Chemed Corporation (CHE) Earnings Call Transcript & Summary

[Audio Gap] services and managed care coverage universe. Today, we have Chemed Corporation in our next fireside chat. With us today, we have Chemed CFO, Dave Williams, along with the CEO of VITAS and the EVP of Chemed, Nick Westfall. So welcome, gentlemen.

Thanks, Frank.

Thanks, Frank. Great to be here.

Look, why don't we first start out, maybe at a high level here, kind of assessing and looking at and evaluating the regulatory and maybe the more -- maybe the policy backdrop for hospice today. We'll talk more about the payment updates and those kind of things in just a minute. But kind of your view of the world, what are you seeing from a policy perspective, good and bad? I know that COVID has probably served as a catalyst for a lot of initiatives. But why don't we start there from a policy backdrop, how do you think hospice fares? And what do you see happening in the hospice?

Frank, this is Nick. I'd say, I'm very encouraged for some of the policy modifications the pandemic thrust upon the government who appropriately reacted and allowed for some policy enhancements as we think about the one that gets the most pressed, telehealth. As an organization, there was the ability for us in a community-based decentralized service provider, which we are, as you know, with the majority of our care being provided out in the community. The reality of telehealth allowance, relaxation really allows for not only a more efficient delivery of care, but a higher quality one with just improved ability to interact with patients and families from a video component as well as manage some administrative requirements through telehealth when it is appropriate. But the reality with that as well is that a telehealth remote interaction will only complement our care model. It's not going to replace our care model given the importance of physical touch and care with our population, particularly given their prognostication at this point. So very encouraged with sort of the acceleration of telehealth. We've seen a range of stuff. I'd bank it as accelerating the rules by 5 to 10 years that, with absent the pandemic, probably would have taken that long to evolve, too. So very encouraged by it. And with the proposed wage rule that had just come out, encouraged with the 2.3% price proposal, some of the mix and modification inside of the labor aspects of it. And there's a lot as it relates to how CMS is thinking about evolving the definition of quality inside of the hospice benefit that I hope, not only ourselves, the trade association and other providers will be able to comment towards as we look to really improve the way in which quality gets measured uniformly across the industry.

And Frank, I'd have to add on the -- on what I'd call the telehealth portion. I think that's going to probably end up favoring some of the larger players with scale and the ability to make the investments as well as make sure you have the documentation in place for government's 2020 hindsight on what type of care was delivered and how. So that will be an interesting evolution in terms of investment into IT. And then, regarding the increase that Nick mentioned at the 2.3%, we all have to be very conscious of. There was a subtle rebasing in that increase. So the absolute basket dollar was done on an apples-to-apples basis. But clearly, CMS is continuing to do what they telegraphed in October of 2019, and that is trying to increase the reimbursement of high acuity care because they consider that was under reimbursed and that's why there was a dearth of high acuity care being provided by the industry.

Got you. So in the proposed rule, you're saying that they still are favoring and sort of cutting the pie in favor of higher acuity services?

That's correct.

Subtle shift [ inside ] of some of the way that they're constructing it.

That's still part of the proposed rule, but what we expect that to stay in the final rule.

And I think the last time they did this, it seemed like you were sort of a net beneficiary, as I recall?

That is. And we expect once we get to normalization on our census and referral patterns, we'll go back to about 4.5% or so -- between 4% and 5% of our days of care to be high acuity.

Got you. Maybe before we leave the telehealth, why don't you remind investors what were the provisions that changed the most during COVID? And which ones do you specifically hope or continued on? And then, where do you -- areas up for additional telehealth to be added?

So the major one was really the ability to when you're unable to make in-person visits from a face-to-face perspective, recertification-wise, the ability to leverage telehealth for that recertification from a coordination perspective. And I really think that's the primary one from a policy perspective. The other real benefit that it helped to build acceptance toward and illustrate, not only to everybody inside of VITAS, but broader inside of the community, was the ability to leverage some of those investments. As I mentioned, we'd already put those in place at VITAS to really connect patients, our hospice clinicians and their family members that more and more, those family members may be participating as the primary caregiver, but participating in another city or across the country. And so, when you had access restrictions inside of certain facilities and only our team members were allowed to access to deliver care, we were able to create an experience to connect that patient and their loved ones that had some really profound impacts. And while that's not a policy modification, what it did was thrust the need for that and then demonstrate the value from an improvement of quality as well as the -- just the overall a few main aspects of just continuing to connect patients and their family members when they're not physically able to be in the same location. So just a whole heck of a lot with that.

