Q3 2022 Amedisys Inc Earnings Call
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Greetings and welcome to the medicines third quarter 2022 earnings call at.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
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Please note that today's conference is being recorded.
At this time I'll turn the conference over to Nick Muscato Chief Strategy Officer. Thank you you may now begin.
Nick Please go ahead.
Mr. Mcconnell you May you may begin your presentation.
Yeah.
Ladies and gentlemen, please standby.
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Mr. Mosquito. Please go ahead.
One moment, we'll get that taken care.
Once again, Mr. Mascaro will begin now.
Thank you operator, and welcome to the <unk> Investor Conference call to discuss the results of our third quarter ended September 32022.
A copy of our press release supplemental slides and related form 8-K filing with the SEC are available on the Investor Relations page on our website.
Speaking on today's call from <unk> will be President and Chief Executive Officer, Chris Gerard and Executive Vice President and Chief Financial Officer, Scott Ginn.
Before we get started with our call I would like to remind everyone that statements made on this conference call. Today may constitute forward looking statements and are protected under the safe Harbor of the private Securities Litigation Reform Act.
These forward looking statements are based on information available to a medicine today. The company assumes no obligation to update information provided on this call to reflect subsequent events other than as required under applicable securities laws.
These forward looking statements may involve a number of risks and uncertainties, which may cause the company's results or actual outcomes to differ materially from such statements.
These risks and uncertainties, including factors detailed in our SEC filings, including our Form 10-K, 10-Q and 8-K.
In addition, as required under SEC regulation G. A reconciliation of any non-GAAP measure mentioned during our call today to the most comparable GAAP measure will be available in our forms 10-Q10-K NHS.
Thank you and now I'll turn the call over to President and CEO , Chris Gerard.
Thanks, Nick and thanks to everyone for joining us today, <unk> announced our third quarter 2022 results.
Before we get into the performance update I want to give a heartfelt. Thank you to all of their medicines employees there.
The work you do.
And the carry you provide on a daily basis are an inspiration and I am truly grateful for all that you do for those we serve.
As we speak with you today, we are awaiting CMS is release of the 2023 home health final rule.
We expect that any day.
There is a wide range of potential outcomes in the final rule.
But if the rule carries forward the behavioral adjustment cuts as proposed our bipartisan champions in Congress are fully committed to seeing this fight to the finish by aggressively pursuing the passage of legislation that pauses these cuts from going into effect.
We have spent the last six months working in Washington on this issue.
And key lawmakers and staff fully understand the impacts this fundamentally flawed budget neutrality methodology will have on patients' access to care the home health industry and the entire health care system.
We know a lot happens in Washington to hear at the end of the year and we're hopeful that if CMS final rule contains these owners cuts a policy fix to mitigate these cuts will be included in the yearend congressional legislation.
We along with the United industry have a plan a pad and bipartisan congressional support to successfully address the proposed behavioral adjustment cuts if CMS fails to do so in the final rule.
As I mentioned, we expect a rule any day now and once we see it we will update everyone on its impact to medicines.
Now that we've got the reimbursement discussion out of the way, let's dive into what has become a transformative and exciting time here at <unk>.
As you will soon here, we've been an important chapter of investing in our company, including our innovative service offerings, our people and our partnerships all of which will result in strong momentum going into 2023, and a bright horizon ahead of us.
While we're not immune from certain economic conditions.
And the known difficulties of operating in today's health care landscape. We have used this quarter to strategically position ourselves to be an even more powerful player on the national stage moving forward.
With that I'd like to discuss some exciting developments across our business lines.
For a number of quarters, we have been pointing to the increased penetration of Medicare advantage as a catalyst to our for our strong desire to innovate with payers with the goal of moving to a mutually beneficial value based payment model.
And today I am very happy to announce that we have signed an innovative case rate contract with one of the largest Medicare advantage health plans in the U S. Cvs Aetna. We're excited about this new partnership and look forward to expanding these types of contracting relationships across more of our business in the future.
I wanted to thank our partners at Cvs Aetna for their desire to do something new and innovative.
To summarize how case rate works for thinking plans, such as Cvs Aetna pay us a flat rate per admission.
We then provide the highest quality most optimal care to each patient from the time. They are admitted until they are discharged from our service.
In order to assure positive outcomes for Cvs Aetna members, we will tie a portion of our case rate to specific quality metrics, such as re hospitalization rate and timely initiation of care.
As we free up clinical capacity. We are then able to dedicate more capacity to these plans members, resulting in more planned members receiving care in the home, thus increasing access for Cvs Aetna, while providing our medicines with new organic admissions growth opportunity.
I again want to thank our partners at Cvs Aetna and our internal teams for embarking on what will be one of the future growth levers for our organization.
As we have discussed in the past we are in active discussion with other plans for similar contracts or other value based models.
The remaining plans that had been unwilling to engage on models like this should take note.
In a world where clinical capacity is at a premium we will not work with payers, who fail to see the value that we deliver and the quality outcomes, we provide for their members.
I'd also like to acknowledge other organizations, who are innovating alongside <unk> to leverage the tremendous amount of value that our services offer their patients and plans.
Professional health care network and care Centrex have taken a holistic view to working with their provider partners.
<unk> been willing to pay us episodically and have shown a desire to innovate and expand their relationships with us I'd.
I'd also like to call out my Nexus, who pays us a strong per visit rate.
These organizations recognize that high quality providers of scale, our unique in home health and tie bonus dollars to quality results.
These organizations are the types of <unk>, we strive to work with.
As they grow our capacity will be shifted to serve more of their patients as their reimbursement structure enables us to deliver the best care in the home.
As opposed to the short sighted convenor is that simply want to take a fee drive visits down and increase administrative burden, thus negatively impacting patient access to appropriate timely care.
We also feel the addition of Contessa will uniquely position us to spring ahead of the industry and developing innovative new ways to work with our patients and managed care partners.
Speaking of apps Contessa.
We recently announced a first of its kind comprehensive care at home partnership with the University of Arkansas for Medical Sciences.
