Encompass Health Corporation (EHC) Earnings Call Transcript & Summary

Good morning, and welcome back to the Barclays Global Healthcare Conference. My name is Andrew Mok, and I'll be hosting today's session with Encompass Health Care. Thanks to the entire Encompass team for joining us this morning. It's my pleasure to welcome Mark Tarr, CEO; Doug Coltharp, CFO; Barb Jacobsmeyer, President of Inpatient Hospitals; April Anthony, CEO of Home Health and Hospice; and Crissy Carlisle, Chief Investment Relations Officer. I believe Mark has some opening remarks. So Mark, why don't I open up the floor to you.

Yes, Mark, you thought of the oldest trick in the book. Here we go.

Okay. Well, thank you, Andrew. Hopefully, everyone can hear me now. It's -- I want to appreciate everyone joining us today. I want to start off just some brief recap comments first on 2020. And then probably more importantly, how excited we are with the momentum that we've taken into 2021. But in spite of the disruptions of COVID in 2020, we were able to achieve the primary operating priorities that we had set out in 2020 to achieve and start first with the IRF segment. We brought on 4 new hospitals and a number of those were in new states that we're excited to have a presence. Both of our operating segments had to implement the new regulatory changes. We had the Section GG on the IRF side of the business, and of course, PDGM on Home Health. So those were challenges that we successfully faced. We saw the continued growth in the IRF side of business with the Medicare Advantage payers and continued to have a chance to show our value proposition that we could achieve, particularly with the COVID patients where the higher acuity patients that we could get great outcomes and get those patients back home. And then we continue to advance our post-acute solutions using all this data that we can now capture through our electronic medical record in data analytics and most notably through our readmission prevention model. So it was a busy and successful year on the IRF side in terms of achieving a number of these operating priorities that we had set out. Same thing on home health and hospice. I already alluded to the fact that we implemented PDGM the -- once again, the home health and hospice segment had the highest margins in the business. A part of that can be attributed to introducing a new therapy compensation model at the height of the pandemic. We had a chance to continue to roll out and utilize the information with Metalogics care tool and working with our therapists and nurses out there. And then we're excited about the fact that we executed a new national contract with UnitedHealthcare with MA plans there. So we continue to have ample discussions with the MA plans on both of our segments. So we have a lot to be excited going into 2021. The fundamentals of our business remain very strong. We were very pleased to see the volumes come back throughout the year in fourth quarter and then that carried over into the first quarter. So for 2021, we'll see 8 new hospitals coming on in terms of our IRF s2164egment. We have 12 new hospitals that are planned for 2022. So we have a very robust pipeline. That's a combination of wholly owned and joint venture hospitals. We'll continue to build upon the MA plans and working with the payers to continue to show the value proposition. We've very successfully done that with stroke patients. We think there are other categories of patients as well such as fractured hips, that we can show the same value or increased value with those patients treated in IRF versus a nursing home. And then we're pleased to continue to be involved with the American Heart Association. We'll be co-branding and launching stroke continued education programs. And so that relationship with AHA has been very positive in terms of positioning the company as the go-to site for stroke rehabilitation. It will be another active year for home health and hospice as well. This is a year where we would say that the reimbursement landscape has greater visibility than at any time in the recent history. We'll continue to focus on capturing market share, both organically and through industry consolidation. We certainly, with the improvement in the trend lines for COVID, we would expect for the electric procedures to start to tick back up, particularly those in orthopedic categories that would benefit our home health agencies and increase volume there as well. And then we're collaborating with 2 home health care organizations that provide personal care to support the SNF at home program. And then finally, we're encouraged to be rolling out a virtual visit platform with national payers capitated programs. So we have a full slate of advancements for 2021 that we think are clearly indication of the basic fundamentals and drivers of our business that will lend to the growth and continued need for the services we provide in each one of our segments. So Andrew, that was a very quick recap of 2020 and those areas that we're very excited about in 2021.

Great. A lot to unpack there. And you put out an 8-K this morning. So, to start, I'll ask you to highlight the real-time volume trends in that release, including the impact from the February weather disruption in Texas?

Yes. So as I said, we got off to a good start in both our operating segments in 2021. Each segment was at or in the IRF's case slightly above pre pandemic levels, particularly for March. Home health got off to a really strong start in January and February. Of course, the storms in Texas and Oklahoma were impactful for us for the 7 day time period. We estimated impact us by 700 admissions. The good news is that, that has rebounded. That volume has rebounded. We're seeing kind of a return to normal business and the hospitals are returning back in terms of their volume. So we're starting to see the downstream flow from that. So we did not have volume impacts from the storms in our hospitals, although we had some increased expenses that will be affiliated with that, whether that's putting up our staff in hotels or having to buy water and other supplies, but it certainly had a short-term impact on our home health and hospice.

