Chemed Corporation ($CHE)

Pleased to be joined today by Mike Witzeman, Chief Financial Officer of Chemed Corporation; and Joel Wherley, Chief Executive Officer of VITAS Healthcare. Thank you, guys, both for being here today.

Thanks, Ben.

Thanks, Ben.

Just wanted to kind of kick off with some -- a little bit of discussion about admission mix rebalancing cadence. For the quarter in 1Q '26, VITAS had over 19,000 admissions. It was up about 7%. Hospital direct admissions were up almost 14%. All other pre-admissions up about 8.5% in the Florida program. You described the hospital admission range as appropriate, balanced for sustained long-term stability. With Florida kind of at about 44%, how quickly are you experiencing a push to nonhospital admissions to become the dominant growth driver for the remainder of this year?

Yes. We spoke about in the fourth quarter of the calendar year of '25, first quarter of the Medicare cap year, that we needed to see how that quarter went before we could think about responsible, thoughtful growth back into that Medicare CCN. We established key metrics that we measure on a daily basis specific to the percentage and split out of where our business comes from. We can't control average length of stay. What we can control is where we focus our resources and our efforts, into referral environments that we know typically generate a short length of stay, medium length of stay, long length of stay type patient. So as we purposely refocused where our resources went in response to our cap mitigation strategy, we came out of that fourth quarter extremely strong, very pleased with our execution and feel like we're in a really good position. I know we put out there to keep our hospital environment in kind of that 42% to 45% of our total admissions. That's on an annualized basis. There's going to be fluctuations up and down. There is a little seasonality in Florida as well. So that's going to fluctuate monthly, but we feel really good about where we're at with that number. And in all honesty, we look to the back half of '26 really as an opportunity to now thoughtfully begin to grow back that census. And actually, we're already doing that, and we're ahead of our expected growth trajectory.

Yes. As far as cadence goes, Ben, we -- as you well know, I'm sure, we had projected in the first quarter having ADC flat during the period where Joel and his team were sort of rebalancing that portfolio. And it actually grew 2.2% in the first quarter. And so we're ahead of the curve. Joel's team did a great job in accelerating the return to a more balanced patient mix. And that adds to itself, right? It's cumulative as you go along. So we really, as Joel said, expect the second -- particularly the second half of the year to really show some significant growth for us.

Yes. And then from a cap perspective, $32.5 million of cap cushion in the Florida combined program in the first quarter alone. No cap liability accrued for in the quarter. And then how are you thinking about that developing, just the dynamics of Manatee County opening and kind of knowing that all of those are going to be kind of short stay to begin with?

Yes. So I'm sure the pendulum doesn't swing too far one way or the other. We like the balance where we're at. Yes, to your point, Manatee, so that if you look at Manatee as a statistical opportunity, about -- in fiscal year '24, about 61% of the Medicare deaths that occurred benefit from hospice benefit, okay? Their average length of stay was less than 50 days. So they were exercising their right to the benefit very late in their disease trajectory. We feel strongly through our educational efforts that we'll be able to work with the health care community, improving education and expand that, allowing that patient and their family to access that benefit earlier. To your point, for the rest of '26, all of those new patients are essentially going to be a short length of stay patient given the time frame of the Medicare calendar year, which ends September 30. So they're going to come online mid-June and they'll continue to help contribute to our cap mitigation, but as -- starts, Pasco, Marion, Pinellas specifically, we're already seeing that we've received their short length of stay benefit from start, but now they're building census. So now they're starting to contribute and, essentially, we're able to then monetize the value of that cap mitigation strategy in those new start markets.

And the new starts are really what has allowed us to really start taking in those longer-stay patients in a quicker time frame. They've given us that runway to be able to do that.

Yes, maybe we can stay on the whole Marion, Pasco and Pinellas discussion here. Obviously, as you mentioned, exceeding expectations on the pace of ramp-up. Anything in particular driving that outperformance relative to kind of the, I guess, the 500 admissions you had expected from those markets, in your internal model? Any referral source relationships, community awareness dynamics in those markets that are developing that faster new start benchmark?

Yes. While I won't talk about specific referral sources, the opportunity that we've been presented in those communities where there clearly was a need to be met. So increased educational opportunities and our approach to a new start market. We go all in. We don't come in with a skeleton staff, pay as you go, advance your team as you grow census. We come in all in, fully loaded and are able to hit the ground running. And it's been extremely well received. Florida does such an incredible job managing the CON environment. They identify the need through a very long tested algorithmic approach. And so when we see that high growth in deaths that are not being met, they open up the CON opportunity. And in those markets specifically, we've seen it be received extremely well. And it's exceeded our expectations, but that's a contributor to our team, being able to come into the community, present who we are, the value proposition that we present and the referral sources have responded.

