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

Good afternoon. And welcome to Oppenheimer's 33rd Annual Healthcare Conference. I'm Michael Wiederhorn, the health care services analyst. It's my pleasure today to have Enhabit Home Health & Hospice. We have Chief Executive Officer, Barbara Jacobsmeyer; and Chief Financial Officer, Crissy Carlisle. Thank you guys for joining us.

Thank you.

Thank you.

Today, we'll do a fireside. So we'll keep this pretty informal. And hopefully, you guys will get a lot out of this.

So we'll start with the kind of a big picture question. If you have a few months under the belt now in 2023 and as we view trends of the business going from last year to now, how should we think about this as a year, a normal year, normalized growing off base year going forward?

Sure. I think when you look at some of the big priorities coming off of 2022 into 2023 are really 2 big themes and that is labor and Medicare Advantage. And so for us on the labor front, we did a lot of work in 2022 as it related to market adjustments, benefit changes, mileage reimbursement things that we felt made us more attractive both for new hires as well as for retention. And so certainly have seen the impact of that when we looked at our nursing hires and retention in the fourth quarter. And then for Medicare Advantage, we put our payer innovation team in place in May of last year. And so we've been excited to see the results of how they really ended the year and the continued work that they have here in the new year. Those 2 things really are going to be important to drive our future growth.

Perfect. So we'll go into labor. Obviously, that's been a big hot topic across the health care continuum. So can you kind of give us an update what you're seeing on the labor front, how are things going? I think you discussed some progress previously with your new hiring and recruiting, but were expected to delay in productivity. So if you can kind of expand upon that, that would be great.

Sure. So it starts with, we can't hire unless we have a strong candidate pool, and we were happy to see that in fourth quarter, we had a 19% improvement in our nursing candidate pool. That continued into January, where we saw a 17% improvement year-over-year. And that really helped us drive the new hires. When we look at our net new hires for the fourth quarter, we had 101 net new full-time nursing hires. And so that was 60 in home health and 41 in hospice. So that really helps, again, as we get those individuals out of orientation, that helps the growth and that really came from both improved retention as well as improved hiring. We really felt that was also the results of some of the work we did that I just mentioned around compensation and benefits in 2022. And so from a labor front, we feel that as we've started 2023, we feel good about where we are from an overall market competitiveness. We do think that there may be some markets, where we'll have to do additional market adjustments. And it's why when you look at our guidance for 2023, we really look at that cost per visit going up at 4% to 5%, when you think of 90% of that is labor. And last year, we saw really closer to 6% to 7% increase. So we feel things are starting to normalize a little bit as it relates on the labor front, particularly from a compensation perspective.

So I know everyone has been talking about the constraints or due to staffing, so how your agency has been constrained permitting due to staffing constraints? And how has that shifted over time? And kind of what are you doing going forward to deal with this?

Sure. So we do continue to have some staffing constraint locations, ended the year with 7 of our hospice locations still constrained and about 62 of our home health locations. So we do still feel that. What I would say I don't know that, that number will ever be 0 because if you think about it, we're always updating our listing so that if a branch starts to grow, they may be fully staffed today, but as they grow, they're going to have to do the adjustments and hire more so that they can have future growth. And so we're always looking at what are our staffing constrained locations, how can we put some focus on those critical markets to get their staffing. And it's kind of a moving target. They're not always the same locations. But when you look at it from a -- our flexibility that we've added, I think it's helped us. Historically, we always had -- the majority of our staff are full-time salaried clinicians. And we've moved to being more flexible in part time, full time as well as the PRN. And so while that means you need more headcount, it does allow more individuals to have the flexibility that they're wanting.

What's the breakdown between full time and part time and how has that impacted your trends?

