Q3 2021 LHC Group Inc Earnings Call

Greetings and welcome to LHC group's third quarter 2021 earnings conference call. At this time all participants are on a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.

As a reminder, this conference is being recorded I would now like to turn the conference over to your host Mr. Eric Elliott.

Senior Vice President Finance and Investor Relations. Thank you you may begin.

Thank you, Rob and good morning, everyone I'd like to welcome you to LHC Group's earnings conference call for the third quarter ended September 32021.

Last night, we issued our earnings release posted a copy of our prepared commentary and supplemental deck on the quarter on the quarterly results section of our Investor Relations Page. In addition to the earnings release and supplemental information like copy of the 10-Q and ultimately a transcript of this call when available can be found on this page our supplemental deck includes a full year.

<unk> 2021 guidance assumptions the impact of COVID-19, and detail on the breakdown among sector performance all of our non-GAAP reconciliations and breakdowns of adjustments are included as well we will reference this information in our remarks today.

In response to feedback from investors and analysts the majority of our time on this morning's call will be devoted to Q&A with me today is Keith Myers, Chairman and Chief Executive Officer, Josh Proffitt, President and CEO, Michael Chief Financial Officer, before we start I would like to point everyone to our forward looking statements on page two of our supplemental presentation and encourage you to read them carefully.

They apply to statements made in this call and our press release and our prepared commentary and in our supplemental financial information now I'll turn the call over to Keith.

Thank you, Eric and good morning, everyone.

Before we begin I'd like to acknowledge the hard work and dedication of our growing LHC group family of nurses physician extenders, Allied health professionals and administrative support staff.

They work tirelessly on behalf of the patients families and communities, we are privileged to serve throughout our country.

Thank you for all that you do sincerely.

I hope that everyone had a chance to review the commentary and supplemental information we posted last night.

As Eric mentioned this is in response to request and feedback from analysts and investors. Our intent is to adopt this practice in our calls going forward to allow more time for thorough discussion during Q&A.

There are a few points I want to reinforce this morning before we.

Go further.

First.

Is that it's been a very long time since this industry had the cumulative tail winds. It does today from a demand legislative and policy perspective.

While there are some entrenched lobbying efforts working to slow down the progress the overwhelming desire among patients and their families as to be treated in the hall.

We need to get that right from a policy standpoint, and I'm confident that we will.

Second the challenges or headwinds we faced in the third quarter were related to temporary.

The issues that were caused by hurricane Hurricane Ana Spike in Covid cases impacting our capacity to meet the demand for our care.

Yes, the higher labor costs will be a hail to overcome for us all but again I'm confident we will and we'll talk more about that this morning I am sure.

And lastly, I would note that we are laser focused on remaining a leader in this industry for quality patient satisfaction employee retention.

Joint ventures, with hospitals and health systems.

And organic growth and and both organic and inorganic growth.

So we will be happy to take your questions and look forward to a robust discussion around all of the issues on.

On the table at this point I'd like to open the call up to questions for Josh or myself, operator, we're ready to go to questions.

At this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.

A confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

Our first question today comes from the line of Frank Morgan with RBC Capital markets. Please proceed with your question.

Good morning, I guess looking at the third quarter.

<unk>, how do you think about the puts and takes obviously I know the M. S. S. P would not be in a fourth quarter number but I'm just curious kind of how you would make that bridge from the third quarter to fourth quarter guidance and then maybe any color on from fourth quarter, maybe some of the puts and takes and how you bridge that.

When we start thinking about growth for 2022. Thanks.

Yeah. Good morning, Frank This is Dale thanks for the question and good morning, everyone.

Your question is an important one and I'm sure. It's a question that's on most if not all of your mines and so what I would like to do is take a few minutes to really deliberately talked through this and make sure. We give you how we explain to you how we're thinking about the jump off point from Q3, the run rate of Q4, and then how that plays out into next year. So.

Bear with me as we go through this for a few minutes, but as you said Frank Q3, the important thing to remember for everyone. In Q3 as the unique item for US every third quarter.

Is the Medicare shared savings payment and it was a very good result for us this year at $11 7 million compared to $9 6 million a year ago, but that is a third party third quarter only of that and so you have there.

Take that out of the run rate from the reported results. So if you do that just a baseline.

Our third quarter jump off point from a revenue perspective, $565 5 million.

And from an adjusted EBITDA perspective, 68, 57, sorry, $553 eight I'm, sorry, $553 eight from a revenue perspective, and 57, one from an EBITDA perspective, so that's backing out the $11 seven as.

As we look to Q4.

When you look at our full year guidance you can see the implied midpoint for Q4 is a revenue number of about $581 3 million and an implied midpoint EBITDA number of about $63 6 million the revenue.

Number is a growth of about $27 5 million or 5% and EBITDA growth is about $6 5 million or 11%.

So here are the components are the building blocks of where that's coming from.

From a revenue perspective, we expect that we will recover the $3 1 million that we lost in Q3 from idle right. All facilities are back online services are restored and so that that revenue should we should return to us when you look at the loss revenue from Covid.

We are seeing an improvement in our clinicians coming off of quarantine and our capacity responding to that obviously and so there still are some questions on <unk>. So it's not going to be a flip the switch, but we expect that we recover about 60% to 65% of that Q3 impact from the Covid Spike.

So that's another $7 million to $8 million of revenue.

And in home Health home health is roughly $10 million to $11 million revenue recovery.

You can look at hospice, we're expecting about a 1% to 2% sequential growth in census, there that'll add $1 million to $2 million in revenue.

And then from a final final building blocks from a revenue perspective is really as you. All know we closed the HCA Brookdale deal on November one that should add $15 million to $20 million of revenue.