Got you. So just as a practical example, it's time for a recertification for the hospice benefit, are you saying that is it -- if they're in a nursing home or is literally somebody from the nursing home bringing in an iPad or something and you're connecting that way? Or bringing multiple people together? Well, how does actually, just as a practical matter work when you do that?

Let's say you had a nurse that was out already performing a visit at that time and was able to connect with the physician, which they normally would, that connect in a more rich way and help assist that physician in the face-to-face evaluation of the patient's condition that helps them make a determination whether that patient continues to be appropriate from a recertification perspective.

And if you had a -- there was a cost associated with each. It was in excess of $100 for each face-to-face recertification. So I mean, it's a significant observable savings.

Yes. And Kevin was able to join us, Frank. So it's the physical -- the commute that, in the past, may have ended up with the delay or postponement of that face-to-face that can now be better coordinated with the overall care planning and team.

Okay. But just to be clear, it's your nurse in a nursing home with that patient or maybe at their home, and the physician who's responsible for doing the recertification. That's the connection?

That is correct. And allowing that flexibility. That's not always the case nor did we pivot to that being a mandatory requirement but it allows for that degree of flexibility. And the recertification, of course, is a very important regulatory and compliance component. But it allows it to occur when needed in a more efficient manner that doesn't sacrifice regulatory compliance or quality in any way, shape or form.

Sure. Okay. Let's jump and welcome, Kevin. I did detect that was your voice on the other end there. So thanks for joining us as well. I guess, continuing on, on the first quarter -- during the first quarter earnings season, a lot of acute care hospitals and senior operators who are -- senior housing being 2 of your bigger referral sources, have commented they're experiencing a recovery in the second half of the first quarter and into April. So I'm curious, what's been your experience? Has that generally mirrored that? Or are you starting to see some pickup from those bigger referral sources for you? Any data points you can share there?

Yes. So I won't go into commenting specifically around activity in the second quarter. But similar to what we shared in the first quarter, we did see a sequential positive progression from the senior housing segment that we would feel comfortable, and is incorporated in our guidance, would continue with the positive changes that continue to occur even as early as last week, not only from a mass perspective, right, with some of the CDC updates, but also with CMS and CDC guidance of requiring nursing homes and other members of the senior housing to report vaccination rates starting in the middle of June. And why I bring that up is that should improve overall confidence in the community for families with their loved ones to feel more confident in the their ability to place their loved ones in those settings of care, which should continue that momentum. So all things are trending in a positive direction.

Yes. And if you look at this trend, remember there, to the extent that we say we get a benefit from long-stay patients, as we get these referrals from these -- from long-term care facilities, the first month or 2, they're like short-stay patients. I mean, it's not until you go through the lag period that you really get the benefit. Let's say, look, we've had the patients, we've gone through the initial stage where we're doing a lot of work, setting up their plan of care and whatnot. And now they're persisting, and it's the out months that have a big effect on the metrics of VITAS. So all we're saying is, yes, we're expecting to see everything going the right way. And when we expect to go back to normalcy, it's going to take a few months to those patients have matured into long-stay patients.

Yes. The census impact was -- took 4 to 6 months from the start of the pandemic and coming out of the pandemic, we'd have the same expectations where in turn to what will deem normalized census rates and will have a similar lag on the back end.

Sure. Some of the other companies we spoke with yesterday in home health care that also have hospice, they've talked about the recovery on the business they're seeing, the referrals on the hospital side seem to be more noticeable, more evident than from the from what they're seeing actually getting into hospice, but versus home health care. So is it just the mere fact that it's -- I mean, is it just the fact that it's acute care, stuff that has to be done, whereas you're in the post-acute world with skilled nursing or assisted living, it's just -- why do you think the -- it's just a slower recovery in terms of just volume of people going back into skilled nursing into assisted living?

Frank, just to clarify, what you're saying is some of the hospital recovery and then discharges come out of the hospital, some of those other providers are commenting that they've seen that recovery much quicker than some of the activity in the post-acute sector?

Yes. The...

Our [ active ] referrals have been -- remain pretty strong.