This joint venture partnership will offer patients a full spectrum of Contessa and medicine services, including hospital at home Sniff at home primary care at home and home health.
We're extremely excited as this joint venture marks a key milestone since our acquisition of contests of last year.
This partnership provides a new standard of care delivery spanning the full continuum of at home care and represents the first partnership in which both Contessa Anna Medicine services had been in scope at the outset.
We will continue to seek out and invest in opportunities with similar health systems looking for an operational partner to build out a differentiated and integrated home care offering utilizing this full suite of services.
It has been an exciting quarter in home health from a partnership perspective, and though the operating environment. In 2022 has been challenging these new relationships differentiate <unk> and set us up for future profitable growth.
And we know the catalyst for this growth and new partnerships is our unwavering commitment to quality patient care.
I am excited to announce for the January 2023 preview our home health quality of patient care Star scores is 449 stars with 99% of our care centers, reaching four stars or greater and 83% at four five stars or greater.
Quality has been and always will be core to all we do at our medicines and this continued improvement is really something all of US here at <unk> are proud of.
In hospice for the quarter Hospice same store ADC grew 1%, which marks the second quarter in a row of ADC growth.
Adding to the improvement in ADC has been the normalization of discharges as a percent of ADC and the leveling off of median length of stay.
As we have discussed during the last few quarters, our discharge rate peaked at 39% and our median length of stay dropped to 18 days in January .
And has sequentially improved compared to our internal modeling since that point.
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To quantify how impactful this experience has been to revenue.
If discharge rates mirror 2019 experience year to date September revenue would've been approximately $51 million higher than our current year to date revenue.
Within our high acuity segment total admissions in Q3 for hospital and stiff at home were 430 <unk>.
Representing 25% growth over Q2.
We further strengthened the positive trajectory of this segment, we've invested significantly in integrating the nursing function into the <unk> home health operations and.
And devoted resources to recruiting our own nurses to service our joint venture partnerships.
Nurse staffing continues to be a widespread challenge for organizations across our health care system accounting for 59% of our volume mix within our live joint venture partnerships in 2022.
With the largest factor in our ability to take these high acuity program referrals increasingly in our control we expect to reap the benefits in the form of meeting our targeted emission metrics this year and beyond.
Additionally, Contessa continues to have tremendous success in its newer palliative care at home model engaged members were up 57% quarter over quarter.
We see a tremendous opportunity to capitalize on this initial success by building out additional infrastructure and risk taking capabilities to enable new innovative palliative care at home programs.
On the business development front contest is currently implementing programs with high value health systems, including Baylor Scott <unk> White health.
Memorial Hermann in Virginia, Mason Franciscan health.
We expect all of these programs to be live in early 2023.
Impressively of our eight currently referring JV partners for now have positive EBITDA at the JV level year to date in Q3.
Since our acquisition of Contessa, the nature of the JV discussions in our pipeline have expanded to include home health <unk> hospice.
Because these partnerships are more robust and more complex in nature.
Selling cycle of the new JV has increased significantly causing delays in getting deals done.
In fact timing delays in new JV partnerships accounts for 61% of our revenue Miss year to date.
We continue to track towards closing these additional partnerships to eventually bring this additional volume on platform.
We'll look to execute more comprehensive partnerships in the near future.
As we near the end of 2022, we expect our higher acuity segment to build upon its initial success and generate significant positive positive momentum into 2023.
In summary, although we continue to be impacted by a few industry headwinds we are confident in our ability to outperform and accelerate growth.
Most of the adverse conditions impacting the business will be short term in nature.
And our enthusiasm for the outlook of our medicines has never been stronger.
The longer term value proposition of our lines of business remains as strong as it has ever been.
As evidenced by the announcement of our partnership with <unk>, our innovative case rate contract with Cvs Aetna and our value based negotiations with professional health care Network care Center, it's in my Nexus.
It has been a busy and exciting quarter for our medicines in the future. We are building towards has its all very energized.
With that I'll turn it over to Scott, who will take us through a more detailed review of our financial performance for the quarter Scott.
Thanks, Chris for the third quarter of 2022 on a GAAP basis, we delivered net income of 79 per diluted share on 558 made in revenue a revenue increase of $4 $5 million or 1% compared to the third quarter of 2021.
As I'll discuss in my prepared comments, our operators have faced challenges in Q3.
Impacted our near term results overall legacy operations remained strong and we will continue to find opportunities to increase our operational efficiencies. Despite delays in the closing of new JV and other contracts have continued to invest in contested cost structure.
We believe.
Believe these investments are necessary to fully recognize the significant opportunities ahead now onto the quarter.
For the quarter, our results were impacted by income or expense items adjusting our GAAP results that we have characterized as noncore temporary or onetime in nature.
40 of our supplemental slides provides detail regarding these items in the income statement line items each adjustment impacts.
For the third quarter on adjusted basis. Our results were as follows revenue increased five.
A 1% to 550 $559 million EBITDA decreased $11 million or 15% to $62 million a year over year comps were impacted by approximately $15 million related to legacy performance.
The significant drivers or the prior year benefit of sequestration leaf of $9 million.
$5 million additional losses from with Tessa, which includes an additional month of operations at two new home health acquisitions in Q2, which added $12 million of revenue at Onemain and losses.
EBITDA as a percentage of revenue decreased 210 basis points to 11%.
Normalizing for the items I referenced EBITDA as a percentage of revenue improved to 90 basis points in our legacy operations.
EPS decreased 38.
A 25% to $1 15 per share.
Sequentially EBITDA decreased $13 million in line with our expectations as described in our second quarter earnings call.
The return of sequestration had a negative impact of $4 million planned wage increases added $4 million of cost and additional holiday higher health and workers' comp costs added another $4 million.
Well I think that performance track with internal expectations, we continue to be behind from a volume perspective, and we expect that a faster than anticipated growth in home health admissions from per visit payers, which has decreased our episodic percent of revenue.
Now turning to our third quarter adjusted segment performance keep in mind segment level EBITDA is pre corporate allocation.
And our home health revenue was $338 million.
Flat from prior year, which includes $12 million of our recent acquisitions. Prior year results includes a $5 million benefit from the <unk>.
