Q3 2021 Encompass Health Corp Earnings Call
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 Tarr. Thank you Mark good morning, everyone when.
When we last spoke to you in conjunction with our Q2 earnings report in late July we pointed to accelerating momentum in both business segments and the expectation that favorable operating trends would continue through the second half of this year.
Based on that expectation and our strong performance through the first half of the year, we increased our 2021 guidance for the second time this year.
In August it became increasingly evident that the COVID-19 surge, which at that time was disproportionately impacting the southeast and Texas was creating challenges, particularly for our home health and hospice business.
We believe these headwinds are largely transient and that we are past the peak impact.
And we have taken and continue to take actions across our organization to mitigate these challenges.
Nonetheless, these challenges will remain with us to some degree in the near term and so accordingly, we have revised our 2021 guidance down.
Nothing related to these prevailing headwinds does anything to dampen our enthusiasm for the long term prospects of the businesses, we operate and for our competitive position in the industry to.
To the contrary.
These circumstances only underscore the growing demand for the services, we provide and the paramount importance of producing high quality patient outcomes in a cost effective manner.
Im going to speak more about current operating trends and the actions we're taking in a moment.
But first I'd like to update you on the strategic alternatives review for our home health and hospice business.
As we stated in our press release last evening.
We expect to affect the partial or full separation of our home health and hospice business into an independent public company via a carve out IPO spin off or split off.
We are targeting such a transaction in the first half of 2022 and expect to announce a more precise timing and the form of the separation transaction in connection with our fourth quarter earnings release while.
While there can be no assurance that a transaction of this nature will be consummated.
We have made specific or significant progress on the various tasks necessary to complete a separation transaction and we will further our state of readiness over the balance of this year.
We've also transitioned our home health and hospice business to new leadership.
And now have in place a team and which we have supreme confidence.
As we previously stated we believe a full or partial separation of the home health and hospice business will enhance the long term success and value of the business.
We have thoroughly evaluated a broad array of public and private transaction alternatives and further believe that affecting the separation via the formation of an independent public company is superior to the other alternatives considered.
Among other considerations. This belief is based on the anticipated strategic focus.
Future growth and value creating opportunities.
Execution risk and tax efficiency, resulting from such a transaction.
We understand that there is some fatigue within the investment community regarding the duration of this process.
We appreciate your patience and strongly believe our review period is appropriate and common for a thorough exploration of transactions in the best interest of shareholders.
We have deployed substantial resources.
Internal and external to the analysis of alternatives and to the aforementioned separation preparations.
And I'll remind you we have undertaken this process.
While continuing to address the needs of a vulnerable segment of our patient population amidst the challenges of a continuing global pandemic.
With that I'm going to turn back to the quarter and operating trends, Doug will give Doug will go into greater detail on key metrics during his remarks.
In spite of that aforementioned COVID-19 related challenges our consolidated financial results for Q3 were solid.
As compared to the same period last year Q3 consolidated revenue grew nine 4% and adjusted EBITDA grew six 7%.
Discharge volumes in our inpatient rehabilitation hospitals increased eight 7% in Q3 with six 7% same store growth.
Further underscoring the positioning of our facilities.
The trusted choice for patients providers and payers.
Although staffing issues were more pronounced in the home health and hospice business. The <unk> business was not immune.
During Q3, we utilize higher levels of contract labor sign on bonuses and shift bonuses in order to meet the increased demand for our services.
These pressures on our labor costs were partially offset by improved productivity.
We are.
<unk> to expand the capacity of our Earth business to meet the rising demand for services by opening new hospitals, and adding beds to existing facilities.
We opened four new 40 bed inpatient rehabilitation hospitals in Q3.
And earlier this week, we opened our eighth hospital for 2021, a 50 bed facility in Henry County, Georgia.
We've also added 89 beds to existing facilities.
Our de Novo pipeline remains very strong with an anticipated 10 to 12 openings to occur in each of the next two years.
Turning now to home health and hospice.
While the long term value proposition of home health care services remains intact.
We're currently operating in a challenging environment, primarily due to COVID-19 surge and industry wide labor pressures.
The underlying drivers of increased homecare remain unchanged.
Strong and increasing patient preference for care in the home gym.
Tim Mcgrath <unk> tailwind due to the aging of the population.
And cost advantages to providing care in the home rather than in other settings.
Our total home health admissions decreased <unk>.
9% in the third quarter of 2021 compared to the same period of 2020.
This decrease resulted from a reduction in episodic admissions that was largely offset with the continued significant growth and not episodic admissions, primarily due to our new contract with United Healthcare.
The primary limitations on emissions growth during Q3 or the reduction in electric procedures reduced.
Reduced occupancy levels and access restrictions and senior living facilities.
And staffing constraints that caused us to turn away qualified referrals.
