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

Great. Welcome back, everybody. I'm Larry Solow, a research analyst and partner with CJS. We are pleased to have with us the management team from Enhabit. Presenting from management are: Barbara Jacobsmeyer, CEO; and Crissy Carlisle, CFO. Enhabit is a provider of home health and hospice services who spun off from Encompass Health in July '22. With that, I'm going to hand the call over to Barbara for about 10, 15-minute overview, and then we'll go into a Q&A after that. Barbara, it's all yours.

Great. Thanks, Larry. So I'm going to discuss through a few slides to give you a little background on the company. Just a quick overview, Enhabit is a leading provider of home health and hospice services. For over 20 years, we've provided the cost-effective care while achieving high-quality outcomes. We operate nationally across 34 states with over 10,000 employees. Our culture focusing on the high quality of care for our patients and caring for each other is what we believe is key to attracting and retaining our talent. In addition, our employees really want to know that there's opportunities for growth within the organization. So identifying those opportunities is key to our retention efforts. We have 2 reporting segments, Home Health and Hospice. Today, Home Health is approximately 80% of our revenues. We have 252 locations in 34 states, and we're the top 5 Home Health provider in the majority of these states. Approximately 75% of our home health revenue is fee-for-service Medicare. We have 105 locations in Hospice, and those are in 22 states. In the trailing 12 months through September 30 of '22, we had an average daily census of a little over 3,500. 95 of our hospice locations do overlap with our home health locations. Hospice is an area that we will be placing great focus on for the future. Hiring of our Executive Vice President of Hospice who has extensive experience was a real critical move for us last year. Our de novo and acquisition priorities lean a little heavily towards hospice with the aging population, increased societal acceptance and the ability for a patient to choose the hospice benefit, we believe there's a lot of opportunity to grow this segment of the company. These are the current members of our executive management team. Several of these team members have been with Enhabit for over 15 years. Our executive team has a nice mix of tenured company experienced individuals with newer members that also bring a vast amount of health care experience. Our Chief Human Resource Officer position is the first ever for the company, and we added Tanya to the team in January of 2022. And then our EVP of Hospice joined us in June of 2022. Jeanne has over 30 years of hospice operations and sales experience. Just to identify a few of what we believe are the key highlights from an industry opportunity. In 2020, $124 billion was spent on the broader home health care expenditures, and that's only expected to grow. It's expected to grow at about a 6.3% CAGR until at least 2028. Of that, Medicare skilled home health and hospice expenditures were $17 billion and $22 billion, respectively. And on a national basis, 44% of Medicare beneficiaries chose a Medicare Advantage plan over traditional Medicare in 2021, and total MA beneficiaries grew 12% year-over-year. So with our low cost of care and high-quality outcomes, we believe we're well positioned to gain market share both in home health and in hospice. Let's talk a little bit about our competitive strengths. Scale and density -- we are really strong today across the South and Southeast. Our 3 largest states by revenues are Texas, Alabama and Florida. We're able to drive our low cost of care and high-quality outcomes for our patients through these economies of scale and with the density in these states. When we talk about productivity, productivity can really be enhanced when you have less drive time between patient visits. So scale and density is critical for productivity management. And the volume of visits in those dense markets also provide the ability for us to hire LPNs and therapy assistance so that the nursing and therapy staff can work at the top of their license. We call that optimization. So productivity and optimization are both key levers in managing our cost per visit. On the centralized -- consistent and disciplined operating model, our centralized processes and our efficient workflows are driven through our use of technology. The centralized process is also key to our successful integration strategy post acquisitions and in the development of our de novo locations. Our standardized protocols and disciplined use of the technology, coupled with our engaged workforce is the