Q3 2020 Encompass Health Corp Earnings Call
[music].
Star one on your telephone keypad, you will be limited to one question and one follow up question. Today's conference call is being recorded if you have any objections you may disconnect. At this time I will now turn the call off to Crissy, Carlisle incompetence health Chief Investor Relations Officer.
Thank you operator, and good morning, everyone. Thank you for joining in Congress Health third quarter 2020 earnings call with me on the call today are Mark Tarr, President and Chief Executive Officer, Doug.
Coltharp, Chief Financial Officer, Bart Jacob Meier, President inpatient rehabilitation hospital.
Darby General Counsel and corporate Secretary in April Anthony Chief Executive Officer of encompass home health and hospice.
Before we begin if you do not already have a copy the third.
Core earnings release supplemental information and related form 8-K filed with the FCC are available on our website at encompass Hell Dot com.
On page 10 of the supplemental information you will find a safe Harbor statement, which are also set forth in greater detail on the last page of the earnings release.
During the call we will make forward looking statements, which are subject to risks and uncertainties many of which are beyond our control.
Certain risks and uncertainties like the magnitude the impact of the COVID-19 pandemic that could cause actual results to differ materially from our projections estimates and expectations are discussed in the company's SEC filings, including the earnings release and related form 8-K.
Form 10-K for the year ended December 31st 2019, and the form 10-Q for the quarters ended March 31st 2020 June 30 2020 in September 30, 2020, when filed we encourage you to read them.
You are cautioned not to place undue reliance on the estimates projections guidance and other forward looking information presented which are based on current estimates of future events and speak only as of today, we do not undertake a duty update these forward looking statements.
Our supplemental information and discussion on this call will include certain non-GAAP financial measures for such measures reconciliation to the most directly comparable GAAP measure is available at the end of the supplemental information at the end of the earnings release and as part of the form 8-K filed yesterday with the SEC all of which are available on our.
Website before.
Before I turn it over to Mark I would like to remind everyone that we will adhere to the one question and one follow up question rule to allow everyone to submit a question. If you have additional questions. Please feel free to put yourself back in the queue with that I'll turn the call over to Mark.
Christie and good morning to everyone.
We are on track record of working through difficult situation.
Since 2009, we have six to successfully manage through an economic recession.
Regulatory changes.
Sequestration and Medicare payment freezes and cuts.
And now we get about a global pandemic to that list.
Our teams are doing an extraordinary job in managing through the various COVID-19 challengers.
While our operating environment remains difficult due to the pandemic, we remain confident in our prospects of both our business segments and our ability to overcome these challenges.
It's what we do we adapt we persevere and would continue to grow.
Let's talk first about our inpatient rehabilitation segment.
Our inpatient rehabilitation volumes recovered substantially in the third quarter of 2012.
While total discharges were down 1.5% compared to the third quarter of 2019. This number improved significantly from the 10.7% decrease in volumes, we experienced in the second quarter of 2020.
These factors are temporary responses to the pandemic and are not indicative of structural shifts in the market.
Net revenue per discharge as being positively impacted by the temporary suspension of sequestration and by a higher acuity patient mix, resulting from the pandemic.
We saw the acuity of our patients increase in the second quarter of 2020 and continue in the third quarter.
And we expect this trend to continue in the fourth quarter.
As you can see on page 10 of the supplemental slides that accompanied our earnings release.
Our expenses did increase as a percent of revenues primarily due to the COVID-19 pandemic.
<unk> hospital teams have done a tremendous job managing our most significant cost labor.
For the third quarter of 2020 hour employees for occupied bed, which we use as a metric to measure our efficiency was 344 compared to 348 in the third quarter of 2019.
This is evidence that our technology in real time data combined with our clinical Knowhow makes us a best in class operator in any environment.
We know how to effectively and efficiently manage our hospitals and can adjust our staffing levels to our volumes.
We've also taken aggressive actions to obtain what we believe are adequate supplies of personal protective equipment, even at the elevated utilization levels associated with the pandemic.
While some facilities in the post to give space have faced significant challenges with COVID-19 are inpatient rehabilitation hospitals have been able to help recovering patients return to their independence.
These patients many of whom spent time on ventilators have endured extended stays in acute care hospitals.
They are extremely weak and require intense multidisciplinary rehabilitation to regain both their strength and cognitive abilities.
Since April we have treated over 3000 recovering covid patients returning 80%.
Back to the communities falling rehabilitation.
And the fourth quarter of 2020, we expect limitations on electric procedures in certain markets to continue to impact volume growth.
But we believe these volumes will return.
It's a matter of when not if.
We remain confident in the long term outlook for our hospitals so.
So much so that we've continued to expand our national footprint throughout the pandemic.
We've opened three new hospitals, thus far in 2020, and we expect to open another one in Toledo, Ohio and mid November.
In addition by year and we expect to have added approximately 120 beds to existing hospitals with 89 of those already yet.
For 2021, we've announced plans to build a new hospitals.
We've also announced a new hospital scheduled to open in 2022.
And we're not done making that.
All of this fully demonstrates our commitment and confidence in our future.
Let's move now to our home health and Hospice segment.
Our home health volumes recovered substantially in the third quarter of 2020.
While same store admissions were down four 6% compared to the third quarter of 2019, they improved significantly from the second quarter of 2020, when we saw a $17 3% decrease in emissions.
And we came out of the quarter stronger than we entered it with year over year same store admissions growth of 2.2% for the month of September.
We achieved this success, even with our year over year admissions related to elect to procedures down approximately 20%.
