Q2 2022 Select Medical Holdings Corp Earnings Call
Yeah.
Good morning, and thank you for joining us today for select Medical Holdings Corporation's earnings conference call to discuss the second quarter 2022 results and the company's business outlook.
With me today are the company's executive Chairman and co founder Robert Ortenzio, and the company's executive Vice President and Chief Financial Officer Martin Jackson.
Management will give you an overview of the quarter and then open the call for questions.
Before we get started we would like to remind you that this conference call may contain forward looking statements regarding future events or the future financial performance of the company, including without limitation statements regarding operating results growth opportunities and other statements that refer to select medical's plans expectations strategies intentions.
<unk> and beliefs.
Good looking statements are based on the information available to management of select medical today and the company assumes no obligation to update these statements as circumstances change.
At this time I will turn the conference over to Mr. Robert Ortenzio.
Thank you operator, and good morning, everyone. Thanks for joining us for select Medical's earnings call for the second quarter of 2022.
The past two and a half years have presented numerous challenges for our company and our colleagues.
Hopefully in the back.
Back in at the more extreme impacts of the pandemic our focus has been on recruiting.
Retention and value and the accomplishments of our employees.
This quarter, we have started to experience progress as a result of our efforts, which has led to an upturn.
And hiring key clinical positions, namely our ends.
The investment in full time staff has resulted in an increase in orientation and education costs for our new hires.
We anticipate these costs will return to approximate historical trend once our utilization of agency reaches a normalized level.
We have gained traction I've seen it decline as the second quarter progressed, both in reduced agency rate and utilization.
For the past nine months labor cost, particularly in our critical illness recovery Hospital Division have created many headwinds, but we are cautiously optimistic we will continue to see improvements, which will result in stability and predictability of our clinical labor by the end of the year.
Marty Jackson will provide some more granular data supporting our optimism on the direction of our clinical labor expenses in his comments.
In other news I am pleased to share with you that U S News and World Report has released its annual best hospitals list.
One of our wholly owned and three of our partnered inpatient rehabilitation hospitals are ranked among the nation's best for 2022 2023.
At number four Kessler Institute for rehabilitation.
14, Baylor, Scott and White Institute for rehabilitation in Dallas.
Number 26, Emory rehabilitation, and Atlanta, and number 31, Ohio Health Rehabilitation Hospital in Columbus, Ohio.
This marks the 13th consecutive year that the Kessler Institute has been named among the nation's best hospitals for rehabilitation and the second year in a row for Baylor, Scott and White, Dallas, Emory and Ohio Health.
For my comments today I am continuing with the format that was introduced in the first quarter, which provide more commentary on each of our four business segments. The financial details. We normally provide on this call are available in our earnings release and Form 10-Q that was provided last night at <unk>.
We will only provide the highlights in my remarks.
Overall, we experienced revenue growth in the quarter with an increase of one 3% over prior year, while continuing to navigate through labor challenges.
For the quarter total company adjusted EBITDA was $181 million compared to $342 million in the prior year.
Our consolidated adjusted EBITDA margin was 11, 4% for Q2 compared to 21, 9% in the prior year.
Cares Act Grant income was recognized in Q2 of this year as well as Q2 of prior year.
This quarter, we recognized $15 $1 million of grant income versus $98 million in prior year Q2.
Excluding grant income adjusted EBITDA for the for this quarter would have been $165 $9 million compared with a 10, 5% margin compared with $244 million with a 15, 6% margin last year.
Excluding the decrease in <unk> income the most significant contributor to the decrease in Q2 adjusted EBITDA of a prior year was the salary wage and benefit increase in our critical illness Division.
While Q2 was the first quarter to show agency reduction in agency expense as I previously mentioned retention efforts and new hires in the or and in CNA positions contributed to an increase in cost.
Salary increases orientation education, and incentive bonuses are necessary steps in the efforts to replace the higher agency cost nurses with employed staff.
We are starting to see positive results in hiring full time nurses and expect this trend to continue into Q4 this year.
Now ill provide some data points as commentary on each of our operating divisions.
Our critical illness recovery hospital division's revenue patient days.
And net revenue per patient day, slightly increased compared to Q2 of prior year.