So when you look at it, really the bigger impact for us has been that difference of full time compared to our PRN. So the PRN is where there's truly flexibility. They can work this week and not work next week. They kind of choose, "I want to work 2 days this week and 5 days next week." There's great flexibility for them. And when you look at back in 2021, 35% of our nursing staff were in a PRN status. That increased to 39% in 2022. So we did see kind of that continued shift to more flexibility. We did see that stabilize, though, over the last 2 quarters of 2022. So we feel like we're in a good mix right now. And with those net new full-time hires, we continue to see that growth in the area where we need for that committed staff.

Okay. So I'll move around a little bit. We talk about referral patterns. And can you kind of discuss what you're doing to diverse away from the Encompass referrals? And is there any color around your late referral mix that you can provide and kind of give us kind of your strategies around this diversification?

Sure. Well, one of the things from the Encompass side, so we don't really have clinical collaboration rates anymore. If you think about it, our denominator for that were always the discharges that Encompass was sending home with home health in the overlap markets, and we don't have that number anymore to really know a clinical collaboration rate. What we did do, though, after the spin is we always saw a great success from that clinical transition coordinator role that clinician that was actually inside the Encompass IRFs to help with that smooth transition home. We did increase the number of CTCs that we have across the country and have them in more other IRFs today, acute care hospitals, long-term acute settings because we've seen that great value of that smooth transition from the facility to home. What I would say, though, with those individuals, including those inside the Encompass IRFs is we have asked them to find out from those referral sources, what payers would be most significant for us to try to get contracted with so that we can be viewed as more of a full-service home health provider. Historically, the majority of what we could take was fee-for-service Medicare. And as you can imagine, most of these facilities are saying, that's what everyone wants. And to be really seen as a great partner, they want us to be able to take more than just the fee-for-service Medicare. So we're feeding that information up to our payer innovation team so that we can work on getting regional contracts in those markets where we have these CTCs, where we can be seen as a more full-service provider.

Okay. On contracting. Obviously, it's a hot topic. Can you talk about your managed care contracting efforts, how that's going? How many contracts are you negotiating? How many you still love to negotiate? And kind of then I'll stop there and I guess extrapolate on that a little while.

Sure. So well, we put the payer innovation team in place May of last year because we certainly recognized that one of the things that we could really improve upon was not only the number of contracts but better contracts. And to do that, we needed to really sell our value proposition. Historically, we were on very few contracts. We were on only 1 national contract. And I would say that we certainly probably did not do as good of a job as maybe we would -- that Crissy and I would hope to do today on negotiating fair rates for that contract. And so what we do is really go in and show the value proposition, which includes access to the care, the timely initiation of care, and probably most importantly, our lower-than-industry average rehospitalization rates. We are having quicker success with these regional MA plans. We're at the table with all the national plans, but it just moves very slowly. And so that's why we've really put a focused attention on these regional because they do understand that value proposition they can make those decisions quicker. And they can really then track the impact that we make with those patients so that we are proving our value proposition with them. So as we mentioned in the fourth quarter call, we were successful in negotiating 18 new regional contracts, 9 of those are in effect today, with 7 of those paying us at an episodic rate, and our average for the episodic contracts is 0% to 10% discount. So much improved over our current average.

What are some of the financial implications from this type of the contracting? What discounts the fee-for-service are you receiving? What type of structures are you seeing? Is it getting more accretive? What's the value proposition you're making to the payers? Obviously, the payers take their time. The large payers, like you said, it's a very long drawn out process. What do they want to see? I mean I feel like leverage is starting -- where the pendulum starting to turn a little bit more to the home health provider because obviously, it's capacity constrained and ensures our time to realize the value. So if you can kind of elaborate on that, that would be great.

