Chemed Corporation (CHE) Earnings Call Transcript & Summary

Ladies and gentlemen, the program is about to begin. [Operator Instructions] At this time, it is my pleasure to turn the program over to your host, Joanna Gajuk. Please go ahead.

Thank you, and good afternoon, everyone. Thanks so much for joining our third annual Home Care Conference. My name is Joanna Gajuk. I'm the Equity Research Analyst at Bank of America in Equity Research and I cover some of the home care providers. So now it's my pleasure to host this session with me Chemed, one of the largest hospice providers. And with us on the phone are 4 members of the team are Kevin McNamara, President and CEO; Dave Williams, CFO; Nick Westfall, who is the CEO of VITAS; and also Mike Witzeman, who is the Chief Accounting Officer. And gentlemen agreed to go right into Q&A. [Operator Instructions]

So first, thank you so much for joining. And I want to start with the most recent news. Dave will be retiring from his CFO post, right, at the end of the year. So Dave we'll miss you really, and we wish you all the best in your retirement. And just, I guess, walk us through your thinking about the timing of things? And also, it sounds like you still will be involved in some capacity as you transition to your successor. So can you flash out for us the plan for that?

Yes, I will step down at December 31, and Kevin and the Board will determine what role they want me to play on a go-forward basis.

And then with regard to -- we anticipate sometime before the end of the year, it's my information that the Board will appoint Mike Witzeman as CFO. Mike has to be a fairly seamless transition, my guess is, because Mike's been with the company since 2005. He's the Chief Accounting Officer, worked very closely with Dave with regard to the financial apparatus of the company, and it's underpinnings, and we look forward. Mike has attended investor conferences in the past. He's obviously been closely associated with Dave and the rest of us for some time. So we expect a seamless transition. But Dave is -- suggest that he's not -- had no plans to go work for another health care company or anything like that. But we certainly wish him the best as he boost from one roll to the next in the circle of life, but it's been a long time of a lot of good results. And everyone here is best of friends and always good to work with your friends. But other than that, I think -- I guess the bottom line, as I say, it's kind of what we've seen at Chemed over the years, we have a number of people who -- myself included, who've been here a long time, had a lot of success. And various points, people say, I'm ready to try something else. And that's -- I think that's -- we're going to see a continuation of that theme. But in the event, with that, I'll turn it over back to any questions you might have on that or any other subject?

Sure. Thank you for that and good to hear the succession plan is in motion, I guess, we're just waiting for the official announcement. So, Mike, looking forward, I guess, to that and working with you. And I guess a somewhat related topic, I guess, question to Kevin and maybe more to the Board. But I guess, obviously, that you mentioned the team has been about for some time. So obviously, Dave transitioning to something else, and Mike taking over, it begs the question, what if there is a requirement, I guess, for a CEO change. I mean, I'm not looking for Kevin to leave by no means, but I'm just trying to think, should we expect a similar kind of process where there's the internal candidates being kind of groom and there's a succession plan for that role as well?

Well, surprisingly, now that the board sees part of its duty is on a regular basis to examine the succession issues at the key officer positions of each of our operating units and then the headquarters. So they've gone into -- they go into this subject regularly. I think that with regard to what they hear from me is that I'm healthy, still very actively interested in continuing, at least in the short to midterm. And that's kind of -- that's what they're hearing from me. What I'm hearing from them is that, yes, that sounds good. I think they feel comfortable that when you look at the bench strength for the CEO position at Chemed, there is Dave and Nick and mostly -- when they look at the people over the years, who have been long associated with the company, I mean, I wouldn't anticipate that the Board would feel that they had any need to take some dramatic move outside the company just because I think they think based on some of their comments and it's up to the Board, obviously. But at each of our operating and at the headquarters, they think that any necessary transition to succession would be handled with a minimum of disorder. So but yes, to answer your question. The regular it's legally reviewed as part of their duty.

