Chemed Corporation (CHE) Earnings Call Transcript & Summary

So welcome, everyone. Thanks for joining us for this session. So it's my pleasure to now host this discussion with Chemed. They are one of the largest hospice providers, but they also have another business, Roto-Rooter. Would try to hit on a little bit though this is a health care conference. But nevertheless, we have the entire team. So we have Kevin McNamara, we have Dave and Nick Westfall, the Head of the VITAS, the hospice business.

So I'm going to go right into questions and start with VITAS since this is a health care conference. And obviously, the retention bonus program you guys implemented last year. It sounds like it's been going pretty well, some success there. So can you kind of flesh out, is there a way to quantify the benefit, how it's tracking versus your expectations? And also, I guess, to that end, are you seeing response in the market as in your competitors kind of trying to mimic what you're trying to do?

Yes. So let's take the first part of it is exceeding our expectations. And we've tried to quantify it in most -- all of our earnings releases since we announced it, but I just used the first quarter as an illustration. We added a net 200 clinicians in the 5 disciplines this program applies to. We forecasted 25 a month, so right, we came in at 200. We expected 75 inside of the quarter. That has been the experience for the 9 months, that's been in play. And so that's a real positive thing from our standpoint. The majority of the net clinical growth of 475 since we enacted it July 1 of last year, is heavily skewed towards nursing and admission nurses. And so what that gives us great confidence and we're seeing it through our operating metrics now is as those individuals come on, we're able to onboard them, we're able to respond to the ever-increasing demand from our referral sources, and it's translating into more patients coming on service and overall growth from the days of care standpoint. We couple that with the Community Access initiative, as we alluded to in the first quarter, not only is that program exceeding our expectations, but the corresponding operating results from admissions and from a census growth standpoint are above or at the high end of our expectations. So very pleased with it now. And it sort of front-loaded a lot of the clinical capacity expansion in the first half of the year, and that should be really positive towards growth trajectory for the remainder of this year, but really launching us into 2024 because of that short-term marginal implications related to it.

But I guess are you seeing response in the market as when your competitors are trying to also do something to respond to your success?

I think that the answer of that is much less so than during the throes of the pandemic. I mean -- and I won't go into it, but obviously, 20% of the health care workers left for variety of reasons, fear of death, retired early, some people that we're holding on past retirement, stopped holding on. We've kind of lapped that, and the death threat is gone. So there's -- we follow it -- it's probably a bigger issue about the decline of the travel nursing program. But that's -- it's the same thing with the nurses we're hiring, less of acute shortage, okay? Because of that, that's one element. That's for instance, one reason like we're not planning on having difference maker 2 starting in July. No, it doesn't seem indicated. That's number one. But number two, we've never seen that with the direct competitors largely because they're not-for-profits, didn't have the financial wherewithal to engage in such a project. I mean it's going to -- it's over $40 million for us. It's $40 million we got from the government, but it's something that, again, we don't view our competitors, which are, generally speaking, not-for-profit hospices being able to respond in that way. So it's not surprising that we haven't seen it. It's not surprising that the need for it to dissipate.

And even if they had the financial resources to come into play, you think about it, we're a pure-play hospice. If someone's running a continuum and all of a sudden, they're going to pay up to a $20,000 bonus to an RN to go to hospice, do they have people leaving their home health segment to go to hospice, do they [indiscernible]. So quite frankly, they would have, what I'd call, internal channel conflict if they offer that. Frankly, our plumbers don't get all upset that we're giving a $20,000 bonus to our registered nurse.

And the other uniqueness from a hospice standpoint versus maybe some of the other service lines going back to, it is the type of individual that joins a hospice organization and joins VITAS is joining usually for a very mission-focused purpose. Economics, they want to service the need inside of the community and so the messaging, and there's a lot of other very thoughtful and intentional pieces that have elevated our culture like we just got our entire employee survey piece back and it scored off the charts compared to where we have. And so that gives me more confidence that the program itself was very helpful, but the sustainability of it because of our local leadership and our local -- just all of our staff really buying in and meeting the mantra of COVID goggles being off, back to growth mode, and there is an ever-growing need in every community in which we service. Let's go and met that need is everybody's marching on all cylinders right now, which is really encouraging.

And you mentioned the whole disruption because of the travel nurses and all these options for those kind of jobs and the income that came with that. So have you experienced your own nurses or nurses that were in home setting that left to the hospital because of this attractiveness of those jobs and now they've returned. I doubt we're hearing it, but I was just curious what are you guys concerning?

There's some component of that. Some of it also is just people that chose to go on the sidelines, whether it's for safety concerns, whether it's for a variety of other concerns and wanting to get back in, not only the hospice or pivot from a 4-wall acute hospital setting that maybe they didn't feel as though they were focused on caring for patients. They were measured on exclusive productivity, clock in, clock out, if you don't see 12 people, you see 11 people, you're going to be yelled at, at the end of the day, and they wanted to change from a philosophical standpoint. So there's a variety of different rationale as people came in, but I think the most important piece is when they come in and when they interview them aligning to the goals, the missions, the value of the organization and their experience with people they're interacting with as the hiring manager of the day-to-day, and we'll hire them on the spot and bring them on as quickly as we can.

