if there is a way to think about it?

Well, it's hard to directly tie the impact of it because, obviously, we don't know which hours came from someone specifically using the app to reschedule or to identify how many hours they have left. That said, we know that over the period of the first 12 to 18 months of utilization in Illinois, we took our utilization rate from low 80s on a percentage perspective to high 80s. And so that's an indication of what we believe is being driven by, in large portion by the utilization of this app. Because if you think about it from a caregiver's perspective, they can interact with the app. They can see how many hours they have left to work to serve their clients for that specific week. And for them, that is -- that's money for them in their paycheck. And so they can see how many hours they have, they can see what their paycheck is going to be, and they can see how many hours are left. And in Illinois, they can actually go in and reschedule those visits on their own or schedule those visits on their own. So you have fewer missed visits as well.

Well, because there's a couple of different things, right? So I wrote it down. So there's like that. The fill rate, right, the hours per caregiver, then there's the caregiver attention, you also mentioned that the app kind of helps to keep people engaged and kind of stay and also like scheduling, productivity improves. Is there any way to kind of maybe without the ability to quantify each, but kind of from the most important to the least important or the most, I guess, material improvement that you see from the app among these different, I guess, pieces?

Yes. I would say the first is for the caregiver to go in and say, actually, I have 5 more hours left this week that I can work. So that is direct money left on the table, so to speak, if they don't have line of sight to that. There are other ways that we can get that information to caregivers, but it's more of a manual process and it relies on us being able to call and form them. So that I would say is number one, closely followed by the ability to reschedule a visit, because that is the avoidance of a missed visit from a billing perspective, but those happen less frequently. So I would say that is probably the second there. And then the third, we're seeing efficiencies if I were ranking sort of the top 3 in our office staff and the interactions that they need to have with caregivers because if you need to interact, if you need to reschedule, the caregiver needs to call in, then we have to call them back. You have to get in touch with the client to see if they're available at that time, and all of that happens sort of self-service by the caregiver, which is a really good efficiency benefit for us.

I think 1 of the things that's very important is as we came through COVID, as you know, most of our organic growth on the PCS side was rate-driven. And we knew that, that was eventually going to change. States weren't going to continue to push Illinois over a 5-year period push from $10 minimum wage to $15 with dollar increments every year. So we benefited from that. But we knew we had to get back to a more naturalized balance between hourly growth and rate growth. And so 1 of the things we looked at in COVID, we got down probably mid-70s as far as authorized hours versus worked hours versus those that were authorized, which was down quite a bit prior to COVID. So how are we going to build that back up. And that's when we -- the team got together and came up with the idea of the app to do a number of things that Heather just described. But 1 of the real critical aspect was to drive volume is to really get our hourly growth back. We would like to see -- hypothetically, if we say we want to grow organic growth 5%, we'd like to see 2% to 2.5% of that hourly in 2%, 2.5% thereabout rate. So we'd like to see it more 50-50 than the unbalanced amount it was. And it's proven to be the case. It's really been a really nice app. As she said, we've driven our hours in Illinois from low 80s to high 80s. We've driven our overall hours from mid-70s to 83%. And so we still have the room. Now you've got New Mexico, now you've got Texas. Both of them have different challenges than Illinois did. But you're going to see some similar -- might not be exactly the same, but you're going to see some similar improvement in their ability to drive worked hours for that authorized hours, too. And we can't give you exactly how much of that's the app, but we do know it's been very effective.

Right. And also with this app in combination with, you guys being a well-established provider of the services and the compliance kind of protocols you have in place, is this also creating maybe like a tailwind with the payers, where the kind of look at this, okay, like this company does things well. And plus now they have this technology and efficiencies and all these things. So is that kind of -- when you look at things, you're saying, hey, like this should drive more of the maybe preferred provider networks kind of arrangement with payers or I don't know, anything else you would highlight in terms of like anything else that this app could create in terms of...

Not the app itself, but I will say that I think a couple of things that have helped drive volume and will continue to be working for us is kind of a tailwind is the fact that as we've grown and gained density in markets, we become more important to the payers. And that's very important because the payers have certain qualifications they have to establish with the states enabled for them to win the RFP. And they need a company out there that can make sure it's a quality provider, it's showing up on time. It's doing a lot of the different things that the states look for, for that program to be successful. And so as we've grown, especially to be honest, with our Gentiva acquisition in December of 2024, we became a really nice payer of size in Texas, which means if you look at the big 3 providers in Texas calling one out, they're all very important, but calling out United, we're a very big provider to United today. So that allows us in markets -- most markets we don't negotiate, right? So what we try to negotiate is volume. If we can give you statewide coverage, if we can give you compliance, if we can make sure that we're doing the things for your members that need to be done to make you look good, we would like to believe that you're going to drive more volume our way. And that's proved to be very effective also as we grow.