The sequestration.
Revenue per episode was up 21% was the result of a three 2% increase in reimbursement, partially offset by the reinstatement of sequestration at the full 2%.
Visiting clinician cost per visit is up 7% year over year and 4% sequentially Medicare.
Medicare visits per episode declined, 8%, which is which offset the cost per visit impact, resulting in a Medicare cost per episode decrease of 2%.
The increase in cost per visit was driven by planned wage increases which were effective August 1st wage inflation and increase in salary commissions and lower visit volumes.
G&A increased approximately $5 million, mainly driven by our recent acquisitions, which added $3 million.
The remainder of the increase was driven by planned wage increases and increased information technology fees.
Segment, EBITDA was $59 million represents a $10 million decline in EBITDA and a 200 basis point decline in EBITDA margin.
Sequestration in Q2 acquisitions accounted for 6 million of the decline.
Sequentially segment, EBITDA was down $12 million, mainly driven by planned wage increases.
The impact of an additional holiday.
Sequestration and higher health insurance costs.
Recently, we have seen a decrease in our episodic revenue as a percentage of total revenue from 79, 3% in Q2 to 78, 1% in Q3.
Hypersonic payers accounted for 89% of revenue in Q3 of 2021.
As Chris mentioned in his comments, we have seen a significant increase in demand for our services for Medicare advantage payers and convenience.
We successfully increased our rates with some per visit Payor lots of case rate model and negotiate episodic reimbursement contracts with two innovative convenience we.
We will continue to negotiate with the innovative containers and evaluate our MMA contracts to ensure that our clinical capacity utilized with payors that part at the best opportunity to drive quality care to their members.
Now turning to our hospice segment results.
For the third quarter revenue was $199 million.
Up 1 million over prior year, which is net of a 4 million benefit in prior year from the suspension of sequestration.
Net revenue per day was flat as a 2% hospice rate increase that went into effect October one 2021 was offset by the reinstatement of sequestration.
Cost per day increased 62.
Primary data raises wage inflation and sign on and retention balances.
EBITDA was $43 million up approximately $1 million and the 5 million when normalized for the sequestration benefit in prior year.
Sequentially segment, EBITDA increased $1 million the sequential improvement in EBITDA was driven by a 1% sequential increase in ADC.
The EBITDA increase is net of a $2 million sequestration benefit in the prior quarter.
Turning to our total general and administrative expenses on an adjusted basis total G&A was $182 million a $32.
6% of total revenue up 80 basis points, mainly due to the Contessa and our recent home health acquisition, which added $9 million of G&A.
It Couldnt contest in our home health acquisitions, our G&A is down $3 million over prior year sequentially G&A was flat.
Cost management is always is something that we havent sell that and we are embarking on and have already rolled out initiatives focused on centralizing and automating our processes and reorganizing our structure to make us a more efficient organization and help us to catch agent more growth opportunities in fact, the initiatives. We have completed this year will.
Nearly a $20 million cost benefit in 2023.
With the potential to expand beyond that as we centralize additional functions.
As detailed on slide 14 items adjusting our GAAP results include $4 million of expenses related to our centralization and reorganization efforts initiated during the quarter.
For the quarter, we had negative cash flow from operations due to the repayment of <unk> audit stemming from a 2015 acquisition.
Excluding the repayment cash flow from operations would have been $21 million.
Our net leverage ratio ended the quarter with one six times. Despite the challenges we have faced our cash flow and capital structure remains strong and position us to take advantage of strategic opportunities.
Turning to M&A, our pipeline remains sold home health hospice and comprehensive care joint venture opportunities and we continue to look for accretive ways to deploy capital for inorganic growth.
Given the current labor market dynamics payer mix shifts in home health, the Preshow and hospice admissions and length of stay and our continued investments in Contessa, we're updating our 2022 guidance ranges for revenue EBITDA and EPS, which can be found on page 16 of our supplemental slide deck.
Our new guidance ranges are as follows.
Two to $2 4 billion to two 3 billion in revenue.
$253 million or $258 million in EBITDA, and $4 82 to $4 93.
And EPS.
While we were able to reduce expenses to offset softness in top line at level of sensus as we exit Q3, and a revised admit projections.
It impacted our ability to achieve our original Q4 EBITDA projection.
Additionally, the delays in the closing of the deals and additional investments to prepare for sizable feature opportunities resulted in a 5 million reduction in EBIT African Tessa.
As we move from Q3 to Q4, we will see impact from the normal seasonality items, such as an increase in health costs of $5 6 million.
Our annual rate cycle, which is effective August 1st with an expected impact of $2 million.
An increase in compensation cost of $5 million and a drop in hospice ADC driven by higher discharge rates in Q4.
With that I'll turn it back over to Chris to wrap up our prepared remarks, Chris.
Thanks Scott.
Additional steps, we have taken to position ourselves for the future, including the partnerships with Cvs Aetna and professional health care network and our relationships with <unk> and <unk> are providing strategic advantages that will play out on a national scale over the coming months and years.
The forward looking roadmap, we have undertaken gives us every reason to be optimistic about our future in this industry and more specifically our company.
We are seeing unprecedented demand for our services in home health and though the mix of business has shifted to Medicare advantage.
We expect to continue growing our fee for service, while innovating with our payer partners.
Setting us up for strong value creation in the coming years.
To confirm this we recently commissioned an independent industry analysis performed by Mckinsey.
And they're finding show that between enrollment and utilization recovery in rate, we can expect to see the total spend in home health grow by 6% to 8% annually through 2027.
With fee for service market, returning to a 3% to 5% year over year growth.
As that growth returns our position as the nation's premier home health providers will only grow stronger.
In hospice the impacts of the pandemic still linger, but we are seeing a return and length of stay and we will see an increase in utilization of benefit as we enter into 2023 and beyond.
Hospice remains an underutilized benefit with less than 50% of Medicare dissidence, passing away on hospice services and as the population continues to age and utilization increases we conservatively expect the hospice market to grow by at least 5% annually.