In the second quarter of 2021 are episodic admissions from patients receiving electric procedures in acute care hospitals had returned to historic levels in.
In Q3, this trend abruptly reversed due to the COVID-19 surge and restrictions placed on these procedures by state governments and local health care systems.
As compared to the same period last year, our Q3 episodic commissions from patients receiving elective procedures in acute care hospitals were down approximately 400 admissions.
Episodic missions.
From patients residing in senior living facilities declined approximately 1100 compared to the prior year.
Demand for Homecare has remained strong.
In Q3, we estimate that we lost approximately 2500 admissions due to staffing constraints.
The constraints are resulting from the combination of quarantine employees due to COVID-19 exposures and industry wide staffing shortages.
We along with other industry players are responding to staff constraints by increasing the use of higher cost contract labor and paying higher salaries and wages to existing staff and new hires.
<unk> sign on bonuses.
We also encouraged our employees companywide to get Covid vaccinations and have seen a meaningful increase in employee vaccination rates over the past several months.
Currently 74% of our inpatient rehabilitation hospital based employees and 61% of our home health and hospice location based employees are fully or partially vaccinated.
We're pleased with the progress, we're making in addressing staffing constraints.
During the third quarter of 2021, the number of our home health locations with staffing limitations.
Decreased from a high of 85 to a low of <unk> 62, as the quarter closed.
Currently we have 50 home health locations with staffing limitations.
We're also pleased with the progress we're making in regards to hiring of nurses.
We hired 435 full time nurses in the third quarter of 2021 compared to 306 in the third quarter of 2020, an increase of 42%.
While we're making progress these labor pressures are not expected to abate in the near term and it takes time to onboard staff on.
On average it takes 60 days before a new full time condition is operating at expected productivity levels, which results in higher cost per visit due to a decrease in productivity.
It may take several quarters before we reach a point, where we returned to historic productivity levels, given our need to recruit and onboard staff.
Finally, we are seeing some encouraging signs thus far in Q4.
Our average home health admissions per day are up 14, and the number of corn team filled employees has dropped from $155 in September to 109 in October.
Now I'll turn it over to Doug to provide more detail on the quarter and to outline our revised guidance and the key underlying assumptions.
Thanks, Mark and good morning, everyone I'd be remiss, if I didn't welcome to his first earnings call for encompass health Mark Miller.
Heard from at the outset of this call as many of you know Mark joined US about two months ago and he comes to us with a long standing relationship with our company.
Turning now to the details of the quarter as compared to 2023rd quarter consolidated net operating revenues grew nine 4% and consolidated adjusted EBITDA increased six 7%.
On a year to date basis through the first nine months of 2021 revenues increased 10, 9% over the same period in 2020 and 11, 2% over the comparable period in 2019.
Our year to date consolidated adjusted EBITDA increased 25% over 2020, and six 7% over 2019.
We continue to generate significant free cash flow.
Adjusted free cash flow for the first nine months of this year was $437 million up 19% over the same period last year.
Much of this free cash flow was utilized to expand our businesses.
Through Q3 of this year, we deployed approximately $366 million towards new hospital construction bed expansions and acquisitions extending the reach of our businesses and underscoring our confidence in the long term prospects of each.
We also distributed $84 $7 million to our shareholders via cash dividends on our common stock.
Even with these outlays, our net leverage ratio declined to three one times down from three six times at the end of Q4 2020.
Turning now to segment results, our Q3 inpatient rehabilitation revenues grew 12, 4% and adjusted EBITDA increased 10, 7%.
The revenue increase was driven by both volume and pricing.
Total discharges increased eight 7% in Q3, including same store growth of six 7%.
Compared to Q3 dollars 19 same store volumes increased two 9%.
Net revenue per discharge increased two 4% in Q3, resulting primarily from increased reimbursement rates and the continuation of higher acuity.
We expect acuity to trend back towards 2019 levels as the pandemic eventually recede and patient flows normalized throughout the health care system.
<unk> as a percent of revenue increased 30 basis points as we incurred additional costs in the form of higher sign on and shipped bonuses and increased use of contract labor to meet increased patient volume in the midst of the tight labor market.
This ratio also increased due to preopening expenses and the ramp up of new hospitals.
These items were partially offset with improved labor productivity as employees per occupied bed declined to 337 in Q3 as compared to 344 in the year prior.
Home Health and Hospice segment revenue decreased 2% in Q3 based on lower volumes.
Home health episodic admissions declined seven 8% in the quarter largely offset by a 34, 2% increase in non episodic admissions, resulting in a 9% decrease in total admissions.
Hospice admissions declined by two 7% Q3 as a same store decrease was only partially offset by the impact of the frontier acquisition.
The Q3 increase in home health revenue per episode of 2% was below our expectation primarily due to the mix between early and late payment periods during the quarter as well as our LUPA.