Got it. One thing that called my attention was the incremental expenses from the winter storms, but the volumes were not significantly impacted, but were some of the measures you took to mitigate the volume impact from that storm?

Let me -- I'll let Barb Jacosmeyer talk first about what we did with our hospitals.

Yes. The main reason, I think we didn't feel the impact on the hospital side is that we certainly saw a few days of delay where patients were not able to discharge home from our hospitals. But what we saw is we saw the same impact in the acute care hospital, their patients weren't able to move out. So by the time things started to clear up and our patients could get home, we had a large pending referral list to get patients moved into our hospitals from the acute care hospitals. So while we had a few days of delay getting patients out, we didn't lose any admissions because those pending needs were happening in the acute care hospital. So we refilled and actually filled above the discharges once we were able to start moving patients.

And April, do you want to provide some insights from the home health side?

Yes. Certainly, Home health had a little bit more of a near-term impact. Those delays and discharges from the hospital, inability for clinical staff to get out to physician offices and the physician offices themselves being closed over the holiday resulted in about 700 admission decline in the month of February, about 30% of our total volumes come from Texas and Oklahoma, which were our most significantly impacted states. And so it certainly set us back after a really nice start to the year in the first 6 weeks. That storm that took about 7 days out of February. It was pretty impactful to our February results. We are encouraged by the return to more normalized volumes in the last week of February and feel good about the start that we've seen to March as well. So I think we've got the rest of the year to recover that. So we feel good that we can certainly do that over time. But impactful in the short period that we had in February.

Got it. That's helpful. There's an ongoing debate in the marketplace about how quickly utilization could rebound as COVID cases decline. Is there anything that you would note during the current drop in cases that would suggest a different or accelerated pattern for non-COVID utilization, maybe a rebound in deferred procedures like orthopedic or joint replacement?

Andrew, a number of things that we have tracked and kind of learned over time in a COVID environment in terms of metrics to keep track of. One is we have seen a significant reduction of our own staff that had to be quarantine due to exposure to COVID. So we got as high as 1,100 staff at one point during the peak of the pandemics. These were staff that we had to take out of their availability to come and care for patients because they had been exposed. So that was down to, I think, almost 300, a little bit less than 300 last week, or less than that. So we've seen a 4-week decline on staff that have been out on quarantine. We've also seen a decrease in the number of COVID patients that we have, both in our hospitals and in our home health service. At the same time, we've been able to increase the number of vaccines for our staff and so the combination of all of the above gives us a great deal of encouragement that we're getting on the other side of this pandemic, and hopefully, that will continue to exist, and there won't be a surge. But like I said, between the staff that were out or the number of patients we're treating, both of those right now are at multi-week lows, and we find that very encouraging.

Do you have an update on the destination rate among your clinicians?

Yes. So on the IRF side of our business, 43% of our employees have been vaccinated with at least one dose. And then on our home health side, we have 28% of our employees have been vaccinated with at least one dose. And with their passing week, that just continues to increase as we have access to the increased supply side of vaccines.

And on the patient side, how has the vaccine rollout progressed in the senior living facilities where access restrictions have hampered growth? Can you talk a little bit more about the reopening efforts that you're seeing there?

Sure. April, do you want to touch base on that?

Yes. We are very encouraged by what we're seeing in the assisted living facilities. They've been pretty proactive, and the government has been working strongly with them as well as the pharmacy suppliers to get those vaccines out so almost all of the ALFs that we have worked with at least have one round of vaccinations for the residents that are willing and eligible for care -- eligible for seat. We're seeing that come online with more and more of them having those complete second doses. And in turn, they're asking that our team members be fully vaccinated to come into their buildings as well. And so I think we've set out a few more weeks before we'll be in a place where we'll be fully back in, but we're getting awfully close to that, and we're seeing steady improvements in our percentage of residents that are being cared for in those assisted living facilities. That's been moving in the right direction. I think the vaccine is going to accelerate that.

Okay. Great. I also wanted to touch a bit on technology. Your technology suite has been a positive differentiator throughout the enterprise. Can you talk about some of the new predictive models you're deploying with respect to readmissions and fall prevention?

Yes. So Barb Jacobsmeyer has been very involved with that, providing leadership on that. So I'll ask her to weigh in.

