Q3 2022 Encompass Health Corp Earnings Call
Yeah.
Yeah.
Ladies and gentlemen, please standby were about to begin good morning, everyone and welcome to encompass Health's third quarter 2022 earnings conference call. At this time I'd like to inform all participants that their lines will be in a listen only mode.
After the Speakers' remarks, there will be a question and answer period, if you'd like to ask a question. During this time. Please press star one on your telephone keypad, you'll be limited to one question and one follow up question. Today's conference is being recorded if you have any objections you may disconnect. At this time I will now turn the call over.
To Mark Miller encompass Health's, Chief Investor Relations Officer. Please go ahead Sir.
Thank you operator, and good morning, everyone. Thank you for joining encompass health's third quarter 2022 earnings call before we begin if you do not already have a copy the third quarter earnings release supplemental information and related form 8-K filed with the SEC are available on our.
Websites have 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 core.
Certain risks and uncertainties like those relating to regulatory developments as well as volume bad debt on labor cost trends that could cause actual results to differ materially from our projections estimates and expectations are discussed in the company's SEC filings, including the company's.
Earnings release and related form 8-K.
Form 10-K for year ended December 31, 2021, and the Form 10-Q for quarters ended March 31, 2020 to June 32022, and September 32022, when 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.
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 encompass Health's, President and Chief Executive Officer, Mark Tarr Mark. Thank you.
Everyone.
We continue to see strong underlying demand for our services in Q3.
With total discharge growth of seven 5%, including a four 1% increase in same store discharges.
Our value proposition is resonating across payers, we are gaining share in what remains an underserved market.
Our hiring and retention strategies again proved effective at reducing our reliance on agency staffing leading to another quarterly sequential decline in contract labor Ftes and expense in Q3 market conditions for skilled conditions remain challenging.
Benefits of lower contract labor in the quarter.
Partially offset by higher sign on and shift bonuses.
Our Q3 profitability was also negatively impacted by hurricane activity delayed openings at two de novo's and inflationary effects on supplies and utility costs.
These factors led us to revise our 2022 guidance as Doug will address in greater detail in just a few minutes.
These are not the results we'd hoped for but we are extremely proud of how our team has continued to respond to this volatile and challenging environment.
Our de Novo embedded different strategies are increasing the availability of the highly specialized services, we provide to meet this rising demand our.
Our commitment of substantial capital to these capacity expansions underscores our confidence in the future prospects of our business.
We opened three de novo's in Q3, making that nine year to date.
We expect to open eight de Novo in 2023.
We added 20 beds to existing hospitals in the quarter raising the year to date total to 87.
We expect to add an additional 100 to 125 beds in 2023.
And the design and construction of our de Novo's, we are furthering our utilization of pre fabrication to enhanced speed to market ensure consistent quality and contain costs.
We are working on a number of new initiatives for the next generation of pre fabrication and look forward to sharing more details with you in early 2023.
As we have discussed previously we have responded to the challenging labor market for skilled clinical resources in a number of ways, including adding substantial resources to our talent acquisition team.
Our strategy of building a centralized recruiting function is generating successes.
Same store net RN hires were 459 for the first three quarters of 2022 as compared to 289 in the same periods last year, a 62% increase.
Q3 same store net RN hires of 183 is up from 149 in Q2 and 127 in Q1.
We also remain keenly focused on managing productivity.
Our <unk> for Q3 was $3 three nine in line with our expectations.
We achieved this productivity, even while opening three de novo's in the quarter.
We are also continuing to create favorable outcomes for our patients and thereby our payors are Q3 discharged community rate was 81, 9% as compared to 81, 3% in the year ago period and are discharged to sniff rate was 7% as <unk>.
Paired to seven 5% in the year ago period.
Moreover, our staffing challenges has not hindered our ability to provide great patient care as evidenced by our favorable net promoter score in trends for patient satisfaction.
On October one the fiscal year 2023, <unk> rule became effective providing us with an approximately 4% Medicare price increase.
This is the largest price increase we've had in quite some time.
