Encompass Health Corporation (EHC) Earnings Call Transcript & Summary

Got it. And then -- so I think that gives us kind of a really nice sort of view of what's going on from a top line perspective and the sequential improvement. Could we shift now to expenses? And I was -- Doug, I think you'd mentioned the potential for some cost to run a little bit higher in the back half of the year. And could you maybe just sort of spike those out and give us -- quantify them a little bit? And I think some of that information was maybe in the 8-K as well. But just sort of help us think through some of the puts and takes from a cost perspective relative to the second half.

Yes. The 2 categories that are most impacted by the ongoing pandemic are SWB and our supplies cost. And within SWB, our ability to achieve our normalized levels were to improve beyond that of labor productivity in both business segments are impaired by the revised operating procedures we've been forced to implement to deal with the pandemic. And so the hospitals are convening things like having to administer more therapy on a one-on-one basis and having to administer some of that therapy in the patient's room. It can mean the inability to utilize our dining facilities in those hospitals to feed patients in quantity. So instead we have to employ labor to deliver build individually into a patient room. And those things we anticipate are going to be ongoing. They may start to diminish a little bit if the pandemic starts to wind down, but those are going to be ongoing to the course pandemic. On the supply side, it's the increased utilization of PPE and the procurement cost of PPE, and we included some specific examples of that for each of our 2 business segments and the materials that we released this morning. These are going to be temporary restraints on our cost efficiency. We are asked frequently whether or not there are things we can do to offset those costs. And that, as you know, we entered into the pandemic being, by far, the most efficient operator in each of our 2 business segments. So if there were costs available to us, we've historically already run those out. And we don't believe because we are not of the opinion that anything here has changed the demand for our services, as Mark alluded to previously, has chased the prospects for our businesses. We don't think we should respond to these temporary conditions by making wholesale cost reductions. In fact, as you've seen by the recent state of development announcements we've had on the IRF side, we're continuing to invest through this cycle of uncertainty because we have so much confidence that the demand is going to be there and significant tailwinds that we've discussed previously, including at the Investor Day that we hosted in early March, are going to be there and are potentially augmented by some of the things that will be residual from the pandemic.

And then maybe asking about some of the data in 8-K. And I think you mentioned the second quarter EBITDA was $162 million. And then there's obviously the $43 million from the PTO. And then some of the unusually low costs that you called out. So that would get you to kind of $168 million in a in terms of a normalized EBITDA. Is that a fair number to think about in terms of the run rate of the business? Or are there puts and takes to call out that would -- presumably, some of the costs you talked about are sort of in that number, but -- and maybe there's not a fair way to be responsive to this. But just sort of trying to understand kind of what the run rate is versus that $168 million number?

It's a little hard to say specifically what the run rate is. I think that as you look at the second quarter and compared to the third quarter, you had the heavy volume impact in the months of April and May with the recovery in June, but then we gave back some of that recovery in the month of July, predominantly based on the surge in the activity in the states of Florida and Texas that Mark described previously. But it's also the case that we get the full benefit of the sequester, the Medicare sequester suspension for the third quarter. I think from an expense perspective, that it probably is realistic in terms of trying to establish a run rate to normalize for those items that we just described. One of the reasons that we put out this information in the 8-K this morning as I think there was some confusion about the ability to perhaps just add back because it was -- it tended to be onetime in nature, the full amount of the special PTO benefit that we're in through the Q2 P&L. And so we were just trying to point out that there were some of these favorable cost offsets that are likely to prove unsustainable as we move into the second half.

Got it. That's fair enough. Maybe looking at some bigger picture questions. There's been some discussion, particularly amongst the home health companies about the fact that patients and caregivers and family members, there's maybe a little bit of hesitancy to go to a nursing home setting. And even though your volumes have bounced back, and your home health volumes have bounced back nicely, it seems like occupancy rates at nursing homes are still lagging. And I was kind of curious what your reaction to this trend is? Is this a major opportunity for Encompass? Or just how you're thinking about where those patients may end up in your ability to capture some of that share shift.

Yes. Matt, we do think this is a great opportunity for both of our segments relative to taking share from skilled nursing facilities. On the IRF side, certainly, there are almost always a number of patients that are sent to skilled nursing facilities that could have really excelled with the level of care and the intensity of care provided in adverse setting. We see that quite often, for instance, with stroke population that patients aren't always put in the proper setting. And then on the home health side, we also see maybe even a greater opportunity on the home health side. Our team have a history of treating chronic patients, patients with a significant number of comorbidities. So they're already able to handle a higher QE patient in the home setting. And I think these are the types of patients that we have a really strong chance to go out and capture that share of those patients that historically may have been sent a skilled nursing facility, where now because of COVID and because of the clear differentiation between different levels of care for different types of patients and post-acute. I think our home health agencies will be able to take advantage of some of these patients that were historically sent to skilled nursing facilities but now referral sources or family members or the patients themselves will be reluctant to go down that path and would much rather receive care in the home setting.