And I guess talking about operations. So VITAS' results have been coming at better than expected this year. The guidance for VITAS has been raised again. And so now when I look at the revenue guidance, it's about 3% above the initial guidance we gave earlier in the year and also the segment EBITDA guidance is about 10% above this initial view adjusting for the costs associated with the retention bonus program. So is that how we should think about it that this VITAS' outperformance is really driven by the benefit of the retention program resulting essentially in better volumes that how we should think about that?

Well, I'll turn it over to Nick. But I mean, yes, I think that you -- well, we should assume that the fact that we've been able to replace many of the key clinical personnel that we lost during the pandemic, it's got to build them and they will build it and they will come, having a lot of things breaking in the right direction has meant that we're basically back to where we were before the pandemic and with some very good internal metrics in some ways to suggest not only we're back as far as census, but in a little better position with regard to some of our metrics. But Nick, why don't you want to weigh in on this.

Yes, just to add a little bit more commentary to it. I would think about the retention program as much as catalyst that help us get us to where we are today. I know we spoke about it a little bit on the third quarter earnings call and all commentary as we sit here today is consistent with that, which is, obviously, our ability to build clinical capacity with the catalyst of the retention program combined with the compounding effect of all the cultural benefits that come, have allowed us with the expiration of the retention program to really continue to see ongoing and improved levels of our ability to attract and retain talent in the compounding effect of that has been our ability then to go out and continue to sequentially improve referrals, increase admissions across all segments. When you combine that with our community access focus that's going to continue, it puts us in a really good position, as you pointed out, to outperform our volume expectations at the beginning part of the year, all driven due to our ability to outperform from a human capital and team standpoint. And with the expiration of the program, that continued performance gives us strength and confidence in where we finished the year and where we're going to jump off on as we move into '24 and get into a very predictable realm of growing earnings inside of a predictable range on a go-forward basis. So feel very good overall. That story has not changed since any of the narrative, I think, over the last few quarters, just further strengthened around the confidence in our stability.

Right. And I guess the retention program to your point ended in June and on the last -- the third quarter earnings call, you said that actually the turnover did not increase right after the program ended, so why do you think is that? Why this turnover is continue to be stable even after the program ended? And also if you can share any trends since then? What have you seen in November?

Yes. Let me start, Nick, just a very generally speaking, not surprisingly, with this program we got a lot of goodwill with the employees. Maybe they starting with -- they made -- they got money. That's always a good reason for my employees come to work. But also, it showed that we were responding to their needs. They were concerned. They were overworked. They were underappreciated to the extent that the program response to those issues, that's very good. To the extent that they saw that the burnout factor was largely mitigated. I mean all those things combine to a good situation. Now we can't kid ourselves. What I just don't resume really speaking for Nick as to say. We did see that, that goodwill was the type that would be dissipated from the day that they cash the check, the answer is no. In fact, to the extent that it hasn't and to the extent that it's been maintained, it's a little surprising to us. It's heartwarming. It's good. It's financially rewarding. We don't kid ourselves that over time, that goodwill. It gets dissipated just by the next time the employee has a bad interaction with his or her boss. I mean, as to the extent that any number of things that cause dislocation among employees. But for the present time, it's much better than we expected. But we got the trends and rates, Nick, what could you add?

Yes. I mean, really, the underpinning is ever since the enactment of the program all the way through today, been a singular universal reinforcement of a whole bunch of the other things, whether it's recognition programs, whether it's just simple prioritization, we also have an annual recognition program that's underway right now. And all those, I hate to use the word cultural, but it's really the cultural wraparound with it, really has continued dissipate any burn out, create a communal -- a real collaborative environment that our existing team members want to continue to be part of and it begins to self recruit for itself inside of the marketplace. So anybody that wants to join the hospice industry by definition has some higher priority for mission focused, the ability provide care at the bedside and do the right thing for patients and families. And we believe we've really accelerated a competitive advantage we have in each of our local markets for anybody that wants to get into the hospice industry that we're the best option for them inside of that space, and they're joining a team that's happy and will continue to be happy. And it will be a #1 priority. It is right now for all of our leaders. It will continue to be in 2024, and we're not going to put our foot off the gas in terms of reinforcing that and we get all the other complements of serving more patients every day more than we did the day before it as a result.