Additionally continued facility access restrictions has negatively impacted the volume of patients admitted onto our service who reside in assisted or independent living facilities and these emissions down approximately 40% year over year.
We also continue to experience covid related challenges and certain geographic markets, specifically in Texas, where admissions or at 95% of our 2019 levels and the third quarter of 2020.
Mostly due to limited electric procedures.
While admissions in Florida dipped in 91% of historic levels in August they rebounded nicely in September to finish the quarter above 100% of Q3 2019 emissions.
Even in the face of restricted access to some of our historic referral sources.
And with limited electric procedures and many of our markets. We continue to perform at a high level.
Cost controls remains strong and home help with our cost per visit down almost 4% in spite of covid related expenses associated with PPE and staff in quarantine.
Our most significant decline in volume has been in the physical therapy discipline due to the decline in electric procedures and being shut out from assisted living facilities.
To adjust for this and May we made a shift in our compensation structure for therapist.
Lowering each therapist based pay by 20% and in turn lowering their productivity expectations for each pay period by 20%.
This change allowed us to save costs and do so in a manner that did not result in any broad furloughs layoffs or terminations.
We plan to keep this compensation structure going forward as it allows us to better flex or therapy staffing and allows our therapists to earn additional compensation by exceeding their productivity levels.
Although the pandemic is made some collaboration efforts more difficult and necessarily virtual in nature. We believe there is a strong interest in partnering with encompass health home health and hospice segment, among Acos and Medicare advantage Payors seeking value based payment arranged.
We have partnered with more than 100, Medicare shared savings program acos around the country, adding.
Adding nine new Acos to this list in the third quarter of 2020.
A recent analysis of 2019 claims data revealed that we grew our share of ACO beneficiaries by 16% in 2019 versus 2019, whereas with the rest of the home health industry remained flat year over year.
Similarly, our continued efforts to enter value based payment arrangements with Medicare advantage Payors yielded. The addition of two new contracts in Q3.
With more discussions ongoing anticipated to result in additional contracts over the coming quarters.
With the combination of the industry, leading hospital readmission rates, resulting in more healthy days at home for our patients success and Pryor risk faced payment arrangements and a commitment to scale and density at the regional level encompass health is the clear choice for organizations engaged.
And the risk based payment models for America's seniors.
And after several months of unusually slow M&A activity and the home care sector. We are encouraged that the pipeline of acquisition opportunities is rebuilding particularly for hospice.
Despite the pandemic, we're continuing define new and effective way to provide care to our patients and support our clinicians and both business segments.
Reducing <unk> emissions remains of focus for us as.
As many of you know our react model focuses on presenting acute care transfers while patients are in our inpatient rehabilitation hospitals.
This month, we rolled out our Readmissions prevention program, which uses information from more than 400000 patients who have been through our inpatient rehabilitation hospitals or home health agencies to estimate a patient's risk of hospitalization after discharge.
We use this score combined with social determinants of health and are clinical judgment to estimate and act on a patient overall probability of being hospitalized and hopefully prevent a readmission from occurring.
And our overlap markets or hospital and home health teams are working together to ensure a smooth transition to the home and have established clinical protocols to help mitigate the need for both emergency care and hospitalization for high risk patients.
This is another way we are using data from our electronic medical records from both segments to predict a potential decline in health status and act in a timely manner to presented this is good for patients and payers.
While many uncertainties continue to exist our visibility has improved.
And we'll have more information and experience in managing operations during the pandemic.
Therefore, we have issued guidance for the fourth quarter of 2020.
You can see this guidance on our earnings release as well as on page 17 of the supplemental slides the company to release.
We expect to be in a position provide full year 2021 guidance and a longer term outlook. When we report our queue for a full year 2020 earnings at the end of January.
While many uncertainties still exist our company is well positioned to drive long term growth.
As I mentioned at the beginning of my comments, we have a proven track record of adapting to and working through challenges, including this pandemic.
Our business fundamentals aren't changing in fact, the pandemic is created an even stronger awareness of the high level of care, we provide in our inpatient rehabilitation hospitals.
And the value of our home health and Hospice service lines.
And as the population ages that demand for a high quality care will increase.
Believe our futures bright.
Before and I want to thank all of our employees, who continue to make in Compass Hell, a leader and integrated healthcare.
2020 has been an unprecedented year, our nation has been through a lot and yet our employees have continued care for patients strive for better outcomes compared to those of other care settings.
I can't thank them enough and I know our patients are grateful for their efforts too.
With that I'll turn it over to Doug.
Thanks, Mark and good morning, everyone. Let me reiterate what Mark just said we are very proud of our team's response to the ongoing pandemic and we're very pleased with the resiliency. Our organization has demonstrated this is evidenced in the continued improvement of our financial results for.
Q3 are consolidated net revenues increased 1.1% over Q3, 2019, 2117 $4 billion and our consolidated adjusted EBITDA for Q3 was essentially flat to the prior year period at approximately $230 million.
Even in these challenging times, our business continues to generate strong cash flow.
R Q3, adjusted free cash flow of $124.1 million increased 13, 2% over Q3 19, bringing our year to date adjusted free cash flow to approximately $367 million or.
Are strong and consistent cash flow supports are complimentary strategies of investing in growth opportunities and making shareholder distributions.
So the first three quarters of 2020, we have made approximately $159 million and growth investments and provided approximately $89 million and shareholder distributions.
We continue to proactively manage our capital structure to ensure adequate liquidity and flexibility to navigate our business through any challenges and to capitalize on the attractive growth opportunities, we see and all three of our service lines.
In late September we again access the debt markets racing $400 million and senior unsecured notes with a coupon of 462, 5% maturing in 2031.
