Q4 2022 Encompass Health Corp Earnings Call

Speaker 2: I'll see you next time.

Speaker 3: Thanks for watching!

Speaker 4: And I wish you a Pandemic day on ourthird about our olduP??

Speaker 5: Good morning, everyone, and welcome to Encompass Health's fourth quarter 2022 earnings conference call. At this time, I would like to inform all participants that their lines will be in a listen-only mode. After the speaker's remarks, there will be a question and answer period.

Speaker 6: If you would like to ask a question during this time, please press star 1 on your telephone keypad. You will be limited to one question and one follow-up question. Today's conference call is being recorded. If you have any objections, you may disconnect at this time. I will now turn the call over to Mark Miller, Encompass Health Chief Investor.

Speaker 7: Relations Officer.

Speaker 8: Thank you, Operator, and good morning, everyone. Thank you for joining in Compass Health's 4th quarter 2022 earnings call. Before we begin, if you do not already have a copy, the 4th quarter earnings release supplemental information and related form 8K filed with the SEC

Speaker 9: are available on our website at encompasshealth.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.

Speaker 10: During the call, we will make forward-looking statements which are subject to risks and uncertainties, many of which are beyond our control. Certain risks and uncertainties, like those relating to regulatory developments as well as volume, bad debt, and labor cost trends, are not related to the risk of future risks and uncertainties we place in keeping with].

Speaker 11: that could cause actual results to differ materially from our projections, estimates, and expectations, are discussed in the company's SEC filings, including the earnings release and related form 8K and the form 10K for the year ended December 31st, 2022, when filed.

Speaker 12: We encourage you to read them. Your caution 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.

Speaker 13: Our supplemental information and discussion on this call will include certain non- GAAP financial major financial measures.

Speaker 14: For such measures, reconciliation to the most directly comparable GAT measure is available at the end of the supplemental information, at the end of the earnings release, and as part of the form 8K filed yesterday with the SEC, all of which are available on our website.

Speaker 15: I would like to remind everyone that we will adhere to the one question and one follow-up question rule to allow everyone to submit a question. If you have additional questions, please feel free to put yourself back in the queue. With that, I'll turn the call over to Mark Tarr, Encompass Health's President and Chief Executive Officer.

Speaker 16: Mark, thank you and good morning everyone.

Speaker 17: Fourth quarter was a very strong finish in 2022, driving our full-year results to the top in of our guidance range.

Speaker 18: Patient buying remained a particular bright spot with Q4 discharge growth of 7.3% contributing to a 4-year discharge growth of 6.8%.

Speaker 19: spot with Q4 discharge growth of 7.3% contributing to a 4-year discharge growth of 6.8%. Continue.

Speaker 20: vigilance on labor management and a solid contribution from our 2022 de novos facilitated Q4 year-over-year adjusted EBITDA growth of 16.4%.

Speaker 21: For fiscal year 2022, we were able to overcome an increase of approximately $70 million in contract labor and sign on the SHIFT bonuses.

Speaker 22: $16 million in net pre-opening and new store ramp-up costs at our Denovo's, and double-digit second-half inflation in food and utility costs to generate a year-over-year increase in adjusted EBITDA.

Speaker 23: And we did so while continuing to strengthen our competitive position.

Speaker 24: We invested nearly $600 million in CAP-ACS in our business in 2022.

Speaker 25: This includes upgrades to many of our legacy hospitals, in many instances, reducing or eliminating semi-private rooms and shared bathrooms, as well as building replacement hospitals in two key strategic markets.

Speaker 26: Huntsville, Alabama and Tustin, California.

Speaker 27: We also continue to invest in our facility-based technology through initiatives like our Tableau onsite dialysis rollout.

Speaker 28: We now offer in-house dialysis in 41 of our hospitals and will continue the rollout in 2023.

Speaker 29: Reducing our reliance on third-party providers and obviating patient transport to receive this service leads to fewer disruptions to therapy schedules and improved patient outcomes and satisfaction.

Speaker 30: It also reduces our cost for these services.

Speaker 31: The central element of our strategy is investing in capacity expansions to meet the needs of a significantly under-penetrated and growing market for inpatient and relotative services.

Speaker 32: In 2022, we opened nine de novo hospitals, the most ever in a single year for us.

These facilities exceeded our expectations by contributing 4 million in 4-wall EBITDA in Q4.

We also added 87 beds to existing facilities leading to a net 4.4 increase in license beds in 2022.

As we've mentioned previously, we are increasingly utilizing prefabrication alternatives to contain design and construction costs and increase our speed to market.

