Encompass Health Corporation (EHC) Earnings Call Transcript & Summary

All right. Good morning, everyone. My pleasure to have the team from Encompass Health today. I've got Doug Coltharp, the CFO; Mark Tarr, the President and CEO. Guys, I appreciate you joining us today.

Good to be here.

Yes. I thought maybe to sort of start the conversation, it might be helpful just to Doug, if you want to maybe start with a quick recap of the quarter, some of the highlights, strong outperformance, modest raise in the guidance. So just maybe give us a recap.

Yes, the first quarter was a great start to the year. It really continued the momentum that we had throughout 2023. It always starts with what our volumes look like, and we've been fortunate that really for about the last 6 or so quarters, we've had very strong volume. We had 10% total discharge growth was the primary metric that we use to measure our volume, and it was nicely balanced between same-store growth and new store growth, 6.7% of that growth was in same store, the balance coming from new stores, predominantly the de novos that we've opened up within the last 12 years. We saw good strength across our geographies, and that remains a trait that again, we have seen in the last several quarters. It was really balanced across our regions. And it was also balanced -- well balanced across payers and across disease categories as well. We continue to see strong growth in our primary categories of stroke and neuro. We did see faster growth in some of the orthopedic categories, but those are much smaller as an overall percentage of revenue. We managed our labor and expenses very well. It's certainly been the case that we've seen a stabilization in the utilization of premium clinical labor, and so that contributed to an expansion in our margin and allowed us to deliver an outsized growth in our adjusted EBITDA even compared to the revenue growth. It is early in the year, so we took the opportunity to raise our guidance, as you suggested and just feel good about the way the business is running right now.

Yes. If we look back over maybe the last 1 to 2 years, if you look through all of the different disease categories, is there anything -- I mean you mentioned SK was maybe growing a little bit faster. There's a little bit more strength, but maybe ranking some of them like where you're seeing maybe more strength versus others over the last year or 2?

Well, if you think about our core categories include stroke, neurological brand injuries, ability. Those are 4 key categories for us, and each one of those categories had double-digit growth in the first quarter. Collectively, they make about 63% of our discharges. So continuing to position our programs towards a higher acuity patient has certainly provided some benefits for us in terms of growth.

Yes. It's like [ us. ] Nondiscretionary, inelastic element of health care services.

Well, it's tied specifically to the demographics. The average age of the patient that we treat in our facilities is 77 and the age cohort between 75 and 85 because of the aging of the baby boomers, remains the fastest-growing segment of the U.S. population. And really, the over 65 population has been the fastest growing for more than a decade now. The incident of the maladies that are appropriate for treatment in IRF setting haven't changed at all within that population. So as the population grows, so do the eligible patients. And with the capacity additions and the clinical capabilities that we've been expanding across our franchise, we've got the ability to treat more and more of those patients.

Right. Really right there in that growth corridor right now. I wanted to spend just a second. I mean I've known you guys for a long time. And when -- any time I've been in the headquarters and we've been able to see sort of the backbone of the operational system and the technologies that you've developed to be able to drive accountability all the way to the field level. I don't know if you just spend a little bit of time talking about some of those infrastructure investments you've made over -- I mean, really like 20 years as I sort of think about it and maybe there's not a full appreciation for, I think, how you guys are able to operate the business as effectively as you do on a day-to-day basis.

So what you've been there, you saw we are a very data-driven organization, both on the operations side and on our clinical side. We are -- 2010, we rolled out our first clinical information system working hand-in-hand with Cerner to develop it from ground up tested it piloted it starting in that 2010 time frame and then rolled that to our entire organization. So since then, that has reaped significant benefits in terms of just our ability to collect the data, our own discharges continue to roll best practices. Our clinicians and physicians have worked to create predictive analytics using that data, which help us to eliminate unnecessary acute care transfers. It helps us identify patients that may be at a fall risk. We've seen our falls go down significantly, and it has continued to allow us to build clinical best practices. On the management side, we have a system that we call our Beacon system, which -- our IT group, which consistently looks at themselves and we look at them as well as a strategic partner, not just a support group for our computer systems. But they have worked with us to create management reports on everything from labor. It really started out helping us to keep track of our labor and allow our managers to respond quicker because they're getting real-time data, they can respond quicker to fluctuations and volume. We look at everything from our clinical outcomes. We look at our other expense categories. And so it allows our managers to have full access in terms of their own organization as well as other hospitals in their region and our entire company. So it really allows the ability to create and roll out best practices across all aspects of our business, both clinical and operationally.