And I guess with this census growth that you've experienced this year, I was thinking also to check with you when it comes to the market share, right, in your markets, kind of where do you stand currently in some of your key markets? And also what can the share grow? I mean do you expect the kind of the impact of this success, I guess, with hiring and retention to kind of continue to allow you to grow faster maybe than the market and where could it go when it comes to market share?

Yes. I mean, by definition, whenever you talk about market share, it's unique in every market. We have a complement of information, some of which is more real time than others that makes us feel comfortable. More often than not, we are -- we have gained share and anticipate continuing to gain share. The question becomes that share is built in 2 fashions. One is more people becoming aware and accessing the benefit as a percentage of the total than before. And what we're also trying to do is make sure that the identification and awareness are happening earlier in their disease trajectory than typically happened. The combination of both of those things will allow more patients to come to us and just as importantly or maybe more importantly, come to us earlier in their disease trajectory, which is, as we all know, more beneficial for them, the patients and family as well as the Medicare trust fund. So it's really the complement of all of those things that we evaluate when we look at gaining share but also not just gaining share for share's sake gaining share with earlier access and identification of patients across the country. So it's not absolute in every market in which we operate. But overall, we feel good about our ability to continue to gain market share in those markets that we compete on a day-in and day-out basis.

I can put it this way, Joanna. There are a couple of counties in Florida, where we have such a dominant position in a say, "Well, there's limits to how far can you go in those counties." But I've been surprised over the last 10 years, even after having established a dominating position that those kind of have continued to grow, almost being on comprehension. So even those counties, even the counties in Florida where we have a very dominant position, there's still been nice growth with regard to almost any other operation, VITAS. There's -- again, there's a lot of -- there's no limitation in that regard on the other markets. It's a function of VITAS that's having enough people. We saw a very unusual time when we clearly didn't have enough people to then establishing -- make sure our reputation -- keep in mind, we don't own any of the referral sources. We have -- compared to almost any other hospice in the country, we have no connection to referrals other than they've decided that the patients that they are referring will get better service with VITAS. So to the extent that we maintain that advantage, and have the people to provide it, those are the only limitations we face.

Yes. I think the last piece, which I assume is understood by most of the audience listening, but is important to reaffirm is, I mean, there's very real reality around the increasing aging demographics of the entire country. And we're seeing some really positive things in terms of overall awareness and acceptance of hospice and palliative care. And when you take the very public experience that President Carter had is having coming out and talking about electing the hospice benefit that was, by definition, enacted when he was President and the real positive experience he has had throughout that entire journey and continues to have really helps derail, misperceptions around hospice benefit and it being brink of death or giving up and really talks about the experience, not only the patient, but they're overall family can have by seeking and electing the benefit early enough in their disease trajectory. Those type of things play a really big role for the future upside of the entire industry and appreciate everything he's done to lead that.

No, I agree, definitely. More of these figures, I guess, that are other in the media talking about openly choosing hospice definitely helps the entire industry. So I appreciate that comment. And just talking about the industry, right, we've seen a consolidation over the years in hospice. And just thinking about how has that changed dynamics in your markets? Are you seeing kind of the market changing because of this consolidation? And also with that, do you expect more consolidation to happen going forward?

Would anticipate more consolidation to continue to happen going forward. I don't think there's going to be any change in direction regarding that. In terms of what the level of impact on a market-by-market basis, it's obviously unique. Most of the consolidation or a lot of the consolidation inside of the industry was -- is due to people becoming part of larger integrated systems, insurance plans that the investment thesis there seems to be more focused on home health in the curative setting, less about the hospice sub sector of that. And so that's had minimal dislocation, where we would be competing in those markets. The rest that we are very much paying attention to is the consolidation of, in particularly, the nonprofit segment as people are in different innings either exiting the pandemic or still in difficulties related to it. And because of economics and other pieces, people are looking to consolidate or affiliate in one way, shape or form, and we'll see how that plays out. But right now, I think we're able to continue to differentiate with the level of service in which we're providing and offering a really attractive place for people to come work and fulfill the mission that we set out as an organization.