foundation to our strong clinical outcomes. The metric that we put a lot of focus on is our 30-day hospital readmission rate. Our rate is 330 basis points better than the nation. We believe this is the metric that drives quality outcomes when you think of it from a patient perspective because they prefer to remain in their home, is also from a payer perspective because every readmission costs the payer additional dollars. To provide our high-quality care, we have to have a focus on employee retention. We are proud of our culture, which has produced over 145 Best Places to Work awards over the past 11 years, and we've done well in our employee engagement surveys. We're consistently above health care benchmarks on employee engagement. We have the quality and the efficiency to be well positioned for value-based care. We've collaborated with various alternative payment models. And the outcomes from those types of arrangements give us the data to present our value proposition to the various non-Medicare plans. We all know Medicare Advantage is a growing portion of the Home Health revenue mix and we're working to ensure that the agreements we enter into have an emphasis on quality outcomes. I'm going to talk a little bit more about growth strategy in just a minute or so. All of our development activity has led to a scaled footprint. There are 11 states in which we hold the #1 or #2 position for Home Health market share. In the purple states, we have both home health and hospice. And as I mentioned, 95 of our Hospice locations overlaps with our Home Health locations. I'm going to close the formal part of the presentation with just a quick look at our growth strategy. We continue to focus on driving organic growth in the existing operations. We'll continue to execute on our de novo strategy. Historically, the company opened 2 to 3 de novos in a year, but our future projections increase this to a target of 10 new de novo locations annually. In 2022, we added a team with a dedicated focus to opening de novo locations. Unlike an acquisition where we acquire an existing branch that already has a license, a provider number, the staff, the established referral sources and patients, a de novo is a location that is built from the ground up. We use market data to prioritize the locations, then we work to find a branch location, hiring staff and then applying for a licensing survey. So the length of the process can really vary depending upon the state. That's why we've added a dedicated team so that we can try to improve the timing and the return on de novo investments. We do continue to pursue and successfully integrate attractive strategic acquisitions to build on our scale and density and on the overlap between Home Health and Hospice. We are going to continue with the same due diligence that we've historically placed on the evaluations of potential acquisition opportunities. We leverage our care transition expertise. The care transition or coordinator position has been a critical role in the smooth transition of patients from a facility setting to a home. When we were part of Encompass Health, this role was really created to help provide that smooth transition from the inpatient rehab hospitals for the patient's home. And that clinical transition coordinator, they're either clinical nurses or therapists that create that working relationship with the discharge planners, who are usually case managers or social workers and help to transition that patient home. The success that we experienced over the years with Encompass Health and their IRFs, we've taken to more referral sources. And now we have CTCs in acute care hospitals, skilled nursing facilities, surgery centers. When you look at the number of these positions we had with Encompass Health, it was a little over 90%. We have over 300 care transition coordinators now servicing in many locations. On expanding Medicare Advantage focus last summer, we formed a payer innovation team. This team is focused on the value proposition with the MA plans so that we can be successful in negotiating and renegotiating MA agreements that place a value on our quality outcomes. We know we need to serve this growing patient population but we need to be disciplined in our approach. And then finally, on exploring adjacent service offerings, we keep a pulse on the regulatory and the reimbursement front to determine if future adjacent service offerings makes sense. And then as we're evaluating that, we look at, does it make sense to build it, to buy it, to partner. So those are things that we just keep a pulse on to see how things are moving from a regulatory and reimbursement front. So that's a little bit of an overview. And Crissy and I now look forward to your questions.

