Q4 2021 Encompass Health Corp Earnings Call
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Good morning, everyone and welcome to encompass Health's fourth quarter 2021 earnings conference call. At this time I would like to inform all participants that their lines will be in a listen only mode.
After the Speakers' remarks, there will be a question and answer period, if he would like to ask a question. During this time. Please press star one on your telephone keypad, you will be limited to one question and one follow up question. Today's conference call is being recorded if you have any objections you may disconnect. At this time I will now turn the call over to you.
Mark Miller encompass Health's, Chief Investor Relations Officer.
Thank you operator, and good morning, everyone. Thank you for joining encompass health's fourth quarter 2021 earnings call.
With me on the call today are Mark Tarr, President and Chief Executive Officer, Doug Coltharp, Chief Financial Officer, Barb, Jacobs Mayer, Chief Executive Officer home Health, and Hospice and Patrick Darby General Counsel and corporate Secretary.
Before we begin if you do not already have a copy the fourth quarter earnings release supplemental information and related form 8-K filed with the SEC are available on our website at encompass health Dot com.
On page two of the supplemental information you will find the safe Harbor statements, which are also set forth in greater detail on the last page of the earnings release during the call. We will make forward looking statements, which are subject to risks and uncertainties many of which are beyond our control.
Certain risks and uncertainties like those relating to the spinoff of our home health and hospice business and its impact on our business and stockholder value as well as the ongoing effects of the pandemic that could cause actual results to differ materially from our projections estimates and expectations.
Are discussed in the company's SEC filings, including the earnings release and related form 8-K, and Form 10-K for the year ended December 31, 2021, one filed we encourage you to read them.
You are cautioned not to place undue reliance on the estimates projections guidance and other forward looking information presented which are based on current estimates of future events and speak only as of today, we do not undertake a duty to update these forward looking statements.
Our supplemental information and discussion on this call will include certain non-GAAP financial measures for such measures reconciliation to the most directly comparable GAAP measure is available at the end of the supplemental information at the end of the earnings release and as part of the form 8-K filed yesterday.
With the SEC all of which are available on our website.
I would like to remind everyone that we will adhere to the one question and one follow up question rule to allow everyone to submit a question. If you have additional questions. Please feel free to put yourself back in the queue with that I'll turn the call over to Mark Tarr. Thank you Mark and good morning, everyone.
2021 brought both continued and new challenges to health care providers.
Our hospital and home care teams have consistently provided high quality compassionate care to patients in need of our services throughout the pandemic.
The dedication of our team members allowed us to make significant operational and strategic progress and to generate strong financial results in spite of these challenges.
We remain confident in the future prospects of each of our businesses and continue to enhance the positioning of each to capitalize on growth opportunities ahead.
Starting with the recap of our financial results on a consolidated basis for fiscal year 2021, we generated 10, 3% revenue growth and 19, 5% adjusted EBITDA growth.
Surpassing the $1 billion milestone and adjusted EBITDA for the first time in our company's history.
Both businesses contributed to the growth in adjusted EBITDA with the Earth segment, increasing 16, 3% and the home health and hospice, increasing 29, 5%.
We continue to invest in capacity expansions across our service lines.
In 2021, we opened eight de Novo <unk> and added 117 beds to existing hospitals, increasing our licensed bed count by four 4%.
We also closed on approximately $102 million of home health and hospice acquisitions and opened three de novo locations.
In 2022, we plan to open 10 de novo herbs and add more than 100 beds to existing hospitals.
We will continue to pursue home health and hospice acquisitions and currently have an active pipeline of potential deals. We will also plan to open 10 additional de novo locations.
As we recently announced we are proceeding with the spin off of our home health and hospice business as an independent publicly traded company under the new brand identity and habits home health and hospice.
Our board believes this will unlock significant value for the business and our shareholders.
We are targeting consummation of the spin off in the first half of 2022 and we have included additional detail on pages five through seven of the supplemental slides accompanying our Q4 earnings release.
This decision comes.
Comes more than a year. After we first publicly announced the decision to review strategic alternatives for our home health and hospice business.
The duration of the review reflects the careful and thorough process undertaken by our company to select an alternative that maximizes value.
From the outset of this process our board has been vigilant regarding its fiduciary duties and it remains committed to evaluating all reasonable means to achieve the objective of long term value creation.
The board has considered an array of alternative strategies and structures and dynamic market environment with the advice of our financial advisors and legal counsel.
And with input from shareholders and taking into account various factors, including execution risk tax efficiency and capital structure.
We believe the establishment of the inhabit home health and hospice as anything company will provide a number of significant benefits, including enhanced management focus separate capital structures and allocation of financial resources, better alignment of management incentives and the creation.
Of independent equity currencies there.
