Q4 2020 Encompass Health Corp Earnings Call
Good morning, everyone and welcome to encompass health fourth quarter, 'twenty and 'twenty earnings Conference call.
At this time I would like to inform all participants that their lines will be in a listen only mode. After the speakers' remarks, there will be a question and answer period. If you would like to ask a question. During this time. Please press star one on your telephone keypad, you'll 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 would now.
And I'll turn the call over to Kristy Carlisle encompass health as Chief Investor Relations Officer.
Thank you operator, and good morning, everyone. Thank you for joining encompass health fourth quarter 2020 earnings call with me on the call today are Mark Tarr, President and Chief Executive Officer, Doug Coltharp, Chief Financial Officer.
Marc Jacobs Meyer President inpatient rehabilitation hospitals April Anthony Chief Executive Officer of encompass home health and hospice and Patrick Darby General Counsel and corporate Secretary.
Before we begin if you do not already have a coffee and the fourth quarter earnings release, and supplemental information and related form 8-K filed with the SEC are available on our website and encompass health Dot com.
On page two of the supplemental information you will find the safe Harbor statement, which are also set forth in greater detail on the last page of the earnings release during the call during the call.
And 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 those relating to our ongoing strategic review and its impact on our business and stockholder value as well as the magnitude and impact of COVID-19, and that could cause actual.
Adult 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, and the form 10-K for the year ended December 31, and 2020 when filed and we encourage you to read them.
You are cautioned not to place undue reliance on the estimates projections and 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 to 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 and 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.
I would like to remind everyone that we will adhere to the one question. 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.
And before I turn it over to Mark I want to reiterate that the strategic review for our home health and Hospice segment is ongoing and our board of directors has made no decision accordingly, our 2021 got it and our longer term growth targets assumed the continuation of the current structure of our business.
Got it from growth targets may change, depending on the ultimate outcome of the review. Additionally, because the strategic review is ongoing we will not be able to comment further on it today.
With that I'll turn the call over to Mark.
Well good morning, everyone and thank you Christy.
Have a history of adapting to change and doing that well.
Looking back on 2020.
I'm proud of our company and how we responded to the changes going on and the world around us.
Both of our business.
Quickly responded to meet the needs of our patients.
Our employees and our business partners.
The patient experience has always been at the center of what we do.
This year and particular the impact of our current and compassionate teams has been on full display.
As our hospitals were forced to close their doors to visitors and.
And as our homebound seniors were isolated from family and friends and often they only direct contact patient Ted for weeks at a time, where theyre encompass health clinicians.
I've heard countless stories of how our staff kept patients connected to loved ones and showed them the kind hearted care day so deserved.
COVID-19, and most of the world down.
Our employees came to work and putting the wellbeing of our patients first.
They truly our heroes.
Turning to the performance of both force segments and 2020.
Our inpatient rehabilitation segment.
And for new hospitals and expanded existing hospitals by 117 beds.
They successfully responded to regulatory changes impacting our reimbursement achieving better than initially expected pricing.
And continued to demonstrate our value proposition to Medicare advantage payers with Medicare advantage discharges and increasing 34% year over year.
We also continue to develop and implement post acute solutions.
We fully deployed our proprietary readmission prediction model.
This program uses predictive analytics to determined and the risk of a patients readmitting after they discharge from an encompass health hospital.
And our pilot market use and this tool lowered the 30 day readmission rate by 280 basis points. So we're excited held this tool further enhances our value proposition to health care providers and payers.
In addition, we.
We deployed a home health agency quality reporting tool and began development of a sniff quality reporting tool to ensure we are accessing the highest quality clinical partners and for building preferred provider networks and all of our markets.
In addition, we expanded our proprietary marketing tool known as the post acute care strategic analysis or packs.
To include DRG level information on cost and quality to enhance our conversations with providers and payers.
And our home health and Hospice segment, we once again delivered industry, leading margins in spite of the pressures brought on by PD GM rate changes and Covid related challenges.
And the fourth quarter of the year, we exceeded our prior year adjusted EBITDA margin by 250 basis points.
And this strong margin resulted from the.
And the effective management of our field clinicians via our new therapy compensation model and our continuous focus on productivity.
The effective management of our patient care plans and supported by the Metalogic care tool and effective management of our spending on routine administrative costs.
Both of our segments continue their focus on clinical collaboration.
Our Medicare quota collaboration Murray is over 43% and our Medicare advantage rate increased to over 15% and 2020.
Additionally, in the fourth quarter, we executed a new national contract with United Health Care for home Health service line that will bolster not only our clinical collaboration opportunity for Medicare advantage patients, but will also produce a new avenue for referral.
Growth.
We have a lot to be excited about as we enter 2021.
Our inpatient rehabilitation segment is well positioned as the market leader and is ready to meet the increasing demand other growing senior population.
From 2010 to 2018.
Applying herbs remained relatively stable yet the 65 plus population grew 32%.
There's a supply and demand imbalance and we're one of the few companies with both the operational expertise and capital necessary to build and operate freestanding ers.
We have eight new hospital is expected to open in 2021, and we expect to add 100 to 150 beds to existing hospitals.
We will also continue development on the 10, new hospitals, we expect to open in 2022.
We have a robust development pipeline and we expect more growth related announcements throughout the year.