Under PGM early payments with a niche within an episode or ascribed a higher payment the late periods to cover the service level of intensity associated with the start of care.
This mix shift tends to occur in periods when episodic admissions are declining.
Home Health and Hospice segment adjusted EBITDA decreased 10, 4% Q3, primarily due to higher cost of service related staffing challenges.
Cost per visit in Q3, 'twenty, one was $82 compared to $75 in Q3 'twenty.
The increase in cost per visit was due to market increases for nurses increased use of contract labor and lower clinician productivity associated with recent hires.
As Marc discussed we have revised our 2021 guidance to reflect Q3 results and current expectations for Q4.
Our guidance assumes Earth segment volume growth will remain strong in Q4 and home health and hospice volumes will remain challenging due to ongoing staffing constraints.
Elevated labor costs are expected to persist in those segments for the balance of the year.
And Ah numeration of key assumptions underlying our revised guidance may be found on page 19 of our supplemental slides.
After giving effect to these considerations we have revised our 2021 guidance to include net operating revenues.
$5 billion $80 million to $5 billion $130 million.
Adjusted EBITDA of $1 $25 million to $1 $45 million.
And adjusted EPS of $4 23.
The $4 38.
And with that we'll open the line for questions.
At this time, if you would like to ask a question. Please press. The Star then one on your telephone keypad you may withdraw yourself from the question queue by pressing the pound key again. It is star then one on your telephone keypad. As a reminder, we ask that you. Please limit yourself to one question and one follow up question.
You may re queue for any additional questions.
And we will take our first question from Kevin Fischbeck with Bank of America. Your line is open.
Morning, Kevin.
Good morning.
I guess a question on the home health labor pressures.
Is there a way to kind of breakout how much of the pressure in the quarter were things that.
Logically decline next year like signing bonuses or.
Temp labor.
Guys cover declined in theory, those things decline versus what you characterize as market rate updates for wages, which which might have a longer term.
<unk> on margin into next year, and I guess, how do you think about those those wage updates do those create them you said in your mind at all around.
Realized margins for the business.
Kevin I'm going to let <unk>.
Barb Jacobs Mark comment on that she has been making this a priority sensor moving into their new role right. So I think Kevin when we think about it we think kind of like you mentioned the short term and the long term long term continuing into the sea curious obviously the market adjustments that we're making to make us a little bit more competitive in our market.
Short term would be the higher sign on bonuses.
The contract labor that we're paying that does come at a at a large premium.
The impact of the quarantines, because when we have folks out from a quarantine perspective.
<unk> paying premium labor, whether it's contract or extra visit bonuses to cover the impact of the quarantine.
And then there is also a big productivity cost that Doug mentioned this a little bit our employees tends to be an orientation about three to four weeks.
General orientation.
After that period, they move into our branch operations costs.
But we ramped their case load up over time and that ramp up as determined by their past experience as well as how long are they adjusting to the role.
We work hard and are probably focus even more on this on not ramping up too quickly because we don't want to impact that employees' engagement and ultimately turnover.
We monitor the number of employees that have been on staff for 60 days and less and how many of those are below productivity expectations.
So to give an example in quarter three we had 793 employees that had been with us for 60 days or less that had not hit full productivity.
That compared to 270 in quarter three of last year. So that's a little good news bad news. The good news is we have the hiring which is why we have all of the folks in there. The bad news is that really does impact productivity and that cost per visit.
But I guess.
How much of this pressure today on margins do you think is kind of maybe permanent.
Potentially impacting your view about long term margins versus.
Transient I think it's all recaptured at some point or is there some longer term it back then.
The market adjustments will remain for the long term. So that is the increase that we're doing in market based on the wage pressures in those mark market the short term.
As we get more people hired and out of orientation. The short term impact is the contract labor productivity cost and the impact of quarantine.
Bear in mind, it's elevated labor costs stay with us and the industry for an extended period of time and Youre going to have a little bit of an exception in 2022 because of the anticipated reinstatement of the sequester.
The higher labor costs auto find their way into the reimbursement program.
That's a significant component of how CMS is supposed to determine the annual updates to the to the reimbursement scheme. So that would suggest that apps.
Absent the reinstatement of the <unk> cluster.
Some of the margin pressure, resulting for more permanent higher labor costs ought to be offset by reimbursement rates.
Great. Thanks.
And we can move next to Brian <unk> with Jefferies. Your line is open.
Good morning, guys.
Yes, so I'll ask the first question about the Earth's first right. So as I look at your performance during the quarter, obviously pretty good.
Same store at $6 seven, but non same store discharge was 2% rate. So given all of the bed adds that you've been doing and whats in the pipeline.
How should we be thinking about kind of like the overall growth trajectory as we exit COVID-19 for the Earth side of the business.