Occupancy decreased to 67% from 69% compared to the same quarter prior year.
Many of our referring short term acute care hospitals still experienced lower volumes within their ICU as compared to prior year, specifically vent patients, which contributed to our decrease in occupancy we.
We expect that when ICU volumes and are referring hospitals increase we will continue to see these patients within our hospitals.
Adjusted EBITDA margin for the critical illness.
It was 4% for the quarter compared to 13% in the prior year as our salary wage and benefit to revenue ratio increased by 14%.
DSW B to revenue ratio improved slightly from Q1, and we have seen improvement every month within the second quarter.
Salary increases are an orientation education, along with incentive and sign on bonuses were the main drivers for the increase in labor.
Education and orientation hours for <unk> increased by 67% over prior year, while overall bonus expense increased 51% in Q.
51% in Q2, we saw a substantial drop in nursing agency rates from Q1, but remains slightly higher than prior year Q2.
In Q2, we expanded our footprint in the Youngstown, Ohio market with a two hospital acquisition.
One existing hospital was closed and consolidated with one of the acquired locations. We've also signed agreements with joint venture partners to open four hospitals located in Jackson, Tennessee Tucson, Arizona.
Alexander Your Virginia, and Venice, Florida, all expected to open in 2023.
On the regulatory front. This week CMS issued final L Tech roles for fiscal 2023 effective October one of this year the final rule.
Includes a three 8% increase in the federal base rate, which is higher than the two 8% increase outlined in the proposed rule.
The high cost outlier threshold increased by 16, 7%, which was lower than the proposed rule. The MSL type DRG relative weights and expected length of stays are also updated in the final rule.
Turning to inpatient rehab.
Our inpatient rehabilitation Hospital division experienced a seven 6% an increase of seven 6% in net revenues with patient volumes increasing by 4%.
Occupancy increased to 86% compared to prior year, which was 85% revenue per patient day increased to $79 from $1849 to 1928, the adjusted EBITDA margin for the inpatient rehab was 21, 8% for Q2 compared to <unk> 23.
Nine in the prior year the decline in inpatient rehab adjusted EBITDA margin was attributed to elevated agency costs, along with an increase in nursing incentive bonuses for employees staff.
The overall salary wage and benefit to revenue ratio for inpatient rehab hospitals increased by 4%.
From prior year Q2, but improved by 3% from Q1 2022.
Nursing agency usage levels increase from prior year, but we have seen improvement compared to the first quarter of this year along with improvement each month throughout the second quarter the.
The agency rates for Rins for the rehab division decreased by 4% from prior year and 21% from Q1.
The increase in agency compared to prior year was predominantly in our California, and North Jersey markets.
In regards to development, we have signed a joint venture we have signed an agreement with the joint venture partner to open a rehabilitation distinct part unit and our Venice, Florida critical illness recovery Hospital, which is expected to open in 2023, there are numerous opportunities in the pipeline currently being evaluated.
Last week CMS also issued the final inpatient rehab rules for the fiscal 2023 effective October one.
The final rule includes a three 7% increase in the standard payment amount, which is higher than the two 7% included in the proposed rule. In addition, the high cost outlier threshold increased by 32%, which is lower than the proposed rule the CMG relative weights and average length of stay values were also updated.
With the final rule.
Turning to <unk> centrum.
And central continues to outperform and exceed plan, although when comparing this quarter to prior year's revenue declined by $15 million as a result.
As a result of the significant demand for Covid related testing and evaluations in the second quarter of 2021.
Last year these services generated $55 million in revenue and $22 million and adjusted EBITDA compared to $8 million in revenue and $3 million and adjusted EBITDA in Q2 of this year the.
The revenue decline was less than expected as the exceptional performance in the centers mitigated the COVID-19 testing revenue reduction.
Patient volume increased by 6% and consensus overall net revenue per visit increased by 2% to $127. Our adjusted EBITDA margin for Concentrix was 21% for Q2 compared to 30% in the prior year.
The results in Q2 of prior year included $32 $3 million of cares Grant income excluding the grant income the adjusted EBITDA margin would've been 23% in Q2 2021 versus 21% this quarter.
<unk> experienced a 1% improvement in salary wage and benefit to revenue ratio from prior year Q2 and remained consistent with Q1.