In our high acuity segment hospital system, and payer interest remains strong and the infrastructure and platform, we acquired with Contessa will enable us to take risk and further differentiate our service offering from others in this space.
The UAE EMS partnership is the exciting realization of the vision, we set out for Contessa, when we acquired the company last year.
We firmly believe that this is the first of many partnerships that will make available our full suite of services within the new comprehensive care at home model and will further strengthen <unk> presence in their homes and communities across the country.
Our next frontier of growth will be prototyping all of our services into a package that one allows patients to be cared for in their home regardless of their payer or their disease state.
<unk> significantly reduces the cost of care for our payer partners and three allows medicines to be fairly compensated for the outcomes we deliver.
As we continue to become the industry standard easy button for our payer partners.
We will see new types of growth in new types of contracts of which we will have only begun to scratch the surface on.
Key to enabling us to tap into all the future growth that is coming our way will be our ability to manage our clinical capacity.
It is not new news that there is more demand than there are clinicians to service that demand.
But I have all the confidence in the world that <unk> will continue to be an employer of choice and win an outsized portion of that of.
The available clinical labor pool.
We are rolling out a significantly enhanced benefit package that builds and expands on the offerings that are already place us among the top quartile of the industry employers for things like wages.
This package specifically focuses on components that our clinicians have said are most important to them.
We're also working on initiatives to build in flexible ability to our clinicians schedules and.
And we have significantly upgraded our recruiting practices to ensure we are hiring the right people for the right roles.
All of these things will positively impact our turnover metrics allow us to grow our net clinical ftes and in turn help us to grow our topline.
We understand that many of the accomplishments and investments described here will materialize. There first topline returns for us in the coming months and years ahead.
We know what work must be done and we are already built and set out on the comprehensive roadmap that will take us into the bright future that awaits.
In closing I am is energized excited and confident as I've ever been in this space and in our medicines.
This ends our prepared remarks, operator, please open the line for questions.
Thank you at this time, we'll be conducting a question and answer session.
If you'd like to ask a question today. Please press star one on your telephone keypad and a confirmation tone will indicate your line is in the question queue.
Start to if you would like to remove your question from the queue.
For participants are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
So let me address questions from as many participants as possible. We ask you. Please limit yourself to one question.
One moment, please while we poll for questions.
Thank you. Our first question today comes from the line of Brian <unk> with Jefferies. Please proceed with your question.
Hey, good morning, guys.
Yes, I'll stick with the one question rule here. So I'll give you a two part or really quickly. So Chris maybe just if you can give us some thoughts on.
How do you think you can grow with the MA contracts that you have.
Signed one with Cvs.
I think you have a pipeline of a few more coming and how do you anticipate that growing and then maybe related to that for Scott as we think about next year right. I mean, you threw a few things here, whether it's the improvement in contests G&A cuts of $20 million, yes, some benefit enhancement costs coming kicking out in 'twenty, three and then I may contra.
<unk>.
If you can help us bridge, a little bit without giving guidance into how we should be thinking about the quantification of those different moving parts and into next year. Thanks.
Yes, great. Thanks, Brian .
On the MA contracts I think Thats a great question.
Just really kind of laying it out in the first frame ended up if you look at our fastest growing part of our home health side of the business. It is in our MMA per visit.
Business mix, that's about $300 million a year in revenue, where we do about $2 4 million visits per year, but our average reimbursement is woefully low at $131 per visit. So there is were our fastest growing market is but the same time, we the economics don't look good so thats why.
I'm really excited about our deal with Cvs Aetna.
Hoping to be able to announce another contracts pretty soon that will actually move one half of that $300 million of business and the margin expanding business.
Just to give a little color on our deal with Aetna.
22 states and interesting enough 15 of those 22 states, our new contracted states for us So and that encompasses 88, new care centers, where we have not historically been admitting aetna patients because we were not in network. So a lot of greenfield there for us to expand.
The size of this contract quickly.
Also just a little color in our very first month four month of the contract where we have.
With Aetna.
We saw our referrals from Aetna double we saw our admissions for met Ed in a triple and we saw our ADC on Aetna case rate double in the first month, so I'm really enthused by that I see a great opportunity for us to move more contracts to a case rate model at the same time with the.
Other with the rest of that business, we're going to aggressively go. After these plants, we're going to we're going to take a firm stance. We cannot continue to dedicate our clinical capacity to treating these patients if we're not going to get paid fairly and cover our cost at a minimum and get really paid more fairly for the service quality and outcomes that we deliver.
We're going to aggressively look at the rest of our portfolio and make some some informed decisions on what we're going to do with our capacity coming soon and we expect that to be a big growth model for us over the next the next coming years Scott.
Scott sure. Thanks, Brian Great question, Yes, I think theres a lot of clarity, we need to get get through a lot of moving parts from Q3 to Q4 and as we exit so implying somewhere around a $55 million for Q4, EBIT I think you have to adjust a couple of things of that in our starting point.
Q4, so I think that real number when you consider Q4, having a extremely our highest health insurance mob.
On our side additional holiday in that quarter than we run in the first two and you're probably looking at more of a $62 million starting point the annualized I forget in that $2 48 to 50 type of range and then you mentioned some of the centralization efforts, where they are we're talking about what we're doing around case rate. We believe there is additional opportunity on a per visit.
One is to expand that we think is a powder programs continued to develop on the contessa side thats going to feed into some hospital safety ADC growth.
Just bucket those in before we really close out the year and really focus on 2023, that's probably about 40 million their allowance you talk and Youre looking at 2000.
<unk> hundred 88 to 90 type of a number right there from a starting point and then you go and we'll see what happens on reimbursement, but I think between growth and.
Other opportunities we have contessa from a loss perspective, we believe we will get better and you offset that listens and wages I think it kind of keeps you in that realm going into next year. So I think those are the high level moving pieces, but I think that.
We've got some good plans in place I think the centralization effort is going to be strong for us and we will continue to update you guys. As we go forward into 2023.
Thank you.
Our next question is coming from the line of Matt <unk> with William Blair. Please proceed with your question.
Hey, good morning, I wanted to yeah, Hey, good morning.