This transaction settled in early October and thus is not reflected on R. E O Q3 balance sheet.
The proceeds from this offering will be used together with approximately $300 million of cash on hand to retire the balance of our 575% senior notes do it 2024, resulting in both lower interest expense and a longer duration of our debt capital.
Our net leverage at the end of Q3 was three six times and we finished the quarter with no amounts drawn on our $1 billion revolving credit facility.
Both of our business segments have continued on an upward trajectory following the nadir in our volumes reached in mid April.
This has been accomplished in spite of the Covid K surges and some of our most important markets.
Beginning with Dr segment total revenue increased 3.1% over Q3 19 as inpatient growth of three 8% was partially offset by a 25, 3% reduction an outpatient and other.
The decline an outpatient revenues stems from permanent unit closures in 2019, and the intermittent suspension of certain units in response to the pandemic in 2020.
Q3 discharge has declined 1.5% with a 2.8% drop in same store discharges, partially offset by new store contributions.
Much of the same store decline was attributable to our facilities in Florida and to a lesser extent, Texas, where the effects of the pandemic have been high.
As can be seen on page six of the supplemental materials, our patients dentist increased throughout the quarter.
We continue to see strong growth in our Medicare advantage business with M. A discharge is increasing 46% in Q3.
As Mark stated, we continued to experienced higher patient acuity in Q3.
The increase in average acuity together with the Medicare sequestration suspension were primarily responsible for our five 4% increase in revenue per discharge.
The higher acuity drove an increase in our average length of stay which partially offsets this pricing benefit.
Ah revenue per patient day for Q3 increased 2% over the prior year.
Earth's segment adjusted EBITDA for Q3 of $209 $2 million declined less than 1% from Q3 2019.
Our hospitals continued to manage labor productivity and operating expenses very effectively during the quarter.
These efforts notwithstanding the effects of the pandemic caused SW be in Q3 to increased 20 basis points as a percent of revenue over the prior year period and supplies to increased 80 basis points as a percent of revenue.
Home Health and Hospice segment revenue in Q3 declined five 1% from the prior year period.
Home health revenue decreased six 5% based on the three 3% decline in admissions and two 3% drop in revenue per episode.
The decrease in revenue per episode is primarily attributable to the implementation of PDGF the effects of which had been exacerbated by the pandemic.
Home health revenue per episode of Q3 benefited from the suspension of the Medicare sequestration as well as the increase in admissions late in the quarter.
R Q3 hospice revenue increased one 6%.
Hospice same store admissions in Q3 were up 15, 8%, but patient days declined 2.1% due to a lower average length of stay resulting from a change in our patient mix.
During Q3, the percentage of our referrals from institutional settings, which typically have a lower average length of stay increased while the percentage of referrals from senior living facilities, which typically have a higher length of stay decreased.
This is due to access restrictions and many senior living facility referral sources, owing to the pandemic.
Within home health, our continued focus on labor productivity combined with compensation structure changes implemented earlier this year for over 270 basis point reduction in cost of services for Q3.
Business per episode declined from $17, three and Q3 19 to $16 for in Q3, 20 and cost per visit declined $75 from $78 and the prior year period.
This effective cost management led to segment adjusted EBITDA in Q3 $51.8 million, an increase of 2% over Q3 19.
As Mark stated we've issued guidance for Q4.
The guidance and the key considerations on which is based can be found on pages 17, and 18 of the supplemental materials.
The queue for guidance includes an adjusted EBITDA range of $225 million to $240 million as compared to $238 $2 million achieved in queue for 19.
As noted on page 18, adjusted EBITDA in queue for last year benefited from nine $5 million of items, we do not expect to repeat this year.
And now operator will open the line for questions.
And if you would like to ask a question at this time please.
Against our questions Press Star one clean.
Yes first question comes from the line of with male of UBS.
Morning, when the word.
Thanks for all the color. This morning, I wanted to start with just the home health volumes, if we adjust for the assisted living the senior.
Referral declines what would the year over year volumes be I mean, if we just isolate them in a 40% decline just strikes me as very high and I get that Covid makes forecasting difficult, but I am curious maybe to hear from April any experiences that you could share in markets outside of Florida, or Texas that might be trending more favorably and does that make.
You more negative or optimistic on the outlook for volumes going forward.
Yeah, So I think.
The commute.
Community impact has been pretty significant in pretty consistent across the country and we haven't really had certain regions that have come in openly welcome welcome in a in a minute.
The lockdown consistently across the country and I think begin to kind of <unk>.
August July timeframe, we started to get a little bit greater access that now we can be a little bit into.
Period by it definitely feels like.
Again sort of being equally certain market will be again in the beginning.
Lockdown, they will let you or nurse and if not you will.
We will not year Ah nurse in the hospital.
Your capital as a social worker.
A little bit of a mixed bag market by market.
And I think that market, probably one that we think is going to continue to be challenging for a bit.
What we've done I think pretty well.
Getting opportunity, while I really going out and using that disruption deposit.
New sources of revenue.
Increased slow.
Surgery centers that are starting to get some of these elected and in the area of electives, we're seeing a lot more positive.
Instantly.
By months July August September even into the first three weeks of October where it looks like our defining elected.
Down at the comparatively covid level down on the only about 12% from where it was in the January February timeframe, but will be encouraged about the trajectory that we're seeing everywhere and other than ALLL continued in the.
A little bit of a roller coaster, but still.
Wow.
So just to be clicked, if we could exclude the assisted living referrals is there.
A number to think about in terms of how the business would be declining are increasing right now.
