Chemed Corporation (CHE) Earnings Call Transcript & Summary

Good afternoon, everybody. Thanks so much for joining the Bank of America Healthcare Conference. It is my pleasure to host now this session with the team of Chemed. So as you know, Chemed is one of the largest hospice providers in the U.S., and they also provide plumbing services under the Roto-Rooter brand. So today, with us, I guess, on the phone, and you can see their head shots too, Kevin McNamara, the President and CEO; and also David Williams, the CFO; and we also have in the room with them, Nick Westfall, who's the CEO and COO of VITAS. So we have planned this to be an interactive session. So please, comment to the audience, if that -- if you have a question, please submit it in the box you see next to the webcast window, and I'll be happy to incorporate that questions.

So thanks again, Kevin, David, and Nick, for being here with us. And happy to have Nick with us because actually, I guess, my first topic was the hospice business. So if we can please talk about kind of the most recent trends in the business in terms of the census, why the census declined in the quarter. It seems like that's likely the lowest point for the year. So can you talk about kind of how the census progressed through the quarter? And kind of what was the exit rate as we -- as you finish the quarter and you moved into April?

Sounds good. So Joanna, this is Nick. I'll take that one, we can build from there. As we reported in the first quarter on a year-over-year basis, census was down 6.1%, in line actually with our internal expectations and forecasting that we provided for full year 2021. And as we've alluded to, no different than the rest of the industry. It's a combination of a lot of things that have occurred as part of the pandemic, starting with the disruption to the overall health care system. And while in 2020, we cared for and admitted more patients than we did in 2019, because of the disruption in the health care environment, patients were accessing the hospice benefit later. And the best barometer towards that not only in overall aggregate ADC is what -- the experience we've seen in median length of stay that went, pre-pandemic, from about 16 days to a low point in January of 11 days and has been stabilized and building back throughout the course of the first quarter and would be expected for the remainder of calendar year 2021 resulting in stabilization, bottoming out and beginning to return towards normal ADC growth trajectory, coupled with a changing market dynamic as people market-by-market access the health care system as it reopens, particularly in senior housing as well as everyone becomes more comfortable with traversing physician offices, the hospital environment and the full complement. So it's -- through the first quarter, it's in line with our expectations and we're just ensuring we are proactively prepared and responding to the needs of the market, which are -- as always, have been unique and localized. So we're -- we feel good about where we sit today, but recognizing that we're digesting all the information like everyone else and working with our localized partners and for -- in senior housing and nursing homes as occupancy begins to stabilize, normalize and pick back up as well as ensuring we all are taking advantage of the strength and relationships we've had with some of these other health care partners, hospitals, physician offices, et cetera, out in the community that we've supported throughout the pandemic.

I guess. And can you kind of talk about reaching out to these new sources? Have you done any proactive rechart I guess, to kind of build in your referral source space based on the fact that the pressure has been concentrated in these institutional settings, nursing homes and senior housing?

Yes, absolutely. So it's part of our normal course and DNA for how we target our daily activity out in the communities with our staff who are out helping to support all ongoing educational efforts and ensuring that, that educational messaging and focus is tailored and specific to that referral source need. And also we're listening and responding to what their needs are as every single one of them, in many instances, is in a different place with how -- with where their business and patient needs reside as well. So we have always deployed it that way and the pandemic has only highlighted and reinforced that need and it's something we focus in and target and talk about on a day-to-day basis, of where we're prioritizing our time and how we're ensuring our education and messaging is on point to meet their needs today as well as anticipated needs in the future.

And so is there any stat you can share with us in terms of growing your, let's say, physician base or hospital base during this most recent time versus where things were kind of historically?

Yes. So we don't share or disclose those metrics publicly. But what I can say is we have established and grown more relationships than we had pre-pandemic in each of those segments. And obviously, the rate, we look at it at a macro level but also on an individualized market as well. So physicians' offices, practices, new providers that come in as well as strength of hospital business as well, we've been pleased with the relationships that we've seen expand. And we're also making sure we're prioritizing time and continuing to be available to our senior housing partners as their needs look to accelerate, normalize, bottom out so that we're not losing sight of the new relationships we formed but also focusing on making sure those senior housing partners are aware, as they have been through the pandemic, that we're already willing and able to respond to not only new patient referrals but continue to be available on accessing their facilities safely to care for the existing residents we have on service.

And I guess to that end, for the institutional settings like the nursing homes and senior housing, kind of -- this tends to the big think factor, right, in terms of bringing back the length of stay. Just any indication you can talk about looking at different markets, say, those where the vaccination rates were higher versus those where the vaccination is lower? Kind of any early indication of the pace census for building in these facilities where you either get the patients from or you can visit them over there?