In Q4 for the two months of Q4.

So when you add those components together you come up with essentially a $27 5 million of revenue sequential growth from an EBITDA perspective were expecting.

From the home health volume about $3 million to $4 million of EBIT improvement in Q in Q4 again from from the Ida and Covid recovery.

From the hospice growth about a half a million of EBITDA growth.

And then.

For cost improvements operational cost improvements, which which we'll be bringing playing into next year as well and Josh will give a little more color on this after me we're expecting two to $2 5 million of cost improvements from Q3 to Q4, we.

We are expecting no contribution from the the HCA brookdale closure.

In the fourth quarter as we integrate that business and start to work on the contribution from that business into next year. So those are the building blocks that build up to 27, five and $6 $5 million of revenue and EBITDA, respectively from Q3 to Q4.

When you when you look forward then from how does that play out into 2022.

Take our Q4, adjusted EBITDA number of roughly 64 or $65 million based on midpoint to high point.

Annualize that out you get to the 2022 baseline of about $260 million of EBITDA.

On top of that we are now.

Pretty much locked down on our M&A added about $300 million of acquired revenue.

So that that revenue will contribute roughly $20 million to $25 million of EBITDA.

For 2022, and we've soften that.

EBITDA margin a bit as you guys know, we always take about 12 months to 18 months to get our newly acquired entities to the corporate standards, but we softened at 100 150 basis points because of as Keith mentioned in his comments there are a lot of labor.

Headwinds that we're dealing with right now and so we're just being realistic about how those are going to play out in terms of our acquired businesses next year.

And then if you look at what our expectations are around organic growth rate, mainly for home health and hospice, we expect organic admission growth in topline growth in the mid single digit range for next year that will contribute roughly $10 million to $15 million of additional organic EBIT growth.

And then the the operational cost improvement initiatives that Joshua.

Provide a little bit more color on after I get done here we.

We expect $10 million to $15 million of incremental operational cost improvements in next year.

You add on top of that MSP next year, we expect a very similar results to what we.

We're awarded this year, so that's another $10 million to $12 million the final rate updates.

We see those as essentially offsetting the return of Medicare sequestration and the expiration of Phe. So those are a neutralizing events.

And then lastly, as a takeaway.

Next year, we are going to be making COVID-19 related costs into our into our numbers and into our guidance. As you guys know we were adjusting those out this year.

And so our expectation right now around Covid expenditures for 2022, or 25% to $30 million, so that would be a takeaway from from the <unk>.

The bridge.

So you add all of those together and what you've come up with is the our view right now of 2022 of an EBITDA number of $280 to $300 million.

So that represents roughly a 9% to 10% growth over this year's adjusted EBITDA number, which obviously are on a year over year comps are kind of like an apples and oranges. Because this year's number has COVID-19 expenditures adjusted out and where we're going to bake those into next year. So that's our runway Frank and I'll, let Joe.

Josh will provide a little color on the operational cost improvements.

Hi, and good morning, good morning, everyone I'll be real brief and then I can't get into any more specifics or details.

Bill alluded to.

A few points as he was going through the buildup for 2022, Theres clearly a lot of operational cost saving initiatives that were working forward as well as you know a lot of initiatives on the labor and supply side.

A few that I'll just hit now and can get into more as more Q&A kind of builds throughout the morning.

One is the.

For us to reduce our dependence on contract labor.

That one is going to come as a surprise to anyone.

We're running in Q3 around 4% of our home health visits were made on the nursing side, you utilizing contract labor, which is up significantly from our historical norms of around 1% and just to put that into context for every 100 basis points, we can reduce our dependence on contract labor for nursing, we would save around.

One in a quarter million.

Per quarter net savings.

Net between the difference of the contract labor cost and the employee labor costs. So that's a real needle mover as we go into next year and a real focus of ours on the operation side.

Then maybe the other two I would point out quickly is just a continued opportunity for extender utilization on the LPN and PTA front as well as we're working really identify some some areas to gain some G&A efficiencies because as we enter into next year and have the top line growth that Bill just described.

We're focused on continuing to leverage our G&A going into next year as well.

Thank you.

Our next question comes from a J Rice with credit Suisse. Please proceed with your question.

Thanks, Hi, everybody I might just.

Just drill down on the labor topic, it's gotten so much play this quarter.

I mean, some of it obviously you were talking about nurses out on core gene and the need to replace those with contract labor and scrambling and then other aspects of it are more long term in nature of just the tight supply.

Burning out from that.

The Covid pandemic and retiring are starting families or whatever can.

Can you just parse out a little bit how much are you.

As the surge comes down and if we don't have another surge.

Would ease up and how much you think is sort of more of a continuing thing that will persist for a while.

Okay.

Yeah sure a J this is Josh good morning.

I guess I may start out sounding a little bit more positive than you would expect for that question because when I think about your question is yes.

Is there available supply out there.

And when I look at the last three quarters for US we have had record numbers of hires.

So although there is a contraction in the nursing labor market across health care I do think due to our flexible scheduling and some other benefits of the home health industry in general and just care in the home I think we're seeing an uptick in the number of applicants and the number of hires we've made we went through.

Almost 4200 hires across home health and hospice.

Q1 up to over 5000 in Q3, so from a supply standpoint, yes. I mean this is an issue we're all facing but I feel encouraged by the trends we're seeing.

But I wanted to maybe touch on a few of the recruiting initiatives that we have that are going on some of which we started earlier. This year that I think is helping to bear that fruit.

And then a J I think the other piece is retention. So once you hire all those employees what are your initiatives and what are we doing to retain them, but on the recruiting side, we've really done a lot throughout the year. This year and have some new strategies that we're going to roll out next year as well to keep that momentum going on.

