Q2 2023 Aveanna Healthcare Holdings Inc Earnings Call
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Greetings and welcome to the Avionic House Care Holdings, Inc. Second quarter 2023 earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded.
I'll now turn the conference over to your host Shannon Drake you may begin.
Thanks, you Molly and good morning, everyone and welcome to Avi on our second quarter 2023 earnings call. My name is Shannon dragging the company's Chief legal officer, and corporate Secretary with me today is Jeff <unk>, Our Chief Executive Officer, Matt <unk> culture, our interim Chief Financial Officer, and Debbie Stewart, our Chief Accounting Officer.
During this call we will make forward looking statements risk factors that may impact those statements and could cause actual future results to differ materially from currently projected results are described in this morning's press release and the reports we file with the SEC. The company does not undertake any duty to update such forward looking statements and.
Additionally, during today's call, we will discuss certain non-GAAP measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. A reconciliation of these measures can be found in this morning's press release.
As posted on our website at Ww Dot Aviano Dot com and in our most recent quarterly report on Form 10-Q filed with the SEC.
With that I will turn the call over to Aviano's, Chief Executive Officer, Jeff Shiner, Jeff.
Shannon Good morning, and thank you for joining us today.
We appreciate each of you investing your time this morning to better understand our second quarter results and how we are continuing to progress against our near and longer term objectives for 2023 and beyond.
My initial comments will briefly highlight our second quarter results along with the progress we are making in addressing the labor markets and our ongoing efforts with government and managed care payors to create additional capacity.
I will then provide some thoughts regarding our liquidity and refreshed outlook for 2023 prior to turning the call over to Matt to provide further details into the quarter and full year guidance.
Starting with some highlights for the quarter.
<unk> revenue was approximately $471 9 million.
Representing a six 5% increase over the prior year period, and a one 2% sequential improvement.
Gross margins was $155 3 million or 32, 9%.
Which is essentially flat when compared to the comparable prior year period, but a seven 5% sequential improvement.
And finally, adjusted EBITDA was $35 $8 million, representing a three 2% decrease when compared to the prior year period, primarily due to the costs associated with the current labor environment. However, a 25, 6% sequential improvement reflecting the <unk>.
Proved payer rating environment as well as cost reduction efforts taking hold.
As we have previously discussed the labor environment remains the primary challenge that we are aggressively addressing in 2023 to see aviano resume the growth trajectory that we believe our company can achieve.
As a reminder, we do not have a demand problem demand for home and community based care has never been higher with both state and federal governments and managed care organizations asking for solutions that can create more clinical capacity.
As communicated in our previous quarter, our ability to recruit and retain the best talent is a function of rate.
Our business model offers a preferred work setting that is mission driven providing a deep sense of purpose for our teammates however, our caregivers need to be able to provide for themselves and their families. In this inflationary environment and we must offer a competitive wage.
Since our first quarter earnings call I am pleased with the progress we have made on several of our rate improvement initiatives with both government and managed care payers.
Specifically.
As it relates to our private duty services business.
Our goal for 2023 was to execute a legislative strategy that would increase rates by double digit percentages across our various states.
With particular emphasis on California, Texas, and Oklahoma, which represent approximately 25% of our total Tds revenue.
Year to date 2023.
We obtained double digit pds rate increases and six key states, including Oklahoma.
We have also achieved rate wins and an additional 11 states that were either in line or slightly better than our expectations.
These combined 17 states represent approximately 50% of our Pds footprint.
And we should continue to see positive progress throughout 2023 and into 2024 as we continue to focus on the remaining states.
As a point of reference the majority of the rate increases are effective in the second half of 2023.
So we will get a full year benefit as we head into 2024.
Finally, we were successful in expanding the family caregiver benefit in two additional states, which should help ease caregiver capacity constraints.
While we're pleased with our Pds legislative messaging is being well received by state legislators, we still have much work to do.
As an example of the work ahead.
We received a modest increase in Texas effective September one.
And do not anticipate being included in the California budget until mid 2024.
While we believe we have made significant strides with both Texas and California legislature.
Demonstrating the importance of rate increases and how they support and overall lower healthcare costs improve patient satisfaction and quality outcomes.
It is clear that we need to further accelerate our preferred payer strategy and.
<unk> continued to focus on opportunities within our current infrastructure to allow us to pass meaningful wages through to our caregivers.
This allows us to become a solution for overcrowded children's hospitals, and distraught parents, who want their children to be cared for in the comfort of their home.
Yeah.
Moving on to our progress with preferred Payors.
Our goal for 2023 was to double our Pds preferred payer volumes from approximately 10% to 20% by year end 2023.
In the second quarter, we added one additional preferred payer agreement in a key market.
Our preferred payer volumes increased to approximately 16% of <unk>.
Total pds volumes as compared to 13% at the end of Q1.
We have since signed an additional preferred pay agreement in early July and are optimistic we will continue to execute this strategic initiative throughout 2023.
While we are taking a national approach to our Pds preferred payer strategy. We are placing particular focus on the state of Texas due to the moderate rate increase and intensifying our ability to shift capacity to our preferred payors.
As of June 30, we now have over 50% of our Texas, PD and volumes with preferred Payors.
And believe we have an opportunity to further improve this trend to approximately 70% by the end of the year.
Finally, we discussed the need to shift our current labor capacity to those payors that value our services and appropriately reimburse us for the care we provide.
We continued several initiatives to shift caregiver capacity to our preferred payers to optimize staffing rates, while minimizing days in an acute care facility.
In the second quarter, our preferred payer relationships benefited from accelerated caregiver hires.
Two and a half to three times more than our other payers.
