Enhabit, Inc. (EHAB) Earnings Call Transcript & Summary

Well, hello, everyone. I'm A.J. Rice, the health care services analyst at Credit Suisse. And next up in this room is Enhabit. We've got Barb Jacobsmeyer. She's the CEO of Enhabit. And we've got Crissy Carlisle, who is the Chief Financial Officer. I think we're going to have a few introductory slides from the company, and then we'll get into a little bit of a back and forth of the fireside chat. So Barb, let me hand it over to you, if that's okay.

Great. Thanks. So yes, it's just actually a few introductory slides that we thought it would be helpful for those that maybe are not familiar with Enhabit Home Health and Hospice. They're not. I think we'll switch in that.

You'll get it.

Okay. Yes. Okay. There we go. No, you're good. Thanks. So for those just aren't familiar with -- we are a leading provider for home health and hospice services. We've actually been in existence for over 20 years, providing this high-quality care. We are national across 34 states with over 10,000 employees with an award-winning culture. So just a quick overview. We do have 2 segments. Our largest segment is home health. We're the fourth largest provider of Medicare-certified home health services. We actually have 250 locations in 34 states, servicing over 200,000 patients. And then our hospice is the 12th largest in the country with over 100 locations now. Our recent announcements have been some acquisitions on some small hospice locations. Average daily census about 3,500. The nice thing about our management team, we spun into our own independent company in July of this year, and we have a nice blend of the management company of people that have been there for 15, 20 years, and those of us that are relatively new. So Crissy and I have been there almost 1.5 years now, and then we have folks on the management side, both sales and operations that have been with the company again for 15 to 20 years. This is a very busy slide, but really what we wanted to do is just to introduce. This is our new Board of Directors. We do have 5 legacy Encompass Health Board members. They've actually done a really good job helping us to recruit the 5 additional new Enhabit Board members that bring a lot of great expertise, particularly on the payer side and the technology side. When we look at the industry opportunity, we know there's a lot of growth potential as the baby boomers continue to age. So when we look at just the growth in those baby boomers, whether it's traditional Medicare or Medicare Advantage patients, we know that the need for home health services are going to continue to rise. We also know that patients are preferring more and more to receive as much care as possible in the home. So when we talk about our competitive strengths, we do believe it's our scale and density, our consistent and disciplined operating model, our clinical expertise, our people. We feel like we're well positioned for value-based care, and then we have a multifaceted growth strategy. This is our scaled footprint when we talk about just home health and hospice. We do have a lot of overlap. There's 86 hospice locations that are co-located with home health that brings a lot of great benefits to us, not only from a people perspective but just from a local branding perspective. And then just to kind of end with is just our growth strategy, focused on organic growth, our de novo strategy, which is new for us with the commitment to open 10 new de novos each year. $50 million to $100 million in acquisitions each year, leveraging all that we've learned over the years with Encompass Health as it relates to care transitions, expanding our focus on Medicare Advantage and then continuing to keep a pulse on adjacent service offerings. So A.J., that's just a quick overview on Enhabit.

Yes. That's great. And I appreciate that. When you think about the issues of the year, labor has been probably #1, 2 and 3 for most health care providers and home health certainly been a part of that. Can you just comment maybe a little bit on what you've been seeing? Is it getting any better over the course of the year? Is there any place where it's actually worsened a little bit. Give us just sort of some high-level comments, and I'll dive in a little more with that, but maybe level-set us on that.

Sure. On the good side is we have -- continued to have positive net nursing hires when we look at each quarter. This year, we've been able to positively increase the number of nurses that we have. I would also say on the great side, we've seen -- in quarter 3, we had 10% less nursing terms than last year's same time. So it's really important for us to not only recruit but to retain the talent for the growth going forward. On the side that's created a little bit challenges, one of the things we've wanted to do is become more flexible allowing staff to not just be full time, but take opportunities of different types of physicians. We have seen a shift in the number of our nurses that are in more of a PRN or working when they want kind of status than full time. Last year this time, about 36% of our nursing workforce was PRN. Right now, it's a little over 40%. So that's great because it shows that offering that flexibility has helped. The bad side is we need to have then a higher number of head count of nurses because, again, that flexibility means they could honestly decide. I don't want to work for the last 2 weeks of the year. And so to really be able to commit to our referral sources, we need to have a good balance.