The announcement of the spin off and the introduction of the.
And habit brand have been received with great enthusiasm by our associates and the home health and hospice segment.
The rebranding of our home health and hospice branches two in habit will begin in April and is expected to largely be completed by the consummation of the spin off.
Now turning to Q4, our consolidated financial results for the quarter.
Our solid and were in line with the guidance we provided on October 27th.
Q4, consolidated revenues increased eight 6% and consolidated adjusted EBITDA grew five 3%.
Beginning with the <unk> segment.
We experienced record level average daily census, during the quarter of 7100 patients leading to discharge growth of nine 6% inclusive of 6% same store growth.
This increase in volume drove revenue growth of 11, 7% for Q4.
The acceleration in demand for our services in a tight market for skilled clinicians necessitated an increased utilization of sign on and shift bonuses as well as agency staffing.
Doug will provide some commentary around earth staffing cost trends in his remarks.
<unk> segment adjusted EBITDA increased eight 4% in Q4 with margin impacted by higher staffing cost.
Our home health and hospice business in Q4 continued to confront the industry wide challenges around staffing and patient flows.
Those challenges notwithstanding we made progress on key staffing initiatives and saw some green shoots related to volume growth.
For the quarter home health and hospice revenue declined one 8% and adjusted EBITDA decreased five 2%.
On the staffing front, we had another strong quarter with net new nursing hires adding 133 nursing ftes in Q4 on top of the 127, new nursing Ftes, who joined us in Q3.
These recent hires will progress through orientation and initial ramp up and serve as a source of increased productivity in the second half of 2022.
Thus far they have served primarily to backfill for quarantined employees.
We estimate a loss of at least 1700 total home health admissions in Q4 as a result, the staffing constraints.
To ensure a continued increased focus on recruiting new clinical talent and reducing turnover Barb has added a chief human resources officer, and a vice president of talent acquisition to her leadership team.
These rules did not previously exist at our home health and Hospice segment and these hires round out and solidify the senior management team for this business.
With regard to volume trends, our home health business had total admissions growth of four 7% inclusive of two 4% same store total admissions growth.
It'll starts of care, which includes admissions and re certifications increased one 7% reversing a decline of one 5% in Q3.
Growth is occurring and not episodic volume, which increased 67, 6% in Q4, while episodic admissions declined seven 2%.
Roughly half of the episodic decrease resulted from the conversion of episodic admissions to not episodic under the national contract with United Health initiated in February 2021.
We added approximately 3100, new referral sources in Q4, and a total of approximately 12200 for 2021.
These relationships will serve as a source of revenue and volume growth in 2022 and beyond.
Now I'll turn to 2022 guidance.
As we look ahead, we are confident the fundamentals of our business are intact.
We believe the pandemic has created an even stronger awareness of the high level of care, we provide in our inpatient rehabilitation hospitals and further reinforced home as a preferred care setting.
We expect stakeholders will increasingly divert admissions away from skilled nursing facilities to higher value <unk> and home health providers.
And as the population ages the demand for our high quality services will increase.
We do however expect some of the challenges we have been experiencing recently to persist through the first half of the year.
Additionally, we are benefiting from the continued suspension of the Medicare sequestration into 2022, but its planned phase out will dilute our pricing increase at a time when cost remained elevated.
The re implementation of the sequester creates an approximately $50 million headwind to consolidated adjusted EBITDA growth in 2022.
Our guidance for 2022 on a consolidated basis includes consolidated net operating revenues of $5 three 8% to $5 5 billion.
Consolidated adjusted EBITDA.
1.015 to 1.065 billion and adjusted earnings per share of $3 83.
To $4 19.
The key considerations underlying this guidance can be found on page 24 of the supplemental slides.
We anticipate providing updated guidance for each of the businesses as the separation date approaches.
With that I'll turn it over to Doug.
Thank you Mark and good morning, everyone.
I'm going to focus my remarks on two areas I'll review some of the additional detail regarding the spinoff and I'll provide some additional color on the key trends within both business segments that are informing our 2022 guidance.
As noted on page five of the supplemental slides.
Currently estimate following separation and as compared to the current segment level operating expenses inhabit we will incur approximately $26 million to $28 million in incremental annual expenses related to becoming an independent public company.
A portion of these incremental expenses related to standing up capabilities and functions required public companies such as a board of directors SEC reporting Treasury Investor Relations and tax.
The remaining expenses relate to adding capabilities that didn't have it in order to replace services that are currently provided by the encompass health corporate office, such as information technology human resources and legal services.
Some of these expenses will be incurred prior to the spinoff date in preparation for the spin off.
None of these incremental expenses are included in our 2022 guidance.
For a period of time after the spin off date certain of these expenses will be incurred under a transition services agreement with encompass health.