The market basket update leading to this increase is based on trailing information and lags to prevailing inflationary environment.
We are optimistic that ensuing reimbursement changes, we will close that gap.
Benefit of this Q4 reimbursement increase is being partially offset by sequestration.
On the regulatory front, the improving Medicare post acute transformation act of 2014 known as the impact Act requires collection and reporting of quality measures and standardized patient assessment data elements across post acute providers the 2020 to earth.
By 4.0 form is now 30 pages of admission and discharge interdisciplinary data elements.
Consistent with our prior regulatory update we began preparations for these changes well in advance to ensure that our associates were well trained and fully ready for transition.
We have implemented Earth Pi four point across all of our hospitals with little to no disruption to our operations.
While CMS has not yet announced the start date for Earth Ruby choice demonstrations that are slated to begin in Alabama.
We have been proactively communicating with our Medicare administrative contractor for Alabama regarding the potential implementation process.
With regard to our revised 2022 guidance. We now expect net operating revenues of $4 32 to $4 $3 5 billion.
Adjusted EBITDA of $800 million to $820 million and adjusted EPS of $2 71 to $2 86 per share.
The key considerations underlying this guidance can be found on page 13 of the supplemental slides.
As I mentioned previously Doug will provide more details about our revised guidance.
With that I'll turn it over to Doug.
Thanks, Mark and good morning, everyone I will start with a quick recap of Q3.
Q3 revenue increased seven 8% over the prior year to one 9 billion and adjusted EBITDA declined 2% to 195 3 million.
Our year to date adjusted free cash flow was $294 million.
As Mark discussed we continue to see strong volume growth combined with a modest 7% increase in revenue per discharge to produce or eight 2% inpatient revenue growth in the quarter.
Once again staffing challenges did not limit volume growth, but did result in the continuation of elevated costs.
Our Q3 contract labor plus sign on and shift bonuses of 49 million was comprised of $24 8 million in contract labor and $24 2 million and sign on and shift bonuses.
Contract Labor expense in Q3 declined approximately $10 3 million or 29% from Q2, and $17 1 million or 41% from the Q1 peak.
We experienced sequential declines in contract labor expenses and Ftes for every month in Q3 and in fact for every month since March of 2022.
Contract Labor Ftes, which peaked at 749 in March declined to 597 in June fell further to 447% in September .
Agency rates also declined during the quarter.
The Q3 agency rate per FTE with 205000 as compared to 223000 in Q2.
AMC rates do remain market specific and highly variable.
As an example, after steady monthly declines we've experienced an uptick in average agency rates in September .
Consequently, while we expect our total contract labor costs to decline again in Q4.
Our revised guidance assumes the pace of improvement will be slower than previously expected.
John on his shift bonuses increased sequentially to $24 2 million from $21 8 million in Q2.
Sign on bonuses increased approximately $1 8 million and shipped bonuses increased approximately 600000.
We had expected less of an increase in sign on bonuses and we had also expected a decline in shipped bonuses as we move from Q2 to Q3.
The increases stemmed from the net new or in hires hi.
Higher sign on bonuses at the three de Novo's opened during the quarter.
And the use of ship bonuses to cover periods unexpectedly high clinical staff PTO usage during the summer.
Our updated guidance assumes sign on and shift bonuses will decline in Q4, albeit at slower pace than previously expected.
As Mark noted we remain very pleased with the result of our de Novo Embed addition programs.
We had previously expected our 2022 de novo's to be breakeven to modestly accretive in the second half of the year.
However, during Q3 opening delays at two of our hospitals.
Higher initial staff recruiting cost.
And hurricane related disruptions at our newly opened Naples facility led to the approximately $5 billion of net pre opening and ramp up costs incurred in the quarter.
Our updated guidance assumes that 2022 de novo's will be approximately breakeven in Q4.
There are three other items that arose in Q3, there were outside of our expectations negatively impacting our adjusted EBITDA for the quarter and contributing to our revised guidance.