Our use of prefabrication has regressed from head walls to bathrooms to exterior walls and in 2022 Uber modules which are two patient rooms adjoined by a corridor.

We anticipate piloting full hospital prefabrication beginning in Q3 of this year with anticipated cost savings of almost 15% and speed to market gains of 25% as compared to conventional construction once the program is fully ramped.

We complemented these investments in our business with the return of nearly $100 million to our shareholders through the cash dividend on our common stock.

The strength and consistency of our free cash flow generation allowed us to fund these investments and shareholder distributions primarily with internally generated funds.

Our leverage in Q4 was 3.4 times, unchanged from Q3, and our liquidity remained strong.

Evidenced by our strong and consistent discharge growth, our value proposition continues to resonate across our constituencies.

Within our payer mix, we further consolidated the gains made with Medicare Advantage, achieving 4.1% discharge growth in 2022.

Our Q4 same store Medicare advantage discharges.

were 41% higher than Q4 of 2019.

The normalization of patient flows through healthcare facilitated 8.6% discharge growth and Medicare fee for service.

We do believe that Q4 volumes benefited from early and aggressive flu season as well.

None of this success.

has been accomplished without more than 30,000 dedicated associates.

The past three years have been complicated with a lingering pandemic.

tightening labor market.

burgeoning inflation, and the strategic alternatives review for our home health and hospice business.

Our team has consistently risen to meet these challenges and to seize opportunities.

Our value proposition and our operating strategy have been further validated and we remain highly optimistic.

about the long-term prospects of our business.

as is our custom.

Today we are also providing our initial guides for 2023.

Our revenue guidance reflects our expectations of continued high single digit growth driven this year by both volume and pricing gains.

We also expect solid and adjusted even a growth.

Given continued uncertainty around the trajectory of further labor cost improvements and the impact of inflation elsewhere in our cost structure, we believe it is prudent to exercise some caution in establishing our initial guidance range.

Our 2023 guidance includes

revenue of $4.68 to $4.76 billion.

adjusted EVADA of $860 to $900 million, and adjusted EPS $2.87 to $3.16.

A list of considerations underpinning these guidance ranges can be found on page 13 of the supplemental slides.

I also want to note that we are planning to host an investor day in New York City on September 27th of 2023.

At that meeting, we'll provide more detailed insight into key elements of our strategy, including de novo hospitals, clinical technologies, and labor management.

We will also provide investors with the opportunity to hear from an array of our teammates within the senior management ranks.

Please mark your calendars for September 27th. Details will follow in the days ahead and we hope to see you there.

With that, I'll turn it over to Doug to provide some further details on our operating results.

Thank you, Mark, and good morning, everyone. As Mark stated, we are very pleased with our Q4 results.

Revenue for the quarter increased 9.1% over the prior year to 1.14 billion and adjusted Heba Dah increased 16.4% to 232.7 million.

We continue to see strong volume growth in tube.

Discharges grew 7.3%, which combined with a 2.2% increase in revenue for discharge to drive 9.6% inpatient revenue growth.

On a same store basis, discharges grew 4.2%.

For the full year 2022, discharges increased 6.8% and that was on top of 8.7% growth in 2021.

In 2021, when the clinical labor market began tightening and contract labor and shift bonuses started to rise, we made the strategic decision to continue to admit IRF appropriate patients, regardless of the financial burden to our company.

This allowed our hospitals to provide value to our patients, referral sources and payers.

As a result, we are experiencing gains in market share.

We made further progress on reducing labor cost in Q4.

Our Q4 contract labor plus sign-on and shift bonuses of $35.4 million was comprised of $19.7 million in contract labor and $15.7 million in sign-on and shift bonuses.

Contract labor expense in Q4 declined approximately 5.1 million or 20.6% from Q3.

10.3 million or 34.3% from Q4 2021.

and 22.2 million or 53% from the peak in Q1, 2022.

We experienced sequential declines in contract labor expense and FTEs for every month in Q4, and in fact for every month since last March.

Contract Labor FTEs for December were 325 compared to 749 in March.

Our contract labor expense is fairly concentrated with approximately 50% of the spend occurring in 20 hospitals.

Agency rates ticked up in Q4 versus Q3.

This was due in part to the premium pay associated with holiday shifts.

The Q4 agency rate for FTE was $211,000 compared to $205,000 in Q3.

Agency rates remain market specific and highly variable.

Reducing contract labor expense remains a key focus for us and we expect year over year improvement in 2023, albeit with some uncertainty around the trajectory of these costs.

Our December contract labor FTEs of $325 was in the range of $300 to $350 we had estimated in our Q3 earnings call as an exit level for 2022.