The estimated $26 million to $28 million does not include any cost related to rebranding as inhibit home health and hospice.
The separation of the businesses is also expected to result in an estimated annual reduction of $5 million to $10 million and the operating expenses of encompass health.
The position within this range is dependent in part on the scope and duration of the transition services agreement.
The expected cost decrease is comprised of the elimination of variable cost and functional capacity reductions relating to services currently provided by the encompass health corporate office because of home health and hospice segment.
A portion of the expected cost reductions will take the form of future cost increase avoidance is resources, formerly used to support the home health and hospice segment are redeployed to support the anticipated growth of the encompass health Earth business stemming from initiatives such as the planned opening.
Ken de Novo herbs in 2022.
In anticipation of the spin off our home health and hospice business will begin rebranding hasnt habit.
The rebranding will begin in the Dallas home office this month.
Branch locations will begin rebranding in mid April .
We expect to be largely completed with the rebranding by the date of the spin off.
We estimate the rebranding will result in one time operating expenses of $10 million to $13 million and capital expenditures of $3 million to $5 million.
None of the expenses associated with the rebranding are included in our 2022 guidance.
We currently anticipate leverage measured as outstanding debt divided by latest 12 months adjusted EBITDA.
As of the spinoff date of three to three five times at inhabit and 325 to three five times at encompass health.
The initial leverage for each of the businesses separation will in part be determined by the operating performance preceding the spin off date.
We expect both businesses will have the ability to reduce leverage as a result of future earnings growth post separation.
However, this will be influenced by capital deployment decisions at each company.
The initial leverage expectations are not necessarily indicative of post separation leverage targets for each company.
Turning now to guidance.
Our 2020 guidance for consolidated adjusted EBITDA is 1.015 to 1.065 billion.
This range incorporates uncertainty regarding the pace and trajectory of improvement in the prevailing staffing challenges, which became more pronounced in the second half of 2021.
In the RF segment staffing constraints have not limited volume growth, but have resulted in an escalation in compensation costs.
In Q3, and Q4 are Earth segment, SW B per FTE increased 8% to 9% over the prior year period, largely due to increased sign on and shift bonuses and higher utilization and cost of agency staffing.
We were able to partially offset the impact with improved productivity.
Our <unk> in Q4, 'twenty, one was $3 37 as compared to 346 in Q4, 'twenty, but there are limits to what can be done here, particularly given our focus on higher acuity patients.
Let me provide some specifics here.
In Q4, 'twenty, one we incurred $21 $3 million in sign on and shift bonuses as compared to $9 1 million in Q4, 'twenty and approximately $21 million for the full year 2019.
Further in Q4, 'twenty, one we incurred approximately $30 million in agency staffing cost as compared to approximately $75 million in Q4, 'twenty and approximately $30 million for the full year 2019.
The increase in agency staffing costs as both a volume and a rate issue.
In Q4, 'twenty, one we used 516 agency ftes as compared to 192 in Q4, 'twenty, that's an increase of approximately 169% and between these periods the cost per agency FTE rose approximately 48%.
As we have reported in each of the last few quarters, and our home health and hospice segments staffing constraints have both limited volume and increased costs.
We estimate that staffing constraints resulted in at least 4200 lost admissions in the second half of 2021.
And our cost per visit increased more than 9% in each of Q3 and Q4 'twenty one as compared to the prior year periods.
We are making progress addressing these challenges in each of our business segments through strategies, such as changes in compensation structures enhance scheduling flexibility and increased recruiting teams and resources.
We also expect these challenges to subside as Covid eventually receipts.
And now we'll open the line for questions.
As a reminder, if you would like to ask a question. Please press star and one on your Touchtone phone. Please limit yourself to one question and one follow up but you may rejoin the queue. If you have additional questions.
Take our first question today from Kevin Fischbeck with Bank of America. Your line is open.
Hey, good morning, Kevin Kevin.
Good morning.
So I guess I wanted to maybe better understand of so many moving pieces right now between sequestration coming back and that in part of the year labor costs higher than <unk>.
Improving I guess would love to hear your thoughts.
About where you think the.
The margin.
Sustainable margin is for the two businesses that you have and how far off are you today problem that you're trying to get a sense of where embedded earnings power might look.
Kevin. So this is Doug I'll take a crack at it and.
It depends on when things ultimately normalize.
Staying at the segment level for the immediate time being because it obviously, that's the way that we've been reporting I would think that once we kind of get through 2022, so that we've anniversaried the ramp up that we saw in these cost I think the supply issues on the labor side and the <unk>.
Supply demand imbalance that has been related to COVID-19 are going to improve as we get through the course of the year and then we move through the pricing variability that you have with the phasing of sequestration. So as we move out of 2022 to 2023, I think you could be in an environment, where at the segment level the Earth EBITDA.