I think it's consistent with the long term targets that we had issued at the beginning of this year.
We're sitting here in a day, obviously, where we've made a downward revision to guidance for 2021, but as Mark suggested in his comments.
After two previous increases the guidance.
And even with today's revision where land in 2021 ahead of where we were when we issued those long term targets, we feel very positive about the contribution of the new stores that we've been adding excited about the eight that have come on board. Many of those more recently here so their contribution.
2021 is going to be limited and we've got 12 coming onboard in 2022 now again as we look at 2022, because youre going to be bearing some preopening expense. It is going to some degree mute the contribution of the eight that opened in this year's vintage, but the cumulative effect of those as you move into two.
1023 in the outer years is going to be a very positive tailwind for the Europe segment, Brian I think you've heard US also comment in the past about.
How well we have acclimated to taking on that higher acuity patients.
Specifically last year, and then having that reputation.
Over into 2021 from referral sources that.
We remained very loyal to last year, they've remained with us this year.
And these relationships and the opportunities for the show our quality and outcomes.
In light of the higher acuity I think that has really gained traction and contributes to.
Our ongoing profile and the growth opportunities that we have out there.
We're excited not only about the growth that we experienced in the quarter bear in mind, we had that six 7% same store increase but it was also that represented an almost 3% same store increase over Q3 dollars 19. So in addition to the contribution we're getting from new stores, we're getting very nice results out of our existing plan.
As well.
Yeah.
And we can move next to Matt Larew with William Blair. Your line is open.
What does that mean that.
Hi, good morning. Thanks.
Could you quantify the contracts in that area and maybe what the squibb insertion strategies in the quarter relative to historical levels.
With respect.
Actually the number is higher.
Is this mostly R&D.
Pressure is where you see that other.
Sub categories as well.
So Matt we're picking up a lot of background noise I think one of the questions was quantified contract labor for the quarter for home health and we can do that didn't hear the second part of that and the other was to give you some kind of breakdown and the new hires between the types of nurses.
That's correct I apologize I mean, therefore, I will jump off.
Okay, well, we'll hit at least those two and if I missed the third part of your question. Please feel free to circle back with Mark.
So from a contract labor perspective quarter over quarter, we've seen an increase in about $800000 in contract labor. When you look at the visits that are conducted by contract labor nurses, it's been about one 5% of our total visits in quarter three.
This year that compares to about <unk>, 8% last year.
The bulk of all of that is nursing.
And that comes at quite a premium when we break those down to a per visit.
Cost of the nurses higher they tend to be less productive because they are also kind of learning our systems and so we pay about a $64 premium per visit when we need when we use contract labor when.
When you look at the hires that we've been successful.
The number that we mentioned of the.
435 full time those are all full time RN and Ellen.
287 of those were Rins and 148, where LNG so.
Really a good breakdown of Rins and Allen for our quarter three hires.
And I think that covered the question.
Yes.
And we will move next to a J rice with credit Suisse. Your line is open.
Hello, everybody.
Just to start maybe.
I understand you're still in the process of reviewing the options and haven't made a decision yet but is there any way to talk about sort of the key variables in your mind are the pros and cons of the different.
Strategies for the home health business, you put out the spend the split the IPO.
What are you trying to evaluate that.
It makes it is still an open question in your mind.
Yes, I think mark a numerator many of the considerations in his comments our objective is to position both of our businesses to optimize the long term value creation and our board has instructed us from the beginning to thoroughly evaluate all reasonable means to achieve this end.
And this is a process that to be done right requires time and extensive resources and we have devoted both and Moreover, it is not being conducted in a static environment.
Terms of why we have not chosen a specific option in order to create a public company now.
Just at least two things one is we don't need to.
We're not affecting the transaction now and the second is the conditions will continue to evolve and we feel that we are very well positioned and prepared to choose the best structure to fit the prevailing conditions at the time that we're getting ready to go.
And so we're going to look at the things that Mark suggested before we're going to look at everything from tax efficiency, the pro forma capital structure to both businesses to the ability of both businesses to capitalize on the long term growth opportunities just making sure that we said both businesses up so that they are.
And as to pursue their strategic plans and create long term value for the shareholders.
Okay, maybe just.
Clarification on the comments about the tightness of the labor supply in the.
Earth business I'm, assuming that's mostly nurses I didn't have a sense that there was as much of a tightness on.
The physical therapy side, but I just wanted to make sure of that and how can you characterize how big you're a nurse portion of your labor cost and the <unk> businesses.
Yes, Hey, James Mark Youre correct.
The labor challenges we're almost.
Very specifics the nursing, we did have some support staff.
Also became challenging throughout the year, but the vast majority of it tied to two nurses.
Not had any difficulty in finding therapist. So all of our focus has been on recruiting specifically of rins and retaining our EMS as well and reducing contract labor dependency.