Well we have that.
That way right off the top of my head, but we can certainly look at that detailed information instead of get back to you.
Okay, and just one last one just.
For both businesses. The monthly ADC disclosures are helpful is there any spot number dug to kind of look at for October at this point just to get a sense of how we may be trending versus what appears to be a better September exit right.
And <unk> is good.
Okay, I will take that thanks, guys.
Alright excellent.
Your next question comes from the lineup, Kevin Fischbeck of Bank of America.
Oh, Kevin Kevin.
Good morning, actually this is Joanna Katherine Kelly, Kevin today tweaking, taking the question here.
Thank you I think very.
Nice note the volume fencing home, how can we talk about a little bit about pricing transferred hometown. So I can listen a little bit with that 2% after being down 1% in queue too.
So can you just flat any any items.
Any changing mix.
Yeah.
PDGF, which Chinese hyperparasite, but any kind of color you can provide on that would be great.
Sure well, obviously the revenue per episode.
Right, that's a pretty significantly above is elected electric procedures tend to be one of the other things.
Tend to be the highest one of the higher revenue sources, even under een, although BGN that category of lower than it was under Pts that the 2019. So let me see that declining elected and we compared 2019 2020 at the kind of look at a combination of two factors one PM would've made.
Procedures.
And they had been in the prior year.
And nearly also.
Yeah, a little.
Okay.
Still higher than other kind of a pet.
The nation on the right side.
Ian implication and the proportional decree that we see an elective procedures, which are relatively high revenue sources that makes sense.
Yeah that makes sense and if I can just a follow up on the commentary now on the other side of the other segment on that information we have.
In terms of obviously very impressive.
I need a plan.
Development plans for that.
Meant.
So is that fair to say that not seeing much of a slowdown there in terms of any of these.
Covid cases spiking some of this month.
In terms of actually completing this project some time thank you.
So we do not we think the basic fundamentals on their side of the business continued in.
Straw, both near term and long term, we we see covid.
Has just a near term challenge for us that we will get through as a matter of fact, if anything covid has given us an opportunity marketplaces. The show the caliber of the.
High level of acuity care, we can provide to our patients. So we don't see any impact with covid on our development efforts.
Great. Thank you.
And your next question comes from the lineup Matt.
William Blair.
Okay Mac format.
Hey, good morning.
Doug Thanks for all the detail on the guidance for Q4, I did want to ask about.
Just a little bit on the pricing side, obviously, the last couple of quarters have been very strong for Earth and now moving into that calendar year that <unk> you get a nice pricing. So could you maybe help us understand.
Quantify some extent, what acuity and sequestration benefit or.
The quarter and maybe at that can give us a window into what pricing cross might look like in the fourth quarter for us.
Yeah. So the sequestration is pretty straightforward right. That's the 2% that you see.
With regard to pricing, it's a little difficult to separate out the amount that is specifically related to.
Patient acuity that may be driven by Covid activities, you've got two things that are going on with regard to acuity that are covid related and Mark reviewed and reviewed this in his comments first is you've got a portion of the patients that are coming in that are recovering from covid and there is.
Is an extra co morbidity payment that comes along with those payments are with those patients that will boost the the revenue per episode.
But you've also got the change in the patient mix, because we're seeing relatively the same number of stroke and neurological patients, but we dropped out those lower acuity.
Mark talked about we expect those trends are likely to continue in the fourth quarter. Those had about if you combine those and then the other thing I wanted to throw into the mix is there is an element of this that is still the adoption of section Gigi.
And it's difficult to separate out the impact of patient mix from Covid from Gigi, but together, we think those were responsible for about 190 basis points of the of the lift in revenue per episode for Q3.
Just fell a bit more color tobacco doug's talking about if you think about just from a case mix index, we ran for.
A number of years right at the 136137 case mix index.
Starting this year and Q2.
And carried over into Q3, we ran a 144142 case mix index. So is just indicative of the the acuity that we're seeing this coming out of acute care hospitals remember, 90% of our admissions that come into our Earth come directly from acute care hospitals for these patients are just sicker and whether.
They are specific to covid or not we're just saying a higher acuity across the board.
Thanks Bye.
I was looking for and then and then maybe just thinking about.
2021.
<unk>.
And you'll get guidance early next year, but I.
I think about half the location that can diverse coming on board next year are in Texas, and Florida any reason at this point to think that.
That the sort of the on ramp up those facilities might be any slower and then I think you said you are going to update the long term plans it might take away from this cause it sounds like nothing about your long term outlook has changed at least qualitatively.
Yes, I think with regard to the the ramp up the new facilities that are coming on board.
Most of those are scheduled to come onboard in Q3 of next year. We've got some that are opening late and Q too and I think it's it's either our expectation or our hosts or the combination of the two that we're going to be largely on the other side of the effects of the pandemic by that time, so we're not really anticipating anything different different different with regard to the.
The ramp up there and absolutely nothing has changed regarding our enthusiasm and commitment to long term growth prospects of the businesses that we're in and so we will continue on the course that we have started down with regard to the development of the increased dinovo pipeline in New York City.
Okay. Thank you.
And your next question comes from the line of Brian and Twinkling of Jeffrey.
One of our own a good morning, guys. Good morning, just to follow up on Matt's question I guess for for both of you guys. If we're thinking about the growth algorithm right I mean without going into guidance for next year.
I'm using kellogg the queue for is a bit queue for guidance as a baseline.
Is it the right to assume that you should be able to grow on top of that and what would be the driver so that growth as I think about 2021.