<unk> margin is settling in in the low twenties.
And the home health and hospice would be in that mid to higher teens level.
Okay. That's that's really helpful.
And then I guess is another way of thinking about it.
On the labor cost side, you guys are guiding to.
Labor increases for the year 2022 below what you are seeing in the second half.
Of last year.
It is the way to think about it that you are kind of guidance for 2022 is more what you think normalized wage growth would be kind of the delta between what you saw in the back half of the year and what you're kind of guiding to for next for this year.
It's kind of the excess cost if we will or is there a better way to think about that.
No I think you're probably right if you're looking specifically at kind of the assumptions that we've dropped in there regarding the annual increases in the guidance for <unk> per FTE I think assuming that even as we move into 2023, we're looking at something in that 3% to 4% range is probably reasonable again right now you have.
Got a high end of 5% for home health and hospice, because there's some more normalization to occur, but I think probably 3% to 4% range for 2023 is a reasonable proxy.
Yes.
The next question comes from Brian <unk> with Jefferies. Your line is open.
Hello, Brian Good morning, Brian .
Hey, good morning, good morning, guys.
Mark I guess my first question for you. So as I think about this labor issue or the concern the labor rate I mean, you have two sides of the business.
Are the factors impacting turned over in the headwinds there are they the same or should we be thinking about how they are probably more company specific challenges and the home health business that will go away once it spun out and because when you really focus on your core business.
Or just getting through the pandemic.
Well the two segments clearly have different challenges some of them overlap but the.
The issue of labor, particularly around quarantine staff has impacted our home health.
Much more significantly than it has the hospitals.
Impacted their volume at the same time, it's impacted their cost or the ability to go out and treat the volume that.
We know the demand is there for both segments has been much more difficult to treat that.
Demand on the home health and it has been the hospitals hospitals have a much easier time covering for quarantine staff there is much greater.
Means of flexibility for covering so it doesn't impact volume near as much.
I think that both segments have done a lot with regards to supporting the recruitment and retention focus.
Turnover has been pretty consistent in the hospital segment from one year to the next Barb is getting our arms around the turnover factors.
Home Health segment that you heard me mentioned that she has brought on a new chief Human resource officer as well as talent acquisition staff. We've done the same with talent acquisition resources for the hospitals here in Birmingham, So Brian I think we're in a much better position going into 2022 to face the challenges there.
There's been a huge imbalance in the marketplace relative to just nursing staffing with acute care hospitals as well as post acute services all chasing the same a limited number of resources out there and we do think that that should be.
Began to normalize, particularly in the second half of next year, as we see less and less impact.
Impacts.
From Covid.
Yeah that makes sense.
My second question is just as we think about home health I saw in your slide deck.
Yeah, I still think longer term, it's a 10% plus grower.
Admission side. So how are you thinking about this.
Where do we get there how do we get there is it just a matter of.
Getting all of the turn it over and recruitment issues are fixed or just any thoughts on the comfort or confidence that 10% plus number.
Yes, Brian I'll, let Bob answer that obviously, she's been living and breathing. This every day since she's taken on her new role right. So I think you hit on it the biggest thing for US is the volumes are there staffing has been the challenge. So as we do not only successful in recruitment, but the retention piece you know then.
We can get fully staffed so that we can be accepting all of these referrals and then continuing to increase the number of referral sources. The team as to the sales team has been really excited about being able to go out and offer to be able to take more patients than your episodic because we're finding that referral sources need to have a provider that can take them.
You already have their patients. So we've seen a nice increase in the episodic come from those same referral sources that are sending us the non episodic. So it's really going out there and reopening those doors for the sales team once we have the staff in place.
And once again, if you would like to ask a question. Please press star and one on your Touchtone phone, we do ask that you limit yourself to one question and one follow up and then rejoin the queue for your additional questions well take our next question from Matt <unk> with William Blair. Your line is open Hello, Matt.
Hey, good morning, Mark I wanted to ask about maybe how contract labor has trended here.
Crown.
Has started to death.
First few weeks of 2022.
The new <unk> guidance.
Has that had any impact on our labor availability and curious your line is that how youre vaccination rates have trended.
So I'm going to let Doug go into the contract labor cost.
On the vaccine I can tell you that both segments right now.
Relative to vaccine the compliance with the CMS guidelines were both in the mid Ninety's in each segment. So we've made significant progress there and make significant progress every week with getting our staff.
Fully in compliance with the CMS guidelines.
So the staffing constraints that we've experienced are.
Are directly related to the presence of Covid.
And the staffing constraints that would give rise to the use of the agency staffing and obviously.