And I guess when it comes to the consolidation question, that I received here from the audience is, obviously, we know there's a pending acquisition by right of the Amedisys assets. And I guess the question was whether you would be looking or would you be interested if there was to be a divestiture sale of the hospice assets? Would it be something that you would consider looking at? And I guess even outside of that particular transaction of question from me in terms of just your interest, right, to also acquire some existing operations?

So the short answer and the one we've been consistent with is we're always open, and we do look at a large number of those opportunities. The question becomes, we have our own strategic priorities and thesis around what makes sense, what we're interested in, particularly what markets we may want to expand into that we're not in today and what's the best entry point. And so nothing's ever off the table totally, but we look at it very specific and have a pretty good understanding, we believe, of what value there is and what value there could potentially be inside in the hospice segment specifically. But we wouldn't just be buying something for the sake of buying something and hoping it works out and strategic thesis for it.

And when you look at it, Joanna, over time, the hospice assets that have become available, I mean some Amedisys hospice assets, when you look at their census size they're under [ 100 ] with the markets that getting to a [ 100 ] would be a big job. Our breakeven maybe because of our full service hospice offering all levels of service in each one of our programs is higher than that. So in other words and I say this, I don't mean to demean their efforts. It's maybe what's necessary in their markets. But it's hospice light in a sense. And unless we made a company-wide decision, it hasn't put it this way, it's not in the area of our expertise to operate on those lower number census programs unless we made that decision, it's almost like 2 different businesses. Nick started -- he referred to 2 different segments of the hospice industry. It's a different segment. It's a different business. Could we be successful at it? Maybe. Would it inject an element of risk into our business that is not currently there? Yes. Would we wave the way as out of hand? No. Would we pay a premium price for it? No. So all those factors really have -- if you look at the past that's prolonged to the future, it suggests that it would have to be a special situation for anything that size for us to want to change the risk profile of the Chemed investment.

It's always looking at the best alternative use of capital compared to everything else. I think the other aspect you referenced not only consolidation inside of home care and hospice, but there continues to be ongoing consolidation in every health care vertical. And so as we look at opportunities where we would be the preferred provider to an ever-growing larger entity that a referring health care provider across the space? Are there opportunities then? Or are there desires for us to expand into markets to service that entity along with the rest of the community? Potentially, but we got to let the pandemic get rather far in the rearview mirror, I think before some of that stuff starts to creep up.

And I guess when it comes to VITAS still and the outlook, I guess, for this year by the guidance calls for a 9% revenue growth this year. I know you don't have a specific guidance for next year. But I guess how should we think about the outlook into next year when it comes to VITAS' top line growth? And also essentially, can you grow another year of high single digits? And I guess what would be the long-term kind of growth algorithm for that business?

So yes, as you point out, we'll come up with guidance here in the next few months regarding '24. We typically only give guidance 1 year at a time. But when we start thinking about the impressive mid- to high single-digit volume growth combined with the rate increase and then potentially some stabilization regarding high acuity, which has tended to eat into that top line growth over time. We feel good about the predictability of the business and the predictability of operating profit generation inside of a predictable range. So we feel good about it, but we'll hesitate to provide specific.

Nothing unusual about this year. Right I mean we're retreating to normalcy.

So when we think about the confidence we have in building sequential -- census sequentially, it's very much there. And right now, we're lapping some low points from the fall to latter half of '22, which help on the year-over-year comps, but we feel real good about sequential growth.

When it comes to, say, 5 years out, is this business kind of a mid-single-digit top line growth? Or how should we think about it?

Probably so. I think the one thing when you look at macro trends inside of the industry and the space, hospice as sector is the second highest growth -- forecasted second highest growth rate of everything that Medicare evaluates, right? So it's talking mid- to high single digits across the country. The real question there is less about the number of lives and the demographics coming in. That's an important component of it. But also, will the country and the industry continue to move in the direction of feeling more comfortable of accessing the benefit earlier in their disease trajectory. And the combination of both of those things very much impact 5-year forecast out, but it's not just about lives. It's as much about lives accessing the benefit earlier. And as things like the NORC Research study and others have helped to illustrate not only is quality improved, but total cost of care reduction to the Medicare trust fund only accelerates rather dramatically as more people access the hospice benefit earlier in their disease trajectory.