Net provider tax revenues, which can be volatile from quarter to quarter, and thus are difficult to forecast declined by approximately $2 million as compared to Q3 of last year.
Utility costs exceeded our expectations.
Both on higher utilization and increased rates.
The higher utilization occurred primarily in Texas, and Florida, our two largest markets, which both experienced very hot summers.
Utilities expense per patient day increased by approximately 13% over Q3 last year and 21% over Q2.
And finally food cost increased beyond our expectations as inflationary pressures drove the cost per patient day up 15% over the prior year period and accelerating from up almost 8% in Q2.
And Ah numeration of key assumptions underlying our revised guidance may be found on page 13 of the supplemental slides.
And with that we'll open the line for questions.
Yes.
Thank you, ladies and gentlemen, if you would like to ask a question. Please press star one on your Touchtone phone you may remove yourself from the queue at any time by pressing star Q 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 back over to Mr. Mark Tarr.
No I think it would take more mark it sounds good.
Paul The first question first question comes from Kevin Fischbeck.
With Bank of America. Please go ahead, hey, good morning Kerry.
Good morning.
So I guess I wanted to focus on labor, obviously, you took up the.
The labor outlook for.
Q4, I mean, how are you thinking about the improvement into next year, how should we think about.
Wages, how should we think about contract labor and then.
I think sometimes people think that it makes too much of a lift to bottomline for contract labor going down because you have to.
Fill that with a full time person how should we think about kind of wage growth next year, but then the net net of contract coming down and is this normalize next year or two or three year kind of thing that you're thinking about for labor.
So Kevin it's Doug I don't know that will be completely normalized because we're not sure what that means any more in 2023, but we certainly do expect as we outlined that we will see sequential improvement from Q3 to Q4, and we would anticipate with regard to Q2 2023 is a.
Whole youll.
You'll see improvement over 2022 in both contract labor and sign on and shift bonuses.
There's still a lot of volatility out there you heard me mentioned during my remarks that we saw but not overly alarming, but we did see an increase in the average rates in September after seeing sequential declines in that rate from March all the way through the <unk>.
Contract Labor expense in total is much more sensitive to the number of ftes than it is to the right, but thats just kind of adds to the to the uncertainty.
Patient is that as we go through the fourth quarter, we're going to see the number of contract labor Ftes continue to come down nicely.
There is a quarter ago, we were anticipating.
Stating that we would end the year the exit rate with regard to contract labor MTS will be somewhere between 250 and 300 now that number is probably 300 to 350 with the low end of that range being optimistic.
And the two other things that I would throw in there is some uncertainty and make it difficult to give you just a very straight in place to answer. Your question is you get a lot of PTO in the fourth quarter around the holidays as well and so we don't know what that will necessitate similar to what we experienced in the summer associates, taking PTO with regard to the need to fill in.
That could have an impact on the rate as well and then finally, although right now it appears like the.
<unk>.
The coronavirus is not going to be as severe winter and some had earlier here I think there is some trepidation disaster can flow goods with some kind of winter surge.
<unk> combined with a maybe more volatile.
Flu season.
All of those things as we enter 2023.
Wood.
Cause some potential stat and challenges in the period that is normally our highest volume of the year.
Kevin It's Mark I, just wanted to add in there you mentioned earlier about adding the talent acquisition resources I mean, we've done a number of things to make.
Make sure that we're well positioned going forward to to do everything we can to support our hospitals and fill the open positions that we have and we're now have over 60 full time recruiters that have centralized that recruitment function to take some of the load off the local hospitals.
In order to do that and as evidenced by our net.
In hires we're making some significant progress on that too.
Are doing everything we can to.
Strategically position us against this very challenging environment.
The last thing I'd throw in there I'm, probably pilot, but it does it relates to simply contract labor, but rather to the sign on bonuses and.
We have made some significant progress and kind of getting some standardization around those and also we've been successful at now paying less of the amount upfront and tying more of it to retention periods and those vary a little bit from market to market based on the competition, but whereas earlier. This year, we were having to pay a significant.