And since you mentioned the kind of more normalized growth going forward, volumes versus rate. So kind of where are we now when it comes to rate updates? I know we have visibility this year for Illinois and I guess, Texas, and I'm still waiting for New Mexico rate or just...

With the app...

No, no, as in the rate updates...

With the rate update?

Yes. Maybe talk about the pricing that's switching a little bit...

We've had a very interesting problem. And that is every time we start getting our volume percentage up, these states give us a real nice rate increase. And so we're not going to complain about that. And so up until recently, our rates have still been heavily weighted, our growth heavily weighted toward rates. Now we started to see midpoint of last year, our growth getting into that 2.4% growth each quarter. In the fourth quarter, we were pretty balanced. We were almost 50-50 between rate and volume, a little more on rate, but very much close to where we want it to be. In the first quarter, we dipped from 2.4% to 2.2%. So it's a little more balanced toward rate than it was the quarter before. But I think we're making nice progress, and hopefully, over the next few quarters, you'll see us really be in that 50-50 balance between rate and volume.

Right. And as we think about going forward, the state budgets, rate and the OBB coming with those changes. Are you guys worried at all about the states, your states that you're in that they might be faced with it, how are we going to balance the budget, where are we going to find the money essentially to fill that hole and maybe some things are missing from the federal government. So kind of help us understand how you guys are thinking about this beyond obviously, the fiscal '26 because you have visibility, but I'm thinking going forward after that.

Yes. We obviously, when the Trump administration started talking about OB3 there was a lot of rhetoric around Medicaid and some of the things we think were unfairly stated about people that are involved with Medicaid as OB3 went through what we saw is a much more balanced approach. It wasn't what they had talked about it first. And so really, if you look at today, we're not affected directly by OB3. There are going to be in the next couple of years some reductions in provider taxes for certain markets. That could be an effect if you're a provider in that state. However, if you realize what we are from Addus' standpoint, we are the low-cost provider for a high cost population. Our elderly population realistically, if they cannot stay at home through our care, they're going to go to a nursing home. And from a state standpoint, if I just saw my provider taxes cut, and I'm having to look at where do I spend my dollars in Medicaid. I think I would prefer to spend my dollars in a home setting that's 1/3 of the cost of a facility-based care for that same population base that has to qualify for our facility-based care in order to qualify for our service. So we don't view it as a negative. We believe it could be a tailwind to help us grow down the future. But we're also not going to sit here and tell you that every time the federal government talks about Medicaid, we don't start looking and say, okay, how do we overcome what they may be talking about? So far, it's not been an effect. But we're always, I don't want to use the word worry, because that sounds -- but we're always aware of what they're talking about and how we can work with our states because remember, Medicaid is a state-based program. So we try to work with our states to make sure that they understand the value we're providing.

Yes. No, that's exactly what I was getting at as in like how will the states respond to the pressure? Because yes, to your point, there is nothing in the bill that suggests there's going to be specific pressure to personal care, but I'm just thinking in the states going to be faced with how we're going to balance the budget, if there's some funding, so is there a risk that some provider reimbursement could be under pressure. So that's what I'm thinking. Like is there a risk that maybe some of the benefits will be taken away or reduced or any changes that we should be looking out for? And are you seeing any early indication that this is happening?

All I can really do is talk about the 15 years I've been involved with, 10 of which is CEO, and then before that on the Board. I've seen maybe 1 or 2 instances where a state tried to reduce the hours of care per new clients coming on board. And typically, that doesn't last very long, and they kind of move back up to the norm, which is about 60 to 70 hours a month. I think I've seen 2 states. I think probably since Brian and [ Brad ] both have been here, over that 10-year period, we saw 2 states try to reduce by 3%, 4% their personal care rates that lasted less than 90 days because people realize that if you can't hire people to take care of those folks and keep them in their home, they are going to go to a higher level of care. So again, I do want to -- I don't want to be -- I want to bury our head and say we don't worry about things around the federal government, but our relationships are deeply developed with the states.

And maybe quickly because there was acquisition that was announced and there was one about to close pretty soon. And this is a new state for you, right? So anything that's different with that state in terms of what I was just talking about in terms of rate updates and outlook for the budget, any way to kind of frame this market specifically?