So you're still talking about that, like how quickly when you hire a new nurse, assuming that maybe she's not coming from your competitor or from hospice setting, how quickly is it to ramp them up. And also, can you talk about in that context, when you have a lot of new hires, does it kind of disrupt the productivity of the existing workforce? Are you having like that issue sometimes we hearing from providers.

A little bit, not as much. We sort of have a central educational piece that can be self-learning and at base it's heavily predicated on the experience that they're coming in the organization with, right? Prior hospice experience, therefore, they just need to understand how VITAS delivers care or no hospice experience and we're educating that piece, too. So you have self-learning, but also a mentorship piece of it. It's all built in inside of 30 days is when the shadowing component then to be able to be out on their own, I would say, is on average. And that's for case nurses. The mission nurses, there is a much more structured approach with that as well. So we try to get them up to speed as quickly as possible and support it as quickly as possible. And that's what we're seeing from a results standpoint.

During the pandemic, we had a lot of new hires during the pandemic. It's just that retention level was pronouncedly bad, in all health care companies. So it's not that we have more newbies necessarily now, it is we're doing better keeping them.

We're keeping them.

And I guess that ties to the next set of questions, you mentioned the important -- this success with the hiring program is translating into census. So can you talk about that? Because obviously, the quarter came in actually better than expected on census, it was up nicely sequentially and year-over-year. But you have your guidance from previous year outlined for the year. So are you also tracking better versus general expectations? And also, can you give us maybe a little bit of flavor how this changed through the quarter? Also as you exited the quarter and maybe any comment how April has been tracking versus Q1?

So we won't comment on April. So -- but directionally, nothing has changed from our commentary of really encouraged from hitting on all cylinders from an operating metric standpoint as well as the contribution of adding clinical capacity. Even if it's -- we're adding more people than we expected, the return over time and the amount of families we're also able to impact with that. It's just really encouraging, and we're finding a huge differentiation in all the markets we're operating in. And some of it becomes self-fulfilling because our competitors, we have a lot of people coming from other organizations looking for a role with us because it is a degree of stability, right, and predictability towards their personal longevity.

If Nick had told me that in the first 9 months of this program, he was going to bring in 475 net increase of people, I probably would have had him lower his margins for us forward-looking estimates just because I don't think -- I didn't he could put them to work as quickly as he has. So quite frankly, the margins held up phenomenally or different -- said differently, the capacity expansion is almost immediately leading to admissions and the census growth. It takes a while for that census to become a positive margin versus negative margin, that margin will increase, but he has done a much better job and a tighter job of expanding capacity with immediately putting them to work. It really is accelerating 2024 being the year of normalcy versus rebuilding.

And to that end, because I want to say that on the call, we talked about the expectations when you're going to be back to the census before the pandemic. And you said, how to pinpoint, but I guess I'll ask it again, you expect -- if you keep this trajectory, you're going to be there, beginning of '24, it's kind of more like the end of '24?

First half of '24, we expect break the 19,250, if we stay at this pace, but that's a hell of a caveat. We're doing really, really, really well and bringing people much more than the 25 a month that we had budgeted. On the other hand, you'd expect us to do a little better through the first half of this year because the hiring and retention program in mass goes away on July 1 of '23. So then it's make us hiring people based upon the quality of a schedule, the people prevailing wage, I can get unscheduled and scheduled time off. So we don't think we'll add as many people in the second half of the year as the first half but hopefully, we're being a little too conservative on that as well. But without a doubt, we're doing better than we thought on capacity expansion and doing better than we would have thought on census expansion.

Yes. And most importantly, we feel really comfortable in sustainability for a lot of different reasons of all those metrics. Sustainability, it relates to paying prevailing wages. We didn't go out and set ourselves up for failure in the future. It's -- we still have our annual merit process. So everything from a prudent business management standpoint continues to be an effect and overall engagement by our employees has never been higher.

And we get a lot of questions on all meeting about, okay, you have this program where somebody is getting $10,000 more this year and they're not getting it next year. Is that a shock to the system? How are you going to deal with that? Maybe for some. But I'll give you an example. In the first year of the pandemic, we got $80.2 million from the government, we didn't take it in income. We said, okay, we have it. We have the cash, but how we're going to use that? In the first year we said what the employees needed was more time off, more time off, if they got COVID, if a family member got COVID. We gave 2 extra weeks of vacation. Well, the first comment I'd say is the next year when we ultimately decided to give 1 extra week, they didn't say, "where's my other week, I was used to getting 2 extra weeks." That did not happen. And then after the second year when that 1 week went back to normal, they didn't say, I'm used to getting 5 weeks' vacation now, I'm not -- that did not happen. Similarly, I think with regard to this bonus, it's associated with a special place and time that is the COVID years. And [indiscernible] by everything I hear from Nick and [indiscernible] is that could be least of our issues. I mean, no, they see that as something that is sustainable. In other words, Nick has continued. Nick didn't say, we won't give anybody merit increases because they're all getting an extra $10,000.

