Encompass Health Corporation (EHC) Earnings Call Transcript & Summary

Yes. So nursing was getting tight before COVID and certainly, COVID has exacerbated that for a number of reasons. During the height of pandemic, you saw many of the acute care hospitals providing these contracts to lower nurses in from other markets because of the extreme needs they had. Now fortunately, that impacted our business at a time when our volumes were down anyway. And so really didn't create a staffing shortage through most of the deepest part of the pandemic. What we're seeing right now is that the acute care hospitals are largely returning to normal, and some of those traveling nurses are returning to our markets. Nonetheless, there's a real fatigue out there within the clinical workforce. And so many of them are just opting to take some time off and step out of the workforce, whether it's due to fatigue alone or due to the fact that they may be facing some home situations that might involve senior care or child care. There's an element of that, that will prove to be temporary. The -- in terms of how that's showing up with regard to wage pressures and inflation, it's more pronounced right now within our Home Health segment. And there, we are having to increase wages a little bit higher than we had anticipated, not substantially. We had anticipated we might be just north of 3%. And on average, what we're seeing is something that's probably closer to 4% right now. It is not as pronounced. It's more of a market-by-market situation. In the IRF sector, we haven't had to revise our estimates for SWB increases this year, but it's certainly going to be a challenge that we continue to face in both of our business segments and that other providers will face as well. Your point on the lower-skilled resources is a very valid one as well. And that one is most applicable to our hospitals. And it's areas like housekeeping and food services and so forth. And there, what we certainly find is that the incremental unemployment benefits are causing some friction in terms of getting folks to return back to work. When you combine the extra benefits they can get with some of the same home issues that they faced regarding senior care or child care, we just -- we just haven't seen the kind of availability for workers of that skill level that we had seen pre pandemic.

I appreciate that. Mark, let's shift gears a little bit. I've told myself that I'm not going to ask you about the strategic review of the Home Health business because I figured there's not much you're allowed to say right now. But just taking a step back, right, when you bought Encompass 6 years back, there was a strategic rationale for it, right? I think you guys saw the value of vertical integration or having a one-stop shop offering. So yes, where do you stand in terms of that view on the importance of integration? And maybe let's just put a hypothetical that if you decide to either sell or spin-off the Home Health asset, are there ways to keep that strategic relationship intact to maintain the benefit?

Yes. Absolutely, Brian. First of all, we referred to that relationship as our collaboration. And that's where we have standardized the process and everything that goes into the discharge process from our hospital into our home health and our overlap marketplaces. And we've been able to refine that over the last 6 years since we have been doing this in a standardized manner. It's very important for us. It's a very important quality marker. We think that it makes for a better hand off that benefits the patient in terms of their own satisfaction, with the communication and the integration of the care provided. We think it better sets them up to reduce elimination or the potential for them to have a need to be readmitted back to acute care hospitals. So there are a lot of reasons we do it. One of the things that we've learned that we've determined our last number of years of doing this is, we've been able to compare our overlap markets with our nonoverlap markets. And if you look at the number of items or the number of information, the amount of information provided from CMS now that allows with transparency, and you can really compare providers in any given marketplace and quality factors and you can really hone into whatever the really strong home health providers and who's not. We didn't know that back when we first got into the home health. As a matter of fact, our hospitals would discharge patients from an inpatient setting to home health, and they may have anywhere from 10 or 12 different home health agencies, of which they really had no way of differentiating the good ones from the bad ones. And we knew very little about what happened to our patients after the time of discharge. The whole world is different now. We know -- we have a lot of information available to us. We can work in our nonoverlap markets with a number of home health providers that are interested in working in a collaborative manner and do many of those same elements of the process that we have standardized in our overlap markets. So getting back to your initial question, we believe that we can maintain a strong level of collaboration, but we don't have to own it. And we can still have those strategic relationships and partnerships without having the ownership portion of that. So we think, absolutely, we can continue that going into the future, regardless of which direction our strategic evaluation takes place.

No, that makes a lot of sense. So shifting gears towards the operational side of your Home Health business. One of the things that I've noticed this past quarter, right, is the announcement of the Home Health contract with United That's on a nonepisodic basis. So how are you thinking about pushing more into MA, one? And then maybe second, Doug, kind of like balancing that with the margin impact of taking nonepisodic business in home health.