On the talent acquisition front, we've hired a new senior leader, that's going to be helping to set our strategy and drive our recruitment to our in house recruitment Department. She comes with a lot of experience and talent acquisition for some very large organizations. She just joined US. This past month, so very excited about that and we've also.

Increased our recruiting team over 65% year over year. So we're now up to 56 dedicated recruiters and as you know a J all health care's local so those recruiters are very much targeted at the local market level trying to you know.

Make sure that we are competitive from a wage perspective of benefits perspective in and all the other areas around bringing on and attracting and retaining new talent.

I really like what we've done on the talent acquisition front.

We've also done things to improve our velocity of hiring.

Get into all the details there because for obvious reasons, but we've really accelerated the time period from when I qualified candidate applies all the way through the interview Onboarding and getting them started process and I think that's critical when you're trying to.

<unk>.

Compete out there with a tighter labor supply the quicker you can get them onboard and started the better.

And then a couple other smaller initiatives that we've done that's really starting to bear some fruit.

We've redeployed our employee referral program earlier this year and we're on track to higher almost 2000, new employees through that effort.

We just last quarter launched a talent ambassador program, where our account executives or sales team members are actually incentivized not only to go out and grow the business.

Also help identify and bring on talent and we've brought in almost 60, new employees and just a very short amount of time through that effort and then our alumni recruiting efforts.

Got a dedicated team that's focused on re recruiting former LHC group family members and we've already hired almost 600 of those just since June of this year.

And then there's a few other things that I won't belabor the point, a J, but on the recruiting side I do think we're doing some things there that are really moving the needle.

We do have some longer term strategies in place whether it's the development of our internal traveler program or whether its something as big as building a future pipeline for more nurses. Some of the initiatives, we've got going on with the University of Louisiana in trying to partner with some other universities across the country.

So that's on the supply side and then on the retention front AJ.

I'd tell you we are laser focused on making sure that our turnover continues to be very much below kind of the industry norms and driving that down and in the best data points I'd give you. There is if you look at page 17 of our supplemental deck.

You'll see quarter over quarter, our net hires continue to grow so not only is our gross hires and the applicants growing but our net numbers, we are netting positive and all of our service lines right now.

All right that's great. Thanks, a lot.

Thank you.

Our next question is from Joanna <unk> with Bank of America. Please proceed with your question.

Hi, Thank you good morning, So I guess just stay on that topic.

Yeah Yeah.

Lots of focus on that and I appreciate all the color around the as far as you know to improve Oh my attention, but just.

Thinking about numbers here.

How should we think about the outlook into next year and I guess ask it works in terms of wage growth because obviously, we see in the slide that was helpful. Can you talk about the implied direct labor costs per visit was up almost six.

Any of you are into home health segment.

Oh, that's it.

Shelly.

So how should we think about that is at the moment I mean.

Going forward wage inflation should we think about this.

That's going to be.

About the historical because that gets shipped.

Turkey was maybe more like two 3% growth. So thanks for flex was kind of trying to quantify that for us.

Yeah, Yeah Joanna. Thank you. This is dale so you're right I think historically worked out from two two to 2% to 3% increase annually and I think the environment. We're in today, which everybody is familiar with so we won't we won't get into the details of that but with the with the challenges in the labor headwinds were really probably looking more like at least into.

Next year at a 3% to 5% type of.

Increase in terms of those I think the important thing to understand.

What Josh was talking about earlier, so we've got some real real costs from labor out there, but we've also got some real leaders in that we're going to be pulling to mitigate those costs to increase in that and that's through how we deploy our resources in a more optimized manner around utilization of their extenders.

Optimizing our productivity, there's always there's always pockets of productivity improvement using telehealth more all of those things right we've got opportunities.

Two and again not the under under mentioned the recruiting and retention efforts right because one of the biggest leavers is to lessen our dependence on contract visit utilization. So all of those combined together, we feel really good that we have levers in place and plans in place to be able to neutralize or manage it in fact.

I believe the cost increases, but we are definitely definitely expecting a 3% to 5% environment for next year like we've been seeing so.

Thank you any pause might just a follow up on that.

When you when you talk about this wage inflation are you sticking to ponder. The fact that the vaccination that mandate for the health care workers that I guess, it's coming with that.

I think just came out and I guess on desktop can you remind us what percent of employees that are vaccinated. Thank you.

Yeah Joanne good morning. This is Josh Yes, I think it was like two minutes before we went live.

The the vaccine mandate got released so obviously, we haven't digested all of the details yet but are aware that it's out there.

For employers are greater than 100, which is the Osha mandate and then you've got the health care mandate as well so on the vaccine front.

First and foremost I would say we continue to be.

A strong supporter and an advocate throughout our entire workforce to get our workforce vaccinated and have really been driving that initiative.

Ever since the vaccines were made readily available.

Specifically, where are we to your question or approximately 65% company wide on the vaccination rates throughout our company now I will tell you Joanna that you know very much follows kind of the national geographical patterns. So if you look up in our northeastern Division for example.

We're north of 80% across that entire geography out in the west were more closely like 70% and then down in the Gulf South state regions were more down in the upper Fifty's.

But what we continue to see really I would say almost even week over week improvements and that even in some of our Gulf South States.

We've really started to see that move recently and across the board we range anywhere from five to high teens percentage above the state averages in those states where were watching it that closely to make sure that we are outperforming at least.

The marketplace. So you know in a state like Alabama, the states in the upper Forty's vaccination, we're in the low fifties and in a state you know up in the northeast.