<unk>, if not all of the sign on bonus upfront and take risk around retention. We're now able to time that creates a bit of a tail on those payments for instance, a substantial portion of what you would probably see in Q4 as our reported sign on bonuses actually relate to the hires that were made in Q3, but overall, that's a positive trend.
I think it's safe to say, we're testing we're challenging the marketplaces in terms of the overall.
And if a sign on bonuses, even required as well as the level of ship bonuses and the rate we are willing to pay or contract labor and I think we're just at a record for the longest answer to the singles.
Yeah, and I guess, that's still looking for the wage growth number but.
Give that for next year expectation and then maybe just the second question being.
When you think about your comment that labor is improving but more slowly than you thought is something we've heard from everyone. The last couple of quarters is there something in particular that you would point to as to why that is.
And if that's a sign that it should just get better faster next year or whether it just means that we should be prepared for this to be a slow improvement.
For longer.
So first of all let me I will tell you Kevin. This one this will answer your question with regard to 2023, but if you want to get a sense as to the underlying wage growth. When you strip out some of this noise. If we look at our S. W. B.
Increase ex sign on and shift bonuses, we pull that out and of course. It also doesn't include contract labor in the second and third quarter. It was running up about three 5%.
And that's compared to four 7%. This is on a year over year basis. So we're not seeing anything overly alarming.
In the.
In the core wage inflation, and we would expect that to be at a similar level or perhaps even lower maybe something closer to 3% in Q4.
With regard to the contract labor usage I would say.
The thing that surprised us the most and in retrospect, maybe we should have seen it coming.
Our clinical staff had fairly high amount of accumulated PTO just based on the need for them to work additional shifts and the fact that for a big portion of the early stage of the pandemic couldn't go anywhere and we had volume coming in and they just decided to take time off this summer and so we had because the volume was so good in our.
<unk>.
Again adhering to the philosophy will take the volume and figure out the labor situation later on.
We use more contract labor.
<unk>.
Third quarter than we had initially anticipated.
Okay, great. Thanks.
We will take our next question from Andrew Mok with UBS.
Good morning, Andrew Andrew.
Hi, Good morning, just wanted to ask a little bit about framework for 2020.
The midpoint of the revised guidance range implies about $223 billion of EBITDA in Q4 with annualize that to about $92 million before considering any growth for next year are there any items you would call out that impact that <unk> run rate and if not is that a reasonable way to think about 2023.
Well, Andrew I know everybody wants to hear more about 2023, but.
Youre going to hear from us much and what <unk> heard from some of the other provider reports really across industries.
Is there.
Continues to be considerable volatility and uncertainty out there, which makes forecasting business trends beyond the kind of immediate future very difficult.
We remain very encouraged as mark alluded to by the validation of the underlying demand for our business and it was indicated again in our volume growth for Q4.
But trying to forecast, particularly with two weeks out from the midterm elections.
Political risks that are out there you've got a whole host of things that make it difficult to say how much of Q4 is going to be representative of what we experienced in Q3, what we do expect as we we expect that we'll continue to see good positive volume growth.
In 2023, we expect that we will see.
Good contributions from the 2022 de novo's that we opened up as those continue to ramp up and we expect that we will continue to see improvement in labor expense to forecast any particular level is difficult.
Unfortunately, it's really going to be with the provision of our 2023 guidance that'll be in conjunction with our Q4 earnings report expected to take place in January before we can give you a lot of concrete answers there.
Got it okay, but there is nothing you would call out as materially impacting the <unk> run rate at this distance now.
I think if anything we tend to err on the side of too much detail, but if you look at the the.
The fourth quarter its full year 2022, but there is only one quarter left if you look at the guidance considerations that we enumerated I think theyre pretty thorough.
Got it Okay, and then just a follow up on the volume side same store growth was up 4% on a very difficult <unk> 'twenty one comp Mark you made some comments in your prepared remarks that you are taking market share can you elaborate on what you're seeing and where those share gains are coming from what are the primary drivers of those gains.
Yes.