The seasonality of our business.

and capacity growth via new hospital openings and bed expansions may lead to some incremental needs for contract labor FTEs.

Finon and SHIP bonuses decreased $8.5 million sequentially to $15.7 million in Q4 from $24.2 million in Q3.

This represents a decline of 5.7 million from Q4 of 21.

Sign on bonuses declined by approximately 700,000 from Q3.

Much of the Q4 Sino bonus spend was tied to new hires in Q3 and prior.

We saw an approximately 8 million decline in shift bonuses sequentially.

You will recall that in Q3, shift bonuses were elevated to cover periods of unexpectedly high clinical staff PTO usage during the summer.

We have also made significant progress standardizing the process around shift bonus utilization and rate.

We expect year-over-year improvement in signon and ship bonuses in 2023 as well, but there remains a trade-off between our utilization of these bonuses and our objectives for reducing contract labor. ftees.

Specifically, ship bonuses paid to existing associates

sign-on bonuses paid to new hires provide a positive arbitrage against current contract labor rates.

As such, we expect the year-over-year improvement in sign-on and shift bonuses in 2023 to be less pronounced than the anticipated improvement in contract labor.

Our efforts in hiring and retaining clinical staff remain our best option for mitigating contract labor and shift bonuses.

For the full year of 2022, we had net same-store RN hires of 427.

As we have discussed previously, we have made significant investments in our in-house recruiting capabilities. We have made significant investments in our in-house recruiting capabilities.

This includes the establishment of a centralized recruiting function and a significant expansion of dedicated resources.

Our centralized talent acquisition team is now comprised of 73 associates.

We have also increased our investment in marketing support for our recruiting efforts.

As a result, recruiting and relocation costs in Q4 increased to $7.8 million from $3.2 million in Q4-21.

And for the full year 2022, this investment increased to $24.5 million as compared to $12.7 million in 2021.

These expenses are included in our other operating expenses.

Food cost per patient day increased 15.9% from Q4 2021 and 0.7% from Q3 2022.

Utilities cost per patient day increased 16.1% from Q421 and declined 11% from Q3 of 22.

The Quential Decline in Utilities Costs for Patient Day was primarily attributable to seasonal weather patterns.

We anticipate continued inflationary pressures in the first half of 2023 before lapping the larger increases in the second half of the year.

Our De Novo Embedded Edition strategy continues to generate solid growth and contribute to share gains.

Our Denovos performed exceptionally well in Q4, contributing 4.2 million in adjusted EBITDA.

We call that we had expected the denobos to break even in the fourth quarter after experiencing administrative delays and openings and hurricane-related disruptions in Q3.

Much of the overachievement in Q4 was attributable to our Naples and Cape Coral de Novos, which rebounded from Hurricane Ian much faster than anticipated.

We plan to open eight new hospitals in 2023 and add approximately 80 to 100 beds to existing hospitals.

Three de Novos, totally in 149 beds, are scheduled to open in March with an additional 50-bed hospital scheduled to open in April .

As such, a significant portion of the estimated $10-12 million in net pre-opening and ramp-up costs for 2023

is expected to be incurred in the first quarter.

As you may have noted on page 18 of our supplemental materials, we have changed our expectation for annual bed additions from a range of 100 to 150 to a range of 80 to 120. There are two reasons for this revision.

First, we have been increasing the initial bed count in organovos.

The average number of initial beds in our denobos opened in 2018 through 2020 was 42.

That average increased to 44 for the 2021 Denovos and 46 for the 2022 class.

The average number of beds in the Danobos we expect to open from 2023 to 2025 is 49.

The larger initial footprint creates incremental leverage on the core infrastructure of the hospital, thus serving as a partial mitigant to higher construction costs.

effectively front end loads future prior future period bed growth.

You may recall that I spoke about this in response to a question on our third quarter earnings call.

The increase in the initial size of new hospitals has effectively boosted the number of beds associated with our denova strategy by an average of approximately 56 per annum.

Our market density strategy is also a factor here.

In certain large and growing markets, we have chosen to open an additional hospital instead of adding beds to an existing hospital.

This allows us to better serve the market by overcoming geographic barriers and traffic patterns.

and placing the new beds closer to incremental referral sources.

We have successfully deployed this strategy in markets like Dallas and Houston and are now doing so in certain other markets including most recently Tampa and Orlando.

I'll also note that our 2022 maintenance capital expenditures of $238.4 million was higher than the estimate of $195 to $215 million cited in our Q3 earnings report.