The state averages in the upper sixties, and we're now in the mid Eighty's. So so we're tracking it in that kind of a way as it relates to the mandate I would point out for Ya Joanne We've got some experience obviously not on the national scale, but we have seven states and the district of Columbia that we operate in today that have.

Already instituted mandates that were complying with.

And then in those states as we sit here today I confirm these numbers last night.

Our 100% vaccinated of our clinicians with the exception of those that have a qualifying exemption and certain states have medical exemptions are religious exemptions, so we're either vaccinated or exempted.

Qualifying way and we're tracking very closely and those states to ensure that our turnover isn't changing from pre mandate to post because I think that's the big fear that everyone has is is it going to.

Result in an exodus of your workforce and the and the backdrop of all the labor issues. We just described and we've not seen any real movement in our turnover rates. We saw very late adoption by a lot of workforce and that we're waiting to the end to say if the mandate was gonna go live but then we saw.

Good healthy compliance in those states.

I'd mentioned there is one additional state we have experience in where the mandate is either a vaccine or weekly testing. So if that ends up being what is and what just released a hub about 20 minutes ago. Then we do have not only protocols in place to monitor that but we've developed some internal proprietary tools, where it's real easy.

Z for our operations team in the field to be uploading and tracking and monitoring that so that we remain compliant. So I know that's a lot to your question Joanne but wanted to really give you some color because clearly we're very focused on this whole effort.

No. Thank you I appreciate it and I'm very glad that to hear that I guess, you did not yet available.

Turnover Interstate so thank you.

And I might before we go to next question I might just add.

I was asked this question several times last week when I was in Washington D C by.

Members in both chambers with.

I think this helps us.

Really do cause a lot of our hospitals and health system partners have wanted to go in that direction. Some did in and asked us to follow but our concern was that it.

If we went out and implemented something like this than we could have employees, leaving us and going to other providers, who are more lax in this area. So by leveling the playing field, where where it's either vaccine or tests for everyone. I really do believe that this helps us.

Our next question is from Justin Bowers with Deutsche Bank. Please proceed with your question.

Hi, Good morning, everyone. So just wanted to follow up on the DC topic.

Keith can you provide us an update on some of the choose home.

Legislation and maybe how that relates to the SCP strategy and then I have a follow up on it.

As it relates to costs.

Okay sure.

So.

So first let's start with the choose home legislation.

Most of you probably know, but I'll just recap. So we currently have 19 sponsors in the Senate.

<unk> 22 in the house and that support is growing everyday maybe more now.

Date was yesterday.

But I think what's more important is.

Is the support from those in leadership positions.

Who who it wouldn't be appropriate for them to sign onto the bill of course, but.

But our giving us indications about.

Are committing their support when it does get to their level.

So what's the path forward first of course is.

The current reconciliation process were in play and we're in those conversations.

I think that's the most challenging one.

Of all.

All of the efforts to to limit.

What goes into that package.

But beyond that we have.

Two more opportunities in 2021.

One being an expected Medicare extenders.

Package and then.

And then a a.

By year end.

The omnibus budget budget package it.

That we think is likely.

Likely.

But I would also say that with this strong support.

Some people don't realize that this bill was introduced into the 117th Congress, which which is 2021 and 2022.

So the bill is in play for all the way through 2022.

So we're going to have those up and those opportunities.

Again in 2022 and reconciliation.

Packages or whatever moves through that.

The.

Wanted to just give a couple of nuggets about support though just to get back this up with them.

The sponsors that's talking about the Senate purse.

One of one of our.

Sponsors on the Bill as Senator Casey.

Who is chair of the aging committee.

And the lead sponsors Senator Stabenow as chair of the Health Subcommittee of the Senate Finance Committee.

You know who the sponsors are are very important.

Other good indications are.

You know I met with Senator Wyden.

With our partner partnership group.

And so he is now the chair of the Senate Finance Committee and.

It's.

It's good for us that he began his career.

And as an attorney.

And where he was the head of the art and legal services centers for the elderly and.

Was the founder of the Great Panthers.

This has been his life's work is to provide these these type of options to seniors.

So he naturally voice.

Yes, his support and that when it when it reaches his level.

That he would advocate for the scoring and all of the things that we need to do to move it forward. So that that's why we're quite encouraged about it.

We're in play and now again in this reconciliation package and you're probably hearing some noise about that.

That I would say is.

Less than a 50 50 chance that we get into this current reconciliation package, so but I think we have a.

A really a really good chance at.

This year.

And he then extended package or are a year impact.

Got it maybe just one quick follow up.

With respect to PDGF has there been what's kind of the.

And with the file final rule coming out earlier this week, what's what's kind of the latest on that and the thinking as it relates to 'twenty next year or 2024.

I'm talking about.

Yeah, Justin this is Josh.

As it relates to the final rule.

We're very pleased with you know kind of the ultimate rate update that came through all in around the three 2% and even some of the underlying kind of.

Points underneath that that you know.

Signal a.

The appreciation for the cost environment I think that we are faced with an N.

So all in all we were pleased with.

So kind of the increased update in the rates and when there was building all of his building blocks earlier for the 2022 outlook, that's kind of factored in that to help offset the sequestration going away in the phe exploration and some of those things. So all in all I think it was a real positive signal two again.

Just at the macro level the support.

For health care delivery in the home and a lot of the tailwind of that.

Heath talked about and that we've been putting in our supplemental deck and I would add just and this is Dale I think you know obviously.

There was no adjustment to the behavioral factor right and that's still being studied and I think obviously, we believe that that should be.

A more favorable going forward, but that's that's got a lot of analytics around it and so at least it stayed neutral and we're hopeful that that will continue to get the right. The right focus and the right data on it to make the right decision, especially in this kind of a cost environment.

