Q2 2023 Encompass Health Corp Earnings Call
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Good morning, everyone and welcome to encompass Health's second quarter 2023 earnings Conference call.
At this time I would like to inform all participants that their lines will be in a listen only mode.
After the Speakers' remarks, there will be a question and answer period.
I'd like to ask a question. During this time. Please press star one on your telephone keypad if.
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's, Chief Investor Relations Officer.
Thank you operator, and good morning, everyone. Thank you for joining encompass health second quarter 2023 earnings call.
Before we begin if you do not already have a copy the second quarter earnings release supplemental information and related form 8-K filed with the SEC are available on our website at encompass health Dot com on page two of the supplemental information you will find the safe Harbor statements, which are also set forth in <unk>.
Later detail on the last page of the earnings release during the call. We will make forward looking statements, which are subject to risks and uncertainties many of which are beyond our control.
Certain risks and uncertainties like those relating to regulatory developments as well as volume bad debt and labor costs 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 relate.
Good form 8-K, the Form 10-K for the year ended December 31, 2022 and Form 10-Q for the quarter ended June 32023, one file we encourage you to read them.
You are cautioned not to place undue reliance on the estimates projections guidance and other forward looking information presented which are based on current estimates of future events and speak only as of today, we do not undertake a duty to update these forward looking statements.
Our supplemental information and discussion on this call will include certain non-GAAP financial measures for such measures reconciliation to the most directly comparable GAAP measure is available at the end of the supplemental information at the end of the earnings release and as part of the form 8-K filed yesterday with the.
C C all of which are available on our website.
I would like to remind everyone that we will adhere to the one question and one follow up question rule to allow everyone to submit a question. If you have additional questions. Please feel free to put yourself back in the queue with that I will turn the call over to Mark Tarr encompass Health's, President and Chief Executive Officer. Thank you.
Mark and good morning, everyone.
We're very pleased with our second quarter results driven by continued strong volume growth and substantial year over year improvement in labor costs, our second quarter revenues increased 11, 7% and adjusted EBITDA increased 27, 1%.
Q2, total discharges increased nine 8% with same store discharges up six 2%.
Our strong volume growth continues to underscore our value proposition to referral sources payors and patients.
As anticipated our patient acuity continues to broaden with more normalized patient flows through the health care system.
While we continue to show solid growth in stroke discharges, which were up five 5% year over year.
Knee and hip replacement fracture of the lower extremity and other orthopedic discharges each grew approximately 15% year over year.
Given the strong demand for inpatient rehabilitation services, we have continued to invest in capacity additions we.
We opened two de novo's in second quarter, adding 110 beds. This brings us to five do know Bose and 259 beds added year to date.
We also added 10 beds to existing hospitals in the second quarter.
Over the balance of the year, we plan to open two more de novo's and add 31 beds to existing hospitals.
Three of our bed addition projects originally scheduled for 2023 have shifted 2024 due in each case to local permitting issues.
As a result of this shift we now expect to add approximately 140 beds to existing hospitals in 2024.
We continue to build and maintain an active pipeline of de novo projects.
It is wholly owned and joint ventures with acute care hospitals.
We currently have announced 19 de novo's with opening dates beyond 2023.
During Q2, we again met the increasing demand for our services, while reducing contract labor and sign on and shift bonus expenditures Contra.
Contract Labor was down approximately $13 million or 37% from Q2, 2022, well sign on and ship bonuses decreased approximately $8 million or 36% from Q2 of 2022.
Our talent acquisition efforts resulted in over 200 net same store RN hires this is a very strong hiring quarter.
Want to remind you that higher results may vary significantly from quarter to quarter based on seasonality and other factors.
Last week CMS issued the 2020 for her final rule.
This included a net market basket update of three 4%, which we estimate would result in a three 3% increase for our Earths beginning October one 2023.
We view choice demonstration or RCD is scheduled to begin August 21st in Alabama, we've.
We've been working closely with CMS and Palmetto, the Medicare administrative contractor for the state of Alabama to prepare for its implementation.