We will continue to educate stakeholders about the value proposition of our inpatient rehabilitation hospitals will continue to use data to show our outcomes and total episodic cost to health care providers and payers and demonstrating that we are the high quality cost effective.
Provider, they want and need.
Specifically, we plan to build on the momentum we had in 2020 with Medicare advantage by focusing on getting more one on one meetings with local and regional medical directors, who heavily influence the preauthorization process.
We also will remain focused on developing and implementing post acute solutions.
Our robust technology capabilities, including the use of predictive data analytics and differentiate us from our competitors.
And 2021, and we'll monitor the data from the Readmission prevention model, we deployed in 2020 and will develop and pilot a fall prevention model specific to inpatient rehabilitation.
Our strategic sponsorship of the American Heart Association Slash American stroke Association is continuing.
And 2021, and we plan to co brand and launch stroke continue education programs for health care providers.
As part of our education efforts for patients and families on the importance of inpatient rehabilitation. After a stroke. We are featuring encompass health patient success stories on the association and support network blog and launching how to videos to assist stroke survivors.
With completing daily activities.
Let's talk now while we're excited about home health and hospice.
A strong demographic tailwind.
Our strong and increasing patient preference for in home care.
A growing number of seniors experiencing four or more chronic conditions and the cost effectiveness of treating those conditions in the home.
Reimbursement and visibility that's better than we've seen and a decade and.
And accelerating opportunities for market share capture both organically and through industry consolidation.
As you May recall in December we announced that we are exploring strategic alternatives for our home health and hospice business.
Being one of the top providers and the nation as measured by both our financial results and our quality outcomes.
Allows us to consider a wide array of transactions and structures.
Our strategic review is ongoing and no timetable has been established towards completion.
So we remained focused on the diligent execution of our strategy for both segments.
And 2021, we look forward to the full return of elective procedures and the resulting growth it will produce for our home health service line.
We also look forward to the continuation of the strong admission trends, we've experienced and hospice.
In addition, we believe there is strong interest and partnering with encompass home health among accountable care organizations and Medicare advantage payers.
Value based payment arrangements.
Over the past few years, we have participated and various ACO arrangements, where we demonstrated our value through the achievement of savings for these organizations.
We will continue to build and rely upon these experiences to become even more innovated and the way we work with Medicare advantage payers.
Our goal here is simple to deliver higher quality outcomes for their members and better share financial outcomes for our organizations and their plans.
With the combination of industry, leading readmission rates, resulting in more healthy days and home for patients.
Success and prior risk based payment arrangements and a commitment to scale and density at the regional level encompass health is the clear choice for organizations engaged and risk based payment models for America's seniors.
Operationally, we're excited about the full deployment of the Metalogic care module and the further improvements it will produce and both quality outcomes and our operating margins.
This tool assist us and ensuring our patients having a care plan that includes the right number of business performed by the right level of staff at the right time to achieve the desired outcome.
We're also collaborating with to homecare organizations that provide personal care to support a sniff at home program in order to meet a growing need for these services and our markets.
Additionally, ruling out a virtual visit platform with a national payers Capitation program.
And this virtual platform App allows patients to participate and a secure video call D. A personal device such as smartphone tablet or computer with their physician and.
And the nurse care manager or other medical staff.
As we look ahead into 2021, we are confident the fundamentals of our business are intact and strong.
In fact, we believe COVID-19 has created an even stronger awareness of the high level of care, we provide and our inpatient rehabilitation hospitals and further reinforced home as a preferred care setting.
We expect stakeholder holders will increasingly divert admissions away from Smiths to higher value <unk> and homecare providers.
And as the population ages the demand for our high quality services will increase.
Our initial guidance for 2021 includes consolidated net operating revenues of five to $5, one 7 billion.
Consolidated adjusted EBITDA of $925 million to $955 million.
And adjusted earnings per share.
$3 31 to $3 and 53.
We remain confident and the long term prospects for both of our business segments.
Yesterday, we issued longer term growth targets for our company, which you can see on page 16 of the supplemental information that accompanied our earnings release.
This outlook included.
And 8% to 10% CAGR for consolidated net operating revenues.
And 8% to 10% CAGR for consolidated adjusted EBITDA.
And a 5% to 7% CAGR for adjusted free cash flow.
These targets are supported by our strong financial foundation and the substantial investments, we've made and will continue to make and our businesses.
We feel very good about the strength of our organization its team and the opportunities that lie before us now.
And now with that I'll turn it over to Doug.
Thanks, Mark and good morning, everyone. As Mark stated we are pleased with the performance of both of our segments.
We exited the year on a positive note with fourth quarter consolidated net operating revenues up two 5%.
Validated and adjusted EBITDA up 7% and adjusted EPS up nine 4%.
And we continue to generate high levels of free cash flow with adjusted free cash flow, increasing 55, 6% and the quarter and 12, 3% per year.
And our inpatient rehabilitation segment, our revenue per discharge was higher in 2020 than initially expected primarily due to the higher acuity of our patients throughout the year as well as the suspension of sequestration that began may one.
Inpatient rehabilitation and volumes started 2020 strong before being significantly impacted beginning in March.
Patient census recovered substantially and the second half of 2020.
Turning to 2019 levels or higher.
However, as we've discussed previously we experienced an increase in our average length of stay which resulted in a year over year decrease and discharges and EBITDA margin.
Specific to the fourth quarter of 2020.