Thanks.

I think that's one part of your.

You asked how this connected also to our.

Through our new partnership with S&P around advanced care at home.

And here's how I mean choose home.

Is just.

It's just.

Another vehicle.

That that.

That moves higher acuity patients from inpatient settings to home.

The way the way we view it as.

Whether whether you choose to call it hospital at home Smith at home.

Choose home advanced care at home.

We see all of those as as the same it's we're moving higher acuity patients.

Now go to hospitals, we're moving them to the hull and.

And the way we think of our.

Advanced care at home initiative.

Is each each hospital is unique.

Some hospitals want to move.

Just a handful of their lower acuity patients at home some of the larger systems that.

That are are at capacity always with a waiting list want to move as much as 30% of their lower acuity patients to the home, which requires a different program.

And.

And much.

Much greater capability and cost to do that so each one is taylor, but I think I think it does fit into this this whole movement.

That's geared towards.

And as consumer driven people want to be cared for at home, if they can and it and pay its payer preferred and and for hospitals. It allows them to do.

To backfill those beds with higher acuity patients that are better for for them.

Financially.

Understood. Thanks, Thanks, a lot for the follow ups and I'll hop back in queue.

Thanks Jasmine.

Our next question comes from Scott Fidel with Stephens. Please proceed with your question.

Hi, Thanks, and good morning.

First question just wanted to get back to thinking about the.

The the wage pressure relative to some of the saves and maybe if you can.

Can you help us think about what the cost per visit stat, and where you reported that in the third quarter.

The 121.

How should we be thinking about that or how are you thinking about that.

As you go into <unk> and then.

Then moving into 2022 as well.

So hi, Scott. This is Dale I think specifically with respect to so the 120 number what you saw there was a settlement all in contract contract per visit number and home health right. So that's nursing non nursing everything.

So we did see that slow bright that in that slope actually.

That was about a 10% I think in your five 5% increase in the quarter. So we're seeing that starting to temper a bit.

It's obviously 23, 5% higher than a year ago, but again temporary in the quarter. So.

We're encouraged and hopeful that that continues to be somewhat stable I think again I think our greatest opportunity because we can't control what those rates are right. What we can try to control is how much we utilize and I think that's really where our focus is going to be on again through all of the levers we discussed how we lessen our dependence on contract visits.

And that's our biggest opportunity but.

Hard to predict where that's going and were seeing it like I said right now it looks like its tempered a bit but there's a there's a lot of people vying for clinicians out there.

Scott This is Josh I may go one layer a little bit deeper.

And coming out of our most recent monthly operations reviews as we were really.

Analyzing our contract labor spend in certain geographies.

Not all contract labor is created equal either I mean, these are some aggregated numbers, but I mean, when you look at it there's the traveler component of contract labor that even looks different than the more traditional component of contract labor. So you know, we're focusing on the higher cost contract labor first as.

We continue to alleviate some of that capacity.

Okay.

Got it and do you have sort of an update on where I guess the contract labor percentage is trending in October so far relative to that 4% on staff at <unk>.

Sure for nursing I think its relatively stagnant right now.

Yeah. So for nursing, Yeah, we're at 4% nursing overall for home health were six 7% of our visits are contract.

Yeah.

We don't have a strong data point, yet on that that lags a little bit, but we will have the visibility into that in the next in the next week or so.

We would expect to see a little bit of improvement based on what Josh just said is through the <unk> and so forth. There's been a lot of focus on how we how we can more optimized around the use of contract labor.

I understood and then just my follow up question would just be.

Would be interested if you can maybe just give us some insights into how you're thinking about the margin progression on the on.

The acquired business from the Brookdale HCA, obviously, that's a pretty big block of revenue and I know you mentioned that you're not assuming much contribution initially show how are those margins sort of coming online initially and then how do you see that progression.

In that book of business do you ultimately expect that to get to your corporate average and how long do you think that will take.

Yes, Scott this is Josh.

Do you expect it to get to the corporate average, but I mean these assets.

And when you look at the $430 million of revenue.

Paul at 65, or so as home health and about 45.

Is hospice and then the remaining is in the therapy.

Services area. So I would I would say you know.

They're in good markets, which as you know one of the primary drivers why we were so excited to do this transaction and I would signal and highlight the relationship that we have had and continue to strengthen and build with brookdale.

From a margin perspective, I think this one is going to take that 12 to 18 months to kind of get it there I think youre going to see progression quarter over quarter through next year.

We're finalizing some.

Some of the budget pieces to it.

<unk>.

As we go into next year and did a review of that earlier this week and really saw some nice progression and while our team is building together in the budget, but I would also tell you that as we continue to get in and dig deeper there are some really good growth upside in this asset as well so as we grow at those margins will get even.

So all in all I think you know this is a good transaction for us that's going to contribute in 2022 and be part of that bridge that Daryl described but really be a big big.

<unk> for us in 2023 and beyond.

And I would I would echo that.

Well I think I think that we see a lot of operational opportunity around that asset and then as well as the growth those those combinations are very exciting.

We're always saying tempered about is the labor environment that we're facing so while we were working all of those improvements were also dealing with some headwinds right. So all of those probably just slow it down a little bit.

Okay.

Our next question comes from Andrew Mok with UBS. Please proceed with your question.

Hi, good morning.

Covid costs that are excluded from current guidance are expected to be around $45 million. This year, and I think you've called out $25 million to $30 million of Reentering. The guide next year can you remind us what the bucket of those costs are and how much visibility you have on the COVID-19 costs that COVID-19 cost number would be entering the guide next year. Thanks.

Yeah, absolutely. So if you if you look at the Covid costs and sort of high level context, as well, we had $53 million of COVID-19 incurred costs in 2020.