We're seeing the same piece. And obviously, we're just simply speculating here. But at a really high level, as health care systems continue to reopen and confidence in the community with individuals that may have foregone care, they're going to continue to reengage with, I hope, their primary care physician and specialty physicians with it. However, you're going to also feel that degree of confidence with the ability to go into the hospital systems if you have some acute need that you can no longer delay, that needs to be provided and therefore, those patients are going to ultimately get discharged to whatever the appropriate setting is at that point. Once again, that's pure generalized speculation for some of the activity we're seeing that is really broad-based comment and is today, very -- still very unique on a market-by-market basis, depending on where that market is in their reopening phase.

Maybe just to give investors some context, could you remind us of what that referral mix was pre-pandemic in terms of total referrals coming from SNFs and ALFs throughout the pandemic versus where they are today?

So Frank, we don't provide that degree of granularity. I think we commented historically that roughly 50% of our referrals and admissions come from the hospital segment. And then, when you get into senior housing and elsewhere, it's a very important component, but it's obviously a subcomponent. And so, while it is lower than what it was pre-pandemic, it's not -- it's gradually continuing to come back, and you can see that in some of our year-over-year percentage change numbers where nursing homes were running mid-20% down, but now we're lapping that decrease as we enter into the second quarter with the pandemic impact. We don't provide a specific degree of granularity. We obviously track it. We don't provide it publicly.

Yes, I know Florida is an especially important market to you. Is there anything that you're seeing the state of Florida doing specifically with regard to whether it's family visitations, access to residents, for caregivers. Anything unique that you see in Florida that's either ahead of the curve or behind the curve?

I'll say -- and Nick, you can answer maybe anecdotally or specifically, but there's no question. If you look at our results, it's my opinion that Florida is coming back, by far, the fastest of any other part of the country for us. And I think that's because if anybody has been to Florida over the last 3 months, you can see that they're probably the first state to return to some type of rightly or wrongly or intelligently or otherwise, some form of normalcy. And if you see our results in Florida, they're outstripping the rest of the country. Now Nick, we've had some discussions on that, but do you generally agree?

I do, generally. And just going back to, one, the confidence of the overall community, not only in their safety, but their safety and confidence in accessing the health care system. We're absolutely -- those 2 go hand-in-hand. And so, we're seeing that just with the sheer number of patients that are now being presented to us throughout the state. And obviously, one of the starting catalysts for that was the education, some of the policy reform in many instances, Governor DeSantis being an earlier adopter of removal of mask requirements, et cetera, and all those things have allowed for a positive trend. And what I would say as well, we obviously track positivity rates in every single one of our markets and even the markets we're not in. And Florida is on a very positive trajectory as it relates to overall case reduction. And that's something we look at on a daily and weekly basis. So it's a good sign.

And maybe remind investors -- I'm sorry, I missed that.

I just said that Florida seems to be leading the way.

Okay. Great. One final on the question just since it's an important statement. Maybe remind investors what kind of percentage of capacity or like your relative exposure to the state of Florida, what is the percentage of your enterprise, whether it's revenue or census or anything to kind of give us a sense of how important Florida is to the VITAS business?

Yes. It's north of 50% of the overall business enterprise-wise, no matter how you cut it from a total patients days, revenue or overall operating income contribution. So it is by far our largest market. And a lot of our macro numbers move in the direction with how Florida goes a lot of the times, that's how VITAS goes.

And Frank, it's important to note that in raw Medicare dollars, Florida is the #1 hospice reimbursed market for hospice. California is actually a distant #2. So heavy user of the hospice benefit within the state of Florida by far.

For the overall industry.

Yes.

That sounds like great news then absolutely, for the enterprise. Maybe let's talk a little bit about on the labor side. I know that's been a very common theme, either both in earnings season and in a lot of the conversations that we've had so far in our health care conference. So maybe talk a little bit about what's been your -- what's been the trend for you and your experiences in both the use of contract labor and the actual rate of -- that are being charged for contract labor? And are you starting to see a reversal? Presumably, you've been using this, but any change in trend in terms of utilization and pricing?