The reduction in adjusted EBITDA margin from prior year was primarily a result of increased lab and medical supply cost. In addition to travel expense returning to normal.
In Q2 concentric acquired two centers located in Chesapeake in Newport News, Virginia, which is an attractive new market for the company.
They have also signed four leases for de Novo clinics that are expected to open by year end. There continues to be a healthy pipeline of potential acquisition de novo opportunities that are under consideration.
Turning to outpatient or outpatient rehabilitation division experienced a 2% increase in net revenues with patient volumes also increased 2% compared to same quarter. Prior year net revenue per visit increased to $103 from 100 to prior year in spite of a 3% decline in Medicare.
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Adjusted EBITDA decreased compared to prior year with the decrease in margin to 11, 7% from $16 three the decline in adjusted EBITDA margin is primarily due to an increase in salary wage and benefit to revenue ratio compared to same quarter. Prior year in the second quarter outpatient division experienced a 5% increase.
In salary wage and benefit to revenue ratio compared to prior year, but improved by one 5% from Q1 2022, which represents an improvement for the last two quarters.
Other operating expense to revenue ratio increased by 9% over prior cute prior year Q2, mainly due to marketing and travel costs returning to pre pandemic levels.
In Q2, we expanded our clinic count by 19 centers via acquisition and de Novo growth.
Looking forward to the remainder of the year, we have leases executed for 'twenty six de novo clinics.
Finally earnings per fully diluted share were <unk> 43 for the second quarter compared to $1 22 per share in the same quarter. Prior year. Our earnings were positively affected by cares grant income recognized in the second quarter of both this year and lack in regards to our allocation and deployment of capital.
Our board of directors declared a cash dividend of $12.05 payable on September 2nd 2022 to shareholders of record at the close of business on August 16 2022.
This quarter, we bought back $5 million 438939 shares of stock at an average price of $23 16.
We will continue to be opportunistic and evaluate stock repurchases reduction of debt and development opportunities.
This concludes my remarks, I will turn it over to Marty Jackson for some additional financial details before we open the call up for questions.
Thanks, Bob Good morning, everyone.
I would like to follow up on several Bob's opening comments regarding our clinical labor labor costs.
As he mentioned.
We've seen a significant sequential reduction in Q1 'twenty to Q2 of 2200 agency rates utilization total agency expenses.
The reductions we realized during this period were 22%.
For rates with the average rate for Q1 of $143 an hour dropping to $111. After Q2.
13% reduction in utilization moving from 37, 5% in Q1 to 32, 5% in Q2.
37% reduction in agency expense from $89 4 million in Q1 to $56 $4 million in Q2.
Even more encouraging are the reductions of these categories within the second quarter.
We saw a reduction from April to June of 23% on rates from an average rate of $100.
$123 depot to $95 in June .
Dropped 29% and utilization.
From 38, 2% in April to 26, 9% June .
And a drop of 48% for overall agency expense from $24 4 million in April to $12 $8 million in June .
We have seen this trend continue for the month of July with a 5% reduction in rate to $90 an hour.
10% utilization reduction to 24, 1% and a 13% reduction in total agency expands to $11 $1 million.
I'll also mentioned our efforts.
On the hiring full time nurses, we've seen a very nice increase in the number of full time nurses higher this past quarter growing by more than 54% sequentially from quarter one to quarter two.
These new hires typically participate.
70 weeks of orientation and training prior to treating patients.
During this time, we will continue to utilize agency, but we see a pathway to continue.
Through the continued reduction of agencies throughout the balance of the year with these newly hired Rins.
And other key performance indicators, we focus on salaries wages and benefits as a percentage of revenue.
Our historical trend prior to the pandemic ran at a rate of 51%, 52%. During the pandemic. There was a significant increase in demand from health systems for nurses, regardless of the cost.
We saw agency rates increase from historical rates of 72 to $78 an hour up to in some cases $220 an hour in certain geographical locations.
Given this new macro economic environment, we saw through the first three quarters of 2021 <unk> increased to 56%.
This rate increase dramatically Q4 of 21 in the first two quarters of this year ranging from 64% to 66%.
We believe given our discussion above this rate will come down nicely over the next two quarters as new hires replace agency nurses and the agency rates continue their downward trend our target for the end of the year.