I think the continuing effects of the pandemic aside because again, it's our anticipation that you're going to have those at a pretty significant level in Q1, and probably lingering through much of cute too.
Put some capacity in place over the course of 2019 in 2020 that provides room for organic growth and then if you look at the bed additions. We made in 2019 and then another 120 bed additions coming on board in 2020, those are vehicles for same store growth in 2021.
And that we certainly would expect a recovery, particularly in some of these harbor hate markets is Covid works its way through the system. So we think there are good prospects for growth, particularly in the back half of 2021.
Got it and then I guess the question I have for April.
How are you thinking about ear PDGF mitigation efforts right because I think the guidance for Q4 <unk>.
Call for at 2% to 3% headwind for PDGF and I know when we started the year, we were thinking about a gradual mitigation to where we get two zero.
Mid year.
2020, so is there anything that it's changed or just curious how are you thinking about that and also the.
Sustainability of that 75 dollar cost per visit I mean, I know you changed your cost structure is that the right number are you thinking about going forward.
Yes.
And as it relates to dhan mitigation I'm pretty proud of what we've been able to buy the challenges revenue down 5% that the earnings up to really speak mitigation.
That we were able to do whether we volume base our rate base.
In the quarter, obviously some of the things that we had planned as a medium perspective, that's proven to be.
Initially difficult in endemic environment. For example, we were going to try to realize some of that in behavior change as it related limpid.
Actually gone the other way on a and then there's.
Been a number of our strategy that we would've said we're in place in January that had gotten particularly difficult then of Covid environment.
Been able to do other things and as you know one of the significant thing.
Yes.
This resulted in increased cost per visit I do think that within the therapy discipline, we're going to continue to see the savings coming through as we go forward as we maintain that cop planned. However, I think we're going to see them mitigation is that saving is it really.
Nursing discipline as well.
Likely heard nursing staffing across the country, and particularly challenge Hussein compensation rate.
And so we would expect that will be increasing in cost per visit a nursing discipline that may mitigate some of the savings we picked up on their side of the equation that probably a little bit of course Klein as we move in 2021 anything out of the year.
Alright got it thank you.
And your next question comes from the line of method Gilmore Bird.
Our Mack Matt.
Little map.
Match online is opening if your face on mute.
I'm, sorry, I was needed good morning, everyone.
Hoping to ask.
About the fourth quarter guidance.
Relatively wide range on EBITDA for you all which is certainly understandable given the pandemic I was hoping either dogger, Mark and maybe give us some sense for what you're assuming from a volume standpoint with within the guide. So we could just drove understand how you're approaching it.
That's kind of a wild card and the reason that we have a broader range is.
The thing that is most difficult to predict in this environment the impact on volumes of any certainty case.
Experiences was related to Covid so.
The top end of our range assumes that we continue to see the type of gradual volume recovery both of the business.
Segments that we've experienced through Q2, and Q3 and the bottom end of the range assumes that there is some pullback.
Okay.
Certainly came out of Q3 stronger and then we went into and.
We're very pleased with the.
The progress maintenance September in that momentum was carried over into October so we.
Like Doug said I mean, the wildcard is the.
The assumptions or the surge around covid, but we are certainly plays with the momentum that we made through Q3 and have carried over into queue for the other thing that Jack some variability into the EBIT dollar range for Q format relates to the self insurance accruals. So as we indicated on the guidance considerations we had seven.
In positive accrual adjustments in Q4 of 19.
And this year is a little bit difficult to predict I recall second quarter, we had a nice lift from lower claims activity in both group medical in workers comp. We had expected that we would see claims activity under both of those programs pick up in Q3 for different reasons. One is is the medical system began to open up.
And there was some deferred demand we expected our employees and their families were beneficiaries into the group medical plan to start to go out and.
And have more maintenance services, and including including some elective surgeries and we get to see that.
Not fully back, but we did see it come back pretty substantial and we also knew that we were seeing a larger number of workers comp claims related to people who acquired.
Poised required covid and one of our facilities. So that it was work related but what we know is that even though there is a higher number of those claims the payout on those claims is substantially lower because they tend not to beat severe cases, and they tend to be short term in nature.
So we're not sure what to think about those claims activities as we move into Q4 and that against the favorable accrual adjustments that we had in 19 create.
<unk>, a little bit more variability and then that was embedded in our thinking with regard to a broader range for Q4, then we normally have with regard to EBITDA.
Okay.
And then one follow up on the Medicare advantage mix in the Earth's segment I think you said MA volumes are up 40% in.
Certainly that's a big acceleration from.
That trend was prior to the covenant and I think maybe in the past. It said that some of these plans are waving preauthorization requirements, just hoping to get some insight into the sustainability of that trend.
You can.
Yeah. So.
What was driving that higher Emma volume remember, we were up 66% and cute too so that came down a little bit 40%, but remains very high in Q3 was both an increase in in referrals and an increase in admits based on a higher conversion rate. So for Q3 are referrals were up <unk>.
3% over Q3 last year and add minutes were up 38% based on 170 basis point increase in the conversion rate.
That was done largely without the preauthorization waivers in place for most markets during Q3, and it's our expectation that the preauthorization requirements that are in place right now because they've essentially all been reinstated are going to stay with us into the queue for we.
You expect based on the what we saw with regard to the monthly trend throughout Q3, we expect to see a normalization in our payer mix in queue for which means BMA growth rate is going to remain high but it's going to come down and if I were to just.
Give you an estimate right now I would expect to see Emma discharge volume growth in queue for probably closer to the 15% to 20% range. So slightly elevated from maybe the level that we averaged in 2018 and 2019, but still growing at a good clip and probably something that we would deem to be.