Relief of supply chain bottlenecks and mild weather in many northern markets allowed us to proceed with several projects that we assumed would be delayed.

As you can see on pages 14 and 15 of supplemental materials, we expect both maintenance and discretionary catbacks in 2023 to be consistent with 2022.

With that, we'll open the lines for Q&A.

At this time, if you would like to ask a question, please press star one on your touchstone phone. You may withdraw your question at any time by pressing star two. Again, that is star n1 and we'll take our first question from Kevin Fishbeck with Bank of America. Please go ahead.

Good morning, Kevin.

Good morning. I guess the main question I had was around labor costs. I guess the actual wage inflation itself looked a little bit low, and I guess when we, in one of your sub-metals, you have the number of net-same-store nurses added, but it was negative in the quarter after some...

pretty strong hires in the first three quarters of the year. So we'd love to get a little more color about, I guess, maybe what happened in Q4. And if you're still talking about sign-on, shift bonuses, why does the core wage growth kind of drop down to three?

Kevin, I think in terms of the internal SWPREFTE, that has been running right about 3%.

And some of that has to do with the fact that we made a series of market adjustments, really beginning in the latter part of 2020 that have now anniversaries. So we think that that for internal SW per FTE is a good estimate.

We do note that benefits, which typically make up about 10% of SW&B, is expected to increase by about 5% in 2023. That's just the cost that we're seeing, the inflation that we're seeing in group medical.

expense. With regard to the hiring and to your observations correct we did take a step back. The good news is it wasn't on the hiring front.

So, if you look at Q4 of 2022, our hires, gross hires for RNs was 530.

And that compares to 310 in Q4 of last year, so an increase of 220. Thank you so.

Unfortunately, it was more than offset by terminations during the quarter, which were 562 as compared to 264 of 2021, so an increase of 298.

So that took us from a Q4 of 21 net positive of 46 to a decrease of 32 and Q4 of 22.

Berkeley, all of that was attributable to increased terminations within first year RNs.

That rate rose to 45.3% this year versus 36.6% in the 21 quarter.

We think that was a bit of an aberration because for the full year our Termination rate for first year hires actually improve year over year from 45% to 41%

A lot of detail in there, Kevin. We did take a step back. We don't think that necessarily pretends.

that will have a higher termination rate moving into 2023. Frankly, some of that appeared to be tied to bonus hopping based on increased volumes tied to flu volumes in some of the acute care hospitals. And again, we don't necessarily think that that's going to be a persistent trend.

Kevin, we have a focus not only on the recruitment of nurses but also on the retention. We've put in things in place this year in terms of bonus structure. Our CEOs will be having a very strong focus on making sure that we retain the nurses that we've hired.

in the past, especially those within that first year, we've seen kind of a spike in nurses that turn over within the first year that we hire them. So it's an all-hands-on deck to make sure that we are putting forth a very solid orientation that we bring these new nurses into our hospitals.

have them orient with mentors, with folks that are seasoned in our hospitals so that they have a comfort level in caring for the rehabilitation patients that we have. And so that they want to be there for a long time.

It's both recruitment and retention as Doug noted, I'm not taking anything away from the queue for drop off as being alarming. I think that our strategy of having to centralize a recruitment function in town acquisition continues to be a good move. It took a lot of the pressure off of our hospitals.

to keep up with this function. We aren't staff at the hospitals to take on this task at the same degree that we have here from a centralized function in Birmingham. So we are very focused on both the recruitment and retention of nursing staff. We are very focused on both the recruitment and retention of nursing staff.

All right, that's helpful. I guess second question then, just being.

I guess any of your prepared remarks you guys said that you thought it was prudent to have some conservatism in the guidance. Is there anything in particular in here where you say, you know,

This is where we kind of decided to put our finger on the scale a little bit in the area of being prudent, or is it just broad-based?

I would probably point to a couple of things that just really reflect some of the uncertainty. You know, we put in an assumption of 2.5 to 3% Medicare price increase in Q4. If you look at where the input factors have been over the last couple of years, it would certainly point to and justify...

a higher increase, but the

a nice increase that we saw in the existing fiscal year, notwithstanding, we really reflected back on what we had seen over the 10 years prior, and so put that assumption in. We've also put in what I think is a pretty reasonable assumption with regard to the increase that we're getting from other payers.

The other factor that's in on our guidance that may not appear immediately available to you is that we are anticipating that we will see some normalizations we moved from 2002 to 2023 in both our length of state and our EPOB

The other factor that's in on our guidance that may not appear immediately available to you is that we are anticipating that we will see some normalizations we moved from 2000 and 22 to 2023 in both our length of state and our EPOB. And so just to give you some specifics there.