Sure. So I'll start with historically, our average discount on the per visit is 35% to 40%. So it's pretty significant. When we look today, when we're looking, we -- our goal is to try to get an episodic contract, and again, with that 0% to 10% discount so that we can manage the visits appropriately. What we explained to the payers is that when you pay us episodically, we know there are patients that are going to need more visits and we know there are patients that are going to need less visits. And we are the ones that should manage that because we're managing to make sure that we maintain that low rehospitalization rate and that high quality. So the goal is really to get as many of those episodic as possible. We do hear from a fair number of them that they're not set up to pay episodically. And so their preference is still per visit. And so then what we are working hard is to not accept anything below -- or anything above a 25% to 30% discount. So we can start to move that needle a little bit when you look at what our current discounts are. We'd love today to just stop taking the payers that pay us those large discounts. Unfortunately, today, we know that we have to go to our referral sources, and we have to be able to accept more than just traditional Medicare to be seen as a good provider for them. And so today, we're happy to take that. But certainly, in these regions, where we're able to get these regional contracts, if that increases the list that we can take to those referral sources, region by region, we'll be able to start turning away some of those payers that are not paying us fairly at this point.

That's great. Are you seeing any -- obviously value base continues to be a hot topic. What are you hearing? What are you seeing? Is this still in preliminary stages? Kind of where do you think that is from a contracting perspective, and even where home health fits to that continuum?

I do think it's still very early stages. I would say that probably the greatest and quickest traction we'll get is with the conveners. Certainly, they carry the risk around and understand the value of particularly a company like us that has a low rehospitalization, low ED visit rates because they can actually track that. So I think our success will be quicker with the conveners than directly with the payers because again, the home health is still a very small piece of what they overall care about. And so I think while they talk about value base and they talk about putting other things into place, it's just not something that right now, they're willing to put the time and effort into how would that be structured? How would we be paid? If anything, when it comes to the value base, some of what we're talking about is let us earn additional increases to our reimbursement. If it's per visit, have our data and our quality help us earn additional increases in the future years. So those are some of the creative things that we're trying to do.

Okay. Can you talk about the timing perspective how various factors around labor and new contracts impact seasonality as we look at the business going forward?

From -- I don't...

From contract labor?

No, from new contracts coming on, coming off, are you changing from season -- from a modeling perspective and how also the labor constraints and all that from a -- like I said, from a numbers perspective, how should we be thinking about that seasonality?

Sure. So I think that what I would point out in regards to 2023, and we noted this on our earnings call, is that our financial performance is expected to be higher in the back half of the year. Mike, so much of that is predicated on the continuation of getting more contracts at these increased rates as well as the ongoing ramp-up of our labor staff. And then the transition services agreement that we have with Encompass Health also plays a role in that. These first 2 quarters of 2023 will be, what I call, double-dipping a little bit. Again, as we hire those resources internally in areas such as SEC reporting and internal audit. At the same time, we're still paying for those services under the transition services agreement. Most of those, excluding some areas like tax and information technology, will predominantly be done by the time we get to June 30. So that also is impacting the first half versus not the second half.

Perfect. That's great. When we look at visits, I think your visits perhaps took a big step down. Can you talk more about the impact of the use of Medalogix and where you see this trending going forward? And how do you think in terms of maintaining quality, do you think there's any kind of -- what's the kind of flow of that?

Sure. Well, I would say that the Medalogix Pulse tool, which we piloted and now have in some of our branches, we won't have it fully rolled out until the end of the second quarter. But the Pulse tool is different than the Medalogix care, which is what we initially had used. Medalogix care gave more of a snapshot of when that patient was first admitted and gives a recommendation of visits but it doesn't change as the patient progresses or declines. And so it is just that snapshot. When you look at the Pulse tool, the Pulse tool continually updates how the patient is doing. That does help you have a better balance on it relates to managing visits but not sacrificing quality. So I do think that is an important tool as we've always looked at making sure that we manage the visits appropriately, but certainly don't negatively impact the quality metrics that's our biggest value proposition. The other thing that I would say is when you look at going forward from the Medalogix tools that it takes into account that patient and the patient's diagnoses. So while, yes, the fourth quarter had our lowest visits per episode, we look to making sure that the visits that we have are at or below the Medalogix's recommendation. But keep in mind that the recommendation number changes based on your patient mix. So for example, if we have a lot of like neuro rehab type patients like what would come from an Encompass IRF, that patient comes with needs for nursing PT, OT speech, will all of those count as individual visits. Now you also get paid higher for those neuro rehab type patients. And so if your mix increases in that type of patient, so would be the visits that are being recommended, but again, so is the reimbursement. So we look more at what is the mix that we have and then how do we manage to that mix.