All micron remains very present during January so we really did not see much different in the month of January but we remain optimistic that things will improve as COVID-19 begins to recede, which the CDC has indicated appears to be happening over the balance of the quarter.
Yeah.
Okay.
And then obviously you had strong hiring quarter in Q3 and Q4.
Yes.
Just thinking about to be more proactive about labor moving forward you know we've seen some companies acquiring staffing agencies investing in or acquiring nursing schools.
I assume this is sort of becoming a strategic more of a strategic priority I'm curious what are the things you can do to.
Sort of avoid those contract labor spikes in the future.
Yeah, Matt we are we're throwing everything we can come up with that.
At this time, we we do have particularly on the hospital side affiliation with Chamberlain University for Rins and supplementing that.
Tuition costs.
Have initiated a branding campaign.
Here recently.
Through <unk>.
TV ads and online media that better shows what it's like to be a nurse an encompass health rehabilitation hospital.
There's just a significant lack of awareness about what it's like to be a rehab nurse.
So we have.
Really pivoted a lot of resources to in different directions, all with the strategic focus of both recruitment of new nurses into our system as well as retaining the nurses that we have.
It's clear that there is an industry wide challenge regarding the availability of nurses that was that was there before COVID-19 came in and its been exacerbated by COVID-19 , but the trends that we saw on the back of the year, we're almost exclusively related to COVID-19 and it's across the health care system as I know from.
Your universe of coverage, but it really starts.
You've got a demand supply imbalance that is specifically related to the presence of COVID-19 . It starts with the acute care hospitals, where the demand has increased due to COVID-19 patients requiring hospitalization at the same time and increased number of nurses have been sidelined for reasons that have ranged from <unk>.
Contracted COVID-19 to needing to quarantine due to exposure to potentially having elder childcare issues due to facility closures and the fatigue and burn out that they've experienced related to living with this for almost two years now.
As Covid receipts, which should eventually we will do the demand will decrease in the supply will increase and when that happens our use of agency staffing and the cost of it are going to decrease as will the frequency and the level of sign on and the shift bonuses that we used in the second half of the year.
The next question comes from a J Rice with credit Suisse. Your line is open.
Hello, Ajay Hi.
Hi, everybody.
First just wanted to ask a two aspects of the home health and hospice business.
You've got this dynamic of your shifting from episodic episodic to non episodic mainly driven by the big contract. You've signed are you at a normalized run rate there and you're talking about the decrease in EBITDA being all staffing and that's certainly what we've talked about but does that dynamic of the switch.
Any impact on the on the margin and then.
On the hospice side your same store admissions I think are down 14% I know that isn't a huge part of the overall pie, but I'm. Just curious is that the same type of staffing issues or there's something different about hospice.
Because youre attributing that to staffing constraints I just wondered if theres. Some other aspect of what's going on with hospice because I know the mix of people that you have working there are a little different than a traditional hotel.
Sure. So let me start with the first question, Yes, we are seeing the increase in the non episodic, but we're also seeing that Medicare volumes are lower across health care, both in acute care and in our public peer information.
As I mentioned earlier, you know one of the things that we've done is really gone back out and open doors of referral sources that historically have said you know I can't use you. If you can only take one type of patient and now with both local regional and national contracts, we're able to go back out and knock on those doors of referral sources. The good news that we saw was that.
The non episodic growth that we saw in 2021 those referral sources that sent the majority of the non episodic business also sent US an additional 4500 Medicare admissions.
Per the prior year. So we feel that really that does align with what the sales team is telling us and that is that as we grow the non episodic we're gonna be able to continue to go after the episodic. It does have some pressure on the margin and I would say right now the most difficult part would be as we're growing both episodic and non episodic.
Because for US is on productivity and optimization to try to mitigate that margin compression, but that's been really difficult to do in this current environment with all the quarantine right now it's about getting the staff out to see the patients provide the high quality of care, even if that means driving further even if that means not optimizing an RN with in Atlanta, and so it's been a.
Little bit different different environment to try to manage the costs to mitigate some of that margin pressure from the non episodic growing.
On the hospice side I will say that yes staffing constraints has been the majority of the issue. There. We've had 18 branches in three key states that have accounted for about 73% of that same store decrease.
It is a little different because the staff on the hospice side had a caseload of patients and we're on home health you can maybe cover a visit here there when you have a staffing impacted at a hospice agency it impacts your ability to take those additional admissions because there's only so much ADC you can be covering.
With your staff if someone's out so you do feel that one person being out much more acutely at a hospice branch then you do a home health branch and then a J maybe just a further follow up when you think about the the growth between episodic and non episodic as we move into 2022, we're going to anniversary the initial.
The Asian of that United contract in February and so since that has driven so much of the growth in the episodic we expect incremental growth out of that but those growth rates on a relative basis are going to come down.