While many details have yet to be finalized we have prepared for its implementation and we are focused on pre claim review as we believe it will allow for a more iterative process and the potential for real time adjustments.
Moving now to guidance.
Based on our first half performance and revised expectations for the balance of the year, we're increasing our 2023 guidance to include net operating revenue of $4 75 to $4 eight $1 billion.
Adjusted EBITDA of $920 million to $950 million.
And adjusted earnings per share of $3 31 to $3 53.
The key considerations underlying our guidance can be found on page 12 of the supplemental slides.
Finally, I want to remind you that we are hosting an investor day in New York City on September 27, 2023.
At that meeting we will provide more detailed insight into key elements of our strategy, including de Novo hospitals clinical technologies and labor management if.
If you have not already registered you may do so in our Investor relations website or contact Mark Miller, we hope to see you there.
Now I'll turn it over to Doug for further color on court.
Thank you Mark and good morning, everyone I'm going to hit just a few highlights and then we'll open up the floor for questions as.
As Mark stated we are very pleased with our Q2 results. We continue to make significant improvement in year over year labor costs are.
Our key to contract labor plus sign on ship bonuses of $36 1 million was comprised of $22 1 million in contract labor and $14 million in sign on and ship bonuses.
Contract Labor expense in Q2 declined approximately $13 million or 37% from Q2 2022.
Agency rates declined year over year and were relatively flat sequentially.
Our Q2 2023 agency rate per FTE was 186000 down from 223000 in Q2 2022.
Utilization also declined year over year and remained essentially level sequentially.
Q2, 2023 contract labor Ftes of 476, representing a 25% decline from Q2 2022.
Contract Labor Ftes as a percent of total Ftes was one 8% an 80 basis point decline from Q2 of last year and flat sequentially.
We expect contract labor Ftes as a percent of total ftes to remain relatively consistent but we will seek.
We will continue to seek improvement.
Yeah.
Sign on a ship bonuses decreased $7 8 million or 36% from Q2, 2022 and decreased by $2 3 million or 14% sequentially.
The improvements we are experiencing and sign on any shift bonuses are the result of the processes, we have implemented and we believed and easing and market conditions.
Revenue reserves related to bad debt decreased 30 basis points to one 9%.
Supplemental medical review contractor or smirk audit results trended favorably in Q2 compared to our previously established reserves.
Our aging based reserves also benefited from strong collections in the quarter.
<unk> for the quarter was $3 38, an increase from 337 in Q2 of last year and from 332 in Q1 of this year.
Our guidance assumes <unk> to be approximately $3 four ROE for Q3 and Q4.
Q2 de Novo net preopening and ramp up costs totaled $4 3 million, bringing the year to date total to $8 5 million.
We continue to expect $10 million to $12 million of these costs for the full year.
Finally, we ended Q2 with a net leverage ratio of 2.9 down from three one at the end of Q1 of this year and from three four at the end of 2022.
And 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 now on your telephone keypad to withdraw yourself from the queue. You May press star two you'll.
You'll be limited to one question and one follow up.
Your first question comes from Kevin Fischbeck of Bank of America.
Hey, good morning, Kevin.
Morning. Thanks.
So I guess, maybe just to start off on the labor side of things.
I guess, obviously, you're making some progress there are a number of areas, but just.
Because you said in the comments about.
The contract labor expect it to be relatively stable sequentially.
Why.
Why is the you know the.
Progress kind of plateauing here and what do you need to see to to make additional progress on that.
Yes, so Kevin this is Doug I think it's relatively consistent with the comments we made at the end of the first quarter, where we felt like we had hit what at least for now is a is that a run rate both in terms of the rates per FTE and the percentage of our total FTE.
Ftes are made up of contract labor.
The rate is kind of stabilized in the mid 100, Eighty's and as a percentage of total ftes were hovering around that one 8% and that compares to roughly 9% pre pandemic.
We don't know that this represents a permanent level and we're anticipating that there will be further improvements perhaps as we move into 2024, there are signs on the horizon that the labor market for skilled clinicians is getting a little bit better, but we continue to see it move around in pockets or contract labor in the second quarter was <unk>.