And the sustainable range at least 2021.
Okay. Thanks, a lot.
And your next question comes from the line of Hai Rice of Credit Suisse.
Good morning.
Hey, How're you guys.
First of all I just have a slide 20 in your deck talks about the acquisitions and.
To know bows and I'm just curious.
I think you still have in there.
50 to 100 million.
<unk> in 2020, and maybe I've missed a date, that's new and.
Yes.
But is that.
I think there hasn't been any so far.
So is that you see something in the fourth quarter coming and is there any update you heard 97 million the novo's year to date and I think at one point you to assume that 180 to 190 million.
Is that just the covid process is slowed down or is there going to be a bullet southern coming into the fourth quarter on the novo's as well.
Yeah, So I'll start with the second part one to that is there has been a little bit of an impact on pacing related to covid. This year, but we would still expected based on what we're doing in the fourth quarter to see the range for that to Novo numbers still fall into 180 to 190, and 2020, which means we're going to be pretty busy.
In queue for and we are pretty busy.
Project, then on home health as Mark mentioned in his comments, we have seen a pick up.
And the acquisition pipeline.
There is some activity that's out there right now it's more heavily oriented toward hospice that it is upheld but this 50 to 100 reflects perhaps a degree of optimism that we're going to be able to get a deal or two done in the fourth quarter.
Okay, that's good and maybe a follow up question would be.
There have been some studies that had come out and there have been some proposals from individual legislature legislators.
And Congress about potentially looking at rolling back.
The behavioral adjustment there was in the original PDGF legislation or regulations rather.
And I don't know I'd be interested to know what your discussions whether you're seeing any momentum behind that you think is we come out of.
This election season.
The prospect of improve that maybe we will see some.
Favorable developments on that front.
Do you think that we're having some good conversations and that they're very data driven as conversations in Washington, and what is the bed down expected digital effects of 2021 right.
Expect that rate.
Proposal to come out perhaps as soon as Friday.
But certainly within the next day.
And so I don't think we're going to be recognition of the behavior. Thank assumptions being one this coming year right, but I do think we're in a very good position have 2022 right E adjusted to that.
Alright, Thanks, a lot added by adopted into Bonzo and others very strongly or the fact that the assumptions were not well.
Well founded and have not proven to be accurate, even that you kind of covid adjust and I think they they're data would suggest they were way off the mark.
Okay. Thanks, a lot.
And your next question comes from the lineup and Heinzelman Sue how security.
Hi, good morning.
So my first question I have to do with the eight new hospitals opening in 2021.
Constantly <unk> perspective should we do that class as being a negative EBITDA drag positive and can you remind us Jeff, but they do know Vince highly should view, the EBIT contribution and marketing expansion over the first two years. After you open the Geneva.
Yeah, and so I would expect as a class that they are going to be an EBIT.
Negative in.
In 2021.
You know from information that we historically published that are Preopening expenses associated with the hospital, which typically begin about six months in advance be opening date ROM at about $1 million per facility and we don't expect that would be any different with regard to this class and then with regard to the ramp up right. We refer you to the slide that we've included for a long period of time.
Bester reference book, which shows are historical activity in terms of hospitals achieving.
Or wall positive EBITDA and depending on the market depending on other circumstances related to the market. The earliest that typically happens is about nine months.
And.
Usually it would be odd if we didn't hit kind of a four wall EBITDA.
Positive contribution within 18 to 20 months, so somewhere in that range.
Alright, Thanks, and then my second question.
Obviously, an argument 2021 guidance, but can you may be addressed other key headwinds and tailwind that we haven't discussed yet on the call and in particular could you address ongoing PPA PPA cost. Thanks.
Just thought I know everybody's anxious to start thinking about 2021 is.
There's nobody on this call is not ready to be done with 2020 and get into next year. So we certainly share that view, probably like a lot of other companies and maybe even the business you're in.
Normally we would be very late into the budgeting process. Both in terms of the formation of our operating and capital budgets by this time and we've essentially deferred the whole budgeting.
Timeline by about two months, because we felt like depending on the course of the pandemic, we could find ourselves in a position where we had done the budget base, which is a lot of work based on one set of assumptions only to find that as we entered the new year. There was a new set of assumptions. So I just want to throw that out there is a caveat as to why we're not giving more color regarding too.
21.
Call with regard to the expenses, we think we've got a pretty good handle on expenses right. Now. So if we think about the pandemic continuing into the first half of 2021 kind of run rate that we're experiencing right now is probably a pretty good proxy and what we'll see in the first half and then as we move beyond.
The pandemic that can have we would expect to be able to realize some efficiencies with regard to both labor and with regard supplies costs.
And we put on checkout slide 25 and earnings.
Slide Slide book, we tried to expand on the PPE costs and then just say that we're we're a much better position now than we were even six or eight months ago relatives in our team has done a great job going out and finding.
Secondary suppliers to help.
<unk> demanded.
Yeah, No I did see that's why I was just wondering if you think it would be a headwind and for all of 2021 and the going into 2022, eight do you think that extra cost us more transitory nature.
I think the bulk of it is probably more transitory although as we've said previously my guess is that none of us and the and the health care World are going back to pre covid normal that there's going to be some heightened use of PPE that stays with us on a go forward basis and I think in this room.
Realisation, we believe that's absolutely prove.
All right. Thanks.
And your next question comes from the line of Pizza Chickering of Deutsche Bank.
Hey, good morning, Guy I think there thanks for putting me in here a couple of quick questions for April there are some moving parts about what are you talking about on the cost per visit as it relates to nursing disciplines going forward conceptually. So we either $75 per visit as a starting point grow at 5% over the next 12 months or cable is just conceptualize how that works.