I'd say it's still a little too early to tell. We're looking at those correlations but not only with vaccination rates from some of the other publicly available data points that we would get. There's also nonpublicly available data points that we believe are just as significant of an influencer when you start thinking about social settings. We alluded to it in the first quarter earnings call of the availability of Bingo Night and things like that as certain communities reach the potential for safe, ongoing access for their family members as well. That becomes a big driver for new residents to want to come into those settings. So it is still, I would say, a little too early to prognosticate and forecast the pace and speed and what it will translate to for our business. But what we will say is there is a light at the end of the tunnel and for the markets that are more open or have been open for a while. It's in line with what we would expect, but there's a lag -- too early to tell. And there's a lag factor to it.

Right. And I guess what's correlated with building the census back, right, is the admission. So the first quarter, obviously, you had some tough comps because you really saw very strong growth right before the pandemic in Q1 of last year. So can you kind of talk about any leading indicators in improving the admission trends for the rest of the year? And kind of how do you expect the progression of admissions for the year?

I'll let Nick talk about that. Let me just say that, this year, at least, we are looking internally at admissions a little different. And that is one of the reasons is because our median length of stay, fell to 11 days because the senior housing referral network was so disrupted. We've got to the point where our percentage of patients were skewing short-term -- short-stay patients. And whereas we fight, like very important in Florida, for Medicare cap reasons to be concerned about every last admission in Florida, for instance. As a result of the factors I just described, we have a big surplus in Florida. And to the extent that short-stay admits in Florida don't -- we're not -- again, just from our effort, Nick started to say our targeted efforts. We're not targeting short-stay admits in Florida, like we would in a normal year. Accordingly, to the extent that, that number falls during this cap year, I would not be concerned about it at all. And in fact, if you say, well, if our targeting is different, maybe that's what we expect to see. So I just want -- as a lead in to what -- Nick gave you the answer. I'm just saying that raw admit numbers for us this year, certainly from the hospital discharge planner side, we are looking at it a little differently probably through the end of the cap year.

Yes. That's exactly right. And so just to piggyback a little further, sort of a directional trend to answer your question, Joanna. From a quarter-over-quarter sequential basis, starting from the start of the pandemic last year in the second quarter, our admissions at a macro level have grown sequentially, including our most recent recorded quarter. So 15,822 in the second quarter of last year to 17,973 to 17,950 to our first quarter admission number of 18,135. That's been an important directional indicator. However, that, combined with where the patients are coming from and ultimately what median length of stay is, really become the best single source evaluation metrics I would recommend to look at from a trend. And with the macro sequential improvement, combined with positive progression of median length of stay, inside of the first quarter where we saw it bottom out and then begin to build, that momentum is really what we're focused on and tells me that where we're prioritizing our time in the community with all the existing and new accounts relationship-wise, we've been able to establish. We're doing so thus far in the right place, and it allows us to be nimble and flexible to not only grow our overall business but to ensure we're available in response to the 2 those segments such as senior housing real time. As they open back up the existing residents and new residents that come in potentially need our hospice services and we're able to continue to partner with them and safely go into their facilities. So it's sort of the rising tide approach overall.

It's just it sounded like the way you look at things is that since the length of stay bottomed out early in the quarter in January, now things are kind of showing the right trajectory. So you kind of feel that you're kind of on the track to get to where you were thinking it would be for this year.

Yes. It's in line with our internal projection, but the thing the pandemic has taught us like every organization is the need for us to be on top of it on a day-to-day basis and be nimble. So there are certain things we can influence, and there's other things that are outside of our control, and we just made sure we continue to have a diversified referral base as well as a very thoughtful and intentional time allocation for our limited resources running around the community and identifying more now than ever where we need to continue to be spending our time to foster and build and grow relationships with the partners that are going to really be caring for more patients post pandemic.