Okay.
Thanks.
And we can move next to Andrew Mok with UBS. Your line is open.
Hi, good morning.
Good morning, Thanks for the question it sounds like most of the home health volume pressure is attributable to staffing constraints, but it's not clear to me that that also the driver of pressure in the hospice business, which saw same store admissions down 14% could you speak specifically to the trends, we're seeing in hospice and drivers of underlying demand there. Thanks.
Yes.
Sure. So it is the main challenge has been staffing constraints.
10 of our locations are what we're considering our priority markets that we need we're not able to take the admissions that are that we need to because of staffing I would also say, though that we're working to diversify our referral sources.
Just have a little bit less reliant on our own home health patients today are home health patients represents about 23% of the hospice referrals and.
So obviously when our home health volumes down that impacts the potential of the referrals for hospice. So we're working to obviously fill the staffing.
But also working to diversify those referral sources and the other thing that we would point to there that has an implication for staffing within hospice is if you compare Q3 this year to Q3 last year.
Our patient days in our ADC, we're actually up but our length of stay has increased and frankly and I don't know if theres any way to sugarcoat does that has a lot to do with the types of patients we're seeing because prior to the rollout of the vaccine. We were seeing a lot of shorter term patients who were coming out of COVID-19 and expiring within a fairly.
Brief period of time, when you're facing any staffing constraints and you have a longer length of stay your ability to take on new admissions have limited.
Got it Thats helpful.
Just a follow up for Barbara you know now that you've completed your first quarter as CEO of home health. The cockpit can you speak to the continuity of the business and depth of the team in light of some recent departures.
Absolutely. So I think what first important to know is that five of our eight executive team management team members have been with home health and hospice for over 10 years.
Really important note two of these members our EVP over our sales and our EVP over our home health and hospice operations and accident with the company for over 20 years, So Kristina I, obviously, new to the team, but not new to the company.
So the main theme remember that we're currently working to recruit as our chief Human resource officer, but other than that we feel really good about the executive management team.
But shortly after I took the role I focused on the structure of what I would say is our senior management. That's the group that's really over the operations in the field and our sales leadership.
We.
We did some promotions with some increased responsibilities and based on those all of these leaders signed a noncompete non solicit agreement and so I'm feeling very confident about the team. We now have in place are they.
They are not only fully committed but they're a talented group who is excited about changing some of the prior philosophy.
The way, we've always done it mentality and I will tell you they've had some really great ideas that we've already implemented and I think that we're seeing that already in our in our recruitment efforts. So.
So I'm really excited about the team we have in place.
We'll have to add this is mark.
<unk>.
We're certainly impressed with what Bob has done there in order for a short time.
We're not surprised Barbara has been with this organization for 14 years.
We've seen her.
Response, or rather response to her leadership style from staff people like to work for Barb and she has a knack for recruiting and retaining very talented people and her management team and those skill sets are transferable from the hospitals segment to the home health segment, So I'm not surprised at all with <unk>.
Now the team has rallied around bars.
Great. Thanks for all the color.
And we can move next to Peter Chickering with Deutsche Bank. Your line is open.
Good morning.
Hey, good morning, guys, just actually a follow up on that one. So this is for barb.
Put a velocity is filed.
I guess two days ago. He lost five heidrick executives to Homecare Holdings do you know.
We have contracts with.
You know like remaining executives for home health.
As you head into this transaction and the do you have plans to hire or replace any of the executives at the party.
So we have a we've actually through internal promotions.
We have like I said, the entire executive and what I would call senior management team in place.
So the only position means.
Still needing to recruit and we actually have some great candidates in the pipeline is for our chief Human resource officer position and that's actually a new position.
So we feel good about that because we have and as I mentioned, we I feel that we've locked it in place, though we did not have restricted covenant agreements with the senior level and so those are all in place now and so I think we have a stable good management team going forward.
Okay, Great and then.
Back on the topic of staffing wages looking just at fulltime employees, what is the wage inflation that you're seeing today in <unk> and <unk> versus pre COVID-19.
Can you quantify how much labor costs were premium labor during <unk> that should normalize out when the COVID-19 surge pressures go away. Thanks, so much.
So it's a little bit difficult to answer the second part of the question Barb gave you the.
The increase in contract labor.
On the home health side I will tell you on the <unk> side in terms of sign on and shift bonuses. We had I think about a $12 million increase from Q2 into Q3. So it's not it's not insignificant on that end.
Peter remind me the first part of your question.
Yes, you bet looking at staffing wages just for your full time employees.
Curious what sort of wage inflation youre seeing as you are renewing at those employees for today to what percent are you increasingly the way it is today versus 2019 pre COVID-19.
But generally speaking you can kind of measured on a per FTE basis, and the equivalent would be the portion that's within CP V on home health.