Just to be in the range of 55% to 57% with a clear path to returning to a more normalized range closer to our historical rate throughout 2023.
Moving over to our financials in Q2 equity and earnings of unconsolidated subsidiaries.
Were $6 2 million as compared to 11 $8 million.
<unk> prior year.
The decrease as a result lower earnings in our minority owned inpatient rehab hospitals and outpatient clinics.
The New banner East Hospital opened in April and incurred losses within the quarter related to startup costs.
A few other joint ventures experienced lower earnings caused by unfavorable shifts in payer mix, which resulted in reductions to our net revenue rate.
Net income attributable to Noncontrolling interest was $11 $1 million.
<unk> to $31 $3 million in the same quarter. Prior year. The decrease is primarily due to the repurchase of membership interest and consider entering Q4.
2021.
Which we now own 100% of devoting interest. In addition, we experienced lower earnings in a few of our March joint venture hospitals, primarily as a result of the elevated agency cost compared to quarter two of 2021.
Interest expense was $41 1 million in the second quarter. This compares to $33 9 million in the same quarter. Prior year. The increase in interest expense was primarily attributable to an increase in one month LIBOR rates compared to Q2 of 2021 as well as borrowings made under our revolver.
And credit facility.
At the end of the quarter, we had $3 8 billion.
Landing and $94 $7 million of cash on the balance sheet our.
Our debt balance at the end of the quarter included $2 1 billion in term loans $350 million revolving.
Our revolving loans $1 2 billion.
Six in the quarter senior notes.
$8 4 million.
Miscellaneous debt, we ended the quarter with net leverage for our senior secured credit agreement.
<unk> four four times as of June 30, we had $243 million remaining availability on our revolving loans.
In the second quarter operating activities provided one.
$186 $1 million in cash flow of which $14 4 million.
Was recouped in the quarter related to the repayment Medicare advances at the end of June there is $6 $5 million remaining on the Medicare advances to be repaid.
Our days sales outstanding or DSO was 53 days at June 32022. This compares to 53 days at March 31, 2022, and 52 days at the end of 2021.
Investing activities used $58 $8 million of cash in the second quarter. This includes $46.
$3 million in purchases.
And equipment.
And $17 $8 million in acquisition and investment activities during the quarter.
Also generated $5 $3 million of proceeds from the sale of assets in the quarter.
Financing activities used $149 1 million of cash for the second quarter. This was primarily due to common share repurchases.
Totaling $126 million as Bob indicated.
We acquired.
A little bit north of five 4 million shares.
Also included dividends on our common stock was $16 $1 million.
We have the capacity to purchase an additional 407.
One 1 million shares.
<unk> under this program, which remains in effect until December 31, 2023, unless further extended earlier terminated.
We are reaffirming our revenue outlook for the year and expect revenue to be in the range of $6 to $5 billion to $6 4 billion.
In 2022.
Also reaffirming our previously issued three year compounded annual growth rate target for revenue to be in the range of 4% to 6%.
We still expect capital expenditures to be in the range of $180 million to $200 million for the year.
And as stated last quarter, we will readdress, our business outlook and target growth range for adjusted EBITDA and earnings per share when we believe the labor market has stabilized.
And as predictable.
This concludes our prepared remarks and at this time, we would like to turn it back over to the operator to open up the call for <unk>.
Questions.
Thank you Sir.
Ask a question you will need to press star one one on your phone. Please standby as we compile the Q&A roster.
One moment.
Our first question will come from Justin Bowers of DB. Your line is open.
Hi, good morning, and thank you for all the detailed kpis and trends.
With respect to the old Tech segments.
Just curious.
What are.
Sounds like you've made a lot of progress with hiring and we're just really trying to get a sense of.
Some of the initiatives that you're taking and then.
What do you think that changes or whether it's company specific or just.
More macro or market specific in terms of your ability to.
<unk> really improved the hiring.
It sounds like you guys see that continuing throughout the rest of the year.
And then the second part to that would be just.
What are some of the dynamics, you're seeing in the other modalities to like Earth. It looks like an improvement.
Rehab it seems like it's still it's still kind of what are you.
What are some of it but improving.