Let me give you an example. This is just by way of example. When we say that -- of course, and we're not blaming it. Everybody blames everything on the pandemic. It's just an observation that, yes, there's new normals out there. Clearly, everyone -- you can't -- whether it's health care or customer service, whatever, people are saying, it's hard to get full staffing. I mean there's more -- more jobs out there in all industries than there are people that are available to fill them. How that would affect us, just to give you an example, hard to predict. Well, if we don't have full staffing, you might say, in the short, short run for an industry like hospice, that's not the end of the world because you get paid a per diem. At the same time, something that's important to us is a high acuity. And let's say, for continuous care, you need the right staffing. And to the extent that you have your short nurses and can't get a nurse for the required number of hours, it's a failed billing day for continuous care. And those are up at record levels. Why? Are we bad? Are we worse at logistics, what have you? No, it's just that because of the -- and I think the general pandemic effects, it has disrupted that part of any hospice business' high acuity. And it just so happens that VITAS does more high acuity than the average hospice program. So that's the kind of thing that hard to plan, hard to deal with, but that's also one of the reasons that they extended the relaxation of sequestration. I mean the pandemic is continuing to have effect on just a normal operation business. And I think Nick has done a yeoman's job of zigging what he's got to zig and zagging where he's got to zag. Getting back to your one comment that is so you think all in -- things are going in line with what you said when you had the guidance. And the answer to that is, yes. I mean it's -- we're -- we face some tough comparisons. I mean if you normally said just pull the number and said, "Your ADC is down, that -- oh, that's bad." It's bad, but it's -- it was preordained to the extent that we didn't get patients from senior housing in June, July, August, September, November last year, those -- we didn't get them that. Those are the patients that 20% of them would still be with us and driving our results for these months. So overall, I'm always hesitant to blame things on the pandemic. It just creates a new environment, and companies like VITAS have to adjust to still be profitable, to be predictable, to be profitable and provide good service.

And, Joanna, if I can really quickly, we feel good about the -- that the business is, and will continue to be there for us. The other top priority is us really honed in on staffing and staff support. And so I think you've heard other home care providers allude to the same thing. We're no different than others as it relates to some of the staffing pressures that have occurred as part of the pandemic but we spend a lot of time and an absolute focus on continuing to ensure from a management and support perspective, we're honed in on retention of our existing spend as well as the ability to create an environment that's both attractive for new clinical staff, in particular, nurses, home health aides, LPNs, to Kevin's point, but with continuous care that want to join the organization and align with the mission and culture. And to that end, one of the things we also very consciously made a decision going into the pandemic that has put us in a position to continue to operate through and respond was we didn't furlough or lay off any team members at VITAS throughout the pandemic and ensured we had a safe and supportive environment to meet their needs and -- their personal needs that were also going on as they honed in on supporting patients and families. So I think that will be a large influencing factor for the remainder of 2021 and beyond as we -- we, as others, continue to compete for scarcity of resources out in the market and look to support and retain our existing resources as we all grow out of -- come out and grow back out of this pandemic.

And Joanna, there's I think 2 elements of what Nick's describing. Normally, in the midterm issues like forces that cause upward pressure on wages, it's a short-term issue but that's the kind of thing that is taken into consideration as far as our -- the annual increase we got. The issue that companies like VITAS is dealing with is not just upward pressure. We're talking about availability at any halfway reasonable rate of any nurse, for instance. It's not just that well, we're paying $5 an hour or too little if there are none available. And so that's -- it's different in kind rather than degree from the type of issues we normally deal with. But if you ask me, is it a daily challenge? Yes. Is it one that at this point, VITAS is rising to that challenge? The answer is, from my perspective, is yes as well.

And just to close it up on the half perspective, to your point, the scarcity of labor is there. But even with that, I guess, so far, the margins were very strong in VITAS, and I guess you mentioned the sequestration release that's helping here. But outside of that, can you kind of talk about any cost efficiencies, I guess, you achieved during the pandemic? And are those sustainable even after when we think about sequestration at some point coming back? So kind of where do you expect hospice margins to be kind of over time, let's say, past the pandemic?

So Dave and I will come -- combine here on this answer. As it relates to how much of those components are sustainable, we have a pretty good idea, we believe. The pandemic accelerated some care considerations we were going to continue to put in place and thoughtful openness and relaxation of some of the fact that telemedicine and telehealth really couldn't be utilized in hospice pre-pandemic and is here to stay, allows us to really think about our overall care delivery, which is 24/7, 365, to ensure that we're providing the highest quality, most cost-efficient interaction that is the need for the patient and family. And so we've learned a lot, and we're continuing to also ensure the right things get institutionalized in our care delivery model, which should elevate that experience over time. And so when you think about the need simplistically to deploy a runner at 2:00 in the morning for a potential inbound request and need for an existing patient on service, telehealth allows the evaluation of the need to deploy a runner or whether we can support that question more richly from a video interaction. It allows that flexibility, which then translates into overall cost efficiency that should be sustainable on a go-forward basis. But if we want to talk about macro forecasting and numbers, I'll turn it over to Dave because it's embedded in our 2021 guidance and, of course, will be spoken a lot about when we get into 2022.

Yes. I'd say as a macro comment, we quite frankly, view returning to normal isn't going to be what '21 looks off of calendar year '20. The reality is 2019 is probably the best comparative year. And there, we were running -- our overall EBITDA margin was about 18.7%, 18.8% -- or 17.7%, 17.8%. I would expect, once we normalize, return to a 4% to 5% of our days of care high acuity. I think we're going to normalize right around that 18% EBITDA rate. And that's sustainable with obviously higher revenue in, say, 2022, if that's when we return to normal over '21 as we recapture our census plus 19,000 as we go to about, say, 4% or 4.5% of our days of care high acuity, we think that roughly around 18%, 17.4% to 18% is sustainable EBITDA.