Revenue in our inpatient rehabilitation segment increased four 1% compared to 2019 driven by pricing.
Growth and revenue per discharge, primarily resulted from a higher acuity patient mix and increased and reimbursement rates and the suspension of sequestration.
Adjusted EBITDA decreased three 2% and the fourth quarter of 2020 compared to 2019, primarily due to increases and bad debt expense.
Group medical expense and use and cost of PPE.
And the fourth quarter of 2020, we performed a review of our accounts receivable balances and related reserves that resulted in a $4 $5 million increased bad debt primarily related to prior period denied claims.
Our bad debt expense for full year 2020 was one 6% within the initial guidance range, we provided for the year and.
And we expect bad debt to be and a range of one four to one 6% for 2021.
Turning now to our home health and Hospice segment, our home Health line of business also came out of the gate strong and 2020, which starts of episodes for January and February up eight 5%.
Limitations on elective procedures.
Senior living and skilled nursing facility access restrictions.
And Covid surges in states, where we have market concentrations limited our growth and 2020.
We exited the year with starts of episodes up two 2% over prior year levels. In spite of the fact that our admissions during the quarter declined 27% from senior living facilities.
36% from skilled nursing facilities.
And 12% from patients receiving elective procedures and acute care hospitals.
In addition, there were an average 360 employees per day and Covid related <unk> during the fourth quarter, which represented a 48% increase over the third quarter average and further impacted our ability to confer referrals into admissions.
Our home health team continued to manage cost well contributing to fourth quarter adjusted EBITDA growth of 11, 9% over the prior year.
Our cost per visit was down almost 4% with the primary driver of this improvement being the compensation structure changes. We made in May 2020, coupled with the productivity of our full time staff.
As we start 2021, we believe our returned to volume growth in both segments involves return of orthopedic and lower extremity joint replacement.
And mitigation of Covid related isolation and quarantines.
As discussed many of our markets continue to have limited elective surgeries, and particularly with elderly patients with complex medical conditions.
In 2020, our Earth's treated approximately 4500 fewer orthopedic and lower extremity joint replacement patients that we did in 2019.
And our home health agencies treated approximately 3100 viewer.
With regard to isolation and quarantine at any given time 10 to 15 of our hospitals were impacted in the fourth quarter of 2020 by census caps due to isolation needs for patients with Covid and.
And or staffing constraints due to quarantines.
In January 2021 that number increased to approximately 30 hospitals and.
And the fourth quarter of 2020, approximately 360 of our home health and hospice employees were quarantined on average at any given time.
That number increased to almost 500 per day in January.
The rollout of the vaccine will assist and addressing all of these issues and <unk>.
Accordingly, we expect volumes to increase more significantly beginning in the second half of 2021.
In addition to the vaccine revised CDC guidelines and expedited Covid testing results.
And just with reducing the number of days and individual months quarantine.
And the fourth quarter of 2020, we had 30 hospitals with a rapid testing device and we expanded that to 70 hospitals and January 2021.
Our hospitals and home care agencies, using offsite testing are experiencing improved turnaround times. So we believe we will see reduced capacity and staffing constraints across all of our service lines.
Specific to our <unk> segment, we expect the acuity of our patients to remain elevated through at least the first half of 2021 and to begin to normalize from thereafter.
With regard to expenses, we will continue to focus on managing staffing levels to volumes.
We did provide wage increases to our hospital employees effective October one 2020 at the same time, when we received our fiscal year Medicare price increase from two 3%.
We expect benefit cost to increase 5% to 8% and 2021 due to general inflationary increases as well as the rebound of employee deferred medical visits and procedures.
While we do not expect our PPE pricing to return to pre COVID-19 levels.
Do expect the higher cost we saw in 2020.
To subside and allocations from primary lower price vendors continue to increase.
We expect utilization of PPE remained elevated as precautions continues throughout 2021.
We will also incur $15 million to $20 million of Preopening and ramp up costs associated with new hospitals as our development activities continue to accelerate.
And our home health and Hospice segment, our primary focus in 2021 is an increasing institutional and early admissions with the return of elective procedures and receipt and the expected normalization of the mix of patients.
We expect to maintain the savings realized from the compensation structure changes enacted in 2020.
However, we anticipate the nursing staff challenges across the country will lead to increased compensation rates for the home health nurse and discipline, which comprises approximately 44% of our total visit volume.
We expect to mitigate a portion of these increases through L. P and optimization and the improved care planning that will be supported by the metal logics care tool.
As Mark stated earlier, we have reinstated longer term growth targets for our company and we believe we have the capital structure to support the investments and our growth.
We are fortunate and one of the characteristics of our business model is that we generate consistently high levels of free cash flow.
Our 5% to 7% adjusted free cash flow CAGR target over the next five years is off of a high base year in 2020, and reinforces our confidence and our expected free cash flow.
Our net leverage was a very manageable three six times at year end and our debt maturities are well spaced.
We are well positioned financially and operationally for the future.
With that operator, we will open the lines for Q&A.
Thank you at this time I would like to remind everyone and if you'd like to ask a question. Please press Star then the number one on your telephone keypad.
Your question has been answered and you wish to remove yourself from the queue press the pound key again.
Limit yourself to one question and one follow up.
Our first question comes from the line of Whit Mayo of UBS.
With one with hey, thanks.