Fairly concentrated it was less concentrated than it was in Q1, but we still had 20 of our hospitals comprise more than 50% of the spend during the quarter and it is not consistent in terms of which hospitals are experiencing those kinds of trends so until we get greater visibility.
We think it's prudent to anticipate a relatively consistent spend based on those factors from quarter to quarter for the balance of the year again that doesn't suggest that we're not continuing our efforts as you saw evidenced in our recruitment of more than 200 rins during the quarter.
To reduce the reliance on this premium labor.
One more point I would add this is market as we've guided our operators that.
They have the volume they need to just go out and get the labor even if its contract labor. So we.
We've been very fortunate to continue to grow our volumes and they've been accommodated in certain marketplaces, because the availability of contract labor.
Okay, and then I guess that leads me to the second question, which is on the volume side I guess, there's a lot of talk about the volume strength in the industry to start the year.
Just love to kind of hear your thoughts about because your body's came in higher than certainly than we were expecting sounds like maybe you were expecting.
Is there anything in here that makes you look at this and say Hey, this is a a bolus of utilization that would you know.
<unk> moderate in the future or is this kind of a good way to think about the base and the growth.
From here thanks.
Well this is mark I mean, we obviously were very pleased with the volume we saw in the second quarter, we think that.
Our.
Value proposition with our outcomes continue to help us to grow our volumes and clear.
Clearly I think referral sources and patients and payers are recognizing the differences and the various post acute setting. So I think there's a lot of momentum.
Hi, and behind our volume gains that are that are sustainable.
Our ability to continue to perform.
The volume growth was.
Strong grass.
Firstly all categories. So if we look at it for instance, first within patient mix and Mark mentioned some of this in his comments.
Our top acuity categories stroke was up about five 5% and neurological was up about two 5%. So we're still seeing growth in those categories, but based on what we believe are largely normalized flows and then gains in market share throughout the health care system, we saw double digit growth in every.
Other major Rick category.
For the quarter, so across the patient mix it was very strong.
She'd also acknowledged that that growth was coming even as on a year over year basis. The number of COVID-19 patients that we're treating declined by about 43% it was stronger.
The payer mix as well our fee for service was up about nine 5% on a year over year basis, Medicare advantage was up 20% and.
And we really saw the broadening and the patient mix that we had been anticipating within that Medicare advantage book of business as well and then geographic graphically. It was very strong on a broad basis as well if we look at the 35 states plus Puerto Rico, which are.
<unk> in our same store calculation.
78% of those geographies had same store growth during the quarter that was greater than 5%.
Having said all of that on a year to date basis. Our discharges are up nine 5% and same store is up roughly 6% and we just don't know, particularly as we've got more challenging comps in the second half of the year that it's prudent to expect volume growth on a year over year basis at the same levels. So our guide.
This includes some moderation in volume growth for the second half.
It doesn't mean that we're that's what we're seeking we just think it's prudent to plan the business that way.
Yeah.
Your next question comes from Andrew Mok of UBS.
Hi, good morning, with the recent positive indicators around did the early de Novo performance I was hoping you could provide updated views on total startup losses incurred in year, one and time it takes to reach breakeven in mature EBITDA margins. Thanks.
Yes, so we haven't changed our estimate for what the ramp up.
And start up costs will be for this year I remember, even as those new doors come online. It takes them for a while to ramp up which I think is an appropriate segue into your second question generally speaking.
Seeing.
Most of our new units start to hit a maturity level somewhere between year, three and year four.
But we're getting to positive four wall EBITDA.
Typically within a nine to 18 month time period, and that's been relatively consistent.
Okay.
Got it and then I just wanted to follow up on some of the volume discussed it and you've called out orthopedic procedures. I think you said up 15% driving incremental volume strength in the quarter.
As you speak to your referral partners in July August what's your sense of the durability of the elevated orthopedic procedures for the balance of the year. Thanks.
It certainly feels like maybe some of this is a result of pent up demand as we've talked about before we do believe that over the intermediate or long run the conditions that are treated in our facilities are non discretionary in nature, but there was the ability for some of these orthopedics.