We would expect to see further growth under that contract we would expect to see additional non episodic growth out of the other contracts with managed care providers and Medicare advantage. There is an issue there as Bob mentioned with regard to pricing and its impact on volume.
We've quoted many times over the years and it's really been over about a decade, we have made substantial progress.
Underscoring our value proposition with those those payers on the <unk> side and as a result, as we sit here today more than 80% of our Medicare advantage volume on the <unk> side is on our CMG basis versus a per game basis and the discount between fee for service and Medicare advantage is only 7%.
For us it's about 25% on non Medicare advantage managed care, Conversely, within that episodic volume or non episodic.
Volume book of business in our home health right now the discounts about 44%.
That's an industry wide problem and if you think about the impact that the labor issues and in all of the other issues that have existed within the home health over the last couple of years have had on a fragmented industry, it's going to be taking capacity out and at least for a period of time the supply of available clinicians to conduct visits.
It's in the home is going to be somewhat limited and those are going to get allocated to higher paying sources and so the the managed care companies and Medicare advantage are going to have to wake up to the fact that they can't continue to pay these kinds of rates and expect to get quality care delivered in the home.
Our next question comes from Andrew Mok with UBS. Your line is open.
Hi, good morning.
If you look at the earnings seasonality prior to Covid, it's pretty evenly split between the first half and second half given the phase out of sequestration in the assumptions for improvement in labor in the back half of the year, how should we be thinking about the progression of earnings seasonality embedded into 2022 guide. Thanks.
It's going to be backend weighted.
You hit on the two keys Unfortunately more of the EBITDA headwind related to the phasing of sequestration comes in the second half, but in terms of just our expectations regarding the normalization in the staffing, which is which has been a very significant issue as you saw on some of the numbers that are related and we really.
We expect to get most of that benefit the second half of the year.
Right and then just any help on order of magnitude here or is that like a 100 to 200 basis points.
Delta or something more significant on the back end weighted.
Yeah, Andrew I think you've got the pieces.
Okay, Alright, that's helpful and just a follow up on the labor dynamic.
During the Omicron Spike you talked about the contract agency usage, but curious how staff quarantine rates have trended in January and how that compares to the delta Spike in Q3.
No I think that if we look back.
The home Health segment had as many as 1300 staff members out one week in quarantine.
January which surpassed our previous year high under Delta. So I think that reflects the ease of transmission of the virus under Omar problem versus Delta.
So it was more significantly pronounced certainly on the home health and hospice segment during omicron than it was prior year Delta, but certainly the reduction in the quarantine period has helped there and we do feel like we're past the peak with regard to quarantined employees.
A question that came up earlier that occurs to me, we did not address and that was with regard to the vaccination rates in both of the two businesses.
Well as I mentioned earlier, both of our segments are.
Or at a mid 90 plus percent compliance with CMS guidelines for vaccination of our exemption. So we made significant progress and that number gets higher ever week as compliance rates go up but we're in good shape with regard to that and of course, you know what you're seeing across the country has a lot of I don't know if we're still rich.
Turning to them is as breakthrough cases of COVID-19 , but as with kind of the general population. What we do see is when we see vaccinated folks contract Covid.
They tend to be either asymptomatic or mildly symptomatic and so we're really getting them back within that five day period and that has helped.
Great. Thanks for all the color.
The next question comes from Peter Chickering with Deutsche Bank. Your line is open good morning.
Hey, good morning, Thanks for taking my questions a couple of numbers questions here looking at the fourth quarter EBITDA results versus our guidance from October can you walk through the moving parts like the provider tax additional revenue reserves.
Labor and medical benefit I, just want to understand where fourth quarter would have been without those use those as a launch pad for 2022.
Yeah. So.
Generally speaking remember we issued that guidance at the end of Q3, and nobody had ever heard of omicron.
At that point in time.
We certainly weren't anticipating the pickup that we got and provider taxes. So that that was a benefit but nor are we expecting the acceleration in those labor cost trends that I referenced earlier. If you just do a comparison to Q3 and I'm focused on the Europe side in Q3.
We thought was a pretty elevated level our contract labor expense was $18 $3 million in the sign on and shift bonuses were $15 million. So that was a total of call it $33 million.
In Q4 as I just cited the contract labor went to $30 million and the bonuses went to 21 three so that's 51.3 or an increase of $18 million I can tell you is we have prepared our our guidance at the end of Q3, we were not expecting an $18 million increase those two buckets.
Yes.
The other item that we hadn't necessarily anticipated was the pick up that we got in group medical at home health and hospice.
I want to be careful to note that even though that was a $6 million benefit on a year over year basis. It was only $2 million benefit for the full year because a lot of that reversal in Q4 was because we we true up the the overall reserve for the year based on the.