So.
Thank you the question.
About half of that.
Perfect.
Could be flipping into concurrent with this new contract Youre looking at.
Talk to you about here, but maybe just directionally do you have a sense.
What percentage of that book would you characterize it.
Convenience of payers that you are having productive conversations with or if you're optimistic about versus you sort of referenced in your prepared comments.
Many areas, you're not making as much progress just think of a sense for where you stand relative to the whole book of business.
That would be part wanted to sneak it apart.
You hit the high end of performance expectations on those case rate contracts, maybe net and one as an example, how does both the rate and margin compare to your traditional Medicare business.
Alright.
Yes, Thanks, Matt I think I got the first part of the question right in terms of kind of how to gauge out our conversations with the innovative convener.
<unk> is out there and what that is is in terms of percentage of our total book of of of our non our Medicare advantage per visit business. So I would say, it's small today, but the encouraging thing is is that the ones that I called out in my prepared remarks.
Really are the ones that are more forward thinking in terms of how do they value.
Care in the home.
<unk> as a tool to drive down total cost of care, so getting paid on an episodic basis by <unk> with the additional upside based on quality outcomes is something we really want to lean into those as partners and really put dedicated our capacity to do more of that business.
As well as my Nexus would be higher in volume more of a traditional per visit rate, but much closer to the Medicare fee for service side.
The gap is as much narrower there than it is with the others that we've been working with and traditional plans directly as well. So we're looking to have those kind of relationships would be a larger portion of our MA business quickly to be able to drive additional margin on the case right.
We will be able to what the margin is today on the two contracts.
One with Cvs Aetna the other that we're looking to to get done relatively soon.
I'd say, the gross margins in that 18% to 22% range.
That business fully optimized it should get into the low 40%, 40% to 42.
<unk> range, which is ideal for us and it will significantly also close the gap on the per visit from Medicare fee for service versus.
Versus those those rates now the Medicare fee for service is at an all time high on a per visit basis, because our business per episode are at an all time low I don't expect our visits per episode to stay where they are some kind of a labor constraints are driving down that total business, perhaps so today.
<unk> said all along we think it should be in that 13, two to $13 four range, we're a little bit below that but thats kind of by math driving that visits revenue per visit up quite a bit so.
I am encouraged by our ability to really kind of drive that margin expansion and get these contracts in place and then aggressively work with those.
Those forward thinking convenor is to expand that business and then us to really step away from plans out there that are not going to value what we do.
Our next question comes from the line of Justin Bowers with Deutsche Bank. Please proceed with your question.
Hey, good morning, everyone.
So just wanted to talk about the labor market a bit and you highlighted that.
It had sort of constrained growth.
I'm curious if that is just if that's isolated to home health or across hospice as well and.
Did you.
<unk> net hires and do you plan on.
Pacing towards increasing or decreasing clinical capacity.
In this quarter.
Maybe just a follow up to that would be on hospice, you've talked about <unk> being down sequentially.
Do you anticipate that revenue will be down as well.
And I'll pause there, yes I'll take.
Yes, I'll take the second one first.
Basically ADC as our revenue is a direct function of ADC versus AD Miss like it is on the home health side. So, yes in the tick up or tick down and.
In ADC has a direct correlation to revenue. So we would expect that to be down but also keep in mind, we did get.
Rate increase effective October 1st this should offset some of that decline in ADC.
On the labor side.
It's no secret out there that labor across all of health care is very challenged and we're not immune to it either and we have been seeing.
Some some signs of softness, particularly through the summer months I would say this has been the most atypical summer that we've really seen in terms of just time off clinicians wanting to take a hiatus.
Just really trying to kind of re kind of re energize around.
Okay.
Personal life goals and things like that so we did see just our internal capacity a little bit constrained plus the flow of new candidates was down significantly throughout the third quarter.
But we are seeing now that we're at and having some net increases.
Happening so far in Q4 in fact October .
From an offers made perspective, we've had four straight weeks of 200 offers made and accepted.
In the in the field, which is a record high for US, which is really encouraging as we close out this year and our clinical capacity is expanded on both the home health and hospice side.
The question about is it isolated to home health no it's not.
Clinical capacity is going to be our secret for success on both lines of business over over over the coming years, and we're seeing that being challenged on both the home health and hospice side today, but I am encouraged that we have a good plan in place we will build from where we are in.
See some of those results show up in our ability to take more patients and Scott had suddenly wanted to I just want to add just as we think about labor framed up relative to our take back and take down in guidance.
If we look at that the components of it Contessa, we've talked about and you could hear in my prepared remarks is probably about 25% to take down the rest is kind of split evenly between home health and hospice segment.
We look at that and it did.
Kind of look at that further and tight labor into at home health about 70% of that type that is relative to the labor constraint and I would say about 25% of that a hospital. So we are definitely seeing on both sides of the business. We did also see record PTO taken in Q3, even with a.
Lower.
Kind of Labor force so to speak so that's something we're watching and hoping to see that it will soften as we move to Q4.
Our next question is coming from the line of a J Rice with credit Suisse. Please proceed with your question.
Good morning, a J.
How are you.
Maybe just to ask about we've got the rate update for in home health for next year coming any day now.
Any updated thoughts there we've seen some of these where they've stretched out a decision to have a cut into a cup multi years as opposed to doing it all in one year. We have also seen some offsets by increased market basket I Wonder if you have any updated thoughts and then to the extent there is a cut I know you're doing a lot.
On to bringing cost now do you have the ability to see.
You think mitigate any of that if you had to absorb it and then lastly, it sounds like the whole acquisition area in home health. It's been on hold until the rate notice gets finalized how quick do you think M&A might open back up and whole milk. Once this is al.
Yeah, great. Thanks, a J I'll take the first two and I'll, let Scott talk about the acquisition side.
We should see the rate come out any day now.
<unk> kind of viewpoint hasnt changed much if we do look at past actions from CMS, Yes, we would expect to see a pretty significant market basket update to offset some of that four 2% rate cut net rate cut.