Okay. And when you think about your home health cost per visit, that's trended up every quarter this year. Do you sort of start to see -- after stepping down from 4Q to 1Q, do you see that starting to stabilize at this point? Do you have a target for where that ends up? I think I have you at, I'll put my glasses on to read that, at about $92, right, in the most recent quarter.

Yes, I don't think that we have necessarily a target for that A.J. It's more about managing what we have. Our cost per visit on the home health side, about 90% of that cost is labor. And year-to-date, our labor costs have increased 5% to 6%. We've made some pretty big adjustments on a national scale to what I call the pay grid to bring up our wage rates to be competitive. And we feel pretty good about where we are on that national level as we head into 2023. And we're hopeful that, that's going to level-set us somewhat. Now having said that, we do expect there will be markets where we have to continue to make market adjustments depending on the geographic area and supply and demand of nurses in that area. But feeling pretty good. And then also the other thing that helps our productivity, of course, as volumes increase, we have a significant fixed-cost structure with that labor force. We tend to pay salary versus per visit. And so as volumes increase, clinical capacity increases. We're able to use those clinicians more. And then the other side of that is optimization, right? When you have clinical capacity issues, you're just trying to send someone to do the visit. And as volumes continue to grow and increase, then you're able to actually optimize your staff, meaning that we send an RN to do an RN's work and an LN to do an LN's work. And so as we head into 2023, those are some of the things that we're going to be looking at to help with that cost structure.

And do you typically do across-the-board wage increase or merit increase, whatever you want to call it, in both businesses? Or do you stagger that? And is there any way to talk about where you're at this year versus where you've been traditionally?

Yes. So historically, this company has done merit increases based on the employees' anniversary date. So it's not been a once-per-year tied to Medicare increases or anything like that. But having said that, we are moving in the first quarter of 2023. We do want to move to a once-per-year annual merit cycle for both businesses. I think in this transition year, that's more likely to happen more towards the latter end of Q1. So think it effective sometime between March 1 and April 1. So we are moving to that, but historically, no, it's been based off of employee anniversary date.

And what's the rationale behind making that change?

I think it's one, it helps with consistency, ensuring that all staff at the same time, it helps from a budgeting and forecasting perspective as well. And I think it just makes sense, right? We can tie it to home health gets their Medicare rate increase on January 1. Now obviously, hospice does a fiscal year is October 1. But from a workforce perspective, right now, our plan is to do it all in Q1.

Okay. And similar on the hospice side, you've seen a similar trend. You stepped down in the first quarter, but then it stepped up since then, and I guess the main metric you look at there is cost per day. What are you seeing there? And are there any opportunities beyond -- I mean your labor base is a little more diverse on the hospice side. So it was not strictly an RN issue. What are you seeing there? And what are the opportunities for some savings there?

So on the hospice side in the quarter, and we'll just kind of put some numbers to it to kind of lay things out, our cost per day, I believe, increased 600 basis points. Of that, A.J., 470 of that was labor. If you start breaking down that about 200 of that was contract labor. Well, let's call it another 160 or so for productivity. And what was happening there is, as we hire nurses for hospice and it is mostly nurses, hire them in, while those nurses are ramping up, they're in orientation, they're being trained, they're not yet at full productivity, but you definitely have their cost so that's the productivity hit. In addition, because we knew we had them coming on board, we wanted to keep our referral sources strong. We wanted to let them know that the clinical capacity issues we had early in 2022 are becoming less. And so in order to keep them strong, we did bring in contract labor while those new hires were ramping up. So there's a little bit of a double hit in the quarter.

Okay. Okay. And is it strictly a matter where you need to pay a little more to deal with the clinician issue there? Or is there other things you're looking at on the hospice side that could potentially be beneficial?

So on the hospice side, we're moving to what we are calling a care management model. Historically, the company when they would make an acquisition for hospice, they would move everything to a home health productivity management type of thing. And as we started visiting branches, when Crissy and I first joined the team, we heard loud and clear from our hospice branches is we're different than home health. We need to run differently than home health. A hospice nurse can be called out in the middle of the night for 3 hours with a dying patient. And in the way we manage it, we expect them to still come back the next morning and hit regular productivity. So you can imagine a turnover that, that created in hospice. So we're moving to this care management model because it's going to allow them to more manage a case load of patients. We're going to have on-call nurses and triage nurses to help them. And so what we've already seen in the markets that we started to roll this out. The first market we rolled it out, we actually rehired 5 nurses that had left because they're excited about us really running it as a hospice care management model. And I think that's going to really help us as we look forward to the future and how we're going to manage the cost because we're going to manage a case load of patients.