That would be 45. This year is what you just said $45 million in the next year coming down to 25% to 30, if you look at the bucket, there's kind of three main.

Components to it the largest component is around labor right. It's stipends bonuses hazard pay all of those kinds of things.

And that's about 45% of the cost.

About 35% of the cost is what we're incurring in our own health expense for our employees and their dependents around COVID-19 testing and Covid diagnosis right. All the all the treatments and so it's been very expensive lift on our health expense as well that's about 35% of the cost and then the remaining of it is.

The P. P E rate and then the PPE is becoming a lesser of other of our Clos for us because we obviously.

Did a real nice job inventory you got plenty of PPE. So we have adequate supply for any uncertainties going forward. So that's that's the remainder, but thats, becoming a lesser impact as you look at going into 2022. It's it's it's we would expect the health care component to come down. Some we would expect the labor component also that come.

Down, but I'd say the heaviest components are still gonna be labor and health care, the clearly C C.

Expect improvement, we can't predict the new variant obviously, but.

But.

We are definitely looking and expecting that that improved curve and then hopefully 'twenty three we can get we know theres going be some level of permanent cost, but we expect that to be much lower than what we're forecasting for next year.

Okay. That's helpful. And then just a follow up on M&A based on everything we're hearing private market multiples and deal flow remains.

Elevated even though public market valuation of contracted meaningfully how does that widening spread and valuation influence your desire to do deals right now.

Yeah.

Yes.

That's a great question.

Yeah.

Uh huh.

What it's done is it's refocus us on.

Our hospital joint venture strategy.

That's that's an area where.

Hospitals.

Hospitals that we go to typically don't have.

Very good margins.

So there there's turnaround if you will theres a lot of revenue and a lot of volume and upside for us and what we do really well for a long time now is to turn those around.

And to be able to deliver the care more efficiently.

So so so we're focused we're focused in there.

Good.

And while we're on M&A when you look forward.

The hospice activity that you've seen from us this year.

Well, we will not be at the same level next year.

Okay.

I feel like we like we've said that but let me let me say it again.

And this year because of all of that the delay in pipeline activity for home health related to Covid.

We chose to take this opportunity to build out our hospice footprint.

And it's consistent with our with our strategy.

Strategy dating back to the late nineties.

To have hospice and home health co located in every market.

Going forward you know we took a.

We've put a big dent in that this year, so going forward I think we'll still be adding hospice, but it'll be at a much lower percentages than will be filling in markets, where we already have home health.

And we're really refocused on hospital joint ventures that is our sweet spot and always has been and even more so now that we're moving into advanced care in the home and being able to move higher acuity patients downstream.

Okay, maybe I'll add on that as evidenced by Im just doing some quick math.

Pipeline.

As of now.

More than 75% of our pipeline is hospital joint venture activity.

Got it thanks for the color.

Our next question is from Sarah James with Barclays. Please proceed with your question.

Thank you.

What <unk> tried to put together.

Around.

Sustained inflation in wages is going to be do you have an idea.

How much of the pressure that you're seeing retention bonus related signing bonus related.

Actual increases in hourly cost and then I guess, how much is just from the higher short term contract right now.

Isolate those buckets as they have different termination point.

Yeah. So.

When you look at.

The first part of the question right, which is a I'd say the most of the pressure. There is obviously on the more of the bone is retention bonus.

And sign on bonus area right. So one of the things we definitely try to follow them as best we can normalize merit increases to keep our base rates. If you will from a permanent that permanent cost increasing and compounding each year.

So I would say probably 90 over 90% of the pressure is coming more from the bonus area because I think we're keeping our our wage increases.

Pretty much in line with historical is maybe a little bit higher obviously as we mentioned there but you also have some market adjustments going on that put some pressure on it as well, but I think very heavy.

In the <unk>.

In the in the bonus area and then Josh highlighted some strategies around that rate. So we're looking at multiyear type retention arrangements that.

Provide more stickiness and helped defer some cost.

In terms of contract labor that one simply is more around you know you.

I correct labor is the quickest lever to add Quaker celebrity to take off right. So it's kind of it's kind of binary and it really is dependent upon our internal capacity and our internal staffing and so the more we can do around the recruiting and the retention.

And as Josh said, just optimizing that.

Every contract labor.

Is born equal right all of that those are the that's the quickest lever we have on anything quite honestly.

Got it.

I think Virgin.

Accounting policies for the bonuses. So some companies are expensing them right away.

And retention bonuses, the full amount and others are spreading it out.

I'm curious.

What's your accounting policy for that.

Well, we havent started those yet we're evaluating those at this point right. So I think the we haven't we haven't really gotten to that point of making that decision, but we will we will evaluate what the what the appropriate accounting for it is.

Okay. Thank you.

Our next question is from Matt Larew with William Blair. Please proceed with your question.

Hi, good morning.

We've had five consecutive months of normalized say despite.

The delta of everyone during the third quarter so.

Just a sense for how that's been able to stabilize what youre access angles senior living facilities.

Generally what the mix looks like.

Yeah, Matt This is Josh good morning.

I would say our.

Our referral mix has stayed pretty consistent over the last three quarters.

We're still you know down from our historical norms by them.

Probably 300 basis points on Smiths and Earth and the facility type hospice patients, which would further bolster that length of stay but I want to recognize our hospice growth team that our operators for really focusing a lot on.

Patients in the community that you also have a longer length of stay because we've had a lessening in the referrals coming out of hospitals, which tend to have the shorter length of stay. So when you look at kind of the referral composition I think that's helping to make that at healthy.

The consistency and the length of stay on the hospice side.