I really just have one question for right now and when I look at the performance of the home health business and the fourth quarter and then it seems like EBITDA now is tracking above my pre COVID-19 forecast for the fourth quarter growing 11% year over year.
Year and it feels like there's some momentum coming.
Into 2021, when I look at the cost per visit Youre tracking significantly below first half levels, which would seem to imply some some noticeable tailwind coming into 2021. So how are you thinking about the direction of those trends and then if you could maybe comment a little bit more on.
The visits per episode and some of the initiatives you may have and the field and and how that could could trend. It just feels like there, perhaps there's a little bit of a disconnect between the near term performance versus what may be implied within the full year range. Thanks.
And I'll ask Eric to give her insights on that.
Sure so.
Certainly and I appreciate the perspectives and we.
We're pretty encouraged about what we're seeing on the volume side as Doug mentioned, if you look at the December trending we've continued to trend and the right direction from a from a volume perspective and in spite of ships.
Shifts as we mentioned and our Smith, and our senior living and patients as well as the election I think our team has done a really good job of replacing that volume with other sources and so we're obviously encouraged about that and believe that once the COVID-19 pressures release that some of the historical referral sources will return to.
We thank all of the impacts are very COVID-19, driven and relatively short lived and we're also encouraged as Doug mentioned about our cost per visit and feel like the companys.
Compensation structure changes that we made back in may that served us well and the third and fourth quarter and we see that continuing opportunity there, but we are concerned about the cost per visit and the nursing discipline.
Shortage that exists.
It's been exacerbated by Covid and nurses and the in the community.
Just going to make cost per visit go up and that nursing discipline and so we're cautiously optimistic we feel good about the changes that we've made but we also recognize the global pressure that we're seeing and the nursing discipline and then finally as it relates to volume if you look at the data and the slide deck. We provided you I think we've made nice progress.
Brett this year incremented, our visits per episode down over the course of the year.
From the second quarter being a bit of and not an anomaly.
And.
Movements, there, but I think there is room and we really didn't get metalogic carefully deployed until mid year and given that the focus obviously this year and so much on staffing and managing COVID-19 related risk.
I'd say it wasn't as successful and implementation as we had anticipated it didn't come out of the gates as fast as we live anticipated because there were so many other distraction and so certainly we see some opportunity going into 2021 for further leverage the effectiveness with which we are using those tools and so yes, we're encouraged about the trajectory.
And the momentum that we take into 'twenty and 'twenty, one, but I think we're also cautiously optimistic because we recognized total.
And at risk is not behind us.
Can't fully predict what's going to happen here and the first half of the year relative COVID-19 impacts on volume and we're not quite sure about the nursing cost and so we're going to keep the keep pressing forward. We're encouraged by the margins we've been able to produce and we're going to work hard to sustain those.
But I think we're just we're keeping us cautiously optimistic tone and our projections.
Can we is there any way and maybe to circle and number that you've contemplated within the plan. This year for the inflation across your nursing discipline, maybe what it cost per visit any anything directionally. They can kind of give us a marker to look for going forward.
Well not specifically there, but obviously if you look at the 2% to 3% wage increases that we reflected and our guidance and we think those will be disproportionately allocated to the nursing discipline, you may see a lesser rate and there will be disciplined with supply and demand and balance is not the same.
And if those wage increases across the board and likelihood of interest.
Okay. Thanks.
Your next question comes from the line of Brian <unk> of Jefferies.
Hey, good morning, guys.
Yeah.
So I guess, Doug My question for you as.
And as we look at where your guidance is and I'm sure you've looked at where street numbers are.
How are you thinking about what the Delta is there and what do you think the street Miss and just any color that you can give in terms of the moving parts and the guidance that investors might have missed and and drive it so that disappointment today.
Yeah. So most of the models are detailed and up the animals' models arent detailed enough from me to be able to disappoint pointed the specific.
Areas of differential and I will say that our guidance is driven off of our budget and our budgets are built and a painstaking brick by brick fashion from the bottoms up so.
And I can say there is substantial more detail that goes into the provision of our guidance, having said that some of the areas that I may think that I think.
The analysts may not have had complete visibility into relate to things like the $15 million to $20 million and preopening and ramp up costs associated with our new hospital activity. The normalization of some of our employee benefits, particularly group medical expenses.
And the Earth side of the business.
And just I think some of our expectations regarding the impact of Covid and both volumes and expenses and the first half of the year those would be the areas I would point to is the primary differences.
Gotcha, and then Mark I guess you are.
You tweak the long term guidance ranges and so how are you thinking about whether it's the progression back to the sort of the endpoint goal for 2025 in terms of revenues or earnings or.
Is that an indication of your belief and and the fundamentals of the business and then what kind of recovery pace are you thinking about to get to these revised long term growth targets.
Yes, Brian I think our growth targets reflect our confidence and the long term.
And the opportunity to continue to grow our business the demand for services and we've.
We've come out this year and and we're experiencing now the typical seasonal rebound that we would have.
And I've seen in the past and in both of our operating segments. There are challenges and in terms of meeting all of that demand right now given the <unk>.
<unk> core and change staff and the capacity.
Caps that Doug mentioned in terms of having.
Semi private beds and some other hospitals, but we're very bullish on the opportunities.
For us we've got the very robust pipeline and we've got eight hospitals coming on this year 10 already announced for next year and we will continue to look for opportunities for acquisitions and home health and hospice. So the fundamentals.