Additionally, there is a high there is a decent probability that CMS would phase it in over multiple years and I'm also kind of heard the possibility of maybe even delay.
Implementing the <unk>.
Cut for year, and then phasing it in from there either one of those scenarios are not ideal for us and they're not acceptable for the industry. They don't they don't account for the fact that home health care home health care is so much value. During this pandemic, we're dealing with the highest inflationary period that we've ever seen.
<unk> and cutting our rates at any level right now is absolutely capricious and the wrong thing to do and we will aggressively fight that but.
No one how CMS has acted in the past.
Highly large decent probability of that.
They stick with their guns on their methodology, which we think is fundamentally flawed.
Do update the market basket and bring down the towards seems a little softer for us going into next year.
Of which we still will not we will not standby and let that happen we're going to fight very hard on the on the offset side.
Yes, I mean, we've already and we called out Scott called out in his prepared remarks, we have been embarking on a centralization and automation kind of.
Initiative for some time now and we accelerated that when the cuts were announced in the proposed rule.
We've already identified and locked in about $20 million in G&A savings next year related to centralization functions that are in flight. Today. We think there is much more available to us pacing will be kind of something that we will have to be very thoughtful about because it is impacting the <unk>.
Business as we do that we want to make sure that we don't create any harm, but we do think that there are additional efficiency offsets that we will get regardless of rate cut but if the rate cut comes through then that would probably accelerate some of the pacing and then Scott on the on the M&A side, Yes. Good question and I think our feel is.
It's certainly going to accelerate you know theres a lot of deals in our pipeline right now it really both home health and hospice a pretty interesting one I think as we price things out on home health, we are pricing and at the rate cut at this point and kind of showing what that would look like so that's definitely going to slow down.
We're extremely active there and I do think it would it would accelerate rather quickly when we get some clarity there there may be some people wait to see what happens.
Through Congress at the end of the year. So if you get a bill passed but.
That's just something that's certainly the early beginning of 2023, you could see some significant movement there.
Our next question comes from the line of Sarah James with Barclays. Please proceed with your question.
Thank you good morning, Sarah.
Good morning.
And you guys think about your staffing strategy and the shortage that sometimes leads to turning away revenue does the higher margin potential on the value based care contracts impact your decisions on staff allocation.
A tween the various payers and does it impact the.
The calculus or the decision to higher contract labor versus turn away volume given the pay to cost spread on the value based care contracts could be really different with the higher margin.
Yeah, Great question, Sarah and I think that in terms of the.
How we think about the contractor side first absolutely we evaluate if we feel like our staffing shortages more temporarily and we have new clinicians that are kind of in training and soon to be getting into the field and we weigh that into whether or not to commit to a staff.
<unk> contract for a contractor and other markets where.
Absolutely. If we went ahead if we have contractors that means that we're going to be able to grow our business as well as meet our referral partners.
Request and filling those.
Those referrals into and turning them into add minutes, we look at that as well, we do try to have discipline around our contractors, though because we've seen it get out of hand in terms of rate, we seem to get out of hand in terms of the demands from the contract organizations that we have to basically and we saw a lot of that in the first quarter of this.
Year, and where we're maintaining better discipline around that but I would say.
We look at lost opportunity.
As a factor when we decide whether or not to use contractors and then how we're utilizing our staff.
We could we cannot discriminate on patient census, or admissions based on their payer source or are there are.
The payer that they have are the who's covering them, but at the same time, we do have to manage our capacity and we prioritize around our referral sources that do have more volume from case rate type patients as well as some of our targeted payers that pay at a higher rate.
Eventually we're going to end up calling out a number of our contracts with organizations that absolutely refuse to budge on paying us fairly for services and the time has come because capacity is not going to get better for the for the industry for quite some time, we feel very confident in our ability to win.
On the labor side, and actually build our capacity, but there is still is going to be in aggregate a shortage of clinicians available to meet the demand. So.
The time has come for some of these plans out there they refused to get kind of a realistic about what what they pay for them to make some decisions or we're going to make some decisions for them.
Thank you. Our next question is from the line of Ben Hendrix with RBC capital markets. Please proceed with your question.
Thanks, guys within your fee for service volume you noted a one one.
Does it decline in visits per episode have the labor constraints that you've seen added greater frequency of low utilization adjustments within episodes.
So could that be a factor should we think about the Medicare revenue comp next year. Thanks.
Yes, our lupus or up a little bit, but not to the extent that visits per episode are down. So we've always for last I think three or four quarters have averaged a LUPA rate of around 10, 5%.
And it may be up to 11% I think for Q3.
<unk> three <unk>.
Which is as up.
Slightly.
But I think that we have not seen enough fluctuation in lupus.
In the last four quarters to change your modeling for next year I don't expect it to go up from where it is today, yes, yes, no I think thats right I think where we see we feel there's a lot of unfortunately, and it's not good for the patients as you have we had some months really extremely strong admissions kind of within the intra quarter or larger numbers and then subsequently.
What are you see our subsequent months you see somewhat of a dropdown and restart so that's kind of where I think we feel it from a staffing perspective. Unfortunately earlier.
As I said isn't good for the patients so we'd like to see that rebound I mean pretty happy with the efficiencies of our clinicians where if you look at our total census levels were taken care of as many patients as we have year over year with less relations. We've got to solve that coalition number. So we can continue to grow that census.
Our next question comes from the line of Bill Sutherland with Benchmark Company. Please proceed with your question.
Hey, everybody.
Wanted to follow up on on the bridge that you gave us Scott going into next year on EBITDA and just I'm, just wondering kind of what your assumption.
On the.
The Medicare rate that you built into that.
Thinking.
Yes.
Yeah. When I gave you those numbers I really did play out soon flat pricing at that point for just getting to the blood and consider growth or anything like that getting to the numbers. So we'll wait and see what comes out of that don't really want to speculate on where we think that number number will be that kind of get to that 288, 290, <unk> really was just getting to a baseline.
And then we will get growth will have to cover some raises and then we will see what happens with rate.
That's where we are within that $20 million on centralization and kind of our restructure we will see where that number goes but I think we feel good about kicking that off and continuing to get some strong internally.