Okay and then on the.

The home health side, non Medicare growth up.

But I mentioned, 4% on rate.

Under contracts or changes to relationships.

Inclusion in limited networks.

Call out there.

Yeah, Matt if you don't mind I may.

Take that question and expand just a little bit and just talk about sort of growth in general.

Because you know the I'll get to the piece on the M&A front, because I'm excited to kind of share some of the.

Efforts were making there, but I want to maybe just give you everyone an update on how laser focused we continue to be on the traditional Medicare growth side as well.

So much so.

Not going to get into a lot of the specifics.

For obvious reasons are.

Some of the strategies and tactics, we are deploying but but I do want to maybe even mentioned from an organizational perspective. Some things. We've done that I think is going to bear a lot of fruit for the Medicare growth and the continued opportunity to take market share. Although MAA penetration continues to build there is opportunities for market share gains.

On the Medicare side, So one thing organizationally, we have done some restructuring and some rewards on the operation side I'm not even talking about on the sell side, just the second but on the operation side, Matt where.

You know what.

We've got across the board from the area regional all the way up through the organization of leadership on the operation side.

We do a great job across the board at.

<unk>.

Early managing poor ops from quality outcomes patient satisfaction. The marginalizing the business that we have but there are clearly some leaders that are I would say you know more growth minded and have proven to really do more in the area of Medicare growth. So some of our restructure is just too.

You know give those leaders are little bit more responsibility to be more successful and help you know.

Really launched that Medicare growth and a bigger sphere of influence and partner them with some of the other so that they can.

Work with them and learn from them in that way I would also highlight again on the Medicare growth side that we brought in some additional senior leaders that are really going to be helping to lead our sales efforts. So the first group of leaders and re Org I described was on the operation side.

The second group is more leaders on the sales side that are focusing on our sales strategies and our data analytics around sales and really elevating that.

And then lastly, I would say the incentives and the structure that we're going to be rolling out for next year is really going to continue to drive a lot of that behavior. So feel really good about the opportunity and emphasis that we're placing on the Medicare growth then on the non Medicare growth, Matt I would tell you you know.

Well, we're at this point now and the discussions with the larger MA providers and payers in the space.

Okay, I'm going into the future.

Okay. Thank you.

Hey, before we go to the next question is Adele Sarah if you're still on I actually think I misunderstood. Your question around the accounting for bonuses I I I read your question as how are we treating for multi year agreements, where we're evaluating multiyear agreements we're not doing those right now all of our our retention and sign on bonuses or a hutch.

100 per cent expense when paid out so I just wanted to clarify that I think I may have misunderstood your question. So.

Our next question comes from Brian Tank wallet with Jeffries. Please proceed with your question.

And good morning, Guy I guess they'll follow up to the question that match just asked so as we think about your organic growth.

And you hear in the press release or the prepared remarks, you talked about as fundamental show. That's underway. How are you thinking about sort of post COVID-19 growth outlook, our growth trajectory for the business I mean, I know, it's 5% to 7% organic for 2021, but.

Or for Q4, but how should we be thinking about Kelly once you get post.

Maybe recovery back half of next year.

Where's your mind in terms of the right growth trajectory for home health.

Yeah, Brian Good morning. This is Josh I'm glad you asked that question because.

We sit here poised in an environment, where once we get through some of the I'll call you know temporary headwinds.

And this is based on data not just you know a gut feeling that there is more volume and more growth than we've had in years past when we've been in high single digits. If you looked at what we some of the data we put out there in the prerelease year over a year, just referral growth and home health.

20 over 19 was 8% of and that was in the first year of the pandemic and then 21 over 20 is 14% up so that tells you the the growth trajectory and just the the demand for our services. So as we continue to solve the staffing in the labor situation.

I would tell you and the out years and once you get past 2022, we should definitely be in the high single digits, if not knocking on double digits inorganic growth potential because there's so much volume coming our way right now.

Got it and then Josh is talking about imperium.

Briefly there so just wondering as we see more and more interest or a demand for a physician to go into value based care <unk>.

<unk> Street to the world are getting aggressive trying to recruit clinicians and and the Agilent of the world are partnering with Doc groups.

How are you thinking about the growth opportunity or the ability to drive.

New contract or a new relationship growth an imperium.

And that's a great question Brian.

So.

Historically, our imperium kind of growth model was.

Definitely geared for the MSS P type arrangements and I would say, it's pretty blended most of it is in hospitals and.

And health systems, but there are large physician practice groups that are in acos that we manage.

We're seeing more and more kind of pop line activity in that space to your point and then we're also really driving a lot more growth an imperium on more of the PM pm basis, as well, where you've got large physician practice groups that have.

A cost.

Sure or a cost savings potential outside with a payor outside of an ACO that we're engaging with them. So we have we don't talk about a lot, but we have a separate and dedicated growth team.

And a relationship team with imperium that have their own growth goals for next year and and.

Feel really really good about the macro environment and where some of those conversations are leading to so thanks for asking that question.

Oh of course, thank yet.

Our next question is from Bill Southerland with the Benchmark Company. Please proceed with your question.

Thanks have everybody I was wondering I guess for Josh.

You have.

There is an expectation that we should have about the impact of the SCP partnerships.

Next year.

Just kind of taking.

You know have some traction by then thanks.

Yeah, I would say from the timing of the rollout.

[laughter] I would even maybe use the word is overwhelmingly positive, but we've had an overwhelmingly positive response from our JV partners and interest in the program, but I mean, even is Keith alluded to earlier each program is different and they're gonna be size different so I don't want to try them.

Some no material financial impact from that in the next year at all I think you'll see a start rolling those programs out and.