Yes. So let me break it out in sort of 2 fashions with it. Inside the hospice benefit, the ability to use contract labor is relatively limited, right, because you need to be a core employee and member of the interdisciplinary group, and there are certain facets where we're able to use continued -- contract labor in certain states. That pressure for labor -- agency utilization and pricing associated with it is similar pressure that the hospital systems and everyone else would see. When we get to the overall internal labor market, it absolutely is the primary focus right now and we do feel the pressure, no different than others do as well. And so, we're really looking at it, starting with our ability to continue to retain our existing clinicians across the marketplace and create an environment, not only through compensation, but through a whole host of other things that make them wake up and want to continue to be part of VITAS. And we've provided additional benefits. We did it last year. We've done it recently as well that are driven by the pandemic but our rewards we're providing to our employees and have been very well received and have improved morale in what has obviously been a very challenging 15 months. The secondary side of that is the ability to source new staff as we continue to see trends of overall growth and feel confident with that, as we bring our workforce back. And that's still proving to be very competitive. We're all competing for the same resources. But we're incrementally having success with that, but it is really a daily battle because of all the pressures and the scarcity of resources, particularly nursing and home health aid resources that exist on the community today. That's on the VITAS side.

And just to give you one example of, Frank, how this has -- yes, it's -- it's hard to hire and keep people, no question about it. I mean, I think in a year for now, when we're looking at what the government has determined as the hospital wage index, it's going to be through the roof. But here's how that affects that hospice for high acuity, for -- both really continuous care and inpatient, but continuous care. In order to bill a day of continuous care, you have to have a set number of hours, you have to have the right mix of nurse and home health care aid. And there are -- obviously, there are days in the front and in the end where you're always going to have lost days. Well, the hospice industry right now, just from a logistical enterprise, are not being able to fine-tune that staffing. The number of lost days is up significantly, and that's completely tied to the difficulty in fine-tuning the staffing. We just don't have that. It's just, as Nick said, the people are competing for the same resources and it's a different ball game out there in that regard. And I think VITAS doing a pretty good job staying on top of it, but it's not an ideal situation from that standpoint.

But if you think about pricing pressure and wage pressure, one of the things Dave has brought up and I think brought up maybe as part of our first quarter earnings call with the way in which hospice reimbursement that's embedded inside of the proposed rule that we kicked this off at 2.3%. Inside the Social Security Act, the CBSA setup really is and should account for, if there's additional wage pressure and wage increases across the market baskets in the United States, the pricing implication for the hospice benefit should rise accordingly since about 2/3 of that wage adjustment is based upon -- baked in the CBSA. So while it would be a 1-year lag factor, there are some protections inside of the hospice benefit to help account for that from a pricing perspective going forward that are baked into the Social Security Act.

Got you. So expect a better rate increase next year if the wage index stays up the way it is. Maybe just one final question. We're right at the end of our time, so we need to keep it tight here. But Roto-Rooter, how do you think about the sustainability of the residential segment's outperformance and then the recovery in the commercial segment. Are you already seeing any signs of green shoots on the commercial side of the business?

Yes. Well, shockingly, there's been no abatement on the momentum on the residential side, but we fully expect, as the economy reopens and people are going to their place of employment and kids are going to return to school, we see that certainly, that momentum lessening, but we anticipate it to be offset by growth in commercial. The exact timing of that is still up for debate. But I'd say, all of us are extremely pleased with the market share we picked up and the fact that it doesn't appear to be dissipating at this point in time. But without a doubt, long term, the residential growth rate should return to around that mid-single digit, 5%, 6% we talked about, and commercial should more than recover from -- during the pandemic and go to, I think, slightly stronger than pre-pandemic levels. But we're all guessing on the timing of how that's going to roll through the second half of this year, but the momentum has not abated as of today.

And Frank, one thing -- commercial just ticks up, improves every time, but the fact of the matter is the residential is so strong. If we were to flip a switch and residential will return to the 100%, we probably wouldn't be able to -- we'd be closing down our boards and everything. We wouldn't have the number of skilled technicians that we're adding. We couldn't add them at that type of percentage. So it's good for us that things are coming back gradually.

And we probably could exercise more pricing power than we have to date given the imbalance of demand for our services versus supply, and we'll watch that carefully. But we show great constraint during the pandemic in terms of pricing, but we'll look at market by market, whether there's a permanent imbalance of demand supply. And remember, our technicians only get an increase when we raise prices because they're on a commission. Without a doubt, we are going to be looking at very hard for the second half of this year, certainly for the pricing we put in place for 2022.

Interesting. Unfortunately, we're out of time. I'd love to continue our conversation, but Kevin and Dave and Nick, thank you very much for being with us today. And we'll definitely stay in touch, but that ends our fireside chat. Have a good day.

Okay. Thanks, Frank.

Bye-bye.