Are there to provide these growth targets and we have and our longer term outlook.
Outlined here and Brian if I could just add to that what we've done is essentially set.
Reset the CAGR off of a lower 2020 base to arrive at the same station and 2025 that were implied with the growth targets that we laid out at our Investor Day last March and that's reflective of the fact that our shortfall from 2020 that resulted in the lower base is solely relate.
To Covid and that we believe we.
We believe that the impact from Covid is temporary and it doesn't reflect any fundamental change and the underlying business demand for either one of our two business segments and then on top of that our growth plans have not changed we continue to invest as Mark just said heavily and capacity additions and the aerospace and will continue to be.
<unk> and acquisition mode for home health, and hospice as well and pursuing the attractive organic growth opportunities that exist within that business segment, Brian any uncertainty that we have right. Now is just near term and it's all tied to Covid and and how quickly we will be able to respond with vaccines and get on the other side of this pandemic.
Yeah.
Awesome. Thanks, guys.
Your next question comes from the line of AJ Rice from Credit Suisse.
Good morning, and J J.
Hi, everybody.
Maybe and maybe partly to follow up on that previous discussion around the long term targets. I. Appreciate you guys reinstating that I think though if you string out the mid point.
Out to 'twenty and 'twenty five you end up with an EBITDA target. It's about at least we did and maybe I'm calculating it wrong about $70 million below the midpoint of the March 'twenty and 'twenty Investor Day outlook, and then and the margins about 90 basis points lower at about 18, and a half is there something that.
It's changed.
And there because it sounded like from your previous comment just a minute ago. Doug you thought it was sort of coming out of the same book.
And actually what we get and.
And I wonder how you're factoring in this demonstration project that CMS has put forward do you think that's going to have any impact on the outlook.
And that goes into place next year and any thoughts on that.
So a J I'm actually getting mid points when I compare the two that are substantially closer than the delta that you just suggested I'm not going to say that it's exactly the same number but theyre closer so I don't want to get into a math reconciliation exercise right here okay.
With regard to review choice demonstration.
And Theres more that is unknown about that and then there is that is known about that and it's really and the very early stages. It could very well have a positive impact and then it's going to reduce the amount of <unk>.
Claims denials after the fact.
We've already demonstrated in our home health business is that because we are very process oriented throughout our company to begin with it because we have great management information systems in place, we can adjust as well to new regulatory and or process requirements and anybody that is out there and I'm.
And then if we move forward with review choice demonstration and Europe business, we will execute two and effectively and it will not be disruptive to our business and Jan.
As Doug noted, but it's certainly further substantiates the investment that we made and our electronic medical record a number of years ago. So that we.
We see this as positioning ourselves, which is our documentation and standardization across the board and to make sure. The documentations, there and thorough fit us and a real good position if RCD would be moved forward.
Okay, alright, thanks, a lot.
Your next question comes from the line of Matt Larew of William Blair.
Good morning, Matt on Matt.
Hi, good morning, guys.
And to follow up on Brian's question, but let's just maybe remove street models from discussion and instead focus on the second half of 'twenty versus 2021, So I think even after adding back from Sydney and removing those startup costs and you've alluded to the EBIT margin and apply for 'twenty, and one or about 100 basis points lower and second half of 'twenty.
And obviously, you've characterize today a number of tailwind on the home health side returning volumes on their side.
Yes, and I think sequestration, but that's coming back into the picture that wasn't expected for the first quarter certainly that that was an extension. So I guess I'm just trying to think what are the other things that we might not be thinking of is it acuity reversal COVID-19 costs, maybe bad debt increases PPE are there any numbers you can maybe.
Generally point is and the direction of that would help kind of bridge that gap.
So that gives you are trying to reconcile the second half of 2020 and second half of 2019.
No sorry.
Second half of 'twenty, and 'twenty relative to what the EBITDA margins for 2021.
Right right and so the second half of 2020 EBITDA margins were about 19, seven and I think the guide for 'twenty, one and 18, five and I'm just trying to reconcile that and given the positive momentum you talked about.
And then you move past the sequestration dispenser pretty quickly, but I think that thats at least half if not more than half of it.
And then I think if you combine that with the likely timing of a lot of the preopening and ramp up costs for the hospitals.
That you've substantially close the gap just between those two numbers.
Okay, well look again I thought I already contemplated that my model, but fair enough maybe I'll just ask then about the Medicare advantage side and you've given some nice updates throughout the year about pricing and volume trends would be curious there and then any additional color you can give on the United contract you alluded to is it a preferred provider relationship.
And it's an extent and at risk.
And if all that would be great.
Alaska able to cover the United contract first.
So we're excited about joining the panel of national contract providers for the United Health care Contra.
Contract and but it's a little bit of a good guy bad Guy combination on that I think and the long run being part of that national contract is going to give us volume opportunity is going to give us better opportunities to serve patients coming out of our herbs.
And historically, we have gotten some united business and more of a one off fashion and we've been paid episodically for that business and so when we shift to this national contract and as much as we're excited about it and excited that it has a value based element.
A bonus based on quality performance. We also recognize that there could be some near term margin pressure brought on by the shift from the episodic payments, we had in 2020 and prior to beginning in February 2021, more of a fee per service payment with and after the fact, then kicker and so we think it.
The good relationship we think it'll bring overtime as we as we get all of our staff off of warranty and we think it brings the ability to grow that relationship pretty significantly.