In Pinellas, for instance, I think we had market development people on the ground a month before we started operations. And as a result, on the first day, we took 5 patients in, the first day. I mean that's an impressive development for Joel and his team.

Yes. And to that point, Mike, specifically, if you think about Pinellas geographically where it's at, if you think about Manatee geographically where it's at, and there are other CON, Pasco, we're also in Tampa, Hillsboro County. So our ability to market in the metro Tampa area is benefiting those other markets, and it's going to benefit Manatee because our brand awareness is already out there.

Great. It sounds like from these ramp-up, the trends that we're seeing, I think that I just want to kind of come back to the cap issue because we still have some clients who are asking us -- or treating the cap issue as kind of a show-me story just given the 2025 headwinds. But it sounds like just given the ramp-up of the new markets, that there's not too much to worry about, at least as trends are trending now in 2026. And then as I look ahead to 2027, in the rate update, I believe you guys have previously communicated to the market that Florida, you're going to see about a 1% rate update in that state versus a 2.4% cap set up. So do we have anything to worry about next year?

Yes. No. We believe we've put in place guardrails that will protect us and help us manage against the cap liability long into the future. You have to understand how we got there. This has not been a historical issue, the VITAS. And it does speak to the [ archaic ] reimbursement environment on how cap is established. Essentially, a patient by the federal government is set at the same level in Florida as they are in Sacramento, California, where there is significant reimbursement differences. So all of that plays out to you have to manage to what the government says, you have to present in first-time Medicare admissions versus your total billed Medicare revenue. So we feel with the guardrails, maintained that range of hospitals, which typically are going to generate a shorter length of stay patient to then effectively balance that. But remember key strategies is taking that hospital relationship, which is a health care system, in expanding from just a hospital-based referral to perhaps their insurance product, their physician community and all the other relationships that they have, whether it's home health, palliative or pace, the opportunity to then become the preferred provider across all of that genre.

And to further Joe's point on the sort of the KPIs, I mean as he said, we had a 20-year track record of not having an issue. So we use the data that -- from those 20 years to see what guardrails need to be in place to make sure this didn't happen again. You don't need to go through the -- you know the story very well, but we need to go through the whole story of how it occurred from the pandemic and all that. But we just got out of position a little bit. We have better tools, better measurables to make sure we don't get out -- early indicator warnings to make sure we don't get out of position again.

Got you. And as we kind of look through the back half of 2026, I mean, how are we thinking about the [ A ] loss trajectory through the back half and kind of as a lever to get to that 18% to 18.5% margin that you've targeted?

We've already expanded through our strategic initiatives the focus on growing nonhospital [ premet ] environments, not reducing down the volume of hospital admissions, but growing and expanding nonhospitals. We've already seen that shift in a responsible way that will help us then continue to add census, which longer length of stay, driving a less complex patient, greater margin associated with it.

Yes. I mean the new starts obviously helped early in the year. But the other thing I think that Joel has done that's very smart is continue to keep the hospital admissions high, right? So when we got out of position last year, it was because I wouldn't say we ignored hospital admissions or anything like that, but we devoted more resources to the longer length of stay. [indiscernible] equal resources not to both, and so the faster you grow hospital admissions, you can also grow the longer length of stay admissions at the same time.

Got you. And then like your new Tampa Bay Area market where there's obviously a lot of discharges from the short length of stay, and that's a great balancing lever to have for the state, but as we get into 2027 where it appears there might be less of it, even worry about cap, is your ability to attract those longer-stay patients in that specific market, for example, as robust as the rest of the state?

Yes. Throughout the state, I mean, we are, by far, the largest provider in the state, the most trusted and well-respected brand across the state. And so we've done a really good job historically of balancing the benefit and the opportunity that a community may have. And again, hospice -- the hospice benefit was lifted up in 1983. It was primarily intended to be a cancer service environment. That has shifted significantly. And so there is so much more opportunity from other disease states that typically will come on sooner and have a longer trajectory.

And that's one of the reasons -- maybe the big reason why we probably 15 years ago, consolidated Florida into 1 provider number because then it's not so dependent on a location-by-location basis. if Joel sees an opportunity in Dade County to improve a relationship with a long -- a SNF or an ALF or whatever, we can do that and use the cushion created in Manatee to offset that. So that's one of the benefits of having Florida as one provider number.

Yes. And I'll add strategically, if you look forward to '27, '28, as we responsibly balance where we're spending our time and grow that nonhospital environment, we're also bringing on new opportunities from a higher acuity, short length to stay patient. We just did a groundbreaking on a new freestanding inpatient unit in the Treasure Coast Port St. Lucie area that will come online in '27. We just signed a new relationship in the Fort Myers area for an inpatient facility there. So we're [indiscernible] to the portfolio to ensure that down the road we have a great mix and balance to be able to effectively grow and, in turn, drop that to the bottom line.