Also comment on the quality outcomes in my prepared statements.
Attribute our ability to take market share from other post acute providers and if you look back going back to 2020 with Covid I mean, I think we really have proven ourselves.
Very capable of taking on a higher acuity patient.
Doing a great job getting over 80% of them back come back to the community. So I think are.
<unk> commitment to quality development of programs, specifically around stroke another neuro.
<unk> continues to put us in a position to.
To be the favored post acute provider in the marketplaces that we exist and in the quarter and on a year to date basis, we continued to see discharge growth across all payer categories.
If you were to look at our patient mix for the quarter were actually down a little bit in stroke, and neurological which are two of our.
Larger categories, because they are comprised of very medically complex patients, but that is because of what we had anticipated we would see all along which is patient flow start to normalize we're not losing volume in stroke and neurological it's simply not growing as some of the other faster categories.
Chad then a little bit more accident during the early stages of the pandemic. So theres a lot of good news in both the payer mix and the patient mix underlying the support for that volume growth.
Throw a couple of things out there as well we've talked before just about how large and Underpenetrated. We believe the total addressable market is and as we've mentioned in this context before what are the practices that we look at is CMS 13 eligible discharges coming out of the acute care facilities across the nation.
As a reminder, only 60% of the patients admitted into any particular during the course of its fiscal year has to be CMS 13, we run at a higher compliance level and that's something in the low seventies, but even with that only 13, 5% of the CMS 13 eligible discharge is in the <unk>.
<unk> new come out of a hospital wind up in an Earth and we think we're making strides on a market by market basis.
Increasing that conversion rate.
I do want to remind everybody as well that as you think about Q4.
We remain very optimistic about growth, what we're up against another tough comp because Q4 discharge growth last year was up nine 6%, including 6% on a same store basis.
Great. Thanks for all the color.
We will take our next question from a J rice with credit Suisse.
J J.
Hey, Jay.
Hey, Jay are you there.
Why don't we put a J back in the queue and move to the next one operator. Thank you, we'll move to Peter Chickering with Deutsche Bank.
Hey, good morning, Good morning, guys. Thanks for taking my questions just asking Andrew's question in a different way historically for <unk>.
It's been a really good predictor about next year's EBITDA I understand that forecasting today is nearly impossible to put all the.
The volatility of the current macro environment, but assuming the macro doesn't change at all is there anything structurally wrong, taking that number and annualize it again with the caveat that.
Things changed.
Okay, perfect guys give formal guidance.
The only thing if youre trying to use Q4 as a proxy for the following year and I'm, not suggesting whether or not that's a good practice because I've already given you. The caveat that there is a lot of volatility.
Got to remember factoring seasonality, which is more pronounced in Q4 and Q1 and you would also.
You need to factor in that you will have another year, where we're opening up eight de novo's and so there will be probably a fairly similar level.
Maybe at a lower level this year, because some of those factors that I pointed out in Q3 and startup and ramp up costs.
Okay, sorry about that.
Comes to mind that I would suggest was an anomaly you do have the impact of sequestration.
Youre looking at a year over year basis, but it is fully implemented.
Now beginning with Q3, so it depends on whether you're just trying to look at it sequentially or on a year over year basis.
Okay, Perfect and then looking at building de Novo.
It changed at all.
With these moves are building costs that are embedded in these projects and the additional for signing bonuses he needs to pay in order to to wrap us up and then potentially slower Medicare certification due to staffing.
Yes so.
To some extent it does when you increase the preopening and ramp up cost.
You can you're calculating your ROIC you can pick those incremental losses and just build it into the invested capital, but if you just do the math and add up the total capital that we were spending on the de novo's. This year and the estimate beyond our expectation went up by about $5 million that alone isn't really moving the needle at all on ROIC.
The fact of the matter is once we do get them opening it beyond those costs, we've seen the ramp up faster than we expected the larger issues are like everybody else in the country over the last several years, we've seen about a 25% to 30% increase in key components of our design and construction costs, mostly around materials that is beginning to subside, which is good news.