Our next question comes from the line of John Ransom with Raymond James. Please proceed with your question.
Hey, John .
Hey, there.
Cost per visit I mean, not surprisingly is up from say $90 to around 110.
I know it was exacerbated this quarter by the rate increases as you think about that number next year, where do you think and what do you think that will land.
Yes, right now I mean, we had some noise in that number right now kind of look at the visiting piece of it John is still up 645. So a good piece of that some of the impact of clinical managers are just because of visits but I still think we're going to run in that.
Based in place around that 10 around four ish percent type of number I think I think it will settle we're seeing it settle.
Even this quarter it actually.
Was kind of pushed with last quarter and that was because we gave raises so we're seeing some stabilization. There. The key is going to be to us really getting contract is under control and reducing our turnover. That's the best way to impact that and continuing to grow frankly, there is fixed cost within.
Within our structure on home health and when we take down visits and visits per episode dropped and we see some visits per admit drop on the non Medicare that helps us a clinical capacity, but because we have a less base or that can impact that number so you're probably close to a dollar thats probably just the shift there so.
I think the kind of 4% on a pure wage line right now.
The next question is coming from the line of Scott Fidel with Stephens. Please proceed with your question.
Hi, Thanks, good morning.
Interested just on contact Terry if you could maybe give us just your updated thoughts on revenue now for for 2022.
First that $56 million or so that you've been thinking about earlier in the year.
And then maybe just sort of talking about the glide path as we look out to 'twenty three 'twenty four.
And then just on contact also was just interested if.
Are there any can taxi services that are actually included in that new Cvs contract or is that just for just for sort of core home health services.
Yes, Scott I'll take I'll take the last the second question and then I'll, let Nic give a little bit of kind of color around the contessa kind of trajectory.
On revenue the Cvs Aetna contract.
The case for a contract does not include any hospital at home or significant home services.
So it.
It'll be strictly for the home health side, but I will say this that in our discussions with with Aetna through this whole process.
Express a strong desire to expand our discussions around value based contracting.
Include more services, so I wouldn't be surprised.
Dear future, we didn't have something out there that was kind of more in lines of bringing in additional services that contests offers.
Our contracting arrangement, but we don't have anything imminent right now.
And Nick on the on the revenue trajectory.
Thanks Scott.
No no surprise, we're behind on the.
$56 million revenue projection like we originally thought we would achieve this year, but quite honestly still remain very enthusiastic about the demand for the business I think you've seen us announce a number of joint venture partnerships and I would say kind of a new marquee one with you Ams. This.
This quarter actually the last couple of weeks, which is really our first comprehensive JV, which is what we've been talking about since we acquired the asset right and so this joint venture will include.
Hospital at home Sniff at home home health and some additional services, which will really be the first time that the blended organization of a medicine and Contessa has worked together to execute.
Joining venture we think that that's the profile of joint venture partner that will be targeting and that will be working with going forward.
Which which is a very exciting thing at the same time when you start integrating all of those lines of business the complexity around contracting and papering that joint venture becomes harder in the sales cycle has expanded and so though were off from a revenue perspective. This year I do think youre going to get a step up in revenue from Q3 to Q4.
Sure.
Today, we have eight currently referring joint venture partners to US and then we have 11 total signed you'll continue to get some additional volume increases as the newer contracted jv's that we're referring referring to us in Q3 kind of ramp up into Q4, and then there's another there's a number of other kind of opportunities.
As in flight, which as you've seen us struggled to do this year, it's hard to pinpoint exactly when those things are going to land and so.
Not going to give a 2023 number yet, but we will obviously do that as we kind of close out the year and guide towards 2023 and the main reason is we just need to see if we can have a better projection around timing around some of these bigger opportunities hit.
But do you still feel very confident and very excited about the asset and all of that is enabling us to do here at <unk>.
Thank you. Our next question is from the line of Whit Mayo with SBB Securities. Please proceed with your question.
Anyway. Thanks.
Hey, good morning, guys.
I was just looking at the slide deck and there was.
Mentioned here around hospice and elevated BD turnover with tenured reps just any color around that was this isolated to any one market more broad based I mean, you've had a little bit of challenges here in the past so just.
Any any help around a correction plan or color would be helpful.
Yes.
Good question and yes, there was some some challenges around that popped up in the third quarter and I think that we do have I do I know that we've got our arms around it but one thing thats snuck up on us a little bit to be totally transparent is that.
Staffing got tighter on our clinical side and then it started to impact hospice in.
And it was something that we're monitoring but it kind of came up late in the summer.
We have markets that we really were unable to take patients or we were slow rolling admissions because of staffing capacity and having to.
To spin up some contractors as well.
Just just self inflicted here what we did see happened was we had high performing tenured reps that were negatively impacted based on their compensation model and some frustration slate kind of surface stuff that we were just slow to react to so kind of caught us off guard a little bit, but we have our eyes on it now we are.
Plans around it we're doing a lot of tuck ins with our reps.
BD turnover in hospice, it's no secret we've talked about in the past has been elevated.
Particularly relative to our home health side.
We've got to cut that down significantly we have a lot of things in flight right now that are really kind of getting more personalized to each one of our individual BD reps out there. So that we are kind of matching their skill set with our needs but also.
Recognizing challenging conditions out there and I would expect that we're going to see that come down significantly.
Starting this quarter and then and then carrying on for a while.
So a little bit of a little bit of a kind of a hit is kind of out of left field quickly, but I think that we know we've got our arms around it and we should see that stabilize.
Thank you for.
Our next question is from the line of tunnel Q with Stifel. Please proceed with your questions.
Hey, good morning.
Part of my question is on the care demand side.
Some of that.
Referral settings, including acute care hospital.
<unk> also had elevated labor supply issues in the third quarter and continues to manage their capacity. So based on the volume trends from your referral partners, helping hospice.
Whether you expect any delay in the manual business and when do you think that headwind at some point it will turn into a tailwind for you and the second part of my question is really a follow up on the staffing commentary early here. So we saw that voluntary voluntary turnover kind of ticked up a little bit are you seeing more competition from other health care providers.