Yeah.
Mentioned, Billy wrapped up our budgeting process and are planning for next year and I think we feel like there is.
Significant challenges on the dancing side that they're saying, they're going to drive off that I can't say that we're seeing net everywhere and broadly yet, but certainly in certain markets and seeing some of that though I think it's reasonable to assume that it will be a little bit of a.
Plane over the course of 2022.
And David.
Wait quicker we make these the nurses that had previously retired returned to the market sort of like either ease up a little bit.
Think it's totally reasonable thing, it's a little bit of a steady plain of increase in the nursing discipline throughout the course of 2021.
Okay, Great and then visits per episode are relatively unchanged in third quarter versus the first quarter I would assume that with the metal objects rollout, we would've seen some reductions in this day, that's how should we think about sort of that.
Perhaps a declining over the next 12 months or so.
R. As I mentioned in Pryor called our deployment in the middle is us to get a little bit.
Delayed as a result of the pandemic I think we didn't get it fully deployed until June ish timeframe.
And then just takes a little while to change practice people and especially when you're deployment with a virtual deployment versus the hands on training.
Training afraid so I think we have not really begun and scratched the surface bully of the opportunity with metal on this and that we will continue to be improved net quarter over quarter as we get that fully baked into our processes update anr approach alright, great and then last quick one here for you.
What percent of your business is tied to assisted living I apologize if I missed that and looking at 2018, what percentage of your growth came from that type of business. Thanks. So much.
Kevin.
Right well, let me read the second.
Ally of community again around plenty.
10% to 20%.
In the past in that category, one that's kind of off in 2025% range and Covid world.
That's earlier.
Okay, but ballpark as the cost of living is this like a 5% of your exposure is it's a 25%.
Somewhere in there will be helpful.
I think we within 15% to 20% of our total patient volume reside in.
Unity alright.
Great Great I think to let you guys know quarter.
And your next question comes from the lineup Frank Morgan RPC capital.
But Frank Frank Good morning.
Hey, I wanted to go back to I guess.
<unk> and a and a J question about that that's likely M&A activity. You certainly mentioned in your opening remarks, you expected to pick up on the hospital side and I'm curious I would've thought by now that maybe you would see more on the home health care side, but just curious on your thoughts about why why you're seeing it more on the hospice side.
Versus the home health care side and.
And then secondly, appreciate the color to wits question about sort of the ending 0.4 cents us a lot of a lot of our other provider calls and indicated that September in a strong no but a lot of them were talking about they are starting to see.
Covid surge again, so just any color there.
I'd appreciate that as well thanks.
So I think we had on the first part and then I'll turn it over to April.
Hospice is generally speaking been significantly less impacted by the events of 2020 and home health. So you've got a better run right and it's easier to engage in price discovery for a buyer and seller and the two things that we would <unk> one hospice was not subject to a payment system to form like <unk>.
And then hospice volumes were less impacted at any point in time Bye Covid and so when you later on having and growing up in North Dakota.
And with the pandemic, having come into play or providers had an opportunity to establish a new base rate.
A new baseline I should say under PGM. It just makes getting to a run rate EBITDA, which to to have meaningful discussions regarding a potential transaction very difficult in those same limitations don't exist in hospice.
And for both businesses I think that there is an awareness that there is.
Favorable growth opportunities and that's reflected in the multiples. So if you are an owner of one of those businesses and I've been thinking about transitioning out.
Right now, it's a pretty good time to do so from hospice perspective.
Franco ask both April and Marc Jacobs Mario in on what they're saying in the current marketplace relative just covid.
Yeah well.
Well and so I would also say on the hotel side I think we came into this year expecting tdm to really disrupt some health providers and for that to create a wave of opportunity and Activision.
And the <unk>.
The advanced payment that in the care that fun a lot of the smaller midsized agency that we thought would be a significant level of disruption.
Disruption in spite of the combination of the complexity dead mentioned and then all of that.
Secondary support is not going to continue long term. We think is just really kind of kick the can down the road a year or some of that hospital.
Disruption that we still expect that will begin to see some of that kick back in 2022.
Advanced payment at start eight repaid are pretty shortly.
And I would say on the on the census sci-fi that are signing October is certainly looking similar to.
The year over year that we've seen in September but.
What I would say is what we've experienced throughout coveted bend market by market challenges and those certainly are continuing so we.
See a decrease in one market and then it pops up in another market. So that has not changed we're continuing to see that affect us on a on a pretty regular basis.
<unk>.
And maybe April could address that same question. Thanks, yes, sorry.
Yes.
Overlooked that part of the question and so I think like like bar, we definitely are being sort of blue bond market and I think our biggest challenge is really been that about 37% of our total admission volume comes from key state.
Florida.
They hit pretty hard with the first wagon second wave.
We are encouraged in both states that we're seeing progress.
From the third quarter really even into the first week of October and so we think we have learned to create new newer broke horses as I mentioned earlier, we are looking for ways to mitigate losses that were experiencing some lack of elected as well as valid.
<unk>.
Impact and Filipino encouraged by what we're doing and think that that would suggest that when we do start to see a return of norm in those two states, particularly with elected and ALLL. We've got the datable trend to maintain new sources, while adding back of our own.
I think we're going to continue to see delayed from the Covid situations.
Situations out within the next six months, but.
We're we're working hard to create new avenues for growth feel pretty positive that the trajectory that we're on.
Frank.
Certainly we never want to characterize it as routine, but our staff and I said in my opening comments, our team's I've just done a tremendous job and.