Yes. I think if you think, Joanna, about the type of states that typically we're interested in if it's a new market, fiscally responsible, typically manage Medicaid and has shown good support for the program. And Indiana for us, kind of checked all of those boxes. In addition, it kind of sits right in the middle of where we have a good concentration of services today, obviously, right next to Illinois. We're in Michigan, we're in Ohio, it sits right in the middle of that. But we saw good rate support and updates from the state over the last 2 to 3 years. I think there's a fewer number of providers in that state than you would typically see, which we think is probably a positive for somebody like us. I think the ability to do 2 deals simultaneously that are going to be complementary to each other, it gives us a good footprint in the state. I think we always talked about when we enter a new market, we want to have some form of size, scale and density. And I think this achieves that for us. And again, all the large managed Medicaid providers are in the state as well, and we have good relationships with them. So you kind of put all that together, I think the valuations on these obviously were very attractive for us. These are both 2 smaller providers. So in personal care, typically, those valuations are pretty low. So it will be nicely accretive for us, and we can kind of tuck that into our regional operations and leadership as well. So it was a nice fit.

And when it comes to capital deployment, right, as kind of on that topic. So any change in your priorities to how you're thinking about capital deployment going forward and between the different segments and also maybe the size or types of asset you're looking at?

Yes. I think we'd love to do deals in all 3 segments. I think, obviously, we want to be a provider of all services in the home. Obviously, PCS is probably going to be the largest opportunity for us. A lot of -- it's a very fragmented industry, a lot of small providers out there similar to what we're doing in Illinois -- I mean, sorry, Indiana. I think we have line of sight into some larger personal care assets that we believe are going to be either in market or coming to market over the next several months that we're kind of excited about. We'll be in good geographies for us. We'd love to do more hospice, if we could. I think it's probably a little less likely for us there just based on the valuations that are kind of still being commanded in that space today. If we saw things on the smaller side in hospice and markets that we like that had reasonable valuations, those are things that we would be interested in looking at. And I think Home Health is the smallest segment we have today, really kind of 3 primary markets, but we think is complementary, particularly where we have personal care hospice, we talked a lot about kind of our Home Health feeding admissions into our own hospice program. So there's a nice revenue synergy opportunity there. Valuations, I think, are still very reasonable in Home Health. Dirk talked a little bit on our call most recently about our thoughts around reimbursement. It feels like maybe that environment is becoming a little more favorable. We'll see coming up here in the next few months with the proposed rule. But I think we'd like to continue to be active. So capital deployment and M&A is definitely our priority.

And we also spoke about or you spoke about on the call about the heightened scrutiny, right and specifically, some of the, I guess, in CMS and in government or Congress highlight personal care as one of the areas because of the Medicaid, I guess, as a payer. But it seems like you guys are thinking this could be actually a positive for someone like Addus, right? So maybe help us understand -- are you seeing anything in terms of more deals because of this? Or are you seeing states looking for different solutions or maybe the payers looking to you to kind of fill the hole that maybe they expect to kind of occur because of the scrutiny of some of the smaller providers out there?

I can start that one, and Dirk, you have some color. I think, yes -- I think as a large scale provider with a pretty robust compliance department, I think we feel very good about where we sit when you start thinking about some of the audit, fraud, waste and abuse type scrutiny. We think that probably is going to put some pressure on people maybe that don't have those capabilities. We want to be helpful there. I think we want to make sure that anything that comes through wouldn't be an administrative burden to everyone in the industry, but would be more specifically targeted. But could that be a benefit to us in certain markets, could there be market share opportunities, we think that's definitely possible. But Dirk, I don't know if you want to add any kind of color to our thoughts around that as well?

Yes. I think as there's more focus on fraud and abuse -- some of the issues are right around that. Some of the bigger companies that have the ability to really have a very strong compliance program, I think, are going to make a lot of sense, not just for the states but also for the -- when the state outsources the managed Medicaid payers, they want to deal with somebody too that they know is compliant, is taking care of their patient. And it's not going to cause a problem with the state. And so I think that's where you're going to see the real focus is as we go into those markets as we have in Indiana, Illinois, Texas, where we're really dealing with these bigger payers. I think our compliance program is going to be a real benefit to our relationship with those folks.