So on the readmission front, we did get that rolled out to all the hospitals by the end of 2020. That's been really critical because as you know, in the past, we focused on our ReACT model, which was to help prevent the patients to have to go back to the acute care hospital while they were with us. But a big cost to payers and to acute care hospitals as it relates to their readmission is really that remission that happens after we give the patient home. So the deployment of the readmission prevention really takes into account other types of variables for the patient that affects them once they get home. And so the readmission prevention allows us to notify whether it's our home health or another home health of a patient's risk for readmission after they get home. That really helps the home health focus on getting out to see that patient within that first 24 hours and try to help front-load visits because that patient's most critical time is usually that first week at home. And what we find is that a lot of the home health do have the ability to have some risk mitigation efforts as they start to diagnose and evaluate the patient, but that many times takes those first few days of visits to get that information into their systems. This predictive analytics allows us to notify them at the time they're leading our hospital that they're high risk. And so we're going to be able to monitor what does that readmission look like and how much are we able to decrease that readmission after the patients leave our hospital. So we're really excited about that. So that got out to all of our hospitals by the end of 2020. On the fall prevention piece, we're really just at the stage now that we're going to be developing and piloting that. But that is to really help -- again, that will have an impact on readmissions because we've had over 12,000 falls in our hospital in the last year, and those are things -- as the patient enters the rehab hospital, one of the goals is to help them become more mobile. But becoming more mobile, they're at greater risk of falls. And there are sometimes those falls actually create a need for a readmission, and that obviously increased cost to the payers as well. A lot of the current systems out there to predict a patient's fall risk have been developed and are more for the patients in the acute care hospital. And if we use those models in our rehab hospitals, almost every one of the patients are at a fall risk. And so it really doesn't help us focus and identify those patients at greatest risk. So we'll be starting to model this predictive model in our hospitals and refine it, just like we did with ReACT just like we did with the readmission prevention, with the goal of having something that we can roll out to all of our hospitals by the end of this year.

Andrew, just as a reminder, we have made a pretty substantial investment a number of years ago with Cerner Corporation to work collaterally on developing an electronic medical record that is specific to what we do in a rehabilitation hospital. So that's been fully deployed now for the year. So what we are able to do now is to capture that data of over 400-plus thousand discharges now since we've had the system, we're able to collect that strategy, data analytics, create these predictive models that Barb just touched based on. So we're really starting to see the benefit of that investment made several years ago.

Okay. Great. Let's transition to the home health segment now. Throughout 2020, new referrals led to nice market share gains from SNF diversions, but the next leg of SNF market share gains will likely come from the higher acuity patients. How do you think about that opportunity set for home health? And what investments are you making in this area?

I'd be happy to jump in there and talk a little bit about that. So we're -- I feel excited about what's happening with SNF diversion. We've seen it really accelerate, obviously, throughout the course of the pandemic. But at the same time, we recognize that the SNF at home model, although a catchy phrase, doesn't have a full reimbursement model around it yet. So we're certainly seeing the opportunity to take higher acuity patients into the home and under the current diversion strategies, we're seeing that those patients, if they have a reasonable caregiving network, can come home and then home health can support their acuity of those patients under the current model. There are other patients that, as you really think about the broader scale of the SNF at home model, are going to need a different kind of reimbursement model, something that covers non-skilled care, home delivered nutrition, a variety of different things that we don't have in the model today. And so I think we're working with payers who are willing to come up with innovative ways to create those models. When it comes to the traditional Medicare model, I don't think they're quite there yet. Some are being ready to fully innovate the SNF at home model, but we're seeing a lot of the payer relationships where they've got a strong interest in finding a new alternative to that. So I think we're going to find lots of opportunities. And that when we can put together the right structure of both reimbursement and access to those home-based services SNF at home model has the potential to make a huge difference, a daily cost of care under our current home health model. Your average reimbursement per day runs right around $50, even a little bit less than that. You take that service at nursing home at $450, there's a place in the middle where I think SNF at home model could work really effectively.

What needs to happen on the regulatory side to facilitate that shift upward? What do you need to see from CMS here?

I think it's obviously less of a regulatory change and more of a reimbursement change. So it's not that we necessarily need some freedom to care for these more acute patients. We can handle the skilled components of that here, it's just that we need reimbursement to support the non-skilled components of that care. Today, we can do that when families have the personal financial resources to do it, but as you know, that's an expensive undertaking to bring in non-skilled caregivers for a block of hours each day. And so many families can't afford that alternative. And until the government sort of steps in and says, hey, there's a model where we can see savings between the $450 a day for nursing and the $50 we're currently paying from the skilled portion then I think there starts to be a much broader opportunity. But it's less of a regulatory issue, more of a reimbursement issue.

Got it. That's helpful. COVID has also accelerated long-term trends toward virtual care broadly. How do you think about the role of telemedicine within home health specifically? Where are you seeing the greatest levels of adoption? And where are you seeing the greatest levels of resistance to telemedicine?