We were seeing.
Lower number of claims and less severe claims, but again that was largely offset by the fact that we had anticipated based on it.
Mitigation of some of the staffing constraints that we would see both a higher growth in volume and a lower cost per visit.
I think those were the puts and takes because at that address your question. Yeah. That's perfect and then a numbers question for Barb I know that Youre, giving segment level detail yet on 2020 guidance, but obviously I tell people, we're trying to value.
You know spin assets. So is there anything structurally wrong with taking the fourth quarter EBITDA was 52.6 million Joshua medical insurance costs and because the fourth quarter. It really has a lot of pressure from staffing and grow that at a normalized high single digit EBITDA growth, putting in some additional cost pressures and sequestration and getting into.
Around $200 million of EBITDA for 2022 before this one G&A rebranding is there anything structurally wrong with those assumptions.
The answer is theres nothing structurally wrong with your assumptions.
Yes.
Okay.
Perfect and then.
So a squeeze in.
It's a tricky quickie in this one Doug.
They can talk about the managed care contracts, which are lower rate and fee for service.
He knew he was a lack of staffing pressure now.
We're not take those patients are forced managed care into higher cost settings like Smith and is there any indication that maybe.
Those rates can get reset in 2023 are you having any conversations yet thanks so much.
So the answer to the second one is absolutely yes again. This this imbalance between the increased cost at home health providers are experiencing and not seeing that kind of price pass through to the to the Medicare.
Medicare advantage and managed care companies cannot exist cannot persist throughout the industry in terms of right now.
If we are given a choice between a Medicare fee for service and a managed care patient and we have limited clinical resources. Then we would attempt to apply that clinical resource first to the higher paying fee for service, but there are many other considerations that go into that and we're playing for.
For the long term here. So we're certainly not prioritizing the non episodic over the episodic, but nor are we completely kind of shunting or turning away patients on the episodic basis as is evidenced in those growth figures.
We'll take our next question from Matt Borsch with BMO capital markets. Your line is open.
Good morning.
Hi, Thanks for squeezing me in here.
I'm just going to ask you on an inflation, obviously, we're talking a lot about the.
The temporary labor constraints and the costs around that but what about other areas of inflation.
In your in your cost base or anything else I'm curious, what you might be seeing.
You know, we've really done a pretty good job controlling that and I think you can see that by looking at the other categories of expenses.
In both of the businesses, where we've gotten some good good leverage on a year over year basis.
We after seeing a lot of improvement with regard to use.
Both the availability of supply and the cost of PPE, we've seen a little bit of a tick up there, but nothing that appears to be overly problematic on the <unk> side getting the.
Getting the testing equipment and supplies in house has been a real productivity saver as well as a cost saver and as we get revenue growth, we're getting leverage across the occupancy expense. So at this point in time, we're really not seeing much in the way of outsized inflation in any other expense categories.
Thank you that's really helpful and if I could on a different topic going back to the.
All right the issue of the Medicare versus Medicare advantage reimbursement what can.
Can you just.
Give us your thought on maybe why you think this gap has persisted for as long as it has because clearly home healthy as you know.
Far more cost efficient alternative at least to the extent. It is an alternative you've kept the facility based care you think it's just one of those things, where it's very hard to break the status quo.
No I don't think theres been an impetus to do it before so you know pre Covid. What you had was a highly fragmented industry with just a few large players you had a rapidly growing demand there was not a supply constraint with regard to clinicians and so it was a land grab.
<unk>, where the payers did not differentiate based on the quality of the outcome.
And many of the providers, we're willing to accept lower margin or even negative margin patients in some instance in order to build market share.
And I think those dynamics have changed very significantly over the course of the last two years and particularly within the last six months.
Fragmented or not I mean, the economics of what's playing out right now with the labor cost.
Affect everyone in those.
<unk> that continue to take the LOE.
Payment rate.
Gonna be negatively impacted and it's certainly not a long term strategy, that's a that's going to be.
Beneficial for them.
Yeah.
Our next question comes from Scott Fidel with Stephens. Your line is open.
Morning, Scott.
Hi, Good morning. Thanks, I just had one question and just interested if you could give us a little more details on the home health and hospice deal pipeline I think in the prepared remarks, you talked about having an active pipeline and then just also interested in what youre seeing interest around valuation expectations around the deal environment obviously.
Public comparable valuations have come down quite considerably.
Over the past year or so just interested if that's starting to manifest itself on the private side as well when you look at opportunities across the pipeline. Thanks.
Well I'll touch on the development on the pipeline certainly we have seen an increase of inbound calls some of that you know just coming off a fourth quarter, which tends to be acquire quarter, but also our development team feels that the announcement of what our future looks like has helped because with that being a little bit confusing that's made it difficult for some of the.