Is it just higher churn inside the home health and hospice industry. Thank you.
Yeah, Thanks, Todd and again Doug.
Those are the right questions to be asking in terms of when do we expect volume to be coming back.
As well as what does labour market could look like beyond our line of business.
On the volume side without a question hospitals, having slow recovery is impacting our business.
And it's impacting referral flow for us because a significant portion of our missions in both home health and hospice do come from hospital settings. So.
The longer that their recovery is delayed it is going to be continue to be a little bit of a headwind for us on us for us from a from a volume perspective.
That being said, it's more impactful for the home health business than it is the hospice business because patients that transition out of a hospital onto hospice.
<unk> to our hospice, they're traditionally going to be very very low linked to stay patients and they're not going to be on service very long and theyre not going to add to our average daily census, which is which is what drives our top line. So.
So for us, it's not necessarily hurting us on the ADC side on hospice.
But it is hurting us from the emission volume, but that secondary on the home health side, it's much more of an impact and then on the staffing side as competitive cross well beyond just home health, we're not trading clinicians with our competitors oftentimes when we lose clinicians it is because.
Its burn out or there is a more attractive offer in another setting.
And it's also kind of clinicians that actually choose not to not to.
Hey on the healthcare healthcare field.
One data point that I think is interesting for us.
And it's an opportunity for us to actually.
Worked through our retention strategy has as one in five hires that.
That we have today.
<unk>, our return employees their boomerang to come back to us so they.
Might have left either to take a hiatus or think that travel nursing was for them or the grass is greener somewhere else, but they end up coming back to our organization. So we see that as a great opportunity for us too.
To get ahead of them, leaving in the first place and build our retention and that will build productivity and capacity for us.
Our next question comes from the line of Andrew <unk> with UBS. Please proceed with your question.
Hi, good morning.
At the end of the prepared remarks, Chris I think you made a comment that you expect the first service home health volumes to grow one did I hear that correctly and two can you elaborate on why you think fee for service volumes can grow next year given expectations that industry membership I think will be down again, what initiatives are you, taking specifically to grow volumes there are taken.
Sure. Thanks.
Yes, Thanks, Andrew I appreciate you calling that out.
No question right now that Medicare fee for service volume in home health is down and Theres a couple of reasons number one the actual the market. The number of members Medicare fee for service members is declining slightly and it has been for the last couple of years, but more importantly, the actual utilization.
<unk> of home health within that population has been declining it was eight 9% in 2020 and eight 1% in 2021.
But at the same time.
The value of home healthcare has not diminished as just the utilization has changed during this during the pandemic, we expect that actual utilization to start to return to kind of pre pandemic levels.
That will drive significant growth in the fee for service World the 3% to 5% we're talking about over the next five years, we do think that 'twenty three we will still be a little bit of a and impacted year from a fee for service volume perspective, so for us to be able to grow faster than the market, even if the market is slightly.
Climbing for us to turn that into growth, it's going to be a market share stealing strategy and thats something that we are aggressively understanding of diving into all of our markets, where we don't have significant share and developing very unique strategies that again are market specific to go out and to leverage our quality.
<unk>.
Ratings, our service offerings and to be able to drive.
Under a disproportionate share of the referral volume out of those markets. So I expect that even in a declining Medicare fee for service market for next year again, we do think 3% to 5% part of that is on rate as well.
On the spend side, we do expect to be able to take market share from our competitors.
Thank you.
Final question is from the line of Joanna <unk> with Bank of America. Please proceed with your question.
Thank you thanks for squeezing me in.
Okay.
No questions.
Keith suite contract.
Good.
Good progress there.
That's being done.
In talking about blowing.
Growing volumes.
Markets with that inside of a contract that will clarify things around rates.
So you said something that would imply that you expect the rates to be actually higher versus.
This is the purpose it right. So are you referring to like that.
It's going to be later, because the way I'm thinking about it that could be some discount division might be offering to the players and then you kind of catch up.
Jonathan will not some kind of can you walk us through the timing of things.
Contract matures. Thank you.
Yeah, Hey, Joanne a great question I think on case right. I mean, there is going to be a lot to be learned on this.
I would say don't don't.
Don't factor in the upside to kind of us getting true ups on the backend on quality metrics. There are some opportunities there, but really the expansion of margin and revenue per visit is coming from us really optimizing our visits per admission utilizing our metal logics tool that helps us really get more.
Precise around what the right level of carriers for those patients as well as utilizing other tools such as remote patient monitoring as well as <unk>.
Tele visits to be able to have touch points with the patients while we're guaranteeing that they stay out of the hospital. So yes youre right. Initially it is at a slight discount.
This historic rates.
On a per visit basis, but to the.
The speed at which we optimize our visits which we expect will take us six months to a year to get fully optimized on the on the case rate that we have in place today. That's when you get to where you get the full benefit in the margin gets into that 40% to 42% range.
Already executing very well right now we will give more color around that again every one of these case rate deals that we do end up negotiating we will have some different nuances to it we're going to be somewhat selective of what we actually publicly discussed because we don't want to negotiate against ourselves when we're trying to.
Yes.
Cloud is this new territory for us and actually create these partnerships, but at the end of the day. The patient is going to win because theyre going to get a better outcome, we're going to win because we're going to expand our our margin on that business. We're also going to grow significantly organically through this and the plan is going to win because they got guarantees around access and they got.
Guarantees around.
Quality outcomes so.
We will we will give more color on this as we go along but.
I am excited I do think it'll be up to about a year before we fully optimized on a plan, but it should not have a drag on us with performance in 'twenty, three and we should see benefit by the second half of next year.
Thank you.
At this time, we've reached the end of our question and answer session I will turn the floor over to Chris Gerard for closing remarks.
Great. Thank you, Rob and thanks to everyone, who joined US on the call today and once again. Thank you to all the <unk> employees, who have helped to deliver another strong quarter of performance.
Everyone stays well and I'll look forward to seeing you all soon thank you.
Thank you. This will conclude today's conference you may disconnect. Your lines at this time. Thank you for your participation.