News, but when you combine the increase in construction cost with higher labor costs running through the P&L. It puts some pressure on the early years of the unrealized fee.
That again has been largely offset.
The more rapid increase in ADC, we've seen that those facilities.
And the other thing that Marc had mentioned, which is an important consideration is the use of pre fabrication for us is holding costs steady right now ultimately we think.
Result in savings, but it's accelerating our time to market and that has a very favorable impact on the return characteristics of the de novo's. So we remain very excited about the returns we're seeing the returns that we're forecasting with regard to this capital investment.
I think we're likely more the more we use the more we like it is on the prefab as just the speed to market, which I alluded to in my comments, but just to give you some sense of how fast that is the whole hospital. It cuts. The time construction time from nine months to six months and then for bed additions it reduces it by about a half.
So the speed the market is very important in these competitive marketplaces, we've specifically seen that.
Florida, and really really like the direction, we're heading with this prefab construction in those periods that Mark just mentioned relate to construction specifically there is also a design benefit to it. So the more you move towards pre fabrication. The faster we can get the design for our new facility retrofit into the land that we acquire the fans.
<unk> can get through the permitting process as well so we're taking incremental time out of the project on the front end as well and so in aggregate, we feel like we've knocked 30% to 40% over the time to open up a facility that's not going to be the case everywhere, sometimes permitting and zoning is more difficult than other markets, but it's a <unk>.
Generalization thats the kind of results we're seeing.
And then just a really just a quick numbers question.
On the Opex, you talked about increasing fuel food costs energy costs and then if you can quantify those for us in the Opex line and then what was the hurricane impact for Q4 Q. Thanks, so much.
Versus our previous expectations each of those categories was up just over $2 million.
In Q3.
We'll go ahead and take our next question from Brian <unk> with Jefferies.
Brian Brian Hey, Good morning, guys, I guess I'll just piggyback on the questions on the de Novo So as we think about.
You added a lot of beds from 28, 2019, 2020, one, but obviously it depends on if it was in the background. So maybe the ramp on those bed ads did not look as good as what you would've expected or should have been so how are you thinking about the opportunity for a faster or greater than expected contribution as these.
De novo as compound and ramp as we think about next year.
Well, it's there in the volume.
And the ramp up on those facilities, even open up during the pandemic has been very positive and so.
The flow through is simply being impacted by the elevated cost that we've talked about but look at the year over year revenue increases as evident that those those.
The new capacity that's added to those market is resonating with payers and patients and referral sources and so as we continue to make progress and now we've got a pricing increase as well.
We probably didn't put enough emphasis on that in Q3, we face those increasing.
Cost pressures against essentially a flat price increase youre hearing about nice earnings gains in certain sectors like consumer brands Mcdonald's was out today, yes, there are raising their prices because they've got the flexibility to do that we had to meet these challenges against flat against flat pricing.
Mark alluded to the increase that we're getting in Q4 again thats going to be partially offset by sequestration, but it really begins to flow through as we enter 2023.
And in lesser of games that are going to get played in the rulemaking process just based on the cost of inputs and youre seeing that.
Across the provider universe right now we should see another nice price increase in 2023 for the 2024 rulemaking process, then you're really going to see the operating leverage in the efficacy of these de novo's and really our entire business start to flow through into EBITDA improvement.
Ryan we brought on are now 17 and others in the last two years and they have all been.
Very successfully ramping up in <unk>.
Just as an indication.
Of the <unk>.
Talent that we have out in the field. There are operators that are largely responsible for bringing these hospitals online staffing them and getting them up to speed and I just want to do a call out to our teams and our regional presidents that are out there in the depth of talent that we have within this company.
And so like a lot of other things the more you do the better you get at it.
And so all aspects of the development process, we've shown improvement our development team is increasingly adept at evaluating good markets for adding an earth.
We believe that a JV relationship would be beneficial those negotiations have been streamlined and every aspect of opening that facility and then ramping it up has improved.
Some of the we mentioned the delays that we experienced in Q3.