For fiscal year 2022, our length of stay was 12.7. It was actually 12.5 in Q4 of 2022.

And the EBITDA flow-through is very sensitive to small changes in this metric. In fact, moving that metric by just 0.05 can have an impact of approximately $8 to $10 million on EBITDA.

We think that the 12.5 is not something that is necessarily sustainable, particularly given the acuity that we've been running. CMI has been hanging in there right in the kind of 1.44, 1.45 range.

We're also expecting further normalization in our EPOB. Fiscal year 22 EPOB ran at 3.35. It was 3.38 and Q4, and you've probably seen in our guidance assumptions that our expectation for 2023 is 3.4. Some of that is attributable to the...

cumulative effect of opening 17 hospitals over two years. This again is a very sensitive metric and every .05 increase in EPOB translates to about six to eight million dollars in EBITDA depending on where you are in the guidance ranges.

It's worth noting that 3.4 EPOB is the same EPOB level that we're running pre-pandemic in our hospitals.

Great, that's great.

And we'll take our next question from A.J. Rice with Credit Suisse. Please go ahead.

Good morning, AJ. Hi, everybody. Good morning, everyone.

Maybe first just a little bit more on the pricing assumptions and where you see things evolving at this point. I guess Medicare Advantage and managed care together are about 26% or at least in your fourth quarter revenue. Are you seeing, I mean you've got to step up. Do you see how produces a much bigger debt streamer, how what Amazon, LinkedIn,icable plans and more tasks play into modernization?

and the underlying rate normalizing for sequestration for Medicare fee for service, are you seeing a little pickup in the rate from your managed care, either MA or straight managed care or any move to some of this value based type of stuff? Is that becoming more a part of what you're contracting?

are tied specifically to the Medicare rate.

So right now about 88% of our Medicare Advantage revenues are paid on CMJ basis and those move in lockstep with Medicare.

The per-dem contracts there and virtually all of the managed care are one-off contracts that have to be negotiated most of them on an annual basis. And that's, frankly, actually the real warfare around those. And it'll take getting into this year to see what kind of increases we're able to wrestle from those payers.

But with regard to the movement towards more value-based care and risk-sharing arrangements, we feel like we have been more ready than the payers to enter into those types of arrangements, but I would say that little traction has been made to date.

You've been our outcome while we've provided our hospital's OAG. I would say that if we had the opportunity to work with pairs and as Doug noted we've certainly reached out to them in terms of including a value-based component. It's just been difficult for them to think about how to administer that.

Okay, maybe just going to follow up on the labor.

We talked a lot about the RN side of it. Anything new or different? What kind of an increase for physical therapists and therapists generally? Is it similar to last year? Is there anything changing there? And maybe just to remind us, what percent of your labor is RNs versus therapists?

So just in general on the on the marketplace of therapists we've seen some limited number of markets had a little bit more pressure on therapists, not just PT but it's OT's and speech therapists as well but that's been...

pretty much isolated on certain markets where there's been pressures. Nothing near what we've seen relative to nursing, but we've had to respond in those markets just the same way we've responded in markets for nursing. But keep in mind, I mean our turnover on therapy is around 8% for licensed therapists.

It is nowhere near the degree of turnover that we have in nursing.

And AJ to your second question, in terms of our hospital staffing and this is based on the number of FTEs, about 37% of the staff is comprised of nursing, 21% is therapy and the balance would be administrative and support personnel.

Okay, great. Thanks a lot.

We'll take our next question from Peter Chickering with Deutsche. Please go ahead.

Hey, you guys. Thanks for taking my questions. The first one here is how should we think about fixed cost leverage from off-ax in G&A and 8% revenue growth throughout the midpoint guidance? Any color on what percentage of these expenses are fixed versus variable?

Now that's a good question. There's a little bit more influx right now because of the inflationary rates that we're seeing around food and utilities. And again, we've got to go through the first half of the year before we anniversary those. And just because of the volatility in contract labor sign-on and shift bonuses.

The other variable that I would point to that's changing that equation a little bit, it really should be just a one-time adjustment in 2023 is that normalization and the length of stay and the EPOB that I referenced previously.

If you think just about that EPOB adjustment going from where we were this year with the 3.38 to 3.40

If in fact we go all the way there, even though you're getting good leverage on total SWB, with it growing about 1.5% on a year-over-year basis, 1.5% to 2% based on the improvement in contract labor and sign-on shift bonuses, you're increasing your FTE count by about 8%, and so that's causing some deleverage in there.