About I would say in the third quarter, we saw SW be per FTE FTE up about <unk>.
Six 5% to 7%.
And thats versus call. It the normalized assumption that we had which was in the 3% to 4% range.
Trying to determine at this point in time, how much of that has a stickiness factor is difficult. We do think it's going to be prevalent in the fourth quarter and that's baked into our guidance assumptions I think it's too early to suggest how much of that might start to dissipate as we move into 2022.
Great. Thanks, so much.
Okay.
And our next question comes from Frank Morgan with RBC capital markets. Your line is open.
Well Frank Frank.
Good morning, Hey, I guess I'll ask one labor question here is staying on topic.
I always thought of.
Rehab nurses in the home health care is probably being less susceptible to moving around but I guess my question here is.
Where are these.
Where are these nurses going or what type of setting are they going to are they just retiring.
That'd be my first question and then the second question is more just about if you could go back and look between all of your different segments.
Maybe talk a little more can you give us a little more color about kind of either how they exited the quarter or where they are now and some of those key operating indicators.
Frank It's Mark I'll take the the Earth response June nursing question that asked Bob to talk about the home health, but.
Certainly with an R. R.
The typical.
The preference of our nurses, if they don't choose rehab theyre typically going back to the acute care hospital inpatient settings. So you've heard us talk about in the past.
Having a higher percentage of our nurses get that certified rehab nursing.
Accreditation and if we if we can encourage them to do so.
We see far less turnover of those C R and in our hospitals going away that acute care hospitals, but it's certainly not a typical for particularly nurses early on in their career if they start out in a rehab setting they wanted to get an acute care hospital try and then what.
We often see is wells will will get a number of nurses that will tire from being in an ICU level environment and want to come down too.
A situation, where they have more patient care.
Time over a duration and length of stay that.
That we see in an Earth set and so that's kind of the major differences between the earth versus the acute care hospitals and I'll, let barb talking about home health. So for home health and Hospice you know, we do lose some to two competing home health and Hospice Agency I.
I would say, though during COVID-19, we lost a portion.
Both traveling as well as a group that just really wanted to be at home. It was hard for them to manage that workload on top of.
As not being in school that sort of thing that's a group that we're really working to re recruit are the ones that kind of stepped away for a while.
We're working to bring them back which is why we think it's so important to offer the flexibility of two days a week three days a week because milestone maybe willing and interested to come back. They may still be trying to juggle things. So we're just really trying to create the flexibility. So we can re recruit other staff members. We're also seeing larger in.
<unk> of folks interested doing home health and hospice for the first time, some coming from the acute care hospitals, because frankly, they're just exhausted and so they are coming to look to do something a little different something that allows a little bit more flexibility.
So you know so while we're losing some do some competing home health and hospice I think were really being creative on where we are recruiting new folks from Brexit I think we also experienced a number of nurses that took up on these traveler.
Engagements that were highly profitable for the nurses they require them to travel to the surge.
Markets.
And then as we saw in 2020, it's typically that those nurses will come back to the marketplace that they initially left but.
It's a little early to tell how quickly these.
Nurses will come back to the markets that we've seen from the surge of transition here in the second half of 2021 and then Frank Your question on the trajectory for both businesses coming out of Q3 into Q4 as is included in our guidance considerations for 2021, we expect continued strong vol.
<unk> for the <unk> business.
In Q4 and October is supportive of that and then with regard to the home health just to reiterate some things that mark highlighted in his script during the third quarter. The number of our home health locations with staffing limitations had decreased from a high of 85 to a low of <unk> 62, as the quarter closed and current.
We all have only 50 only 50.
Relative to the term.
Home health locations with staffing limitations and then we are starting to see some more encouraging signs.
As we enter into October with regard to volumes and average home health admissions per day are up by 14 in the month of October and the number of <unk> field employees has dropped from 155 in September to 109 in October.
<unk>.
Okay.
Okay.
And we can move.
Next to.
Excuse me we can go next John Ransom with Raymond James Thank you for your patience.
Yes.
Hey, John Hey, Thanks, Josh Good morning.
Just trying to figure out I mean, once you decide what to do with.
Home health and hospice.
What's the outside.
Sort of time frame from decision to execution that you're going to have to get our year end audit is there like a multi month SEC process does this help us understand the backend of this once you decided to pull the trigger and also could you help us think about any sort of.
Additional cost, let's assume it would be a separate public company, how should we think about the trap. The additional costs that would result from that.
There will be additional costs to establish our home health and hospice business as a separate company. We've done a very thorough analysis of that including having embedded by third parties, but we have not disclosed that yet.
With regard to the lead time with the SEC or anybody else. It depends on the specific form of the transaction none of the lead times, particularly given the work that's been done to date should be viewed as.
Particularly onerous.