But we also recognize that and the near term it'll put a little bit of margin pressure on us and the early parts of 2021, as we kind of re baseline that contract.
And I'll ask Barb Jacob Meier to give her insights and what we're seeing from MA.
<unk> plans with regard to our hospitals and so as you say and we had a nice growth obviously the relaxation.
Between May and September of the pre us assisted and 2020, but as you know we really has seen some nice growth and N E and back in 2019 that continued in 2020 and and we're continuing to be focused on that and 2021 and <unk>.
I think the great thing for US is that we saw admissions to earth here in 'twenty and 'twenty that maybe in the past they would not have sent to us some of that was due to the waivers and somewhat because sniffs were really unable to accept patients maybe due to COVID-19 outbreaks or other limitations and the sniff. So we now have more data on the outcomes of those patients.
And that's going to assist us as we continue our discussions, particularly with the medical directors of these MA plans and so that we can really talk about the value proposition directly as it related to their patients.
Okay. Thank you.
Our next question comes from the line of Kevin Fischbeck with Bank of America.
Morning, Kevin.
Good morning, actually this is Joanna <unk> filling in for Kevin. Thanks, So much growth. Thank you for your question, but yes.
Just a I guess a follow up on the other discussion around the long term growth targets.
So it gets you were saying that the the numbers are a little bit closer, but would you describe it as.
And if those targets, implying higher revenue, but maybe slightly lower EBITDA because I guess, that's what we are also getting up and when we do other than that.
And then I guess, if that's the case is.
Is there any particular area, where you would point to in terms of the.
The lower margins and you know.
And you know either segment related or something around the P. P garage door or did not was there anything.
In terms of these long term growth targets.
I think you're all reading a degree of precision into a five year CAGR that simply doesn't exist.
These CAGR reflect the fact that the base for 2020 is lower than we had anticipated last March and the delta between those we attribute 100% to Covid, which we ascribe as a temporary impact and we anticipate will fully dissipate through the course of 2021.
So in addition to the lower 2020 base you have some residual impact in the first year of the transition.
And that you've got 200 basis points spread on five year CAGR so allow for some rounding.
And I think what Youll see is the base is lower we've already talked about that our growth plans on top of that have not changed and you see that reflected and the and some of the assumptions that we've put out there. So we're going to arrive at essentially the same station and 2025.
Margin is 10 or 15 basis points lower or higher so be it there are multiple ways that we can get from here to there, but the targets that we're shooting for in 2025 are essentially unchanged from those that we discussed with you and March of last year.
Okay, Great that's down and.
And that's why I was just trying to confirm based on when and how you responded to the product question. So thank you for that and if I may I'm, just I guess force you fall off.
And something you mentioned in your.
Introductory remarks around business at home I guess the association.
Relatively optimistic that something could be ex U S legislation could be introduced to Congress, obviously, we don't know when it would.
And would be passed or not but can you just talk about I guess.
And for April.
Carl encompass could participate in them.
And and expanded.
And if it such methods.
And I guess, you mentioned about contracting with personal care providers.
Would that be enough would you be able to cover.
The other markets without because I can see you do not have that akshay and presence in terms of personal care services. So kind of can you just frame for us how you think about this opportunity before encompass thank you.
Yes, so I'm happy to share about that so as you and you know we don't have the personal care division as part of our organization and that was why it was critical for us to be able to create some key partnerships with private duty focused companies that had national presence. So that we could ensure that we can.
Respond interest.
Same timely fashion that our some of our competitors, who have that service line and responding and so we feel like we've got those relationships in place.
And and are beginning even to kind of leverage those when we have a family structures that can support that private duty service line. As you know we are hopeful that there will be a a.
Aversion and SNP and home that actually makes it into legislation and that there becomes a payer source for those private duty services acknowledging that we can likely provide that tier two that certain cohort of patient at home less expensively than they would be cared for in a facility, but it'll take more than that.
Average 50 ish dollars, we get today out of Medicare to do that so we think that theres certainly legs to that program and that is defined as a funding source that we can we can care for those patients effectively that we've got the technology tool to be able to support virtual care and the plant that with our contractual relationships.
Private duty and then really use our historically strong quality and clinical performance on the skilled side to keep those patients safe at home and low cost. So we look forward to that program evolving and and are looking for heat waves that we can execute and deploy on it before there is even a alleged piece of legislation that might funded and certainty.
And.
Okay.
Okay. Thank you.
Our next question comes from the line of Frank Morgan of RBC capital markets.
Well Frank Motor Frank.
Good morning, I hopped on late so I apologize and I think April was just at the point of making up some comment about volumes in December.
I guess I'll ask did I understand that correctly and then do you have any commentary around what you're seeing so far and the first quarter, Boca and the home health care side and and and.
Herbicide and I apologize, if you've talked about it before.
Frank I will talk about this is mark I'll.
Cover where we are at least up to this point.
As you know, we typically have a seasonal rebound after the holidays and we've we've seen that there's a strong demand for our services and in both of our operating segments.
Which is a testament to the coffin and so we have going forward.
Our challenge and in certain markets with the staff at our corn and change the positive news on that is both segments have seen a decrease and the number of quarantine staff over last week and a half or so so that is at least trending and a more positive manner. When we get more staff back we'll have fewer market.