Great. Thanks, Barb. So I'm going to start with the questions. If anybody out there has a question, please don't be shy. You can just type it into the portal, and I will try and weave it into the conversation. With that, I'll just go ahead and we have a sort of a macro question that we've been asking all of our presenters today, so I'll start with that. Sort of the key theme we're hearing from a lot of our companies as we ended '22 was just about visibility or lack thereof, I should say. And '22 was somewhat of a challenging year for many companies, whether it was supply chain or staffing issues. Now maybe a recession looms on the horizon. So our question is kind of for you guys. Is it just -- in terms of visibility, how you're approaching '23 versus historically? Is there a difference this time around, just kind of trying to get a feel for on the macro level?

Sure. So I would say as we go into 2023, there is -- the biggest focus is on growth. As you mentioned, we kind of spent the last 2 years blocking and tackling all the various challenges that arose from the pandemic. I would also say that we face challenges for us as a result of our previous lack of work with Medicare Advantage plans. Members are and were moving to MA, and we just were not on very many plans, which restricted our sales team, and I would say, restricted our growth. So when we look at 2023, it's really with the lens of growth. While it's still a challenging environment as it relates to labor and other things, things are becoming a little bit more of normal state because I think those challenges are always going to exist. But for us, it's really 2023 growth.

Okay. Great. I like that confidence. Great. Let's go -- split this into some more specific questions. I guess the first question is just the starters. Obviously, you spun from Encompass I guess, in July of '22. What was sort of the impetus for that? And what are the advantages coming out of the spin now for Enhabit?

Well, I would say going back to the actual impetus at the time, which was really that end of 2019. If you think back way before the pandemic ever started, home health multiples had really grown considerably, and Encompass and the Board felt it was important for them to initiate a strategic review process to evaluate and consider if other structures would open up greater shareholder value. At that time, they were open to all alternatives, and the decision by Encompass and the Board was ultimately to spin. I would say when you look at advantages, for us, really the advantage is obviously the focus on care in the home. I'll give an example. In the past, we would have never really spent much time or effort marketing, the flexibility of being a clinician in the home environment, the flexibility that creates in your schedule, whereas a hospital, a nurse has to commit to that 12-hour shift and can't really leave till that replacement comes in. We never really would have done a lot of marketing and recruiting around the flexibility of home and health because it would have been kind of a little bit of a poke in the eye to the facility setting, whereas now we have the ability to do that. I would also say, as we look at how we spend our capital, we can be completely focused on home health and hospice. So I think it does give us a little bit. It also -- I mentioned the care transition coordinator. We wouldn't have been really present in a lot of other IRFs or really a lot of other settings, and this has allowed us to be able to really be Enhabit and provide this care transition coordinator role in a lot of other settings and in other IRFs.

Great. All right. Another sort of macro type question. Just on the competitive environment, the industry itself and -- as well as sort of Enhabit positioning in both home health and in hospice.

Sure. Well, I mean, I think -- and this is one thing that we talk about a lot is that the industry remains really fragmented, but for companies like Enhabit, the scale and density really provides companies our size and ability to focus on efficiencies. Pilot technologies that I think are difficult for the smaller owners and operators. And then when you look at the increase of the Medicare Advantage penetration, I do think the size and density is starting to carry a little bit more leverage as we negotiate, especially with those payers that are being a little challenged with access for their members and timely access for their members to the services.

Great. I think the business, if we look back the last 20 years, even in the last 10 years, it's been about a mid-single-digit organic grower. Do you feel like going forward, you obviously have the COVID or the pandemic and some -- but do you feel like that's just -- that's skew things. But as we sort of get back some equilibrium here, do you think sort of a mid-single digit plus or minus is a fair target? Or have there been any structural changes, like I mentioned the pandemic or other things that may make that a challenge?

I think that's still a fair target. What I would say is what we have to solve for are 2 big things, right? For us, it's this Medicare Advantage piece, right? I mean we're nearing 50% penetration for MA. So for 2 reasons, we have to be part of that. One is obviously, that's where the beneficiaries are moving, but also we found and heard from our sales team is that there's been times that they've been actually turned away by referral sources over the past few years because they've said, "I can't have you just wanting to service one type of my patient, the fee-for-service Medicare patient, everyone wants that." So to really be more of that full service provider to our referral sources, we have to be successful on our focus on the payer innovation team. I think the other thing that's changed throughout the pandemic that I don't think is going to go back is the number of clinicians that want more flexibility. Historically, the majority of our clinicians have been full-time staff, and what we've realized is we have to -- we're going to have to really increase the headcount of clinicians because so many more of those clinicians while they've retained and are still with us, they want hard time or PRN roles, which is still really an important role, but it means you just need more of them. So those are kind of the two things that I would say we need to really focus on so that we can deliver that kind of historic growth.

Right. And you mentioned sort of the changes in labor or the mentality of people or what they're looking for today. Without getting to too specifically, but where do you guys stand? I know obviously, like many others, '22 was a challenge for you, just in staffing. What -- can you sort of give us an update on where you stand today? And what are your efforts of sensing around to try and not only bring in new people, but also retain your current staff?