And I think that last point is worth underscoring. It's really a hallmark of our strategy and it's embedded into our culture that we utilize standardization and best practices and roll those out across our platform. And that really creates a lot of flexibility and strength in our organization. When you consider the fact that we are a very big fish in a relatively small pond in the air space. Our services are all that we provide, and we've got roughly a 35% market share when you think just about the Medicare population. What we have done with regard to the continued refinement of best practices and the standardization of those best practices as well as things like hardware across our platform is create a system where across our 160-plus hospitals. You could take an employee at any level and pick them up and move them from one of our physical facilities and drop them into another, and they would know how everything works. All of the systems that they're accessing are the same, the hardware, the equipment is all the same, the way they go about their business with the exception of some modest adjustments that would have to be made for changes in physical plant will be very much the same. That also gives us great flexibility when we think about moving around hospital leadership or developing hospital leadership. And that has paid great dividends with regard to our de novo program. Many of the CEOs in our de novo hospitals are either moving from another hospital within our system where they're coming up through the training program that we have, the apprentice program that we have, which we call Developing Future CEOs.

When you look at the investments you made into the electronic medical record, how was the -- how would you get like the return you've been able to see in terms of the connectivity with hospitals and being able to grab greater mind share. Has that been helpful as you sort of develop your relationships with the referral sources?

Absolutely. And about 1/3 of our portfolio, our joint venture partnerships. So having this clinical information system, having the interfaces with whether it's our partners or having the ability to collect the data that we can go out and then show our referral sources the outcomes that we get on our patients and that connectivity that you have, it absolutely helps to develop the relationships with the referral sources, helps give them confidence in terms of their ability to refer to a quality provider. And then physicians and discharge planners they too are data-driven. So if you can show them data, it goes a long way and their continued confidence in you as a provider.

With more than 90% of the patients coming into our facilities coming directly from an acute care hospital, one of the most important elements of our value proposition that we can provide to those acute care hospitals is the ability to take patients out of their facilities in a timely basis and allow them to reduce length of stay and open up those beds for another patients. And the clinical information system is instrumental to that process. The interoperability that exists between that system and the acute care hospitals allows us to identify very early in the stay of a patient in the acute care hospital, whether or not that patient is likely to require or services upon discharge. So we can begin the dialogue early in the process with the discharge planners and the case managers in the acute care hospitals. And that combined with our ability to treat a higher-acuity patient means and many times, we're able to take that patient after a shorter stay in the acute care hospital versus our peers who need for them to get more of that acute treatment before they're ready to start their reaveraging.

Yes. It was -- I don't know how many years, it could have been 10 years ago, the American Stroke Association, American Heart Association came out and endorsed inpatient rehab is the preferred setting of care for stroke patients. And I was trying to find like additional studies or data like that's been conducted since that was published. Have you seen any -- have you guys done any peer review studies with them? Or has there been any [indiscernible] can -- I don't know, anything we've learned out of that partnership.

Well, we continue our relationship with American Heart Association and have co-branded now with them for the past 5 or 6 years, working on all of our marketplaces. And with, as you noted, American Heart, American Stroke Association came out a number of years ago with independent research that showed that if you have a stroke and you need inpatient habilitation the best setting to get that is in a rehab hospital. And so we have worked hand in glove with them and having that co-branding where we help with education on for store patients, clearly, they are on the prevention side. And so it's been just a real beneficial relationship moving forward.

And we haven't seen that they have updated any of those studies. We do track the results for our own stroke patients. First of all, in every year since we started, I think this is our 6 years, Mark suggests since we started that partnership. We've seen our stroke market share go up. And so that's been a nice trend line there. And the -- as we continue to roll out and refine our clinical protocols for addressing stroke patients across our franchise, we're seeing that the results that were already very positive for the patients who come to us are only getting better.

Where are we on the review choice demo, you guys periodically also have other audits that you've had to deal with, whether it's a Palmetto or Cahaba or maybe, Doug, you just want to broadly take that question.