What are some of the dynamics there as well.
Yes, let me make some some general comments just as Bob and then obviously I'll, let Marty take a little bit about the details.
I think the big the big takeaway.
I think for investors.
Like to share is that the trends are very good in terms of us.
Being able to replace agency with our added and particularly I'm talking about the critical illness recovery hospitals, but I think the important thing to understand is because of the acuity of the patients that we take in and the the <unk> are critical illness segment. These nurses that we recruit.
Do require a significant amount of training.
Before they can really fully engaged in patient care and Thats the thing thats going to keep our all of our quality indicators.
Quality indicators high the other thing that I think we're doing which is an investment in the longer term as we have to continue to be focused on keeping the nurses and the retention.
Our retention attributes in our critical illness division, rather than just recruiting and we think that the.
Enhanced dollars that we're spending on training is going to help us with retention down the road. So we do see good trends, even though the cost data is still high for the quarter.
If you really.
Dig into the statistics that Marty gave you in his prepared comments.
The trends do look pretty good so I'll, let Marty.
<unk> data that maybe take a shot at the second half of the question.
Martin.
Justin Yes, we've really seen as we indicated some significant improvements both in terms of utilization.
<unk> reductions and one of the interesting stats. If you took a look at the month of April .
<unk>, 96% of our hospitals.
Their agency rates were over $100.
In July .
That percentage is 13%.
So I mean, we've really seen the rate come down pretty significantly as we indicated utilizations coming down too.
The other interesting thing is when you take a look at the utilization.
Probably about 6% to 7%.
That utilization come June and July .
We will be replaced with the <unk> coming in.
So again, all the trends are pointing towards.
Significant improvement.
With regards to the Earth.
I would say that the earth.
It was really.
Only impacted two specific geographic locations as far as labor was concerned and then southern California Andrew.
In New Jersey.
And we continue to see those rigs come down, but not nearly as much as the other rates have come down.
Okay.
Got it and just.
A quick follow up I missed in June what was the utilization in June we'll be able to track.
It was 26, 9%.
Okay.
Alright, So you are saying so.
So then in terms of that additional 67%.
That would.
Yeah.
This quarter progresses.
Come down to somewhere in like the low twenty's.
Is that how we should interpret that okay great.
John .
Alright, I appreciate it on the.
And then on the on the headline rates the market baskets that came out for.
And in <unk>.
All else being equal.
<unk> constant.
Are those good proxies for what you guys would realize or is there other moving parts, we should take into consideration and then.
And then what was the <unk> for <unk> in the quarter.
The rate the rates for the final rates for particularly for Al Tac were better than we expected and were better than the proposed rule. So we're pleased with that particularly on the outlier.
Thresholds are somewhat in line, but I think.
Pretty pretty pretty solid so.
Rob.
We've obviously seen new rates that are a lot worse. So this this was I think Matt <unk>.
<unk>.
Pretty good pretty strong.
And add to the CMI.
Yes, Justin the CMI for this past quarter is $1 two nine.
Obviously that came down from second quarter of 'twenty three.
<unk> III to Bob had mentioned in his prepared remarks that some of that has to do with the reduction in burn patients.
And that's what's really caused that decline.
We don't think long term, we don't think there's any long term impact for long term trends.
And this quarter they just happened.
Yeah.
Okay.
Got it I'll hop back in queue. Thank you.
Thank you.
One moment please for our next question.
Okay.
Our next question will come from Kevin Fischbeck of Bank of America. Your line is open.
Great. Thanks, maybe just.
To follow up on that last point.
I guess normally we think of that.
Patients being a bit more.
I think a high acuity.
Really not tied to the ebbs and flows of hospital volumes broadly is there anything you would point to as to why then patients would be it would be down occupancy will be down as a result of that.
So the question is there anything we can point to for why the.
Acuity of the population.
Population was down this quarter was that the question Kevin Yes.
Yes exactly.
Yes, no I don't think that Theres anything that we can point to I mean, there is.
We saw a.
Just a general softness in the ICU at some of our many of our referral hospitals.
So that may have more to do with there.
Scheduling of surgeries transplants are staffing I mean, I really don't have a great answer for that and sometimes there is no real answer I mean, sometimes occasionally youll see us youll see a soft patch in terms of ICU.