But when it comes to these projections and your primary payer is really the Medicare fee-for-service, but clearly, there's some growing penetration when it comes to Medicare Advantage and CMS testing it, carving in hospice into Medicare Advantage in certain states, and we are in third year of this demonstration, right, CMS extended the demonstration until 2030, they include some modifications. So how do you think about this carbon really being expended nationwide mandated, right? Is this extension really an indication of what eventually will happen? Because I guess there's also a follow-up question from the audience about really hospice getting paid by Medicare Advantage plans like what would be the implications for this business from this happening?

Yes. I think it's a great question. It's an interesting one and one of which we continue pay attention to, of course. The extension of the demonstration for the carbon, right, came out of CMMI and it was on the heels of a year's worth of publicly released results in that first year period, which really concluded that there was no concrete benefit to any of the plans that participated or the providers that participated in the first year. And just as point of reference, the majority of all of the plans that participated own their own hospice providers. As we fast forward into year 2 experience and then as we launch in the next year, it's important to take a look at those overall larger plans that are participating and particularly those that are no longer participating. So United and Optum, I believe, are have a participating plan in the upcoming year from a VBID standpoint. Humana still continues to operate. Obviously, they continue to have their minority ownership interest in Gentiva. And so it's one we're very much paying attention to. But in the exact same regard, the one unique thing on the hospice benefit with the carve-out is, I would argue, as the first, even though it's fee-for-service or per diem, it is the first capitated reimbursement system or value-based piece that got enacted, right? In the early '80s. And so there is some real conflict start thinking about overall design. If you're going to try to carve in the hospice benefit to the overall Medicare Advantage payment mechanism, and as an independent provider, there's some real considerations we would need to think through, and we've been very open and transparent with CMS and CMMI sharing some of those things as they start thinking about network adequacy and helping to ensure that many of those conflicts aren't taken off the backs of patients and families in those markets where the demonstration project is active.

And I guess another topic when it comes to the Medicare reimbursement, there's a couple of different things, a couple of the questions that I got. One of them is around the Medicare Cap and the potential reform for that. So MedPAC has been calling for changes for, I guess, 4 or 5 years, so maybe even more every single year, I know that the industry is opposing this particular proposal from MedPAC in terms of cutting 20% the cap and making some changes. So how do you think -- what is the appetite really, right, from CMS to make changes to the cap to the Medicare Cap. And also if it was to happen, if it was lowered, what would be the impact to the company from that?

Got it. Sounds good. So let me take that in 2 parts with it. I think the first piece for the audience, if you look at MedPAC's even most recent presentation over the last few weeks, regarding the outlook of the hospice industry. There's an important series of slides inside of that, that MedPAC and there's some new leadership as well inside of MedPAC acknowledged the desire to go back and reevaluate some of search that was done back in 2015 by them that led to some of those recommendations over the past few years. One of the catalysts you could speculate was things like the NORC study and others that really illustrated the overall total cost of care reduction and quality improvement across every primary care disease when a patient is on the hospice benefit for 6 months or longer. That starts to challenge thesis that there's an issue inside of the hospice benefit and in some way, shape or form, there is a limitation to how long a patient could remain eligible and receive the hospice benefit. So that's a really important item that will play out in '24, and we'll see what path that goes down. But as an industry, we feel confident in the value proposition hospice provides. When you flip to the proposal that we agree with everyone else in the industry around a 20% reduction to the overall Medicare cap rate, there we have real concerns with it. And without even getting into the VITAS specific component, the primary concern for the overall industry is that type of cut has a very large potential to create what we would refer to as hospice deserts, particularly in rural markets. And the last thing we want as a country, and I'm being philosophical with this, is that have a provider not have the ability to provide hospice care in any rural market because a hospital is not within a 60- 90-mile radius associated with it. And so being draconian and just trying to slash the cap for maybe misguided other reasons could have some real catastrophic impact around access to care across the country. And while we don't operate in rural markets, we are adamantly opposed to it because any negative impact to the overall industry, we see as bad for the collect good level of the country.