Perfect. I'll shift over to hospice here. What are you seeing on the hospice side of the business? Do you expect to see some of the late year ADC growth to continue into 2023?

I think the most important thing for hospice now that we are improving on the staffing front is really getting the staff back in place from a sales perspective. As we had sales team members leave in 2022, if it was a market that we did not have staff or that we were staffing constrained, we made the decision not to replace those sales team members because I mean a salesperson doesn't want to have to keep saying no. And so we are now at the stage where as we have had markets where we've improved that staffing and don't have those capacity constraints and it's why we've used contract labor in some of them so that we can get sales teams back in the markets, back in front of referral sources so that we can get those referrals back that we saw over the last few years.

You mentioned labor, so -- and contractors, so do you see -- how do you see that contract labor being used going forward on that side of the business?

So we certainly use more than we had historically in the fourth quarter, and a lot of that it was because of our success in hiring. We don't approve contract labor to be used just to be used in a market. It's very expensive, especially in a world like ours where everything is one-to-one visits. But if we've hired and we know that we see an end in sight, we know when that employee comes out of orientation that we're going to be able to get on a regular stride, then we do approve the contract labor. So again, that we can get sales folks back out starting to get referrals. When you look at the fourth quarter, 5.2% of our hospice visits were done by contract labor. That compares on average, we're around 1.5%. But again, we did it for a good reason. We did see towards the end of January, where we were able to discontinue some of those contracts already. But again, we'll use them where we know we have the hiring and can use that as a bridge to get those referrals increasing.

On the referral side, are you seeing any shifts in your referral mix on this side? And how is that impacting, let's just say in ADC?

We really haven't seen any material shift. I would say that as we are getting our care management model in place and the staffing where we need to for that model, one of the goals is to be a better resource to the acute care hospitals. They do tend to need you to be able to say yes today and take the patient today. And where you're in a situation where even if you're not labor constrained, but you are kind of at a close to max level, it's difficult to take that same referral and mission. And so our goal is to be a better resource to those acute care hospitals in the markets as we get the care management model fully staffed.

What are you seeing from -- on the senior housing front?

Senior housing, things feel kind of back to normal as far as at least our ability to get into them and occupancies are starting to get back to that pre-pandemic level.

Perfect. Okay. Looking forward, I know you guys are not putting out the 2023 M&A target, how should we view the strategy with M&A going forward in light of this?

Yes. So I think it's fair to say that we continue to believe grow through new stores is an important part of our long-term strategy. Our development team certainly remains active and are looking at deals every day and being very diligent as part of their work. I think for us, it's a matter of making sure that it's opportunistic and that sellers are acknowledging where we are with home health and hospice and where the market is, the multiples are not where they were 2, 3, 4 years ago. And so it's a little bit more about the bid-ask spread and especially on the home health side, ensuring that sellers recognize that reimbursement uncertainty for Medicare and then as well the payer mix shift in Medicare Advantage. The EBITDA from 12 months ago was not the EBITDA for the forward-looking 12. And so we got to be very careful on that bid ask. I think the other thing, Mike, that's important to remember in our strategy is that long-term growth is also -- de novo is a part of that strategy for us. And our goal is 10 per year, and those require a very solid incremental investment.

You get a good traction on the de novos and on the locations that you've rolled out?

Yes. So I mean the de novos are doing well at a full run rate, which is usually achieved around 24 months. We expect a de novo to be at $2 million per year in revenues and $500,000 in EBITDA. The initial investment being $250,000 to $350,000. One of the things that we did in 2022 was actually develop a de novo integration-specific team. And part of what we've challenged them to do is not only open these locations but also work to get that 24-month period down to something closer to 18 months.