So we've been very discerning in terms of the contracts we've signed with MA in both of our segments, but I think particularly Home Health as an industry has been challenging because so many of the payers just viewed it as a commodity, and didn't really evaluate the various providers in terms of their clinical outcomes. So we wanted to make sure that we were working with payers that had a degree of understanding for the quality that's provided. And that it would be more of a strategic partnership. And we felt that with United. And it is -- yes, it is a discount to what our fee-for-service historically had been. They were paying us out-of-network rates in the past before we signed this United contract. We don't have a lot of history with it yet, but we do have a number of months, and it looks like it's been overall positive thing in terms of we've had strong volume. As you know, it's nonepisodic and paid on a per-visit basis versus episode. But we think all in all, strategically, it's positive to us and that the trade-off in terms of the volume and margin or rate at this point has been a positive impact. But I'll let Doug go a little bit further on the margin itself.

It is a transaction that made or a contract that makes sense for us strategically. I would not say it was one that we ran with great gusto into. As Mark said, we had been picking up a pretty good amount of volume from United on out-of-network basis, which paid on an episodic rate and paid at the same rate as Medicare fee-for-service. And we had had multiyear discussions with United about moving that volume in network. And the point of contention has always been that they wanted to move it to a per-visit rate and that, that rate was initially offered to us at about a 30% discount to the implied future service rate and we just didn't want to deploy a limited supply of clinicians to take on that business. Ultimately, we got to the point where United essentially drew line in the sand and said, you would not get any more volume out of network, and you've got to pull that in network. And we were able to negotiate a rate that had been better than it was offered before, but still represents a very substantial discount to fee-for-service. We are optimistic based on the discussions that we had with United moving into this, but as we demonstrate our volume or our quality and how it is differentiated for many of our health care providers out there in terms of the quality of our outcomes, that, that will lead to higher rates and will close the gap between that and fee-for-service. In the interim, we've got kind of 1 foot on the gas and 1 foot on the brake. Because we're encouraged by the incremental volume we're seeing as we move in network, but it is at a substantially lower volume. And because of the staffing constraints that are out there, we're going to give a fee-for-service patient a priority into all instances. So we're going to continue to see it. As Mark suggested, we're early on. I don't know that I would suggest that this is an arbiter of things to come with other MA contracts. There are a number of different models that are underway. Within the Home Health space, we still haven't seen the recognition of differentiation regarding quality providers that we've been able to see on the IRF side. The rate differential that exists in home health right now between MA and fee-for-service is essentially where the IRF business was 7 or 8 years ago. But by establishing our value proposition and the quality of our outcomes, we've been able to move from just over 50% of our contracts 8 years ago that were paid on an episodic basis to almost 85% of our MA revenue in the IRF business now being on an episodic basis. And the rate differential between MA and fee-for-service is 8%. So there is progress that can be made. It just takes some time.

Yes. No, that's great. Last question for me. One question that we're getting from some investors is the fact that obviously, your CEO in the Home Health business left, I think you've said that you're running a search. But people are asking, what's the depth of the management team that's left there? I know you've got Luke, who's been in Encompass for a long time, but how should people think about the team and the bench strength to run that business on its own?

Yes. They should think of it being a very competent team. They're a very engaged team. And there is a lot of depth there. I mean, it's a large organization that had some long-term managers that have risen up to the ranks and started out at the kind of the ground level and have shown the ability to be great operators and have multisite responsibilities. So I'm very confident that the team will continue to perform.

It's been a great partnership with April for 6.5 years, and she is a unique leader and a very special leader in many ways. So we are so grateful for her contributions. And she leaves behind some big shoes to fill, but we're very encouraged by the candidates who expressed an interest in that job, and we're confident that we're going to fill that leadership role with somebody who is really dynamic and can take that business to the next level.

That is awesome. Well, guys, we're at the end of our time here, but I really appreciate the time that you took today and the insights that you shared with us. So thank you again, and we look forward to speaking with you soon.

Thank you, Brian.

Thank you, Brian.

All right. Thank you.