Yes. So the candidate pool has certainly improved. So we feel good about that. What I would say is that what we discovered over the pandemic as I think as people were striving for more of that flexibility. We did have a higher amount of turnover in that first year employee, and a lot of that were people that were trying home care for the very first time. Maybe they were -- they worked in a hospital and they said, well, I just really want that flexibility. But then getting that flexibility, they realize, okay, wait, home health, I don't want to go into some of these homes, right? And so for us, it's been backing up and working with our talent acquisition to say, how do we help as much as possible those candidates to know what is it like working in home care. It can be so rewarding for that clinician that wants one-on-one with their patients. But if someone is not comfortable in that one-on-one, they're used to an entire team around them supporting them in a hospital or maybe they don't want to go into certain homes, then this may not be the right place for them to work. And it's better for us to work with the candidate to acknowledge that on the front end before we invest a lot of orientation time into them. So I think that's the piece that we need to work on. And then as I mentioned, we need to look at really understanding what's that true headcount. So we look now and we need about 250 more either full-time nurses or full-time equivalent. So that may mean it's 400, if it's a bunch of part-time people but we need that to really get back to that significant growth that we saw before the pandemic.

Got you. Okay. Great. In terms of -- on the cost side, obviously, your staffing costs are going to be up more, like everybody, I guess. But historically, you guys have done a great job at keeping cost down. I think you have one of the lowest cost operating model. What are sort of the drivers behind that low-cost model that kind of gives you a competitive advantage versus some of your competitors?

Yes. I would say the scale and density is probably one of the biggest parts of our lower cost model because when you think about scale and density, especially when you think about like our large markets, really like Florida, a Texas and Alabama, when you think about productivity, that's really about limiting that windshield time between visits because anytime a clinician is in their car instead of in a patient's house, you're lowering their productivity. So when you have a really dense market, you can become really productive with your clinicians. And then when you're in those dense markets, you also have the ability to optimize, meaning we can have more LPNs, more therapy assistance on staff because it does allow you to be able to have an RN work at the top of their license because you have enough volume in the market that, that nurse can be on starts of care, reevaluations, those sorts of things. Whereas an LPN or a therapy insistent can be providing some of that day to day. In a market with less density, we first have to get an RN fully productive before we can try to optimize that RN. So when we look at the range of our cost per visit across the company, we see how important that scale and density is. And that's why when we look at priorities for like de novos or acquisitions, it really is about creating those tuck-ins because we know not only does it create a value from volume, but it creates an even better way for us to manage our costs.

Right. Okay. And you mentioned, obviously, Medicare Advantage. It's a big thing going forward. Can you sort of speak to what actions you're taking? What are you doing to try and -- obviously, I guess you got to negotiate and to attract new groups of Medicare Advantage patients. And how are you trying to get somewhat better rates than, I think that today, the rates are up to 1/3 or 40% discount versus traditional Medicare, which is most of your business. So how do you sort of diminish that impact of much lower pricing, I guess, get better pricing. But how is that going so far? What can you do to sort of improve that?

Sure. Well, a lot of it is really about sitting down with the payers. It's not -- the team that was here before really focused on what I would say just your general contracting, right? Give me a contract, let me look at the terms, is it an agreement? That's why we moved to this payer innovation team. It's really about bringing our data and sitting down with these planned individuals to say, here's the high quality that we bring. So for example, what we've heard from some of the plans is that they're being challenged with member access and timely access to care because if you think back 5, 10 years ago, the penetration was relatively low in the market, maybe 25%, 30% penetration. So they could go to these mom and pops, they'd be willing to take these really large discounts. It was kind of treated like a commodity. And these patients got seen. Well, now some of these markets are getting to the point they're 45%, 50% penetrated, and someone just can't take all that volume at these big discounts. So they are starting to feel a little bit issue with member access. So we're going and saying, we will commit access and timely access of care to your members, but we need to be paid fairly. These conversations are becoming successful more quickly with your multistate or regional type plans. I just think they can make decisions quicker. So like, for example, in the third quarter earnings call, we reported we had come to agreements with 9 plans and 6 of those, we were able to negotiate at the episodic rate. And the 3 that are per visit are at a much better rate than what our historical ones have been. So it's really about sitting down and talking the value proposition and then having them hold us accountable to that quality.

Right. Okay. And what about the olive for reimbursement from the more traditional Medicare, I would say is still a larger percentage of your market. I think for '23, there's a bunch of potentials, but it looks like for now, we're basically a flattish type rates, right, for '23, I guess, on traditional?