You mentioned on the M&A front, you talked about the reimbursement environment, the Medicare reimbursement environment. When we think about home health, there's obviously been a lot of noise around reimbursement about 10 years ago, then it got stabilized. Now we're starting -- it's gotten a little bit frenzied again. So do you think CMS will grew on the PDGM adjustment? And also, what do you think about any color around the temporary clawbacks as well?

So I don't think that any of us will be surprised if the proposed rule includes the other half of the permanent adjustment. I think that's something that is anticipated at this point. I think, obviously, whatever comes out in a proposed rule, the goal will be for the industry is to work both on a lobbying effort as well as with CMS to understand is there a way that we can impact that even if it means putting that over 2 years, let's say. On the temporary adjustments, last year, they asked for comments basically from the industry on kind of how do you want your pain if and when you have to take it. I don't know if there was very many comments on that just because there was such a focus on the permanent adjustments last year. It will be interesting to see how and if that is addressed in the proposed rule this year because I do think that, that's an area that obviously creates kind of that cloud of what is going to happen with those temporary adjustments. Is that something that even makes sense? If you think about how fragmented the industry is, to think about clawing back from something from 2020, 2021, someone today could own an asset that they didn't own back then. So I think there's a lot of questions to pose for CMS as it relates to those temporary adjustments.

Okay. That's great. That's useful. Going back to capital deployment, how should we view your overall capital deployment strategy weighing M&A versus debt pay down in light of your leverage profile?

Yes. So we're really focused, Mike, on financial flexibility, and we're also very keenly aware of our leverage. And while we're well within our leverage covenant of 4.75x, we do believe that a more balanced approach to cash flow deployment may be prudent for 2023. As I noted earlier, we continue to look opportunistically at acquisition opportunities at the same time. And we do have natural deleveraging with our term loan as it has $20 million of required amortization per year. So it's going to be a balanced approach. And then again, we can still grow via the de novo strategy and the minimal incremental infrastructure costs associated with one of those.

Okay. So operationally, when we look at your portfolio, where do you see the most potential for earnings upside going forward?

I mean, for us, obviously, it is the results of our payer innovation team, again, to be on more and better contracts, not only helps us to have improved rates on the Medicare Advantage side, but again, the more we can be a full-service provider to those referral source also helps us get back in there and gain additional fee-for-service business because today, obviously, that has to be spread amongst the providers that are willing to take all the other payers. And so if we can have a better list of payers that we can accept in a market, I think that even makes us a better provider for them to gain additional fee-for-service Medicare.

Perfect. I know there's been some chatter around the IRF transfers, do you believe there's any impact to the home health providers? And if you can give some color on that, that would be great.

Well, I think for all our providers, the biggest -- one of the biggest parts of their value proposition, whether it's to a payer or to a referral source is getting the patient home, right? Preventing having to send them to SNF, preventing the patient from going back to acute. So a smooth, successful transfer home is one of the greatest value propositions for the cost of inpatient rehab. So, so many of those patients do require home health to make that a successful transition. So I just -- I think home health regardless is going to be an important part of that continuum for those patients.

Perfect. One last question here, big picture. What -- when you -- looking forward, going out to '24 and '25, what makes you most excited about and have it in terms of going forward?

Well, most exciting for me is the quality that we already drive today. So I think when you have that quality, you have that value proposition and that helps you both when you're recruiting and retaining your staff. They're very proud of the quality, as well as, again, that continued negotiation. So when we look at the levers of labor and MA, I think we have a lot of opportunity as we look to more and more patients wanting their care in the home.

Well, that's great. I think this is really useful. I appreciate the color today. Thank you for your time, and [ hope a good afternoon ] as well for you guys. I appreciate it.

Thank you.

Thanks.