So you've got kind of both puts and takes with regard to our 2023 assumptions around the composition of fixed costs. Okay. I shouldn't get exactly to a breakdown of the percentage, but there is a little bit more that's in flux this year.

Yeah, so again it on EPOB, but specifically if I just think about OPEX and GNA, I mean, you know, on the OPEX side, I guess, besides food costs, what in the air is really variable and same in GNA, kind of what are the air is actually variable versus fixed?

So first of all, I think you're seeing really good leverage with NGNA about the only category that we don't expect to lever in 2023 is that we are going to annualize some of the second half of the year staffing additions in the recruiting function.

And so you'll see an increase is probably a little bit on the higher side of that category, but really not enough to move the needle. And that's included in OOE within the hospitals.

corporate GNA we should see some continuing leverage on. Within the kind of the…

The operating segment P&L obviously the most leverageable portion of that expense

is occupancy costs and then as you move further up the P&L we get good leverage off of the administrative staff as well and then you're getting into a whole lot of variable costs remembering again that almost 55% of every revenue dollars consumed by labor.

Okay, and then a quick follow up here on the new denials you saw in the fourth quarter. How should we think about the denials in 23? You're not changing your bad debts guidance of 2 to 2.2%, but just how should we think about denials for accelerating in 23?

So activity is definitely up across the board. We had enjoyed some cessation, some relief, really starting with March of 2020, and then even as we...

switch got turned back on it was kind of slow to ramp up but you know basically all of the MACs are engaged in some form of audits before. We continue to be frustrated by misinterpretations and misunderstandings of the Medicare guidelines in the claims denial process.

We have had some success, including recent success, in being able to educate certain of the MAX about the requirements and about how we were meeting those requirements, and those resulted in denied claims being reversed. But with many other MAX, it is a slow process and sometimes can even take years.

and multiple layers of appeal to reverse.

You know, when we look at the appeals process, whether it's the ALJ or the DAB, one of the frustrating parts is kind of these blanket denials of claims, which of course indicates to us that they are not making a review of each claim upon its individual merits, which is required by

Great, thanks so much.

And we'll take our next question from Andrew Mock with UBS. Please go ahead.

Well Andrew, turning that thing.

Hi, good morning. I wanted to follow up on guidance by my estimates. Here's to you, Yvita Ronre, annualized above the high end of the guidance range, even after considering the Denouvo Alperformance in Q4 and incremental startup office for 2023. You called out normalization in length of day and EPOB.

as potential headwinds, but it sounds like the assumptions embedded in the 2023 guidance are close to what you experienced in Q4, length of stay finished the quarter at 12 and a half days, and EPOB finished at 3.39. So one, do I have that right with respect to assumptions for 2023 and are there any others?

can translate to $8 to $10 million in EBITDA.

Now Q4 EPOB was 3.38, but the expectations we've laid out there is 3.4, and every 0.05 increase in EPOB translates to about $6-8 million of EBITDA. So I think those two assumptions alone would kind of bridge you from...

from your Q4 run rate once you've normalized for the de novo impact to something that looks like the midpoint of our guidance range.

Got it. Okay, that's helpful. And then it sounds like the Denovos drove $4 million of outperformance into 4.1. Can you help us understand what drove that outperformance? And is there any reason to think that that outperformance would continue into 2023? Seems like a faster Genova ramp.

prepared comments, when we set the expectation for Q4 that the Novos would break even it was because we had experience really just on the front end of our Q3 earnings call, we'd seen some administrative delays that

It pushed the opening gates on a number of our denobos out further, which meant that the time that they were really starting to ramp up had been delayed. And saw some pretty significant disruptions to our Cape Coral and our Naples hospitals from Hurricane E and we had expected those would linger in impact Q4 as well.

Naples and Cape Coral rebounded remarkably quickly. A real credit to our teams down there.

in Q4 and contributed nicely and the hospitals that we had assumed that had other delayed administrative delays that would kind of lag a little bit in in Q4 also contributed above our expectations.

I think also you're seeing a bit of Indigenous market density and where we've built the novos where we have a strong number of other hospitals, we have other resources there, staffing expertise. You're starting to see where staff can move from one hospital to the next so you're starting to novos up with.

at least a portion of the senior team at the Genova Hospital is a seasoned experience and Compass Health staff member. So they can work their way up the learning curve very quickly. And I think that is exactly what we saw at Naples and Cape Core were both of those hospitals.

had existing CEOs from other hospitals transfer in to do those startups. So I do want to throw out my compliments to that group too in terms of working through the hurricanes and working through the startup process.