First quarter of next year, but none of what Bill described earlier for our 2022.

<unk> build and bridge and revenue build a bridge has any real material number from the advanced care at home and it. So if we do gain more momentum than that would be a little bit upside to it but I wouldn't make a whole lot of that in.

Okay and.

And then I guess on the cost side, Alright is one of the levers gonna be visits per episode are you pretty optimize their.

Yeah, no. That's a good question, but I mean, I think we're we're pretty optimize their are quite honestly were were very tight around the model of current quarter of visits per episode where 12.57.

That's a slight improvement sequentially and slight improvement year over year, but we've been pretty tight around there you may have.

To a 10th or to change here and there just depending on the mix the.

The patient acuity the patient, but we feel like we're pretty tight around that.

That's where I guess I'll get back to productivity, you always have pockets right, where some there's some opportunity for for certain locations to to tighten up around it. So there's always some opportunities, but holistically, we feel very good about where we're at with respect to be and what we don't pout is that on top of that and and the important thing is is our quality scores continue to improve right. So.

That's a very important.

Data point to go with it and then what we don't really touted we do average a little over three telehealth visit as per episode as well, which complements the in person.

Mmm.

And then the last one I know you're working down the corn team number seems like it's a little stickier than I've seen for some others are you do you have a sense of when he can get down some 1% against.

Yeah, I mean, I would hate to look into the crystal ball and try and give a date to that we are seeing it really weak over we can in some ways. We track this data daily so <unk>.

They over a day improvement.

And where I would really look at it as you know again, even this is a little bit geographic based and then the data we put out there previously and the southeastern States, where we have you know more than half of our business is located it had gotten up to 4% and that's now down to 1.7 as of two days ago.

So as as those states continue to come down that drives the overall number down but we were back.

Well under 1% back in queue to Bill. So I mean, I do expect and you know have kind of a lot of side that will get back there hopefully here in the coming weeks or next month or so Ah barring no additional kind of spikes or anything but I'm very encouraged we put some good data out there on our deck.

On the Covid cases, and all the market, we serve and they have really come down over this last month and that will be a direct contributor to bringing that number now as well.

The mandates will have to help.

Thanks Scott.

[laughter].

Our next question is from a white male with SBB Lorraine. Please proceed with your question.

Hey, Thanks, So I'll just keep it with one question for the sake of time here at just looking at 20 twenty-two I wouldn't think that we should apply normal seasonal patterns to the quarterly progression next year I mean, presumably.

Labour challenges and other headwinds are are more weighted towards the first half and some of the growth is more second half loaded you've got the payroll taxes I think that impacts you in the first quarter, but just off the top of your head is there any way to frame kind of first half versus second half I Gotta think that the first quarter next year.

I'd be down a good bit sequentially off with the fourth quarter. So I'm just trying to proactively relieve some some future heartburn or so you know any thoughts you have would be would be helpful.

Yeah, I know, what I mean, I I think you're right on right. Obviously, we're still in from a budgeting perspective, we're still in the midst of our bedroom.

<unk> processed for next year, which which is all about not just the numbers, but the timing of the numbers as you referred to so I mean, I I think our our expectations or is it just that as you've laid it out right. You expect Q wanted to be kind of our toughest year because of the toughest quarter because of coming off of the holiday hangover as we as we refer to it as well as the.

The payroll tax headwinds around unemployment tax due to being a stronger quarter.

Q3 stable in queue for good front end and then falling off on the back end because of the holidays again, so I think the seasonal seasonal perspective or history is pretty applicable is way I would say it.

Okay, I'm actually kind of sneak one more and I.

Just a quick number question the rural add on is there Ah I know, it's a small headwind next year, but just any way to quantify it and then I'll I'll hop off things.

The $3 million is kind of what we think.

Yeah, they saw on that two or three right.

Two or three two or three.

Okay. Thanks.

Thanks.

Our next question is from Justin Bowers with Deutsche Bank. Please proceed with your question.

Hello, again, just wanted to ask the labor address the labor and staffing a little differently. It just based on kind of the current clinical work force you have now and and home health and.

Hospice, what what type of growth could you accommodate.

Or or you know maybe another way with you what what what.

What sort of census levels could your current staffing load accommodate if.

We were to go back to say like 2% a staff on quarantine or 1% to 2% on quarantine for example.

Yeah, just and I don't have an exact census number to get here, we could probably come up with that and circle back I would tell you. There. There is even again through last weekend Mlr's there are opportunities for census growth in the current.

Kind of model, if you will some of those or productivity opportunities. Some of those are extender utilization opportunities because as you you know shifts certain visits over to your LPN for example that frees up some capacity to do some more emission visits so I I do think we have.

Census growth.

Potential and the current staffing we have today.

To give us confidence kind of going into the rest of this quarter to deliver what Bill said, and then continued momentum and bringing on net new hires quarter over quarter will.

Fuel that census growth in the next year.

And the only other color I would add just in is if you look back to Q3 is to Covid impact that we had right and that was about a 2400 ADC impact to us. So that's one component to look at it if we can get our get our clinicians back.

To where it was pre pre Q3 spike that's roughly 2400 ADC.

The minutes, Josh said, there's more opportunity there as we continue to work around optimizing our our resource utilization.

Thank you I appreciate the follow up.

We have reached the end of the question and answer session I would now like to turn the call back over to keep Myers for closing comments.

Okay, well, thank you everyone for our.

Are dissipating in this new format sitting here listening to it I think it was very.

Very productive and look forward to future calls and more more of the same <unk>.

Really appreciate your questions and input and it helps it helps us a lot. Thanks.

Thank you.

This concludes today's conference you may disconnect your lines at this time and we thank you for your participation.