Past inbound calls so we have seen an uptick in those over the past few weeks, which has been good to see them and so yeah.
Yeah again, we tend to we are for the most part still focused on kind of those regional bolt on acquisitions that complement our existing footprint.
Seeing opportunities in both home health and hospice and valuations have absolutely come in from the peak.
Okay. Thank you.
We'll go now to Sarah James with Barclays. Your line is open.
Sara Sara Hi, good morning, Thanks for squeezing me in.
So you talked a couple of times about migration of nurses.
Sure because of the PE differential and I'm wondering if you can give us some context around where you see the hourly wage differential for each of your segments.
Cute.
And then how do you think about the possibility of closing that gap with al.
So shift in payments and is.
Is there any discussions with CMS at this point.
Around.
In recognition of the current environment and how that may manifest in the next rate update.
So let me take your first and your first part of your question around acute versus non cute.
Pursing.
Great.
In our hospitals, we are our nurses are very similar in terms of compensation and skill set with what you'd see on the medicine for an acute care hospital.
So that's very comparable there it's going to be less than what you would find in a.
Surgical or specialty for an acute care hospital.
<unk> and <unk>.
But for the lion's share of the nurses that they would have working with many of the what would typically be on the medicine for chronic care type of floor. We're very comparable so that would be part of the competition that we would see in terms of available resources in any given marketplace.
Although we have seen some inflation because of the supply issues in the competition issues in our internal SW be per FTE, the real issue and the reason that I highlighted in my comments, it's been around the staffing agencies and then the need to use sign on and shift bonuses.
And again that feels that feels to be transitory and specifically tied to COVID-19 again. It started with the increased pressure on hospitals because of this influx of COVID-19 patients at the same time that they were experiencing outages related to COVID-19 exposures and the things that I ran two previously.
And so they had to meet that demand with agency staffing they were willing to pay up it creates a shortage of even agency staffing available and the price just escalate today, it's a textbook inflationary style spiral caused by a supply demand imbalance that is going to resolve itself largely.
As Covid recedes.
And the same issues led to the increased use of sign on and shift bonuses and those things will back off as well and that's why we have some degree of confidence around the fact that the SW be per FTE growth on a year over year basis, its going to moderate significantly beginning in the second half and that's why we were.
Able to point to those assumptions with regard to future period inflation in that category for 2023 and in Poland and for home health and hospice I mean, we've been really pleased with the progress we made in quarter, three and quarter four with our hiring and.
That's net new hires so that's taken it turns out we made some nice progress on our net full time nursing hires and a lot of that has been around the focus of our talent acquisition team not so much focused on that rate of pay but the flexibility that home health and hospice allows for that clinician and their daily schedules and focusing on those other burner.
Fifth are being employed in home health and hospice.
Great and then just on the rate front.
You know in your discussions with CMS is there.
Any talk or any indications that.
They could start baking in the current wage environment until the next rate cycle.
Well there.
That's already built into the rules.
And so it's just a matter of.
What magnitude we see.
But yeah that is already part of the annual price adjustment.
It's ultimately catch so theres, a lag with the wage index, but ultimately that that will catch up.
Within the rules that CMS has already laid out.
Yeah.
And we'll take a follow up question from Andrew Mok with UBS. Your line is open.
Hi, Thanks for letting me back in the queue. Just a couple of follow up questions here on the 2022 guidance. It looks like adjusted EPS is down 5% at the midpoint compared to adjusted EBITDA, which is up 1% can you help us bridge the delta between those two numbers in the guidance.
So I can and I'm, just trying to remember where it is.
[noise] not too many places it can be.
Andrew we will get back to you on that one.
Sure. Okay, and then maybe just another follow up visits per episode, it's ticked down to about 15 in the second half of 2021, I think you've rolled out metal objects in the back half of 2020 can you give us an update on the progress there and the level of BPA. You think you can achieve in 2022.
So we've continued to make progress on a quarter over quarter on the V. P. E. Some of that will depend upon the acuity the recommendations that come out of metal objects.
<unk> been making that care plan, but it does.
And upon the acuity of the patient so we feel like right now around that 15 V. P is that it's probably a good place to be considering to maintain the acuity of the patients we have as well as the quality outcomes.
Great for 15 is essentially what you have embedded in the guide for 2022.
Yeah.
Great. Thanks for the follow up.
We have no further questions at this time I would like to turn the call back to Mark Miller for any additional or closing remarks.
Thank you for joining us today, if you if anyone has any additional questions. Please call me at 205970.
5860, Thank you again for joining today's call.
This does conclude today's program. Thank you for your participation you may disconnect at any time.
Okay.
Okay.
Sure.
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