<unk>.
I can't give you any definitive I can tell you that we don't see any systemic long term.
Reduction in the <unk>.
Acuity or the patients that are coming out of ICU use of short term acute care hospitals in this country that that's just.
Any idea that theres been an outbreak of wellness and those are not going to be continued to be highly utilized services in short term acute care hospitals is really would be nonsense. So we expect that the return we certainly will see it in in the winter months.
We'll probably see an increase I guess the short answer Unfortunately, because I don't have a definitive answer for you why that why the bed population was soft in this quarter, but it's not the first time you see that occasionally.
Okay, No that's fair.
I guess one of the things a number of companies and providers have talked about improvement.
The labor in the quarter.
But generally speaking to your point volumes has been a little bit softer.
Trying to understand if there's some way to really disaggregate, how much improvement was because volumes were little bit lighter than they really didn't need to rely on temp staffing versus.
The actual progress you are making.
On the hiring et cetera. There is there a reason to believe that if occupancy rises we won't be back to where it was a couple of quarters ago that we wouldn't be in exactly the same spot temp labor.
To deal with that.
Well I do think there is.
Reason to believe that I mean, I, just think that the period, we're going through with being in a post pandemic period end with a softening of the economy I think you.
You have a general view that the <unk>.
And population.
Nurses out there do not believe that that what they saw a year ago, leading up in terms of the kind of rates and agency was sustainable and they view it generally as a single time occurrence and they are now returning to more of a while.
Stable permanent working environment. So I do think that youll see more nurses coming back into the labor pool.
We do talk a lot about the nursing shortage and of course, there is one but you have to remember that that's driven in large measure by nurses that leave the workforce not that they don't people that don't exist with nursing degrees is hefei have elected for whatever reason not to work.
<unk> and.
They.
Also can elect to work.
So we're starting to see them return to a more permanent.
Physicians and.
What we see is that trend is continuing and so even if there is an uptick in occupancy.
I think youll continue to see that.
The agency drop for all providers.
And more nurses coming into the workforce.
Kevin.
So.
Drop for all providers.
More nurses coming into the workforce.
Okay.
Yeah.
Kevin I also think that I mean.
Increases in agency nursing that we saw was truly a function of price elasticity to the extent that.
<unk>.
Health systems, we're offering substantial dollars because those nurses mean for every incremental $10 more they could make youre going to have a whole bunch more nurses going and I think the reverse is the same way to the extent that.
Pricing is going down.
Youre going to seniors leave the.
The travel nursing programs and move into a full time program.
Other thing Thats happening is the sign on bonuses or drop.
Sign on bonuses were in that 2000 $25000 range.
Range and those are coming down.
So what we're hearing has been.
Introduced sign on bonus before there isn't any.
Anymore.
So I think Kevin kind of last comment on this is what Marty and I are giving you is a combination of facts and opinions.
Particularly on my side opinion, my Marty has has given enough detail in data that shows that as a factual matter.
The environment is improving.
My opinion that comes with that is that it will continue and that this is this crisis. We had in nursing will eventually return to something that looks like trend and that's my opinion, but the but I, obviously believe the facts support my opinion, although I need to acknowledge that there is.
There are still people out there that think that this nursing shortage is going to be exacerbated it's going to continue and agency rates are going to be high and I've heard some of that commentary.
I simply don't agree with it.
There is certainly entitled their opinion.
Okay, that's great.
Okay.
Can you maybe talk about margin and the <unk> businesses as anything.
That's happened over the last few years made you think differently about what target margin.
And that business should be I guess, maybe maybe just remind us where you think target margins in that business should be over time.
Yes.
We still believe that 15 years, 15% to 16% margins are certainly achievable in the critical illness recovery hospitals.
It's interesting if you take a look at this past quarter.
We were running at 64% SWM B.
As a percentage of revenue hyster.
Historically, we've run at 52, I mean, there is 12 points right there.
Yeah.
And to the extent, we're in that 54% to 56% range.
All the best Brian .
Margins back up very significantly.
Yes pretty significant earnings power when they get back there alright. Thank you.
Great.
Thank you.
One moment for our next question.
Our next question will come from Ben Hendrix of RBC capital markets. Your line is open.