Conditions to be deferred for a period of time.
And so that's.
Part of the reason that is contributing to our expectation that volumes might moderate a little bit in the second half.
<unk> said that again seeing the strength that we are across geographies across the payer mix and so forth. We feel like some of it is sustainable and is attributable to market share gains and one final comment on the orthopedic mix that we see just as a reminder, this.
These patients are typically in their late <unk> multiple comorbidities.
All of our patients still have to meet the medical necessity threshold. So.
In many cases, they arent your your typical knee replacement patients.
Your next question comes from a J rice of credit Suisse.
Hey, good morning.
Hi, everybody.
So first question on the two.
Obviously, the 202, new hires on a same store basis.
The highest it looks like in years.
And it's happening as sign on bonuses are down I guess that suggests there is.
More plentiful supply of nurses that youre seeing available or or therapist.
What I wonder.
What was that.
What would that number potentially be.
Or do you have a lot of open positions that you still might see further step up or are you hiring pretty much who you need to hire and want to hire at this point it looks like this quarter it was quite a bit different than the last couple of quarters.
So as I noted in my comments, there is quite a bit of variability.
From quarter over quarter, summit's affected by seasonality and other.
Points I think that a we are seeing some nurses come back into the marketplace I think that they're starting to be some softening in the markets in general.
But I also think we've just gotten better too in terms of our own strategies and tactics that we use to recruit.
Two years ago, we centralized the talent acquisition functions of our nursing recruitment, which has really paid dividends for us and then we've just looked at.
Everything that we could to make ourselves a better employer, particularly for nurses whether that is through scholarships to support nurses that may want to go back in for there are in degree we've been reviewing opportunities for improvement on our clinical ladders.
We've taken a real strong look at our orientation process.
Clinical education flexible scheduling so I think it's the combination of marketplaces externally and internally the things we've done to make sure that we are an attractive.
Opportunity for Rins and also to retain our hands once we get them. So.
So a J.
Obviously, we're very pleased by the more than 200 net RN hires during the quarter to maybe get to your question about how far do you have to go what kind of openings you have out there you can kind of triangulate on it using a number of data points first we referenced the 476 contract labor Ftes that are out there.
So that suggests if you were going to go to zero usage of contract labor, you've got roughly 476 ftes it would need to be replaced in the existing system. In addition to that our turnover has been improving on a year to date basis and it's currently running at about 22%. So you've got it any.
And time, 22% that needs to be back filled and then finally not included in that 200, because thats the same store basis, but we are utilizing our recruiting efforts for the de novo's as well and I'll remind you that our 50 bed de Novo has.
<unk> staffing at about 97, Ftes typically opens 10 or 12 less than that and that youre going to have somewhere I think about 35% of those ftes are going to be in nursing. So.
All of those pieces together and Thats, what our recruitment team is attempting to tackle on a quarter by quarter basis, and not only did they do that with an improvement year over year and sign on a ship bonuses in Q1, but we did it with a reduction in our overall recruiting and related marketing costs.
And that is because we have standardized procedures for using sign on and shift bonuses and we have also really honed and gained efficiencies in our recruiting and related marketing efforts.
Okay, maybe if I could get my follow up.
You are calling out 2% to 3% managed care contracting rate increases that seems pretty consistent we hear a lot from the <unk> about wanting to shore up their post acute networks et cetera, I wonder any of that activity on the value based side is creating.
Any incremental opportunities for you that you are looking at.
We're not really seeing any movement to say risk bearing or value based contract as we've suggested before we actually think we're well positioned to do that and we've had some discussions with some of the major managed care companies.
Whatever reason it just hasn't been a priority for them.
Have seen is that we continue to be able to increase the percentage of our contracts that are paid on a case rate basis versus a per diem.
And basis.
And that tends to move up to a payment rate that is very close to the fee for service rate.
If you look and get into the details the discount from fee for service to Medicare advantage expanded a little bit in Q2, and again that was expected and something that we foreshadowed previously that was related not to our contracting efforts, but specifically to the broadening of acuity within the.