And some of what impacts the ramp up of a new hospital, there are two important factors to consider. One that Mark just touched upon, which is if we're approximate to an existing market, because the payers are known to us, because the referral sources are known to us, because we can leverage the existing staff, the ramp up tends to be...

faster than when we go into a brand new market. And when we have a JV partner, the ramp up tends to be a bit faster as well because we can leverage some of the relationships that they have also. And you've got a bit of a mixed bag on those as you look at the 2023 class. Looking specifically at the first quarter, you know, or

Oh, Claire was constant is going to be a brand new market force as is noxical Tennessee. Why so, Oklahoma we're going to be able to leverage Claremont, we're going to be able to Lairmont. So there's a little bit of good, a little bit of each of those included in that class. LJ.

Great. Thanks for the call.

And we'll take our next question from Ben Hendrix with RBC Capital Markets. Please go ahead.

Hey, thanks, guys. Good morning. Good morning. How are you all?

We're good. Good. A quick question on case mix. Most of my questions have been answered, but you know, you've stressed, you know, focusing on stroke and neurological volume in the past and having a higher than industry mix of that higher acuity volume and differentiated capabilities around stroke and neuro. I just want to see how that's progressing. If there's anything to call out in terms of.

case mix in general and how that how you see that evolving into 2023. Thanks.

Yeah, I think our case mix has been relatively flat. If you look at our program mix with stroke, we continue to be strong performing there with a little bit over 18%. You had another 20, some percent, and neurological. So what we've said over the last couple of years now is we've built up our expertise and just...

neurologically based conditions, stroke and others, that counts for almost a little over 40% of our discharges. If you look at our ability at the time of discharge to get patients back to home, that's an area that we continue to excel. Almost 83% of our total discharges.

This last quarter went back to the community, so the association with our ability to have better outcomes of the stroke population, I would say, the relationship that we have, the American Heart, American Stroke Association in terms of co-branding this.

has helped to continue to put our name out in the forefront in our markets in terms of caring for stroke patients and those patients suffering from neurological conditions.

Both stroke and neurological showed growth on a year-over-year basis in Q4, but as a percentage of patient mix actually declined slightly, and that was because we had a pretty significant increase in depility, and that is directly attributable to the flu season that was very prevalent in Q4.

Great, thanks for the call again.

Great. Thanks for the call, guys.

And we'll go next to a Brian Tink-Killet with Jeffries. Please go ahead.

Hey, good morning guys. Good morning. Congrats on the quarter. I guess Doug, just as I think about modeling.

would call out from a yes, he's anality perspective or just how we should be thinking about the cadence of even that over the course of the year.

I would expect this to be kind of a normal year with regard to seasonal trends. The timing of the de novos has some impact, but otherwise the normal factors with regard to seasonality that go from quarter to quarter should be prevalent.

Got it. And then I know in your prepared remarks, you called out the 20 markets where you're seeing some contract labor, you know, tighten it or labor tightness and high use of contract labor. Anything you can share with us on, you know, maybe which those markets are in any improvement or, you know, anything, any color on rate trends in those specific markets that we should be thinking about. Thank you.

Yeah, so the Northeast remains the most challenging market, both in terms of the number of contract FTEs and the rates as well. I would say that our team has been really focused, the regional team. There has been really focused on that through the course of the year, and they've made great sequential progress. But there are...

couple of markets in and around the Boston area is one that I would cite that have remained a bit in transient with regard to progress.

area is one that I would cite that have remained a bit entranjied with regard to progress. But the team is really focused on it.

All right, got it. Thanks. And as a reminder, that is star and one to ask your questions. We'll go next to Matt LaRue with William Blair. Please go ahead.

Hey there, Matt. Hey. Yeah, hey, good morning. I just wanted to follow up a bit on the sharetaking and just get a sense for if you kind of dialed back the last four months.

How much of a sense do you have for that coming from specific payers or pair categories, perhaps from competitive IRFs, relative to eligible patients, you know, and side of care shifts from other post-acute settings, just anything you can help us out with for

Yeah, I think, and, Joni, you've heard us talk about this in the past, but I absolutely think during the pandemic our ability to take COVID patients and show that we can take a very challenging high acute patient with medical complexities.

and do a really good job on getting them back to community, has continued to pay dividends as we've moved forward into a more normalized operating environment. I think that the referral sources have recognized that not all post-acute settings are created equal, particularly between cash or cash to quarantine,

skilled nursing facilities, nursing homes and herbs. I think that clearly herbs and LTAX stood out in terms of their ability to take challenging patients. And so I think that we've seen certainly taken market share.