How far in rolling that out are you? And when will it be fully out?

So by the end of the year, we will have what we're calling the template of the program rolled out everywhere. But part of the template is that local branch doing a gap analysis on what staff do I have and what do I need to hire to be able to really run in this type of model. I think it will be probably middle of next year before everyone is completely staffed to run into the case management model, but the template that it will be rolled out by the end of the year.

Okay. I mean 1 thing we've heard is issues with positive COVID testing over the course of this year and people having to be out on quarantine. To what extent did that impact your results, particularly through the summer? It seemed like June, July is so big -- that was an issue for some players. Did you guys have that issue?

We didn't have it in the summer. The first quarter was certainly the biggest impact for us. At one point in time, we had 1,300 clinicians out on quarantine, and that was something even that we didn't have at the peak of what I would consider the pandemic. What we saw more in the summer was a lot of PDO usage, a significant amount above what we would have experienced the last couple of years. I think a lot of it was the excitement of staff to finally be able to use their well-deserved time off for travel versus quarantines. And so we certainly saw that through the second quarter and even heavily into July and August and then subside after kids were back in school.

Okay. Interesting. Maybe just pivoting over, there's a lot of focus in home health as well on fee-for-service, Medicare Advantage, maybe first to deal with the fee-for-service. We've had a fairly precipitous slowdown in the fee-for-service volume in home health. Have you guys -- I know you guys have talked about the growth in episodic and non-episodic. So it seems like you're seeing some of that as well. What -- maybe just sort of level set people on what you're seeing in that -- in the fee-for-service side in terms of volumes.

Sure. Well, when we look at just the markets we're in today, what we have seen, and this is just 2020 to 2021 data, so we're looking forward to what this looks like when '22 comes to a close. But just from 2020 to 2021, we saw an overall 11% increase in MA beneficiaries in the markets we serve. We saw a decline and 4.1% of traditional Medicare. So we are certainly feeling the shift in our local markets in MA versus traditional Medicare, and we're seeing that in our referrals and in our admissions.

Is there any way to talk about utilization rate per fee-for-service beneficiaries versus just the absolute number? Is there, for some reason, why the utilization rate among fee-for-service beneficiaries might be going down to? Because it seems like that happened pretty quickly.

Yes, it's a good question. It's kind of been a head-scratcher, I think, for us. There's been a lot of questions on, was that just a result of sadly all the deaths that happened during COVID. If you think about it, our patients tend to be your older beneficiaries. Our average age is 77. They have a lot of complex comorbidities. Obviously, those are the patients that are at most risk when you have -- during COVID to die from it. So that's just one thought that we have because it is hard to understand why there's been such a big drop off of just the general occupancies even in acute cares on Medicare.

All right. And there's debate. One of your peers talked about potentially reaccelerating 3% to 4% growth, and that was based on the study from McKinsey, I think. What -- do you have any view on whether this is going to turn around or are you planning for it to turn around in any way?

I think 1 of the things that will determine that on is do we start seeing a stabilization in the move to MA, right? If we keep seeing this 11% to 12% growth in MA, people choosing to move from traditional to MA, then it's hard to think of that happening, right? But if we start to see that stabilize, then perhaps we'll see that. But we look at -- there we have a community care program where we go into senior living centers. And last year, it could have been full of traditional Medicare and one enrollment cycle. And the next thing you know, the majority of the members -- the residents in that senior setting are under an MA plan. So I think that's going to make a big difference if we see that slowdown.

And we had a lot of debate over the course of the year, what was going to happen with this proposed adjustment to PDGM. We got to find a role recently. It was sort of split-the-baby type of outcome. It wasn't great. I know the industry is not happy with it. Maybe as you look at what they're doing, what are the prospects for getting some relief, I think they're describing at a 0.7% increase for '23. Is that -- is there any reason that wouldn't be what you see?

Yes, it's a great question. I would say that we're certainly seeing it as a reprieve, right? Obviously, we love that we're getting a 0.7% increase instead of a 4.2% decline. I think what's most frightening for the industry, though, is that CMS continues to say that they feel that they have overpaid by 7.85%. And so the biggest concern is the potential clawback. And I think that's where we want to continue to fight as an industry to say, if they really believe that they're going to need to come back and clawback for 2020, 2021 and now 2022, that's a significant number. So I don't -- I'm not sure that the fight's over yet, obviously, we're going down the route of some sort of legislative fix to at least have a pause so that we can try to work with CMS on the methodology. While we're happy with the reprieve for 2023, there's still a lot looming out there.