Yes. Remember, review choice demonstration, started in the state of Alabama, which where we have 7 hospitals, and it began in August of last year with a 6-month initial cycle 1, it was labeled all of our hospitals because they were under the MAC Palmetto we're subject to RCD. It was 100% preclaims review. The hurdle rate that was required in terms of actually, it's called an affirmation rate for the first 6-month period was to be north of 80%. And we moved through that with all 7 of our hospitals, north of 80%. It's kind of a period of settling down and getting everything ready for cycle 2, which began on May 1 in cycle 2, which is another 6-month period. The affirmation rate increases from 80% to 85%. Because we had cleared the initial affirmation rate, we were given a choice to either stay in a mode of having 100% pre-claims review for those 7 hospitals or move to a spot, a random spot audit of about 5%. We felt that we had already made the investments in the infrastructure and the people and have established a good working relationship with Palmetto on the pre-claims basis. And that allows for a more iterative dialogue before a claim is either affirmed or denied while the patient is still within our care and we can provide incremental documentation. So we have stayed with that. So we're just a month into cycle 2. RCD is now expanding to the State of Pennsylvania. We do have a significant presence in terms of number of hospitals in Pennsylvania. Having said that, for various reasons, mostly related to the capacity of the various MACs that are out there. It is specifically focusing on those hospitals that roll up through [ Novitas ]. And our hospitals in the state of Pennsylvania as they do in Alabama, all rolls through Palmetto. So for the time being, we will not be participating in RCD in the State of Pennsylvania. But generally speaking, the program has gone about as well as we could have anticipated.

What I will say that RCD is another example of how our clinical information system and having that electronic documentation and our ability to monitor that and submit information to the to the max. So that just has been very helpful. But that's a good example of what those previous investments have helped us to achieve.

Yes. And what you've seen it time and time again because you've known our company for a long time. We get enough lead time on the rare regulatory changes coming that we make the investments in people and processes, and we put a lot of time in, and we get ready well ahead of it coming through. And this is another case where, frankly, we were educating Palmetto and CMS on what this was going to look like when it got implemented. And it will be interesting to see how it goes with [ Novitas ] because there isn't anybody like us to educate them.

All right. Can we spend just a minute on Medicare Advantage. I mean you guys worked many, many years ago to kind of close the rate gap, which is good. But one of the things that I sort of detected talking to a lot of the acute care hospitals is like there is certainly like growing friction that has been there for a few years and maybe increase post discharge denials and just behavioral changes that have come on the margin a little bit more challenging, maybe their yield, their collection or just back office stuff. Is there any behavior that you would call out in terms of changes within [indiscernible] plans today, or do you feel like the relationship you have is pretty good.

I think overall, the relationship is positive. We continue to see very good growth in the Medicare Advantage business that we have. It's been outpacing fee-for-service for the last several years, although we continue to see good growth in fee-for-service as well. We've had a more than 10-year initiative of really trying to underscore our value proposition to the MA plans. And by doing that, moving them away from per diem pricing to the services we provide to being on an episodic basis with that episode tied specifically for the fee-for-service reimbursement. Today, as we sit here, more than 90% of our Medicare Advantage contracts are on an episodic basis and the payment differential that exists between our fee-for-service and our Medicare Advantage book of business was 3% in the first quarter. So we've done a good job there. And we've done it by underscoring the value proposition that we have, particularly for the higher acuity patients. More recently here, we've seen that acuity spectrum broaden some, which I think is a positive thing. We don't have issues with Medicare Advantage with regard to things like collection or post claims denials for the most part. Those really are not at a level of incidents that causes us any concern. The biggest issue we have is being able to get the patients out of the acute care hospitals, IRF eligible patients out of the acute care hospitals and being able to do that in a timely manner. The Medicare Advantage plans are kind of notorious for trying to hold patients who are eligible for discharge to a post-acute setting in the acute care setting longer to a point where they may no longer meet medical necessity by the time they're ready to be discharged. That's an expensive proposition for the acute care hospital. And where it translates is we continue to see referral -- conversion to referral rates in the MA book of business that are substantially lower than they are for fee-for-service. That to us is an opportunity, not a threat, and we are making progress on it. And if you look at some of the language that's been included in the last rule from CMS for Medicare Advantage. There's a specific focus on improving the access to IRF services for Medicare Advantage beneficiaries.

I think we've gotten better just in the prior authorization process itself in terms of providing the clinical information that the MA plans need to determine what's the best setting for these patients. And particularly, MA and stroke patients, where they have seen that to get the outcomes not to have the readmissions back to the acute care hospitals, I'd be sent to an Encompass Health hospital. You're going to get the best outcome that you can for the stroke patients.