In those communities, particularly where there were nursing homes that were trying to pattern themselves and claim to be rehabilitation facilities and probably overextended a bit in terms of their ability to take rehab-oriented patients.

You know, the practice has really been very prevalent in the two major pair categories for us, which are fee-for-service and Medicare Advantage. If we look at same-store discharge growth in Q4 of this year, Medicare fee-for-service was up 5.9 percent. And for the full year of 2022...

It was up 3.9%. We've had seven consecutive quarters now of fee-per-service discharge growth. We had mentioned relatively early in the pandemic back in 2020 when we were seeing a pretty dramatic increase in Medicare advantage that we felt that our ability to demonstrate our value in proposition through difficult times.

for the services that we provide, and the conversion rate remains low, and that we are resonating with our value proposition to payers, to referral sources, and to caregivers. I believe that all of that is a strong demographic tailwind. Yep, I understood. And then, Doug, on the thought process in existing markets about bed expansions relative to adding a new hospital. I know in the past you've talked about

You know, bed expansions being the highest ROI use of capital that you have. I imagine that your ability to use pre-FAB and that bringing down new build costs and timeline maybe changes some of that math. But I'm sure once the hospital is built down the road or a few minutes away or a few miles away.

employed nurses and therapists to to one or both hospitals depending on demand. Just curious once that new building in place how it would compare to Agenda 10 or 20 bed addition and bed addition under the GIST in hospital. That's that to move the case and markets where we have a cluster of hospitals that are reasonably proximate. We're able to leverage things like the marketing staff, the regional administration staff, and we do share resources to between hospitals. But back to your earlier at Wormat, a bed expansion on an existing hospital.

remains the highest return that we get on capital. When we look to add a new hospital, many times it's because we look at the market, we see that it's growing in a particular direction that is currently underserved. We do a bed needs analysis there and say, oh, this is not going to be solved by adding 10 or 20 beds to the existing hospital. This really needs a, this is really a 50 or 60 bed need.

over the near term. Let's go ahead and construct a new facility and try to take advantage of that demand in advance of other competitors entering that particular market.

Alright, thanks Deb. Thanks Mark................

All right, thanks, Doug. Thanks, Mark. Thank you.

And we'll go next to Anne Hines with Mizuho Securities. Please go ahead.

Hi, good morning.

So just being on the Washington front, is there anything that's on your radar on the regulatory or legislative outlook over the next 12 to 24 months? And then secondly, maybe on your investor day, I know before COVID you had some long-term targets for EBITDA and free cash flow. Is that something we should expect to be re-installing?

know about Revoltacian Hospital having opportunity for them to do a tour so that when we talk about our patients or the process, they are much more familiar with it. So that has been a big focus. We have plans for a CEO fly-in this year. We will take a subset.

of our CEOs in the hospitals and have them come to Washington and we'll do a multi-visit members of Congress from from each one of our marketplaces and that's coordinated with our team there in Washington.

Relative to the regulatory front, it's been fairly quiet. RCD remains a topic out there that we have continued dialogue with our trade associations and CMS. CMS has not provided any timelines or any additional details about implementation of RCD, but that is something that we've...

kept in front of mind and continued to have dialogue with CMS.

So I am just back on the longer term outlook. Our last investor day was March 4th of 2020.

And at that investor day, we issued longer term targets, five year targets for discharge growth, bed additions, and more.

and for a number of denobos to be open for us.

And then we had comparable measures for home health in hospice. We didn't issue any specific long range targets with regard to EBITDA or cash flow or EPS at that time.

Obviously the world shut down about two weeks later, everybody lost visibility so we had to suspend those targets for a period of time. We introduced those for the earth business I think just about a year ago, I have to go back and check specifically, and those are the targets that you see in the, included in the supplemental materials today. I'll be able to change that I've...

explain earlier with regard to the annual bed additions. In terms of what specific metrics we will provide a longer term outlook on in September , that is something that we're still discussing internally. I can say everything is on the table and it's just going to be something that we will discuss and socialize with individuals such as yourself between now and September .

All right, thanks. I was just looking at the, I thought you had some evita in.

Target though for each segment back then. All right, thanks. Now, there was a time in our history we did that, but I forget when we dropped it. I feel like it was.

each side learned back then. All right, thanks. Now, there was a time in our history we did that, but I forget when we dropped it, I feel like it was sometime around 2018 or so.

And there are no further questions at this time. I'll turn the call back over to Mark Miller for our closing remarks.

Thank you. If anyone has any additional questions, please call me at 205-970-5860. Thank you again for joining today's call.

Thank you and this does conclude today's program. Thank you for your participation. You may disconnect at any time.