And you talked about a legislative fix, do you think -- I mean we have this Healthcare Extenders bill that I think it's passed at the end of the year. We have the Appropriations bill, any sense of where the glide path is and the probability that includes -- gets included to one of those?

Well, it's why the industry as a whole after the final rule came out, we did a lot of PR on the hill to basically because CMS was really talking about kind of the win for home health and we wanted to make sure that we got the message out there that this actually wasn't a win so that we hopefully don't lose any traction that we've made on the response that we've had thus far to the potential bill.

Okay. Okay. And then on Medicare Advantage, you mentioned on the third quarter call, I think you guys have done 9 contracts with new MA plans and some of those are episodic. Some of those are per visit. Maybe just give a little flavor for what you're seeing there and what you've signed?

Sure. So we still are trying to be at the table with all the national payers, but what we realized is that we can get quicker traction with some of these regional and multistate plans. So we did come to terms on 9 of them, as you mentioned. The 6 of those are episodic with the most discount on the episodic of 10% on the per visit.

That's discount rolled into fee for service, right.

That's right, 10% fee for service. So that's going to make some nice change there. And then on the per visit, the average is a 25% discount, which is an improvement over the current 35% to 40%. These are all new. So it means it's all new business for us. And so the focus now is really learning who are the main physicians and facilities that have these patients so that our sales team can go out and talk about being on these plans.

And how much do those plans represent and potential lives for you?

Yes. So they're a little over 1 million lives. And when we look at Medicare utilization, about 10% of Medicare beneficiaries utilize home health services a year. So we don't really have data points on MA, but I would say we think that 5% to 10% range is probably a good range to look at. So it's a good number of lives for us to go after.

And are those -- any of those contracts allow you to do things that would reduce your costs, maybe give you a little more discretion on visits per episode, use of virtual care, et cetera?

Yes, on 2 of the per-visit contracts, we were actually able to negotiate being paid for some virtual visits. So that's good. So that we would actually get paid if we do decide that a virtual visit makes sense because it then increases that productivity of that clinician because you're not having to do the windshield time getting to the patient's house. On the episodic contracts, it's great because all of those are paying us episodically which allows us to manage those visits per episode as long as we maintain the quality that we've committed. It allows us to be able to manage those visits.

Okay. And 1 of your peers announced a national contract, I think, with Aetna. I don't know how much visibility one player has versus relative to the others as to what they're doing. Is it the kind of thing where you think you can see what they're doing. And you just go sign another or we'd Aetna will sign one of those with you, too? Or any view on that or if people look at your contracts you're signing and potentially do that? Or is it proprietary in a new way?

It's a proprietary. We don't have the details of the contract, but you can imagine that, that day we're calling it and saying, "Hey, can we come back to the table? Obviously, you figured out a case rate, so we'd like to sit and talk what that means. So certainly, if they're able to go the route of episodic or case rate, we want to be at the table talking to them.

Okay. And when you -- traditionally, possible discharge planner sits there, and they have to offer the patient a list of 5 or 10 providers. And there's not really that much steerage, I guess, maybe how will it change now that you have these contracts or other providers have other contracts with MA plans will -- they know to move to suggest that they'll get coverage if they go with you versus some others? Or how will -- how much does that move the volume. When you happen to get 1 of those patients, you'll be in a better spot. But can you actually get involved where you're getting steered those patients.

I think the thing that helps us is there are referral sources that historically have gotten frustrated that we can only take traditional Medicare. And so everyone, all of their home health providers want the traditional Medicare. So when you think about the list, they're going to be more apt to give that list that includes us to their patients when we can actually take their traditional Medicare and a list of other payers. And so once we know we're signed up, we make sure that they know that, it's on their list so that those patients are given that option to then choose us as well.

And the way it works, if you don't have a contract with a payer, you're not on that list for that patient, is that right?

That's right. That's right.

Okay. All right. And that's an electronic thing that they have somehow and they get that.

Most of them are all moving to the electronic now. A few still use the paper, but most of them now moved to the electronic systems.

Good. And then you're at what MA is about just under 18% of revenue today. How quick is that increasing? And where do you think that will be over the next couple of years?