Some of that.
Virtually all of it was beyond our control I mean, we had one facility, where <unk> and air handler, which is absolutely critical to opening up the facility was delayed in the supply chain those things are going to resolve themselves, but by and large we remain very pleased with the results we're getting out of the de Novo.
Awesome. Thanks, guys.
Steve.
Next question comes from Ben Hendrix, with RBC capital markets had a bit more and Ben Hey, How's it going guys. Thank you for taking the questions guys.
Given the headwinds that you've seen in the past related to claims denial activity can you remind us what's involved with the resumption of the Medicare intermediary PPE and are there any proactive measures you can take from an operational or documentation perspective to at least partially mitigate future increases in denials.
Yes, so we're definitely seeing increased denials and you see that in the information is included in the supplemental slides the resumption of Tpa.
The best thing that we ever did to try to move away from the traditional ADR issues. We had was the implementation of the utilization of our clinical information system.
Which is very effective at capturing documentation and we continue to look for ways to improve that.
Biggest difficulty that we're facing right now with the resumption of PPE is that there are radically different interpretations by the intermediaries of Medicare guidelines around patient care requirements and I mean, just as an example.
CMS guidelines.
Require or suggest because it is a guideline that the preponderance of therapy must be administered.
In our non group or a non individual center.
So I think the average person off the street would interpret preponderance is meaning something like a majority as a matter of fact, if you look it up in the dictionary, that's pretty much what it is.
But we have certain ppas at certain markets, where they have looked at a claim that we've submitted where the patient received more than 80% of their therapy on an individual basis.
And did not declaimed, because it didn't meet the preponderance test.
So we're having to take an increasing number of these denials.
They're not even alarming level right now through various appeal levels.
And it's just it's frustrating we are providing top quality care to these patients.
We're generating great outcomes.
As Mark indicated earlier and.
It's resonating with the patients because our patient satisfaction scores are at all time highs and yet you've got uninformed arbitrary decisions being made about claims that we file.
So Ben we're educating the auditors on the requirements for by CMS for <unk> versus them.
Educating us.
Do you get any.
Is there any additional risk or is this are these issues is that exacerbated in any way by.
From a documentation perspective by the use of an increased number of agency nurses aides nurses, who may not be familiar with their systems are coming in from other settings.
Does that create any kind of additional documentation headwind what it is.
Certainly has the potential to do that we're careful to make sure that we educate AMC nurses on the use of our electronic medical record system. That's part of the basic orientation, even four.
And agency nurse, we do everything we can to prevent that from happening but.
That is certainly a risk for organizations that don't take the time on that.
Front period with.
Contract staff I would also say the the teen nature.
<unk>.
How we approach care in our hospitals means that a contract labor.
Uh huh.
FTE is surrounded by permanent more permanent employees, which kind of helps with that and then also just because our skilled labor force is comprised of nurses and therapists theres a hierarchy in every hospital to our nursing structure and so theyre supervision of everybody who's in the facility not just contract labor nurses.
Thank you, ladies and gentlemen, as a reminder, it is star one to ask a question. We next move to Matt Larew with William Blair.
Good morning, Matt.
Hey, good morning.
I wanted to ask the bond.
Salaries and benefits stronger first half salaries and benefits correct.
<unk> was about 8% on the back half thinking about 3%.
Like you've walked through are part of a number of the moving parts as to why that.
Mhm curving that's.
Is it fair to assume dependent the back second half of the year triangles more emblematic of the go forward on fire months, although the part of that you've not had seen labor down there.
Great.
Straight quarters sequentially, but still 30% higher than in 2020, which I presume was meaningfully higher than pre COVID-19.
A bucket that you expect to continue trending down as well.
It is Matt and I would just say that there is some uncertainty regarding Q1 for some of the factors identified earlier, which is thats normally our heavy volume year and that's also the quarter, which historically has been most impacted by flu season and with over the last several years and I forget how many years, we've been improving now two years.
<unk> has been impacted by winter surge in Covid.
And so those could play a role in.