Book of business, which as I alluded to earlier grew 20% on a year over year basis.
Your next question comes from Brian <unk>.
Of Jefferies. Your line is open.
Hey, Brian Hey, good morning, guys.
Yeah.
I guess, mark as I think about it I mean, you've obviously got a lot of success and we're still adding bed de Novo then.
Additions to existing facilities as we look forward I mean, I've seen more announcements about JV, maybe anything you can share with us in terms of what those conversations are like.
That pipeline is like with hospitals versus doing it.
Stand alone de Novo builds.
Yes, so our pipeline is a nice complement of both wholly owned and JV opportunities I think.
Hi.
Teams that we hear back from potential joint venture partners and our existing joint venture partners is that.
We bring something relative to the knowledge of running and operating on Earth that they don't have in house.
Particularly around all the regulatory and the processes that are different from the acute care hospitals. They are looking at opportunities to grow their business typically these.
The units that they may have or.
Less than desirable portion.
There are acute care hospital that can't be expanded and are looking to grow that with with the partner.
And then lastly, one pointed out we've been doing this business model with partnerships now.
For over 34 years, and so we know how to be a really good partner.
And.
It gives us an opportunity to go out and grow with the acute care hospital systems that are looking to expand their post acute.
We like having both arrows in our quiver and we think we use them effectively and some of what determines whether or not we're prioritizing a JV relationship has to do with the market that were entering there are certain states, where aligning yourself with an acute care hospital that already has a presence in that state are in that market can be useful in <unk>.
Hearing.
N.
Others, where it really doesn't matter as much if you look at our portfolio today. Those hospitals that are already opened were just below 40% in terms of the number of those that are jv's. When we look at our broader pipeline not just the 19 that had been announced beyond 2023, but the total pipeline of <unk>.
Active projects, which is closer to about 50, it's running at about 40% that we currently have identified as potential or likely JV partners. So I think we will continue to utilize both effectively and as a result, I wouldnt expect that we will see a significant change in the composition of our port.
Folio in terms of <unk> versus non <unk>.
That's awesome, Doug maybe any color you can share with us an early read on RCD.
As Mark alluded to in his comments, we think we've been having some very productive discussions with both CMS and with Palmetto, who is our Mac for Alabama.
We think not surprisingly we're ahead of the curve in terms of our competition and even for the administrator not all of the details have been provided we've been asking a lot of probing questions to make sure that there is a practical application. When this starts up we believe based on our resource.
And our systems capabilities that we're going to be in a great position to provide all of the appropriate documentation to the Mac to satisfy them that these are appropriate admissions and to proceed with the claims processing.
And that's really why we've chosen to go on a pre claims review as Mark again added in his comments, that's going to be an iterative process and we think will be very.
Very effective at engaging in that back and forth on any patients where there are questions with palmetto. So we think that in terms of any kind of impact could there be some delays in claims processing that would really be more of a working capital issue than a long term bad debt expense issue city.
In here today, and not knowing what implementation will look like and that's our best guess.
Brian I've been pleasantly surprised at the amount of dialogue.
Both CMS and Palmetto has had with the providers.
We've been very involved with that up to and including.
A meeting yesterday in Columbia, South Carolina, where Palmetto is base so.
If nothing else that has been a learning process both for Palmetto hearing feedback from providers like us as.
As well as us hearing from Palmetto and CMS. So.
From that perspective, I would say, it's gone up as about as well as expected. Although there is still some some process oriented type of questions being answered.
Your next question comes from Peter Chickering of Deutsche.
Deutsche Bank.
Hey, good morning, good morning, Andrew.
Hey, good morning, guys. Thanks for taking my question here.
Versus your last guidance you have increased your labor inflation assumptions, which is offset with tailwind from better Medicare pricing for the fourth quarter.
<unk> was very strong so implying <unk> margin expansion relative to street estimates today. Despite the increase of inflationary pressures on the labor side. So I was curious if you could talk about opex leverage what youre seeing is it getting better than you had assumed for last quarter or the beginning of the year.