Yes, no.

That would've been [indiscernible].

So that's what my comment on sustainability was.

So I guess, to that end, what would you expect your merit increases or your wage increases next year would have to be because I guess there is just the back as providers talk about like returning to pre-COVID, which was more like 2% or 3% increases. But I guess we're still in the high inflationary environment. So to us, now it's more about 4% to 5% actually makes more sense than 2% to 3%. So I guess what's your opinion on that?

So we're in the throes of it right now, literally because we do our merit cycle once a year. We provide a target. So I want to speak in little bit of target to the overall organization. There's some variability based on not only performance where people are in the existing wage band as well as some discipline specificity related to it. We're very cognizant of balancing that against significantly lower price increases than the inflationary piece that's coming out because of the wage roll but making sure we still continue to be competitive from a prevailing market range with it. So is it slightly higher than some of the forecasted rate? Yes. But that's the business balance we've always managed and vocalized with our organization.

But you bring up great point. If you just take health care out of this equation, and let's just talk about inflation on business models. Unfortunately, I'm old enough to remember inflation in the upper teens when I just came out of college in the early days. Kevin was already working for years before that. But let's just talk -- so businesses that are all fixed costs in an inflationary environment, they're somewhat protected or lagged against inflation until they replace equipment and things like that. So if they're predominantly fixed cost, there's going to be -- inflation does a slower erosion of their margins until they start re-upping the equipment or whatever. Then you have a predominantly variable cost model, right? Variable cost model typically get average very quickly by inflation. Now we're going to go into health care. The plays that are predominantly fixed cost or have a huge component. And that would include hospitals and things that don't buy, the MRIs complicated software and everything else. There's going to be a delay, but it's coming. But home health, hospice, physicians practices, those were inflation is impacting things faster. Then you also get into scale. Health care providers, they're predominantly variable that would definitely include VITAS and Chemed, but we have such scale being one of the largest hospices in the country. That's why we added upper teens adjusted EBITDA margin, very manageable. Smaller hospices that don't have access to hundreds and hundreds of millions of dollars of capital that we're maybe only running the 6% margin because they lack that scale. They're now going to get at 2.8% when they're looking at probably a 5%, 6% increase in their wages, plus the benefit in terms of their health care benefits they're providing for their employees, so small providers that generally are not for profit, that don't have access to capital are getting to get crushed. And frankly, that's VITAS' opportunity. That's why it's not so much as -- why did we do the hiring and retention on July 1 of '22? We've been talking about a year before then, there wasn't an opportunity to implement it. It would have been spitting into the wind because things haven't stabilized enough. We saw what was happening. We saw stability. We put the hiring and retention program in place, frankly, to poach employees off of our undercapitalized competitors. And we think that's going to continue. If CMS continues to use estimated inflation that is well underneath the actual inflation, and they don't true up the estimate to actual inflation, they are going to run the small providers of home health and hospice out of business, and it will be to the benefit of the us, larger players with disruption in our industry.

But we're different, Nick and I would prefer the higher reimbursement.

Advocating for it as we speak.

I would be too, because I want to [indiscernible] methodically.

Big picture, long term, don't worry about it.

But CMS is messing with these small providers in real markets and it is going to be -- things will be difficult if they don't true up their forecasted inflation to actual inflation.

And we're advocating for all of that, even though we don't operate that way in rural markets because just as a point of reference, but it's important to get out here, we're trying our best as an industry to go vocalize independent study that's come out from University of Chicago by the North group. And what it highlighted in 2019 is the hospice industry saved $3.5 billion to the Medicare trust fund. And so when you're talking about debt ceiling limits, you're talking about solvency of the Medicare trust fund, what you have is a functioning benefit that is returning money back to the Medicare trust fund. And what I was also highlighted inside of it is the longer you're on the hospice, the more money it saves. So on average, people that are on the benefit greater than 6 months, save 11%. So we have huge opportunity for actually expanding that total cost of care savings and that's the balancing act of you don't want to cut reimbursement to such a small level arguably when the first value-based program, hospice, inside of the Medicare benefit is returning money to the -- and elevating quality to everybody that's carrying for our community.

And I wanted to make a small point. In some respects, I'll saying, okay, that's a great study. Now all you have to do is to have the confidence in the federal government, which is it's various silos to implement it, okay, which some people don't have much hope in. But with hospice, you look at what they did with reimbursement for high acuity, companies that grow dramatic, unbelievable increases just because it was indicated with the federal government pull the trigger on it and they did.