Hey, Thanks, guys I was hoping you could we could dig a little bit deeper into specific retention efforts and you mentioned the extensive training and the investments you make to onboard new nurses, but where else are you focusing on.
Whether it be wage increases our shifts bonuses et cetera.
I'm trying to get an idea of what it takes to keep a nurse and then by extension kind of what's giving you confidence in the levers that you can pull to get back to reducing agency to normal.
And the next next year. Thanks.
Well I think part of what you were referring to in.
Not unexpected would be that.
Our view that retention is going to be based on the economics.
There's just a very large portion that is not I mean once nurses have have joined on a full time basis.
They stay for all manner of reasons that theyre not necessarily have to do with.
Our continued bonuses stay bonuses our salary increases so we obviously have a number of programs.
Going on that will hopefully increase jobs.
Job satisfaction and.
And overall overall retention.
The economics is another matter I mean, thats, a marty can speak to that but I think we assume that if we do a good job of recruiting nurses and we're paying what is the new normal of.
A fair rate market rate, but then we just have to do a better job operationally on retention, but Marty I don't know if you have any comments on what we on the on the economic side of retention I really focus on it less.
Less on that once nurses are recruited they joined for a rate that they that they obviously find is acceptable and we hope fare.
Stay for lots of other reasons.
There's really I mean, there is a couple of different variables that we look at the.
Specifically look to one is what is the increase in base rates that we're seeing.
Right and that base rate if you take a look at over the past two years, our base rate increases has been significantly higher than what it's been historically.
Typically been that 2% to 3% range.
I think over the past few years, we've been annually about 5%.
That's number one and number two is what I just mentioned as far as.
The.
The increase in the travel rates.
So it was really driven by it was really driven by demand from the health systems.
I think that.
What we heard was the first quarter of this past year I mean, there was significant losses in many of the major health systems in the country. So I think that's going to decrease there.
Xyrem to maintain those types of rates rates are coming down and therefore nurses aren't going to go drill unless we can get those types of dollars.
Thank you for that.
Thank you.
One monoclonal next question.
And our next question will come from a J rice of credit Suisse.
Your line is open.
Okay.
Hi, everybody.
Couple of things, maybe first of all as you are pointing to a number of sort of green shoots that.
Make you a little more optimistic about the labor dynamic.
In the back half of the year and into 'twenty three.
What are you waiting for what are you looking for before you start to go back to giving guidance because.
The company has a lot of moving parts in there.
The opportunity for us to get off track and modeling is pretty substantial.
It would be helpful, but I understand the issues around labor.
Pacifically relative to what you don't have right now are you looking for and is there something in your mind, that's a trigger that says okay. We add those will go.
Yes, a J.
We've seen on a month over month basis substantial reductions.
And the question.
It's really double digit.
Reductions so for us as we start to see that level out and team.
Whether it's.
Mid single digit.
Great reduction over.
A couple of months I think.
And time moves that.
That will make us more confident providing numbers.
As you know a J you've done as we provided revenue guidance because it is macroeconomic labor issue, we just didn't feel comfortable and.
I think we're getting more comfortable but at this point in time.
It debuted in the second quarter, we're not prepared to do that.
Modern aren't always evaluating sources the next quarter, we will.
We will make that determination at that time.
Okay.
You quoted the 100.
$11, an hour sort of where youre seeing things I guess thats for the second quarter or is that as you exited the second quarter and as contracts are rolling off I know a lot of these contracts are.
I think youre using some travel.
Three month contracts are you seeing the renewal rate.
Be even lower than the 111 or is it sort of plateauing a little bit here.
Yes, a J.
What we saw.
In June .
The rates of $95. So.
So when we saw that drop in July to 90.
So we continue to see that historically, we've been in the 72 to $78 range.
There is probably more than half of our hospitals have rigs below 90 $90.
I guess Brandon.
Oh go ahead I'm sorry.
No no go ahead ask your question.
I guess I'll take this for granted.
But I probably should ask you are or most of your agency cost.
More what they call per diem local guys are you using a lot of travelers.
In the fourth and the first quarter we used.
A lot of travelers.
And we had some contracts that were 13 weeks.