Offset these labor inflationary pressures and is there any reason why is opex leverage shouldn't continue into 2024.
It's a great question Peter.
The answer is yes, and no right. So if you go if you parse into some of those expense categories, where we saw a lot of leverage there are some of those categories that we feel will be sustainable even if volume growth moderates a bit. So we had been anticipating through the course of this year as we anniversaried some of the more significant increase.
<unk> from the prior year and as market conditions stabilize we would see improvement in areas like utilities expense per day, and food expense per day, and we believe that will be the case that will drive incremental leverage into the second half of the year.
I mentioned earlier that we made some improvements year over year on our recruiting and related marketing expenses and.
And we certainly believe that based on our revised procedures and some of the efficiencies that we gained that that'll be a source of leverage even as we continue to expand significant efforts on recruiting and retaining nurses and other clinicians in the second half.
Weighing against that to some extent are a couple of things to consider maybe three or four one is we just had an incredible performance within our self insured group medical program in the first half of the year.
In terms of the overall utilization rates and the number of higher dollar claims are.
Our experience tells us that that is mean reverting and so we don't expect that to sustain them would actually anticipate that thats going to be a source of a little bit of margin pressure in the second half and that's built into our guidance assumptions, we had a very favorable bad debt experience in the second quarter again that really really.
<unk> to the smirks as much as anything else with little experience with regard to the smirks and but that being a very targeted audit in the first quarter, we put up some incremental reserves based on the information that was at hand, and ultimately we prevailed at a higher rate in the second quarter and that came back down we've assumed.
More of a normalization of that for the for the balance of the year and then two things that I know can sound like they're a little.
Esoteric, but are really important to consider is again, we're anticipating that that <unk> is going to continue to move up towards 340 and that the length of stay is going to increase from its current level, which was at $12 three in the second quarter. So I know, it's thrown a lot into the mix there.
There there are some expense categories that we absolutely anticipate further leverage on there are a few countervailing forces that just need to be considered here in the near term.
Okay, Great and then the follow up on the 20% growth Medicare I mean, it is just hard as you saw in the quarter I'm just curious if you're seeing any different behavior from Medicare advantage, maybe at the end of the quarter in July .
For the days or be in Washington with prior authorizations.
We're absorbing that spike of utilization.
We really arent and I think the good news with the MA growth is that it also has been broad across geographies.
Again.
How we deal with MA plans with regard to prior authorization and their admission procedures and so forth can vary pretty significantly from payer to payer and even within those payers from market to market, but generally speaking and as evidenced by the 20% growth on a year over year basis, it's getting better.
Great. Thanks, so much.
Your next question comes from Steven Valiquette of Barclays.
Hey, good morning, Steve.
Hey, Thanks, good morning, guys.
You touched on this a little bit just talking about some of the patient referral sources. The Medicare advantage payers, obviously talked about elevated utilization more in the outpatient setting versus in patient in the second quarter. So I guess, just kind of tied into that I was curious regarding your incoming patient flow in the quarter and patient referral sources and to you.
Can you remind all of US just on the mix of your patients that are referred into you from the inpatient setting versus other sources.
And did that mix shifted.
Shifted all really during the quarter to a greater amount of patients coming in from outside of the hospital inpatient setting just trying to marry up your trends with some of the comments with managed care companies.
So so close to 90% of our admissions come directly from an acute care hospital, we didn't see a significant change.
And that in Q2 from from past quarters, So kind of kind of goes back to the point that all of our patients have to meet medical necessity. They typically have multiple comorbidities there.
Six so outpatient.
Not really an option for them because they need 24 hour nursing care. So we haven't really seen anything that stood out in the second quarter from our past past trends I think.
We're trying to make there is that.
Those patients who are receiving orthopedic surgeries.
And then ultimately finding their way into our facilities are getting those on an inpatient basis at the acute care level and not on an outpatient basis because of their comorbidities.
Okay. That's helpful just to get some color on that I appreciate it. Thanks.
Your next question comes from Matt Larew of William Blair.
Hello, Matt Good morning, Matt, Hey, Hey, good morning, Mark mindset.