Yes. I think we're certainly encouraged by what telemedicine can do, but we also are quick to recognize that in our population, there's not really a one-size-fits-all kind of approach for telemedicine, but you've really got to figure out how are you going to make it impactful, how are you going to do it in an intentional manner that really ensures the patient outcomes are realized. And so I think we're seeing really a multichannel approach. Sometimes, it's 2-way video calls. Sometimes, it's just telephonic interventions with patients who don't have 2-way video capability. Sometimes it's text messaging using the Cindy app that we've recently adopted. Sometimes it's a combination of all of that. Sometimes it's home-based sensors and in-home telemonitoring devices. So it's just all kinds of different combinations. And what you've got to do is find the right combination for that patient based on their acuity, based on their ability, based on their middle status is a whole host of factors that determine what the right combination is. I think where the innovation is going to come is that we're going to start to see over time that instead of admitting a patient and signing a care plan that's 100% visit based, you're going to start to see care plans to be much more of an evolutionary thing, where you start with a visit based approach, you add in some combination of telemedicine that fits for that patient. And then you start responding on an as-needed basis, an exception basis to the care. And so your face-to-face visits instead of planned or just observation and assessment, start to become the things that are done as a response to what we're learning through the telemedicine alternatives. And then we start inheriting face-to-face visits when they really fit when they're really needed. So that we're getting the most bank for the buck out of the face-to-face encounters and in turn, the most efficiency out of the telemedicine opportunities that we have through that multichannel approach.

Great. That's a nice segue into the home health segment performance and MetaLogics. In the back half of 2020, the home health segment delivered meaningful margin expansion. Can you flush out the drivers of the cost improvements, including the impact of MetaLogics? What were some of the unexpected outcomes from that rollout?

Yes. So well, one of the primary drivers certainly of the margin improvement was our cost per visit. And so if you lower visits, but you don't manage your human resources well, and cost per visit goes up, you really don't accomplish anything. You give the patient less payer and you just spend the same amount of money to do it. I think what we've proved to be really adept at in the second half of the year as volumes were shifting and moving rapidly was creating a cost structure with our employee base to make sure that we were bringing our cost per visit down. We did that through innovating our therapy compensation model. We've leaned into some of those same resources into our nursing model, and we did a really efficient job of managing cost per visit. Along the way, as we deployed MetaLogics, it really kind of got it officially deployed by the end of the second quarter. But because a lot of that deployment was happening in the midst of COVID, I think it was a little bit less an immediate adoption is because people were so distracted with all of the other COVID related issues. So it took us into the third and fourth quarter to really begin to see much in the way of gains in that. But you will notice, as you look at our visits per episode that we began to see some improvement in the third and fourth quarter regarding visits per episode. I think we still got a pretty good runway of improvement that we'll see from the MetaLogics tool in the really each quarter of 2021. I think you're going to continue to see migration in our visits per episode and we're moving cautiously because we want to make sure that our outcomes are not effected. We want to make sure that our patients are getting all that they need. And so we're taking a bit of an expeditious approach to cautiously moving toward what we think is a great new opportunity on visits per episode. And the combination of improving visits and lowering cost per visit is going to create a nice margin uptick. And so I'm proud of the balanced way that we approach that this year.

That's great. We're just about up on time here. So maybe last question. We're now one year into the pandemic. Can you speak to the lessons you've learned in managing through the crisis and how your organization is better prepared to deal with the next crisis? Maybe start with Mark.

Yes, Andrew. So first of all, I'm very proud of the way our organization responded to the crisis. And we were there, very responsive to the acute care referral sources. We never hesitated in taking COVID patients either in our hospitals or our home health agencies. We proved that we could treat these patients and treat them well and be a valued part of the post-acute continuum. And I think it's always to all that not all parts of the post-acute continuum was able to perform with COVID patients, in particular, the skilled nursing facilities were very challenged with that higher acuity patients. So I think that one of the tailwinds we take away as an organization is this goodwill that we continue to develop with our referral sources and the fact that we showed the quality that we could provide in an environment that's really high acuity patients. I think that clearly, we learned to diversify our supply chain for PPE supplies, and we did that in the middle of last year. I think that we've also seen the continued resiliency of this organization and its ability to mitigate challenges thrown at it, whether those are regulatory, whether those are pandemic, whether those are cost or pricing changes in the marketplace. So I think our organization has a lot to be proud of in terms of the way we handle ourselves in 2020 and what we can apply to 2021.

Wonderful. And we're in overtime now, so let's end it there. Thanks again to everyone for joining, and please enjoy the rest of the conference.

Thank you. Appreciate it.