Is that we'd have been capped on volume because of staffing and restrictions and then we also have certain marketplaces, where the hospitals have a higher number of semi private rooms, where we've had to.
And force isolation requirements that have temporarily captisol from those hospitals, but demand is very strong and supports our thoughts that any uncertain and we have as near term uncertainty.
All tied to Covid and the <unk>.
Our opportunity is that we have to get out and the other side of this pandemic.
Got you and and where are you in terms of total amount of your staff that has been vaccinated.
The COVID-19.
So Frank we have a total of 6800 employees that have been vaccinated with a small portion of those and they had their second doses. So we're getting out from the marketplaces. We've had I think close to 70% of our <unk>.
It'll staff respond and that they would like to have the vaccine.
So we will continue with that distribution process as you know it a lot of volatility from state to state in terms of the effectiveness of giving it out to the marketplaces, but we continue to see progress with that.
Got you and then just last one.
And April made the comment about the nursing shortage, but I'm, just curious where some of the pressure because of shortages.
Was that was that limited and it made me back it begs the question what about a world. The her side are you seeing something similar and and.
Net driven more by.
Yeah.
And people being.
Having actually having COVID-19 and can't go into the home and weren't available and the work pool or.
Is there anything else driving that.
And I'll ask Marc Jacobs Mart away and what we're seeing on the Earth side on the other.
We're excited it's been really more about the.
Folks being out and quarantine and and and so again as Mark mentioned although.
Although that's coming back I would say that we did see early on some of our and.
Our experience older nurses.
And I decided that maybe they just didn't want to be and the work force at this point because of some fear and anxiety other good news and so if we're hearing back from some of those saying that now that the vaccines out are they they want to come back and they wanted to able to get the vaccine and get back to work. So I think that we will see more of that as we get more of the vaccine.
<unk>.
Frank I think just overall, you know nursing and general and Anna.
All other clinicians are treating COVID-19 patients.
And until there was a vaccine that was being rolled out they really there was no and are delighted the tunnel. So they didn't know when we're going out and get on the other side of this pandemic and really caused a lot of stress from our work force and that is not specific to our conditions, but the industry as a whole. So I think the vaccine has brought some hope and some soon.
From an endpoint to.
And to look forward to for clinicians.
Your next question comes from the line of Andrew Mok of Barclays.
Alright.
Hi, Good morning wanted to follow up on the home health volumes. Your same store home health admissions remained moderately and depressed due to the continued drag from assisted and independent living facilities and lower elective procedures can you comment on how admissions trend and and the rest of the portfolio and do you see a path back to mid single digit organic volume growth and 2021, even with.
Some of the lingering COVID-19 headwinds.
Yeah. Thanks. Thank you for that question, so and we did see a meaningful decline from the three areas that we called out.
Admissions and patients that are discharged from Smith elective surgeries and the and senior living community combined roughly about 3800 admission decline.
It came from those three sources as you saw our overall organic growth was down about 2%. So if you add those 3800 back in there we really had a strong performance and the other sectors to make up that difference I think had it not been for that 3800 decline you'd be at about a 7% increase now.
And I realize I'm, making a lot of assumptions and projections about what could have been.
But I think debt.
Specifically and the cause of that we do feel very encouraged.
Back to the strong organic growth posture as we see this virus aside and the second half of the year and it's something that we believe is very possible and we think that we replace the lost referrals and loved admission with new sources that are sustainable and so actually we think we can come out on the other side of this.
Covering what we used to have and maintaining what we have developed and come out with really a win win combination once we get past the COVID-19.
Period.
Great. Thanks, and secondly, looking at the 2021, EBITDA and EPS guidance compared to the initial 2020 guidance EBITDA is about 1% lower and EPS is about 5% lower and you walk us through some of the assumptions below the EBITDA line that are driving the spread on EBITDA and EPS growth.
I think the single biggest line as interest expense.
Got it so that's driving the entire delta.
Yeah.
I don't have that right in front of me, but I believe that's the primary driver.
Okay, great. Thanks.
Our next question comes from the line of Peter Chickering of Deutsche Bank.
Good morning, Peter Hey, Good morning, guys. Thanks for fitting me in two.
Two quick questions for April one other.
The payer mix in 'twenty, and 'twenty, and where you've taken the cost per visit and the fourth quarter and all the data that you've collected and how should we think about the new cost structure and leverage from analytics converting into you guys getting more aggressive with M&A and commercial contracts and I guess said differently is this new contract with Vicki.
And the United the tip of an iceberg you guys signing the contracts.
And I, certainly think that we have a lot of momentum moving in that direction and we've always been very discerning about the relationships that we wanted to enter and here. We wanted to focus on those and we felt very comfortable that the reimbursement levels supported the level of quality care that we wanted to deliver and so we have historically lagged.
The industry and and non Medicare relationships because of that and.
And I think that begins to change as we continue to get more and more efficient and our operating model lowering our cost base.
That creates opportunity, but we're also seeing those payers move and the right direction as well and create contracts that not only have higher reimbursement associated with them, but also more efficiency relative to their authorization requirements or better said lack of requirement.
And we're really being very discerning about the contracts that we take and if theres a preauthorization requirement, that's going to become the burdensome and time and effort, we're saying no to those and so I think we're looking for those right relationships, where we can be paid well and we can be a trusted partner, who doesn't have to be nickeled and dimed on every visit allocation, but rather its trusted.