With regard to some of the other preparatory steps as we've said repeatedly beginning since our second quarter report, we have made substantial progress. There. We've previously referenced the fact that we have the carve out audited financials, including a three year look back already prepared it's relatively easy to update those to reflect additional.
Quarters as we progress through this the S. One had been filed confidentially, which suggests a certain state of readiness as well. So you know again as we've said kind of consistently the degree of preparation that has gone into this has been very substantial will continue to invest in our state of readiness for the balance of.
The year, but we are at a very high degree of readiness to.
Pursue a transaction when we believe the market backdrop and the underlying business trends are appropriate.
So just to clarify Doug.
Part of the.
I mean, I'm, assuming it doesn't take a year to make a decision. So so part of your thinking is.
Maybe right now is not the best time, just given the challenges in the in the operation. So if you were to launch it separately, maybe waiting for a more favorable backdrop.
Fundamentals of that is that part of it.
Right.
But you're right it doesn't.
Yes, there is no hard stop on it but it didn't take us a year to make a decision. So at the end of July we stated that based on our review to that point, we determined that it did make sense to separate the business and we didnt foreclose on the form of the transaction, we're taking a step further today and saying, we now believe that separating it into.
Through a public.
Separate independent public company makes the most sense. So those are important decisions to make along the way I.
I guess in terms of your view on the timeframe, John and I understand some of the fatigue that's out there mark referenced in his comments, what's your point of reference I mean, how many of these have you done.
And have you done an analysis of all of the analog transactions to determine that our processes, particularly lengthy.
Sure.
I take the point that sorry, sorry to ask the questions. Thanks.
And we will move next to Scott Fidel with Stephens Bank. Your line is open.
Hello, Scott.
Alright, Thanks, Scott good morning.
First question just interested on the some of the pickup that you did see in October on home health admissions.
Can just give us a little flavor on how you've seen those trending across the different markets and geographies has been relatively consistent in terms of the pick up or is it a bit more staggered still across the markets.
Yes, it's really been about the areas, where we've seen you know.
The quarantine has come down I mean, the referrals frankly have been there. So it really has come to the quarantines dropping getting folks out of orientation and starting to build up their caseload, So where we're seeing this growth is really about.
The branches moving away from being constrained because of staffing limitations to now being able to take more of these referrals and so that's really been where we've seen the progress.
Got it and then just as my follow up and without addressing the planned separation itself.
If you could talk to us about.
How are you thinking about deployment of growth capital towards H H H in the interim period here and.
Are there any limitations on that or is it all systems go in terms of it for example, you see M&A opportunities arise over the next quarter or two where you plan to move forward with dose. Thanks.
I think we demonstrated very tangible way to continuing to move forward to capitalize on M&A growth opportunities in our home health and hospice and that was the frontier transaction, which was an approximately $100 million deal that we closed at the end of June.
Continue to be active in terms of our development pipeline.
Obviously, we remain cognizant of any impact that might have on our flexibility with regard to affected in form of separation, but we do believe that.
The growth pipeline via M&A in both home health and hops hospice remains attractive. We're also going to be ramping up our de novo activity for both of those in home health and hospice and that's something that frankly, we haven't capitalized on well in the past it will be.
More featured in our growth story going forward.
In the <unk> segment, we really like the returns that we're seeing out of deploying capital towards the new hospital openings and the bed expansion and so it's going to be.
Rinse repeat on that albeit at an accelerated level with 12, new openings targeted for 2022.
And we can move next to Ann Hynes with Mizuho. Your line is open.
Good morning Ann.
Good morning. So we spent a lot of time on this call talking about labor challenges and how it's impacted negatively impacted revenue and margin in the home health and hospice business, but we really haven't talked about the opposite side of the equation the demand side and I know the underlying demand profile for home health is attractive.
But I mean do you think this is a structural change going on maybe with families not wanting some home health aides in the house and I guess the reason I'm asking is that the one thing that really stood out to me in your presentation is that only 61% of your home health and players are vaccinated.
Do you think that's going to be a structural impediment to a machine that families don't want an eight in their IRA.
The elderly parent thats on a vaccinated.
My second question would be I mean, you have expressed confidence in our long term business for home health.
How do you view the intermediate term, meaning over 2022 and 2023 do you think we should just be modeling a lower revenue and gross.
Revenue growth rate and margin profile as you know kind of cover it works through the system and I guess, maybe an add on to that question.
Since nobody has asked for 2002, our finalizing our models is there anything you really wanted to consider while we finalize them for 2022.
Well that was that was quite a bit.
We'll try and get to that.
Making very good use of your one question one follow up so why don't we start early September.
The things from a demand perspective, because <unk> got some good data on that that are supportive of strong demand. So yeah. I think first of all <unk> patients are contained to want the care in the home as we mentioned you know we know we turned away at a minimum 2500 admissions in this quarter. So the referrals are there the patients wanting the care in the home is there.