Last quarter, you touched briefly on.
Occupancy rate long term target, reflecting the.
The higher skew towards private rooms.
Occupancy rate again, what was very high this quarter, so perhaps less thinking about that theoretical long term target maybe could you help us think about some more near or medium term targets as to how you expect occupancy to trend over the next year or two given the shift of de novo builds towards private rooms.
Yes, it's a very fair question and to be honest I haven't mapped it out, but we would expect it to continue to increase in the near term do I think it's fair to say that it will move from the low 70 is up into the mid seventies I think that's reasonable.
How I would define the near term and you've got a little bit of this push me pull me that goes on as well because as we see the occupancy increase and recently opened facilities or bed additions that are all private room.
Youre getting downward pressure on the occupancy rate from the de Novo activity in the more recent bed expansions, but if we stay at kind of the current build level that we've been at which is roughly call. It 850 bed de novo's per year and some call. It 100 beds, so adding 600 beds to a larger base.
That should start to result in opportunities for company wide occupancy levels to trend up.
Whereas the theoretical limit gets it really depends on that ongoing ratio between new capacity coming on in any particular year against the base to the extent that new capacity becomes an increasingly smaller part of the base. Then I think you have continued upward opportunity within occupancy.
You can see it will take a while just because of the legacy base, even where we're addressing that through remodels to try to create more private rooms.
Take a while to get it north of 80%, but definitely see upside.
Okay and then.
For three years, obviously occupancy rate.
Companywide that around 70% give or take and.
So I'm curious as that as that moves up obviously in theory, there would be benefit.
Benefits from a margin perspective, but I presume that you've sort of staffed facilities and thought about flex staffing around that sort of 70% level. So just curious do you have any experience with facilities that.
Senior network, it's always perhaps Brian at higher rates and thus maybe half a framework to think about how youll add.
Staffing and sort of management that necessary as that asset octane level chest up overtime.
You definitely get a benefit there from Epo be because you've just got a whole lot of efficiency when youre running at really high staffing the dynamic that can work against you a little bit on that and so youll get margin expansion, if youre taking facility that's running in the low seventies and youre pushing it up perhaps all the way to about 90%.
<unk>, you're getting margin gain opportunities all the way through there I'm, leaving the pricing environment out of the equation for right now when you get north of 90%, though unless the and let's assume that that facility is tapped out theres no opportunity for a bed expansion youre going to see mark.
<unk> pressure would go the other way and that is because in many instances youre going to be kept on growing your volume any further your revenue increase on an annual basis. Therefore will be limited to pricing increases and you may have inflationary pressures SW b and elsewhere in the P&L that are growing.
Greater than the annual pricing increase.
Okay. Thanks, Doug.
Your next question comes from Scott Fidel of Stephens. Your line is open.
When Scott Thanks, Good morning.
Morning.
Wanted to circle back just on the Medicare advantage discussion and I know that.
Often youll give us actually where those MAA.
Reimbursement rates are relative to the fee for service would be interested if you had the updated stat. There and then maybe how youre thinking about that trending I guess over the balance of the year.
And then to 24 and I guess, what I'm thinking about here is the question Paul between you talked about some of the shifts and the broadening of the utilization.
Backdrop are affecting that at the same time, you also talked about growing your market share, which I would assume.
Could benefit that so so trying to think about it I guess, how those sort of friction points net out against each other.
Yeah, absolutely so in the first quarter the rate differential between MA and fee for service was four 7% that broadened by 120 basis points to five 9% in the second quarter and it was really solely attributable to the lowering of acuity, which was based on the patient mix.
That's a positive trade off for us I mean, we like getting that additional volume gain and we like the fact that our value proposition beyond stroke, where its been evident for a long period of time and complex neurological disorders is now resonating with those plans.
The two countervailing forces that Youll have that'll impact at discount on a go forward basis or what we believe will be the continuing broadening of acuity with MMA within MA, which we believe will continue in aggregate to grow faster than fee for service.
But at the same time, our success in contracting with those MA plans to move more and more of those were already added about 80% of the revenues into a per diem basis.