Just to close it out on the telehealth component. I would just want to be clear, we really view it as a complement to the existing service. Nothing can replace the physical touch, particularly near end of life, that our patients receive. But it does allow for a much more rich and yet a cost-effective interaction even on our own internal coordination amongst team members that pre-pandemic and as we were preparing for this on our road map, in many instances, forced them to physically drive to be in the same location to interact in that fashion. They're now able to do that just as effectively, remotely, mobilely. It's why we made some of the investments we did pre-pandemic, and we're just looking to really institutionalize those experiences because they've been warmly received by our group and have only elevated the level of care and done it in a more cost-effective way.

And, Joanna, I'd also have to interject because this question has come up a lot really over the past few weeks. That is a concern on inflation on labor rates. And it's important for everyone to remember that when we get our increase every year from the federal government, it's very granular on how it was legislated in the law when the HOSPICE Act was put in place in 1981. 2/3 of our increase in reimbursement is based upon local hospital wage index basket. So the extent that San Francisco has accelerated labor rate, high inflation in labor, that quickly gets reflected in our next update for the following October 1. And you have to remember, that increase has historically been based upon the Bureau of Labor Statistics rates as of March 31. Those then rates get dialed into our October 1 increase. So there is a natural inflation adjustment factor within the reimbursement.

Right. Definitely, that's helpful. And because talking about Medicare, one last thing on the rebasing, right, that happened in 2020. I guess the proposal we've seen from Medicare for 2022 doesn't include any adjustments to rates and whatnot. But in the future, would you expect another type of rebasing where CMS, I guess, in the past, even after they were rebasing, they kind of were showing the data that imply that the rates for routine, home care is still much higher than the costs, the way they perceive that the CMS is higher. So would you expect, at some point, another rebasing or we're kind of done with this for now?

So Joanna, this is Nick. I think expectation-wise, and you can see it a little bit inside of the current proposed rule, the one item I would comment that I think is really indicative of how perceptive and high-quality CMS is and how they're reviewing claims data and the cost piece of affiliate with it is looking at it in the combination of how all levels of care inside of the hospice benefits that are mandated by the conditions of participation are being utilized and adjusting reimbursement to ensure that all those levels of care are appropriately compensated for with any modifications in the cost structure that are needed for that care to be provided. So as you're alluding to back to, say, continuous care, we can speak to and see it through the Medicare claims data on the back end. That level of care is still one that could be more broadly utilized by the hospice community in every market in which it's provided. But there's operational complexities that come along with that. And I think CMS does an excellent job of observing and including it in incremental wage adjustments to just try to, on a cost-neutral basis across all the levels of care, ensure they're incentivizing hospice providers to provide the full complement in the communities in which we serve.

And Joanna, I know we're almost out of time. But what Nick just discussed was absolutely telegraphed when they did the -- made the announcement of the rebasing in the summer of 2019 and then the final rule that came out. They basically said they wanted to do a little bit more with increasing high acuity care and holding back increases on routine home care. So this was just another subtle follow-through on that telegraphing.

And the result is the overall improvement to quality of care for everyone that's able to experience the hospice benefit as well as long-term earlier access to the hospice benefit and overall total cost of care reduction to the Medicare trust fund as a result.

Okay. And I guess we're out of time -- even though this a health care conference, but I guess the other part of the business just very quickly. On the Roto-Rooter side of things, seems like their growth continues to be very impressive on the residential side and the commercial revenue coming back. So kind of how sustainable is the trend? Do you expect once the kind of residential revenues coming down, that it's going to be kind of offset by the commercial revenue growth? And kind of just high-level comments on Roto-Rooter to close it up.

Yes, absolutely. The growth rate in residential, obviously, is not sustainable over the long term. We fully expect some of the residential to pull back a bit in terms of that growth rate, actually quite a bit, but offset by growth in commercial. The bottom line is Roto-Rooter is going to return, is going to be post-pandemic, massively strong with greater market share after the pandemic than we went in before. We completely validated our Internet strategy as well as having 3 24/7, 365 call centers that we are well, well, well positioned for emergency plumbing, drain cleaning service. And we think the margins overall are also very sustainable. So as Kevin would -- to paraphrase Kevin, it's hard to find any pessimist in the Roto-Rooter business right now.

That's good to hear. Thank you so much for being with us here and enjoy the rest of the day.

Thank you.

Thank you.