Inpatient units are important for cap because they take in the sickest patients.

Sickest of the sick.

And directly from hospitals, generally, taking the sickest of patients. And so they have a pretty short length of stay generally, which provides cap cushion for other things.

And I want to shift over to labor capacity. I know that this has been a core competency of you guys since the pandemic. But we came through first quarter about 100 FTEs understaffed. I just wanted to -- I know you accelerated hiring. Maybe you can kind of talk about your plans there, your targets versus your steady-state hiring, and how that's progressing in the second quarter?

Yes. It really was responding to our growth in census. We purposely had that employee base down based on what we were doing from a cap mitigation strategy. We manage that census responsibly down. And then as we have started growing that back up, program by program, we identify the specific needs. And we're having no concerns whatsoever in moving the labor demands and adding care in all of those programs. We're also managing it appropriately to the census growth, so it's not additional marginal compression.

We had budgeted originally about 30 to 35 FTEs a month that we would add during '26. We started 100 below where we thought we were going to start. So we increased for the last 9 months of the year to about 50 to 60. But as Joel said, that's just responding to the increased, the more accelerated increase in the ADC to respond to the volume.

Got you. I want to shift over to some of the regulatory and policy environment a little bit. A lot of scrutiny in California that we've heard recently about the concentration of operators in that state. And can you maybe talk a little bit about your exposure in California, ADC concentration, and then active CMS state-level reviews that were impacting your platform?

Yes. California is 15-ish percent of our business. Joel can talk about the regulatory environment, certainly.

So we're the largest provider in the state. We've been very actively involved with Washington, with Dr. Oz. Attended his very public meeting in California. We've provided guidance. Look, in reality, we believe that scale, transparency and clinical expertise is going to be a tremendous advantage. We have no concern whatsoever of the increased oversight and the steps that they've taken. And I'm going to separate out the California circumstance from the national moratorium that was just announced and I'll address that specifically. But in California, in L.A. County alone -- and we're very vocal about our concerns about this. L.A. County grew from the high-400 providers to nearly 1,800 providers in a 2-year period. And so they got their license somehow. That starts at the state. That's not the federal government. However, that oversight also comes from the state, and it didn't happen. So we welcome the fact, and Dr. Oz publicly communicated last week in the press conference, that they have suspended the billing privileges of 100 providers in L.A. County, of which more than a handful of people reached out to the government to say, what is going on? The others are just moving on. We had no issue whatsoever in the additional scrutiny. Weed out the fraudsters, because it only takes away from the incredible benefit that the hospice -- in 1983, the hospice benefit was created and the need it was there to meet. This is the most vulnerable time of life, and yet there's individuals taking advantage of that. And there's fraud in every aspect of health care. But we only have one shot at this in hospice and you've got to do it right. So our stance and position in working with Dr. Oz and their group is we are extremely supportive. What we're disappointed with is the broad-brush approach they decided to take nationally in announcing the hospice moratorium last Wednesday. We would much more prefer a targeted, specific approach where they've identified areas of fraud and specifically then, with local state government, to weed out that fraud. Our concern is this, the broad-brush approach on a national basis impacts everyone nationwide. Now from a business case, it doesn't impact us as a clinically competent regulatory [indiscernible] in every state we serve. So we have no concern about the oversight. What we're concerned about is what it does to states that have no front. If you think about North Carolina, if you think about Florida, that have long-standing, fantastic oversight through their CON process, this moratorium applies to them. So it's [indiscernible] they increased deaths in that community, how does someone expand to that community to help meet that need? There's only [indiscernible]. Eventually, it's going to be modified and be more target specific. But for right now, the broad-brush is concerning, recognizing that only about 51% of the individuals who pass away in our country today who could have benefited from the hospice benefit access, that benefit. There's so much more opportunity and more studies that support the fact that as long as the patient is on hospice, the more money they saved the Medicare Trust Fund. Not the opposite. So get rid of fraud, weed them out, focus specifically on where those areas of concern are, let's look at improving education and expanding that benefit to those in need. The misconception is the fact that hospice is about death. And in 1983, when it was lifted up and focused on cancer, it was. Today, hospice is about life. It's about infusing as much life as possible into whatever journey that patient and their loved ones have left. That is a tremendous responsibility. It's not a test, it's not a chest x-ray. It's everything associated with the terminal prognosis for that patient. It's a powerful charge and one we take very, very seriously. [indiscernible] to ensure that there are appropriate guardrails put in place, that we have targeted specific focus to identify fraud and weed it out and the opportunity to expand the benefit to those patients and families in need.

Great. I think that brings us right to time. I really appreciate it. Joel, it's great to have you for the first time at the event, and we always like hearing from you guys. Thank you very much.

Thanks, Ben.

Thanks, Ben.