We don't have a lot of age most of ours is skilled so skilled nursing and skilled therapy, what we have found because our staff where the fall protective equipment. When they go into a patient's home we have not seen a reluctance of having the individuals come into the home knowing that our teams are wearing all the protective equipment.
So we don't feel that that's impacted or will impact the volume or the need for the skilled care in the patient's home probably you wont hit referrals to referral sources.
So our referral sources from our standpoint, I mean, we continue to get the referrals.
We've grown a lot with our physician physician's offices wanting to give direct referrals, they're really and that really isn't the goal of helping patients before they need that acute level of care and so that's why I feel like we're getting more and more of those referrals directly from physicians offices, so you're kind of getting them pre acute and then continuing with the referral.
Sources that we've seen historically from the skilled nursing facilities and the AR and the AOS in ILS and we've also seen an increase in referrals as they've come from surgery centers, because as some of the elective have.
Certainly declined some of that is moved to surgery centers. So we continue to focus on diversifying the referral sources that we go to so and as we think about volume going forward. Our view is that there's no limitation on volume growth being imposed by demand that we have the referral sources.
<unk> out there and establish that we need to drive or to our.
Volume objectives.
We have some additional work that we need to do on the sales side to be able to capitalize on all of those but we've made very substantial progress there and the area of focus is the clinical staffing limitations and based on some of the programs that Bob described in her comments, we feel like we're going to make progressive.
Good progress on that through Q4 and into 2022.
Did that get all right. Thanks.
Yeah, and then just for 2022 is there anything that you really want we should consider anything out of the ordinary.
The sequester is going back in so you're basically going to deal with no pricing increase on your Medicare book of business, which as you know for US is very substantial.
Yes.
Okay.
Alright. Thanks.
And we can take our final question from Steven Valiquette with Barclays. Your line is open.
Thanks, Good morning, everybody.
So with the announcement.
Some form of likely separation of home health and hospice from or potentially in the first half of next year I guess I'm curious if you can discuss on a preliminary basis just the importance from your view of keeping the operational synergies in place between the two operations and how you're structuring a transaction, particularly in patient referrals back and forth, but also in other areas.
Is.
I kind of asked it because there was a.
Obviously, a similar precedent spinoff transaction and the public markets back in 2019 that showed that.
Some of these operational synergies can stay impact for two separate entities between home health and a facility based post acute care company. So I'm also wondering if theres any useful clinical learnings from the precedent transactions that May help guide you as well thanks.
Yes sure. This is Marc I'll take that one.
What we referred to in the past as clinical collaboration.
In our view.
View was the standardized process the discharge.
Coordination collaboration of the patients from our herbs to our home health locations that will remain a priority and having.
<unk> collaborated efforts as a priority and the overall quality of care for our patients I think what we've seen.
That we've learned from what we refer to as our overlap markets.
We can also replicate many of those facets of that process.
With non owned home health agencies and markets.
Where we don't have a presence so that focus on the transition from patients from our Earths to home health will remain a priority even after the transaction.
Next year and the other thing I would add to that is one of the things that we are so important in the initial phases of clinical collaboration is that Theres, a theres a fair number of home health agencies that don't have the full complement of physical occupational and speech pathology. Those are the types of services that many of our patients need.
Because we have so many neurological patients and so knowing that we are staffed to be able to take those patients take them that we can provide the care within that first day or two after the patient goes home those are important factors for us because its what really helps them have the lower readmission rates and better patient satisfaction.
So providing that level of care is not going to change and so the need for that level of care also won't change, though as Mark mentioned, we don't see that being significantly impacted by a separation Steve just as a reminder, borrower brings a unique perspective to that because she was the lead role.
The Earth side of the collaboration now she's going to the home health side of that so she knows it from both sides of the equation is in a unique position to affect that and so Steve to bring that all together. We think that there are four key factors that will lead to the stickiness of this post.
The separation. The first is we have 90 overlap markets established so in order to have any kind of clinical collaboration you have to coexist in the same market and we've been very deliberate about increasing the overlap markets. Since we had the two companies together.
Second is that the the protocols and procedures governing clinical collaboration have been in place for almost seven years now and refined through consistent best practices approaches over that timeframe.
Third as Barb mentioned is we have staffed our home health agencies with the clinical resources predominantly on the therapy side to serve the types of patients who are being discharged from the air and the floor because we have a proven track record for producing positive results.
Okay. That's some very helpful color. Thank you.
Yeah.
And this does conclude our question and answer session I'll turn the program back over to our presenters for any closing remarks.
Thank you if anyone has any additional questions. Please call me at 205 90 705860.
You again for joining today's call.
Okay.
Thank you for your participation. This does conclude today's program you may disconnect at any time.
Okay.
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