And are there any -- are there actions that you all need to take internally to make sure you're able to capture that share, either the way you market your services to referral sources, the referral sources you go after or maybe just your capacity to care for that type of patients or any sort of investments or actions that are underway that we should be thinking?

Yes. It's both, Matt. I think, certainly, we have always been advocates of marketing our outcomes and bringing data that shows the outcomes that we achieve with our patients in various diagnostic categories. So we've been doing that in both of the segments, and we'll continue to do that making sure that we are communicating with our referral sources, both on the follow-up information for patients and making sure that we collaborate on a smooth transition from one setting to the other, whether that's from our IRF to our home health or in terms of working with our home health agencies on a smooth transition from the acute care hospitals. So it is absolutely a time for us to show how we differentiate ourselves from either other levels, other settings in post-acute or other providers in post-acute. Because even among the home health agencies or the IRFs, they're not all created equal, and we think we have superior outcomes that show that.

Okay. Well, let me try to ask about some of the kind of long-term sort of growth expectations. And at the very beginning of COVID, you all had an Investor Day and you talked about sort of expectations around discharge growth on both IRFs and home health and I think also an EBITDA growth expectation of 7% to 9%. And I certainly appreciate you had to withdraw all those targets of amid a bit. But I was just wanted to ask, as you think about longer term, is the coming out of COVID, whenever we get to normal, and I know the timing of that is uncertain, but just what are the drivers behind those types of growth rates? And is the business still capable of those types of targets? And I'm not trying to get you to provide long-term targets here, but just trying to get a sense for what drives the longer-term confidence you have in the business?

Yes. So yes, Matt, you're referring to our Investor Day on March 4, which seems like it was light years ago now, and little did we know what lay ahead. But we did withdraw on our guidance and withdrew the growth percentages keeping in mind that 2020 was our base year for those growth percentages. It does nothing to diminish how positive we are on the growth opportunities going forward. As a matter of fact, we have maintained our growth targets when you think about on the IRF side, the 6 to 10 de novos per year. We have already announced 8 in 2021 and 8 in 2022. So we have advanced even beyond that March 4 day. We're going to add between 100 and 150 bed additions per year, starting in 2021. And then on the home health side, we're remain committed to the $50 million to $100 million per year in acquisitions, and that is net of any larger scale acquisition. And then we've talked for the past number of years on our focus on clinical collaboration and the ability to capture those patients that are being discharged -- that need home health services, discharge from our hospitals. But we believe that we can achieve 45% all payer going that by 2025 with a larger percentage, maybe up to 60% longer term. So COVID does nothing to diminish our bullishness in terms of the business and the growth opportunities that we shared during that Investor Day. And if anything, we think that COVID has provided a platform for us to advance our goodwill with the referral sources that we've taken care of during this COVID period and how we have differentiated ourselves versus other settings of care or our competition.

And then just maybe the last question, maybe 1 more after this. I did want to talk through some of the election implications for you all. Maybe there are some, maybe there aren't. But this is certainly kind of the time of the election cycle where investors will start thinking through these dynamics. But in the event that we have a Joe Biden presidency and perhaps the Democrats, they control the Senate. Are there any implications from that, from your perspective? Or are there other sort of health care policy things that ought to be on our radar over the next sort of 6 to 12 months?

Well, I think whoever ends up, whether it's the current administration or Biden administration, either one will have to deal with this public health issue that we have right now that's going to take a while to dig out from. As you know, we're very active in Washington and have full-time lobbies there and spend a lot of time working with CMS and others. It's too early to tell what a Biden impact would look, how that would look, whether it's expanding Medicare, lowering the age of Medicare to 60. We don't think that would impact us a whole lot. Our average age patient is 76 in our hospitals, it's 77 in home health. So there really aren't enough details to know how things might change under a Biden administration or there has any near-term changes from the existing administration. We don't think so. We think that they will continue to be focused on COVID, the public health challenges that we have right now. And we've just not seen anything on the regulatory front that would indicate in the near term, any radical changes or certainly negative impacts on either one of our segments.

Okay. Well, I think we're just about out of time. We have 1 minute left. So I think this is a good place to leave it. So I really appreciate your all's presence, and I just want to thank the Encompass team for joining us today, and thanks, everyone, for joining on the webcast as well.

Thanks, Matt. Thank you all for joining.