So the way we think about that is with the total number of visits. And if you look back at 2021, non-episodic visits comprise about 18% of our total visits. We expect to end 2022 at a run rate of about 24% of our total visits. So that's a good indication of how quickly it's growing. We do expect that to continue to increase, one, as we get more contracts. And then two, is it seems like more and more Medicare eligibles are choosing Medicare Advantage.

Great. Do you -- we've obviously one pending and one big transaction, Humana buying Kindrid. Now United is in the process of buying the LHC Group. Has that affected the competitive dynamic in any way as far as you can tell? Or is that still we'll see in the future playing out.

I think 1 thing is that on has certainly reinforced that the payers see home health as an important component of saving overall health care costs. So I think that has created kind of that value picture, if you will, for home health. I don't think any of the individual companies no matter how large they are, can service all of the payers patients. So they're still going to need the contracts with the rest of us.

Yes. And the labor issue has not only been an issue of pressure on your margin, but it's also been one of constraint where you have -- are you still turning away a significant amount of referrals that you could otherwise take?

Yes. It's hard to quantify the referrals that we're turning away because once you have to say no, then those referral sources actually kind of quit giving you referrals. And so yes, you're right, it has caused a constraint in the growth side of things. What I will say though is that, that's why when we get to -- as Crissy mentioned, when we get to that hired staff in a certain branch, we'll approve contract labor so that we can start going back out there and getting those referrals going so that as our staff comes out of orientation, we can open those referral lines. We still have about 53 home health locations that are constrained because of staffing and about 11 on the hospice side.

And what would that have been at the beginning of the year?

It probably peaked at one point of over 80 on the home health side, and there was 30-somewhat on the hospice side.

There's one question about the PDGM phase-in of that cut and still uncertainty about the catch-up its impact on industry consolidation that everybody anticipates to continue. Do you think we've got enough clarity now that as we move into next year, we'll start to see a pickup? Or is there still so many unknowns where people are still sort of hesitant to be able to have a meeting of the minds between buyers and sellers?

Well, I think right now, A.J., it's a little too early to tell since the proposed rule or the final rule just came out. I think that from our standpoint, we're certainly still interested in being acquisitive. We do have certain criteria in regards to the acquisitions that we want to consider. And we're going to make sure they check all of those boxes if it's a home health opportunity. And we're going to have to be upfront with the seller to say you've got to realize there is reimbursement uncertainty, and that's going to have to be considered when we do our analysis of your company and that we're not going to be able to assume nothing happens in 2024 and beyond.

Right. I know the company stated goal coming out of the pandemic -- not pandemic, probably feels like the spinoff was $50 million to $100 million of acquisition spend. I mean, obviously, we've had some changes in the industry. We had various dynamics. Is that still a reasonable goal? How does that -- are you comfortable -- is there any change and feel like, hey, I got to pay down more debt and get leverage down, you're about 3x levered, I think, at this point. Any thoughts on that?

So I think right now, we still believe that the best use of our free cash flow is to be acquisitive. It's a long-term growth strategy and a long-term growth story, and so we want to keep using the free cash flow for it. At a $50 million to $100 million pace, we can fund that from free cash flow and so having to draw on the revolver is just simply a timing issue of when those opportunities present themselves.

Okay. Okay. And you're doing the shared services arrangement with your former parent. When you look at your G&A and where it's at today, are there opportunities? Is this sort of a steady run rate, even as you transition out of some of those shared arrangements or what would you say?

So I'll speak towards the home office costs. And then Barb, if you have anything on the segments. But from a home office perspective, we've been talking about this $26 million to $28 million incremental stand-alone home costs. I would say that right now, that's still a good estimate. We probably won't hit that run rate until the end of 2023. But of course, that estimate was made up of people that are no longer with the company or bought people at Encompass Health. And so as we head into the 2023 budget cycle, we are certainly challenging our teams. New people that we've brought on, example, building out the accounting and finance organization, investor relations, internal audit and I'm certainly challenging those leaders to say okay, tell me now that you've been here a few months, what is it that you need? What is that run rate? So it's something we'll be looking at very closely over the next few months and letting you guys know again if there's any revision to that estimate when we report in February.

That's great. Well, I really appreciate Enhabit participating in our conference this year. Thank you, Barb, and Crissy. And next up, we have in this room, I believe, Premier. So thanks.

Thank you.

Thanks, A.J.