And let me -- Nick, just say, we're not whistling past the graveyard. Medicare is a government program. I mean anything -- the government could do anything, okay? Let's watch what they have done. A couple of years ago, we got high acuity, they increased the reimbursement, 35% and 40% with regard to the 2 parts. I mean what and the reason they did that is they said, that's a really good service. It will save us money why don't -- let's get -- let's provide that to the patients, Let's encourage hospices to provide that level of service they're not now. That's what it takes. It will -- we'll do well by increasing that. And that's what they did. What do they do every year institutionally that they've increased reimbursement. It's always possible that company they don't. But I mean that's -- if you look at what they do, it's been a very stable, solid predictable reimbursement model. And when you -- and actually, I would think, given the per diem basis that we don't charge per service, we can't do unnecessary services when it's one that's a very clean service, hard to game from a provider standpoint compared to almost any other service provided to Medicare and paid for by the federal government. So nothing is perfect. But relatively speaking, it's -- if you look at hospice and say, it's predictable it's been -- the government has consistently reimbursed in a very cogent manner. And it's not unreasonable to take some comfort there.

And that's why I referenced things like the NORC study and others, Joanna, where you say, in 2019, the study found that on $20 billion of reimbursement $3.5 billion were saved in total cost of care by people electing the hospice benefit as opposed to them not. And the real resonating finding was not -- you could go from $3.5 billion to $7 billion of savings on $20 million, a little bit more than $20 million of spend. If you simply got 15% to 20% of those patients accessing the benefit a few weeks earlier in the remaining disease trajectory. And so that's what the realm of magnitude in terms of the benefit to the overall Medicare trust fund could mean, but it all needs to be balanced and of course, always focused on the best outcomes for patients and families and what's best for the country and the Medicare system.

No, I agree, escalated that to support the argument, but the hospice's benefits is money for the system. But at the same time, right, we've also been reading in these proposals and final regulations really both in hospice and home health about these different provisions that imply more oversight for hospice, right? And it seems that the biggest one is really the special focus program, which CMS finalized really without any changes. And so not really giving into the industry's pushback. So how do you expect this program to really impact on your operations? Because it sounds like this is happening taking effect, I guess, starting January.

So actually, there's been a modification on a public announcement by CMS since that point, Joanna, just for reference, and I think it's -- that modification is illustrative here, which is they came out on their public webinar, if you weeks back and made everybody aware that the -- while the program continues, unmodified, which was not consistent with 18 months of recommendations by technical advisory panels, trade associations, providers, even the bipartisan congressional leadership that enacted the rule to begin with. It -- we'll see that if they're saying it's not even going to be enacted until at least October of 2024, and they've been very consistent in the stated narrative of being open to continue to listen to modifications to the proposed algorithm, which is what gave everybody the consternation to begin with around some real flaws inside of it and that it may not achieve the intent of the original HOSPICE Act, which was no one that's a well-established mission-focused provider is concerned about oversight. But we want to make sure it gets targeted at those providers that's intended to not do the exact opposite with it. So hopefully, we'll see some continued modifications and openness over the next 11 months before the SFP really begins to go into effect. But they quickly pivoted and pushed it back 10 months, but we're trying -- the industry is trying as a collective group to continue to stay front and center to get the recommendations in place that they are beating the drum on for the last 10 months.

Is there still a chance that maybe Congress could step and mandate CMS to adjust this methodology?

I think there's a whole lot of potential inside of there. Our goal is just to try to get it accomplished in the least disruptive way.

No, I appreciate it. I think this is the end of the time we have allocated. There's a lot to talk about help. So thank you so much, gentlemen, for spending this time with us, and thanks to the audience for your participation. I hope you still stay for a couple of more sessions today, and we have another day tomorrow. So thanks, everyone, for joining.