Put all of that into the mix and our assumption is that that gap that existed in the second quarter widened a bit in the second half of the year.
Okay.
Okay. Thank you.
Your next question comes from John Ransom of Raymond James.
Hey, John Good morning, John Hey, Good morning, Doug aren't you glad we're talking about a complicated health spin out.
What it didn't have a year makes.
Hi, Josh.
Thanks.
Yes.
So this is an unfair question, but is there any indication at all that CMS.
I was unhappy with the current payment structure. It just strikes us that they're not happy with home health ever they are not happy with hospital length of stay but they've left you guys alone.
The 60% rule, we used to be the 70% rule or is there any.
Any kind of inklings on the horizon. They may look to tweak how you pay.
John .
First of all we might we might challenge on we'd been left alone since the 60% recall, we've had sequestration along with everybody else and we've had section GG and more quality indicators and all of that other kind of stuff that has not always been easier to digest.
Structural change of yes.
But like the big structural change that we want to pay you know on per hour divided by 12 minutes or some such thing, but do you think the current structure stays in place yes.
Yes.
Sure.
We're not hearing anything to the contrary John as a matter of fact, if you look at the combined rhetoric out there between CMS and Med pack and then even some of the things that have been considered through for instance, the residue the impact Act.
It seems to be going the other way, which is a recognition that significant improvement has been made in <unk>.
Areas like quality reporting and so forth and that.
Trying to make a more substantive revision would have very significant.
Complexities to it without necessarily accomplish.
So I think the impact out of that.
It's certainly an indicator the blood draw.
And they were gonna had X number of years ago, and creating this common assessment instrument and I think they saw the complexities of looking across the various settings in post acute and that was <unk> <unk>.
Presented their prototype as required but I think everybody agrees that that was not ready for prime time, and very difficult to implement but to go back to your initial question. We're not seeing any major structural changes that would be indicated or hinted that at this point from CMS or.
Or any other regulatory body.
John .
We have enough hubris that we feel like we're immune to it but we're not aware of anything right ryzen.
And so my follow up would be I think you just said, 80% of your Ma rates or per day.
Alright.
Sorry could you could be Doug.
Did you did I Miss that did I hear that right.
88 of our current revenues are on a on.
On a case rate basis.
Okay got you. So if you could be Doug at Donlin.
Again do you think.
Any indication or as you've talked to me than my parents. They want to change how you paid or do you think that will also stay in place.
I think we're making progress pushing that 88% up north so.
The ground.
Round game, so it's small increments, but right now I think the trend line suggests that we're going to be able to not only grow our MA revenue significantly but continue to push the percentage of those revenues that are on an attractive.
Case rate basis north.
Got you. Thanks, so much.
Thank you John <unk> John .
Your next question comes from Ben Hendrix of RBC capital markets.
Good morning, Ben Good morning, Thanks, guys I just wanted to follow up on John's first question there specifically.
Pertaining to the final rule for Medicare It looks like your rate updates kind of in line with the industry, but is there anything else any other observations to call out from the final rule, whether they'd be with the quality reporting program or specifically any implications from the re basing of the market basket given that it's kind of rebase to a COVID-19 late in year.
Thanks.
Theres really no major takeaways that we saw we thought it was a pretty benign final rule it was very.
Very much in line with the.
The initial rule that came out and yes, they continue to have quality quality reporting.
And we're in full compliance with that so we're not seeing anything major.
<unk> indicated in the final rule that would change our thoughts on that and to some extent it may be the case that CMS is cognizant of the fact that we do have RCD rolling out this month and didn't want to overly complicate things for either the Max by injecting something into the payment system or for the providers as well, but it is.
Mark said.
Anil rule was really.
Consistent almost solely with the with the proposed rule, which is a good thing.
Thank you.
Thanks Brent.
This concludes the question and answer session for today I'd be happy to return the call to Mark Miller for closing comments.
Thank you if anyone has additional questions. Please call me at 205 90 705860. Thank you again for joining today's call.
This does conclude today's conference you may now disconnect your lines and everyone have a great day.
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