Thats Dropdowns and we've also included cost clauses, allowing us to get out with two weeks notice.
Okay.
Yes.
Go ahead, yeah alright.
Our PR in rate, our PR and percentage of total nursing hours has remained pretty consistent throughout the pandemic, we're in that 14% to 15% rate and that really hasn't changed.
Interesting interesting.
One of your peers in the outpatient rehab area.
Made the comment on their call earlier in the week that they were starting to see some pressure on physical therapist and rates.
First time I've heard anything like that are you guys seeing anything along those lines.
We're not seeing a significant.
Issue in that and that to that extent there are some.
Geographical areas, where there is a little bit of pressure.
But it's not really that significant for us.
Okay, and maybe just the last question.
You talked about.
The more favorable headline rate for the critical access hospital del tags.
You singled out not just the rate itself with the outlier.
Impact.
We can look at sort of a nominal rate and say, okay. That's probably worth this much but what are the outliers in sort of a hard thing for us to adjust or when you are looking at that.
US to estimate when you look at that.
How much.
On a year to year basis do you think.
The totality of the updated rule is worth to you how much more is it worth in the proposed rule is there any way to size that.
I think I think number one is there was a 90% what was it about a 30% increase just on the market basket itself right. So.
I think we are sitting on.
Two 8% that that changed to three 8% and then reduce the overall high cost outlier.
Percent. So yes, I think the final rule is.
Much better for the company.
We haven't put numbers just came out that we haven't really put numbers.
To that but we know that it will be a pretty positive.
Okay, alright, thanks alone.
Okay.
Thank you.
And one moment please for our next question.
And we have a question from miles Highsmith of Deutsche Bank. Your line is open.
Hi, good morning, guys.
Thanks, a lot for all the detail.
Wanted to just to go back and maybe clarify a couple of things.
No.
Marty when we're talking about.
<unk> W. B, historically 50, 152% this quarter, 64% and then a question.
Sure.
Kind of lose targets out for end of the year and next year.
Just want to make sure Im thing about that Ryan.
Thats all <unk> right.
It's agency.
Extensive existing.
Donna.
And then on education.
Just want to make sure I'm thinking about that correctly.
If I am I wanted to triangulate that with you gave some helpful information about.
Q2 sequentially rates being down utilization being down and then the expense on a dollar basis. I think you said it went from 89 million.
Down to somewhere in the mid fifties or those numbers just related to contract or agency or is that like a total <unk> number for the <unk>.
But the agency.
Numbers.
Okay.
So yes. So those are those are coming down.
The reason youre not really seeing it sooner.
Filter through.
To SWM be coming down because offsetting that is those 78 weeks of training and orientation orientation, we've talked about.
I mean, what you would do is think about that in terms of during that seven to eight weeks, we're actually employing two nurses ones going through the training and orientation ones taken care of the patients.
Taking care of the patients to the agency.
<unk> has come onboard and theyre starting to treat patients we will see a reduction to the agency.
Right Okay.
Keith did not wanted to disclose that but I was just curious if you.
Be able or willing to disclose what that kind of incremental sequential number was for some of the.
A double counting in the training and the upfront bonuses is that a number that you have.
No I think the way you want to take a look at it Myles is to the extent that we get back to historical trends.
You'd think about it is.
At 64% SW would be as a percentage of revenue if that gets back to 54% or 56% that eight to 10 points.
Just multiply that by our revenue line.
I mean, you're looking at in the neighborhood of $200 million of incremental EBITDA coming through as that goes is that normalized.
Got you okay.
That's great and then just one other.
There are a numbers question. Thanks for all the utilization data I can't remember if you said it before but can you give US a reminder of what utilization was on the contract side pre pre COVID-19 and earn more historical timeframes.
Yes, it was in that 16% to 3% range.
Sure.
Got it okay, all right guys.
Yes Cmos.
Thank you.
And Im seeing no further questions in the queue I would now like to turn the conference back to Robert Ortenzio for closing remarks.
No closing remarks, thanks, everybody for joining us.
For the call have a good weekend.
Sure.
This concludes today's conference call. Thank you all for participating you may now disconnect and have a pleasant day and enjoy your weekend.
The conference will begin shortly to raise your hand during Q&A you can dial one one.
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