In Q1, but we do expect significant further improvement in overall labor costs through 2023, as we sit here today. The fourth quarter is going to be very performing for all of us with regard to that.
Okay got it and then.
The first on stroke in neuro just from some other patient monetization, but maybe just give us update on how patient acuity trended through.
Quarter, you mentioned I think last quarter to quarter for your son's Martha patients come back but.
Obviously, you have a 4% price increases started Kevin one but from a patient acuity staff point, how do you expect that evolve it to evolve in Q4 and beyond.
Overall, our acuity was consistent what has been sequentially. The previous quarters. We may have some shifting among the diagnostic categories, but overall, our acuity was relatively flat.
All payers it was almost exactly flat.
Commented it wasn't a big move, but our Q3 pricing across all payers actually came out slightly lower than we had anticipated and the culprit was less around the patient mix and more around the payer mix I mentioned earlier that we saw discharge growth across all payers in the <unk>.
Quarter, and even though it's a small piece of our business.
The most rapid growth that we had in the quarter was in Medicaid and whereas we've been able to close the gap on Medicare advantage to less than 5% of the discount to fee for service Medicaid on aggregate remains at about a 35%.
I was just another factor I don't necessarily believe that that's going to continue with that level typically not enough to call out as we move into Q4 and beyond.
The acuity is staying up there nicely.
Thank you. Your next question goes to Sarah James with Barclays.
Good morning.
Hi, good morning.
I'm trying to piece together the comments you guys made earlier with the 25% to 35% rise in construction cost for key components versus the savings on the prefab and I'm wondering if the net of those two change your preference on de novo versus and facility that expansion.
And does the increased use of the prefab changed your strategy at all for building excess footage.
And to your new facility.
Yes. So those are good questions one is.
Bed expansions, where theyre justified by the occupancy existing occupancy rate in an existing facility.
And where there arent limitations either related to Seo and where the physical structure of the building are always at the top of our prioritization list with regard to Capex, We've mentioned before Youre building into an existing demand and referral sources and the payer contracts or established you've already been marketing.
Out there into the market, so theres familiarity and Youre leveraging key components of the staff and the infrastructure and so the returns are very high and so that will always be at the top of the list.
The second question was extremely insightful and you're on target there, which is one of the things that we have been doing is whereas if you roll the clock back maybe just as recently as three or four years ago. We were entering a lot of markets with a 40 bed all private room facility.
Now, we're pushing up towards 50 or 60, and we're doing so because of two things one is because of the very rapid increase we've been seeing in the ramp up of our new facilities.
How we have extended the learning curve with regard to our efficiency with operating those but the second is the point that you've made which is doing that on the front end allows us to bring down the average cost per bed.
And so that is the strategy, we will likely use I should note. This is kind of thinking out down the road.
More we push from a 40 bed chassis at opening to 50 or 60 bid the more that might cause some lumpiness on future period bed expansions because some of the bed expansion numbers that we've been out there recently have been driven by the fact that we've seen a lot of de novo's opened that within two to three.
Here's where already required expansions as a matter of fact, we have some of the recent vintage north Tampa comes to mind.
As an example, where that's occurring really fast.
Great.
Just to follow up on that.
Cost per bed that you are able to achieve is there any way that you can frame that savings upfront.
Right now, what it's really allowing us to do is kind of hold the line versus further increases.
We do think with some of the strategies with regard to speed to market and increased fabrication.
Nextgen that mark alluded to in his comments that we're going to be talking more about too.
In Q1, we're actually going to bend that curve back around and that will happen. So it's going to be that strategy combined with improvements that were already seeing in the supply chain and then what hopefully will be a somewhat of a decrease in construction labor costs as well.
Great. Thank you.
And ladies and gentlemen that does conclude today's presentation I will turn the conference back over to Mr. Mark Miller for any closing remarks.
Thank you operator, if anyone has additional questions. Please call me at 205 90 705860. Thank you again for joining today's call.
Ladies and gentlemen that concludes today's program and you may disconnect at any time.
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