And maybe switching gears, so we can touch base on your other segment. I mean Home Health is very small, so I'm thinking of Hospice. So in that segment, census growth was pretty good but obviously decelerating from some numbers in prior period. So how should we think about the growth in that segment going forward in terms of census because obviously, the rate is really just driven by Medicare, but just thinking about your ability to execute or where you think the long-term growth is for Hospice?

Yes. I mean I think we've always said, long term, we think Hospice is going to be, for us should be probably pressing upper single-digit growth overall. So if you think about kind of the rate updates we've been getting pretty consistently from CMS being 2.5% to 3%, we would expect, obviously, as a proposed rule that's out there, we'll see how it comes out, final later this year, but the remainder of that we think should come through ADC growth and volume. So good, strong admissions in Q1. I think having the right mix of patients is always important. I think it's a big focus for everybody in the industry as well. We don't have any kind of cap issues. I think some providers have struggled with that a little bit where maybe their patient mix has slanted a little bit the wrong way. I think we've been in a really good spot and continue to be going forward. But I think the rest of that is going to come through just continued volume growth.

So high single digits should -- so high single digits is...

High single digits long term as I think was our expectation.

As since you mentioned the Medicare cap, so kind of what gives you confidence you have the right mix? Maybe if you can quote a couple of starts in terms of your long stay versus short stay. Because I know the length of stay you report is kind of misleading a little bit. So kind of help us understand what gives you confidence that you have enough room? And if you can quantify how much you may have under the cap.

Yes. We typically don't just -- we don't talk about like what exactly our cap cushion is, but we have pretty robust monitoring systems in place in each of our programs. So I think our sales teams, particularly are pretty focused on making sure we have a good mix of who we're looking for from a referral perspective. So we monitor that month-to-month, quarter-to-quarter. We never really have had issues in the past. We have some of our locations also have some IPUs as well, which is shorter length of stay, which helps with cap in those geographies. But something we monitor pretty consistently, as you know, a lot of our management team has a long breadth of experience in Hospice. We understand cap very well, but know the right places to look to make sure that we're managing that appropriately.

And since you mentioned Hospice acquisition multiple seems to be sort of out of reach. What about de novo. Like is that part of the growth strategy here trying to kind of grow that way instead of buying existing providers?

We've done a couple of small de novo in Hospice over, I'd say, the last several years. I think we have not had a program to do, I would say, multiple at one time, but it is something that we have looked at as opportunities if there's the right geographies where we see there's some expansion that could be done through de novo. We have done this in the past. But I think it's pretty minimal for us at this point, probably not part of our broader large portion of our strategy.

Okay. So when you think about the high single digits, that's really just same store without any...

Same-store. Plus, if you think about, we've done a couple of deals over the past couple of years where they were mixed assets where there was some Hospice involved. So maybe they had some personal care, maybe a little Home Health, and some Hospice at a good blended reasonable multiple. So maybe there's some opportunities to pick up some Hospice there, not pure-play, mid-teen valuation type acquisition targets. But I think there's some opportunities. But yes, I think our sense is high single digit is our expectation on a same-store basis, correct.

And lastly, on the Home Health front, very small part of your business, but you did mention that's part of the strategy to have the 3 sort of service lines being offered. And with this latest reg, there's some discussions still out there in the industry. How it's going to play out? Kind of, what is your view? How will CMS go about these recoupments? Do you expect some outsized proposal, then they pull back, do you expect kind of like to see [ plain ] rate out there and they just keep that recruitment in the rate and they will keep it, I guess, for a decade or so. Kind of, any thoughts around that, right? And the outlook for reimbursement in Home Health.

Yes. I think we don't have, I think, a view or any insight out of CMS on exactly what we would expect this year. I think the feeling coming off of last year's final and some of the conversations around that from the industry. I think most of us feel like maybe CMS is understanding a little about what we're saying on where maybe some of the pressure has come from. So I think a big piece for us, and we've talked about it is the clawback. Part of that was part of the rate update last year. I think all of us in industry would love to see just, if anything, just some clarity on what are they planning. We don't have any insight into that today. Are they going to eliminate or are they going to implement it, if they are going to implement it through what process and over what period of time, I think we would definitely all benefit from that. I don't have any insight if they plan to do that or not. And I think our expectation, I would say, broadly is we would expect the proposal this year to obviously be better than the proposal from last year, which is a low bar, but we would expect to see something a little more reasonable, we would hope out of the gate this year.

All right. That's all the time we have. Thank you so much. Thanks, everyone, for joining.

Thank you, Joanna.

Thanks. Appreciate it.