Learning how to treat Covid patience <unk>.
Learning how to take the mitigating efforts they need to our that's in a clinical setting our sales and marketing setting.
I think that we have really set ourselves apart from our competitors in the marketplace with our willingness to.
Take covid patients into our service lines and then also the outcomes that we've achieved with them. So I think it's given us a chance to.
To really endear ourselves, even more to referral sources and.
And we've talked about and MA plans earlier I think this is given us a chance to show it MA plans the value proposition that we have through our our home health and Earth Earth Hospital. So.
Her all they have just done a tremendous job mitigating the impacts.
Thank you.
And your next question comes from the line of Sarah James of Piper Sandler.
Seven Q, good morning, and I'm going to fall on on that kind of train of thought M&A here, so understanding PD Jan disrupted.
What's available and Navy stimulus money, along getting things as well, but when do you expect to home health market to get back to normal as far as that.
The opportunity of what that also Illinois only to the degree that you'll leaning a little bit more into to know, though can you just remind us what the breakeven timeline is Roy differences are for you on the novel vessels M&A.
I'm home now I would say that we've probably got another within six months before we start to become Hell Lily start to get interesting again again.
Berg video cared that get back into your repayment requirements on advanced payment.
Those occurred.
The help help is going to remain a little bit quiet.
All the way probably into the second quarter of next year.
However, because then mentioned multiple one that has been very nice in the marketplace Big announcements recently on multiple transaction and the disruption has been far less I think we'll continue to see a lot of properties in the hospice world from an acquisition perceptive and anticipate that over the next six months that will be there.
Our M&A efforts are pointed.
So with regarding your questions on the on your side and then the comparison of the returns Sarah.
As we mentioned previously with regard to the breakeven point a ramp up on an earth.
They typically achieve a four walls positive EBITDA at the earliest between six and nine months and then probably on average closer to 18 to 20 months.
Based on our historic activity with regard to turn comparisons couple of data points to have out there you could probably ballpark are weighted average cost of capital at somewhere depending on how you want to view the current market conditions call at 8%. So we're certainly looking to make sure that the returns that were estimated.
<unk> from any of the investments, we're making growth opportunities are going to land north of that so that we're creating wealth we tend to use a 13%.
Target for investments that we make we've got a very good track record with regard to work to novo's meeting or exceeding that target.
What you are seeing in home health and hospice is acquisition multiples push up and its acquisition multiples push up it becomes more difficult to receive outsized returns. So we're being very disciplined as we always have been with regard to that kind of activity, but if you get to a point, where you are paying between 12 and 15 times on Ah.
Business that isn't significantly impaired in terms of its current level of market performance or doesn't have outsized organic growth opportunities than your returns are going to be closer to that weighted average cost of capital than they are going to be the that 13%.
Got it that's helpful. Thank you.
And our final question comes from the line of Andrew of Barclay.
Andrew.
Hi, Good morning wanted to follow up on the acuity trends in your rehab centers, even though acuity remains elevated on a sequential basis. Both your revenue per discharge and length of stay decreased which suggests moderating activity. So just wanted to get more clarity on why those numbers are moving lower if you are seeing intensifying acuity in your centers.
Thanks.
Yeah. Thanks.
Checking my own numbers here, but I believe that sequentially the acuity and the length of stay actually increased our acuity in queue to was 149 acuity in Q3 was 152.
With regard to the length of stay.
We will also.
Almost happened.
From.
We were both.
Got it here someplace can you just.
Second viewer 13, even I believe.
Q3.
Of our fingers on the queue to number.
I mean, we had truly does.
We'll get that for you just a moment, but.
I think Oh here we go.
Acuity for this is not sequential book acuity for Q3 2020 was $13 to it was 12 nine in Q3 of 19 and I think it was about $12 nine Q too.
Like the state excuse me.
Got it okay. Thanks trend lines would be consistent.
What you're seeing reflected in the price.
Active you watched made it on the question.
Length of stay at 13.2, and Q2, and then down to 30 minutes here 30. So just more so looking for color on why that was moving lower but.
If you are seeing in pence buying activity or any reversal of those trends would love to hear more color on that.
Now we're not at this point.
One of the other factors we saw early on in queue to relative to our length of stay and it went over in the queue. Three two is just the ability to discharge patients from our hospitals.
Two other posts settings was delayed in terms of their willingness to accept patients has been treated for covid. So that that played a role.
And.
The extended length of stay in our hospitals.
I think it's also important to notice that when and I think we talked about earlier about the patient mix. So our other orthopedic conditions as a percentage of our patients and with that one actually down 180.
180 basic points quarter, three of 20 over quarter three of 19.
Impact our CMO.
And are linked to stay because then the patients in house are much more acute so if we do see the elective surgeries come back online for these patients that have a lot of comorbidities and start seeing that come back to our hospital that could impact that CMI and that length of stay.
And so entered your point you write sequentially. We were at 13, two and Q2 and 13 in Q3 as compared to last year Q2 of 19 was 12, five so with Delta seven and Q3 2019 was.
Four was up was 12 sections of Delta four so the specific length of stay against the the.
A higher CMI would've had less of an offsetting impact on the pricing on how much of the pricing lift benefited us at the margin perspective, but both of those levels on a year over year basis are reflected with a higher acuity patients.
Got it that's helpful. Thank you.
And I was trying to call back over to Ms. Carlyle.
Thank you.
Anyone have additional questions. Please feel free to call me at 2059 705 860. Thank you again for joining today's call.
And thank you for participating you may now disconnect at this time.