And to deliver clinical outcomes and then in turn be rewarded for those outcome. Those are the kind of partnerships that we're looking to form and I think when you get down to you can look at star ratings, but when we talk to payers and they frankly don't ask us very much or talk very much about star rating, what they want to know about is emergent care and hospital.
<unk> and you look at our statistics and both of those categories. We performed very very well and as a result become a very trusted partner to those sources.
And a partner that they'll negotiate with for a little better right. So I think as time continues to moving that direction, you'll see us expanding on those relationships and ways that continue to support our quality care delivery.
Okay, Great and then a follow up question for you April again on Homer on home nursing is obviously, a huge demand for any employees or nurses, who are helping patients in the home setting today, how should we think about wage inflation had a normal levels within home nursing during the next year or two thanks so much.
And don't necessarily think that debt home based care will have a higher inflation rate and other health care sectors. I, just think that we've seen as Barb mentioned, we've seen a lot of of our older nurses, which tend to gravitate toward home care for a variety of reasons leave the market early because of Covid and then we've seen a lot of our.
Younger nurses, who are raising young families leaves.
Leave the market because of some of the child care challenges that existed during the Covid period, hopefully as COVID-19.
I will take both of those cohorts potentially come back to the market, but in the meantime, we just see a recognition that hospital.
Driving the cost up.
And then as a as a provider in the market, even though we're providing a different type of service, we're having to chase some of those acute care hospitals, and what they're having to do to recruit nurses to work their floors and so it's I think it's just something that we're gonna be sort of.
A byproduct not the not the leader of the inflation inflationary market, but we're just going to chase.
And our hospitals and behavior, because that's our competitor for the work force.
Great. Thanks, so much.
Once again, if you'd like to ask a question. Please press star One. Your next question comes from the line of Scott Fidel of Stephens, Inc.
Hello, Scott.
Hi, Thanks, good morning I.
I had to hop on late to another earnings complex, Paul comp and so hopefully this has been asked but and <unk>.
Two questions for you.
First is just if you could give us sort of and initial framework and thinking about.
The home health and hospice M&A targets that you've included the 50 to 100 million.
Just in terms of sort of bias in terms of home health.
Relative to the hospice markets and and sort of pipeline and those in and then also just obviously not expecting you to comment on the strategic review, but just interested and as it relates to that specific M&A target that you have.
For the business, whether the strategic review what would influence that in terms of the pacing of how we should think about you executing on the M&A and got planned for 2021.
Yes, Scott.
Mark So as you noted and we can't comment right now and strategic review and and.
And set timetable for that but the processes is ongoing but it will ask Airpods away and on her thoughts on the <unk>.
Acquisition.
Yeah. So we definitely saw a re.
And surgeons and acquisition activity and the back half of last year and things that are kind of a lull that was experienced at the beginning of the year from best Covid N. P. D. G and transition is in the rearview mirror now so we're seeing a lot of activity and the M&A pipeline and are encouraged that we're gonna be able to find some good options when we focus on really.
Wearables and the deployment of that acquisition capital and go away.
Really continue to focus on our consistent three strategy job number one is that we want to create more overlap markets with our earth, because we see strong results from clinical collaboration job number two is we like to build scale and density and markets, because we see that having margin improvement opportunity and and job number three is we like to.
And also create that overlap between home health and hospital, just like we're doing with home health and Earth and so realistically if it hits one of those three core criteria for acquisition and we're not particularly focused on home health hospice.
So one of the one over the other we really are looking at those three categories, and saying, which one does this serve best and where can we get those dollars deployed.
You know multiples are rising, obviously, and particularly and the hospice sector and so we continue to be a discerning buyer. We went up we want to grow but we also want to deploy our capital.
Carefully and in a way that it can create the best yields to the organization and so we're looking at and.
Ray and transaction isn't it three pronged criteria.
Got it and then just for my follow up question, just interested in and an update on the clinician compensation model changes that you and implemented it does seem like that was supportive for the margin profile for home health and hospice in the back half and and just interested and the ability that you have to flex that.
And 2021, just based on how.
Admissions and volumes for the business and sort of playing out here if they remained depressed because of COVID-19.
That model and sort of staying in place by debt you do see volume start to accelerate and how would you adapt the model to ensure that you have adequate staffing.
Yeah and to get the good news is I think the model flexes itself, because what we've really done and sort of lowered the base pay and in turn and create an incentive and bonus compensation that if you'll work overs and lowered thresholds that aligns with the lower base pay that you can earn back.
And to add or above your prior compensation level. So it's really been a win win and that is basically shifted the opportunity for us for excess productivity to the employee side of the equation and and really as a result people are really pushing and driving to get to the high end and what our previous hundred per cent plan was.
Because they've got motivation to get there I think we have the natural flex capacity, we didn't lower our number of head counts in therapy at all by making this change as a matter of fact that was the beauty of it is that we could keep our full staff.
And that really drive efficiency and our productivity realization. So I think we've got the capacity to grow and that service line and that discipline as we move into 'twenty and 'twenty one.
Okay. Thank you.
Thank you I'll now return the call to Crissy Carlisle for closing comments.
If anyone has additional questions. Please call me at Tuesday Rose five nine and 705 860. Thank you again for joining today's call.
Thank you for participating and encompass health's fourth quarter, 'twenty and 'twenty earnings Conference call you may now disconnect.
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And dividend.
And then.
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