And we continued to experience staffing rates, approximately 20% greater with significantly higher patient admissions.
Our value proposition is straightforward.
Preferred payers reimburse us a fair rate and we pay market competitive wage rates, while also earning value based payments for achieving positive clinical outcomes and improve steps.
We are encouraged by our 2023 rate increases and the subsequent recruiting results and believe our business can rebound quickly as we achieved a rate goal as previously discussed.
Home and community based care will continue to grow and Avianca is a comprehensive platform with a diverse payer base, providing a cost effective high quality alternative to higher cost care settings.
And most importantly, we provide this care in the most desirable setting the comfort of the patients' home.
Before I turn the call over to Matt, Let me briefly comment on our liquidity and refreshed outlook for 2023.
We recently renewed and extended our AR securitization facility for an additional three year term effective July 31 of 2023 maintaining.
Maintaining our ability to access up to $175 million in cash proceeds associated with our ongoing reoccurring receivable balances.
I am pleased with the work of the entire team and finalizing this agreement and allowing us to maintain our focus on running the business.
On the liquidity front more broadly we continue to make progress on improving our cash flow by focusing on obtaining adequate reimbursement rates and growing our volumes.
We have also implemented several initiatives to right size, our corporate cost structure, while optimizing our collections.
As Matt will discuss further we have ample liquidity to operate our business, while we work with government and payers to improve the reimbursement rates to reflect the inflationary environment.
As it relates to our refresh the outlook for the year.
Based on the strength of our first six months results and the rate increases that will impact the back half of the year.
We are comfortable raising our full year revenue guidance to a range of 185 billion to 186 billion.
And adjusted EBITDA guidance range of $132 million to $135 million respectively.
We believe it is important to continue to set expectations that acknowledge the environment that we're operating in and the time it will take to transform our company and return to sustainable growth.
We believe our revised outlook provides a prudent view considering the challenges we face with the current inflationary labor environment and hopefully it proves to be conservative as we execute throughout the remainder of the year.
Finally.
I am proud of our Avianca team as we continue to execute on our 2023 strategic objectives.
The power and efficiency of the home as a health care setting remains critical to our patients families payers referral sources and government partners.
The value of our clinical workforce continues to be recognized through various rate increases across the country and through our expanding preferred payer relationships.
I look forward to updating you on our results at the end of Q3.
With that let me turn the call over to Matt to provide further details on the quarter and our 2023 outlook Matt.
Thanks, Jeff and good morning.
I'll first talk about our second quarter financial results and liquidity before providing additional details on our refreshed outlook for 2023.
Starting with the top line, we saw revenues rise six 5% over the prior year period to $471 $9 million we.
We experienced revenue growth in both our private duty services.
Medical solutions segments.
<unk> grew by eight 5% and 15, 9% respectively.
While our home health and hospice segment declined by nine 7% as compared to the prior year quarter.
Consolidated adjusted EBITDA was $35 8 million, a three 2% decrease as compared to the prior year, but a 25, 6% sequential improvement.
Reflecting the improved payor rating environment as well as cost reduction efforts taking hold.
Now, taking a deeper look into each of our segments.
Starting with private duty services revenue for the quarter was approximately $378 million and a 5% increase and was driven by approximately $9 9 million hours of care.
The volume increase of two 7% over the prior year.
While volume has improved over the prior year, we continue to be constrained and our topline growth due to the shortage of available caregivers. Although we are beginning to see signs of improvement and labor markets.
Q2 revenue per hour of $38 28.
Was up $2, four or five 8% as compared to the prior year quarter.
We expect to see continued improvements in 2023 as we execute on our rate increase initiatives and we continue to be encouraged with our ability to hire and attract caregivers and address the market demand for our services, while we obtain acceptable reimbursement rates.
Turning to our cost of labor and gross margin metrics.
Achieved $111 5 million of gross margin.
Our 29, 5%, a 4% increase from the prior year quarter.
Our cost of revenue rate at $26 98.
Which is a five 2% increase as compared to the prior year.
Represents the rate pressures, we continue to experience and a labor markets.
That being said our cost of revenue rate improved in the second quarter by 49.
Our one 7% on a sequential basis.
Our Q2 spread per hour was $11 30.
Representing a seven 3% year over year improvement.
Our Q2 spreads did benefit from some timing related items and should normalize in the $10 to $10 50 range in the back half of the year.
Moving onto our home health and hospice segment.
Revenue for the quarter was approximately $55 4 million and nine 7% decrease over the prior year.
Revenue was driven by 9900 total emissions with approximately 69%.
<unk>.
11100 total episodes of care.
Medicare revenue per episode for the quarter was $3051 up two 8% sequentially from Q1.
We are intentionally focused on right sizing our approach to growth and the near term by focusing on preferred payors reimburse us on an episodic basis.
This episodic focus has accelerated our margin expansion and improved clinical outcomes.
With episodic admissions approaching 70%, we have achieved our goals of right sizing our margin profile and enhancing our clinical offerings.
As we think about Q3, we expect relatively flat admission growth with improvements in growth coming in Q4.
We are committed to a disciplined approach to growth while shifting our capacity to those payors that value our clinical resources.
We were pleased with the gross margin improvement from 44, 6% in Q1 of 2023 to 48, 6% in Q2.
Demonstrating our continued focus on cost initiatives to achieve our targeted gross margins.
Despite the challenging challenges faced by our truckload segment in 2022.
We hold a strong belief in this business and its lasting value proposition.
Our home health and hospice platform, which is prime for growth is dedicated to creating value through effective operating operational management and delivery of exceptional patient care.
We would expect to see improvements throughout 2023, as our direct and indirect cost initiatives continued to take hold.
Now to our medical solutions segment results for Q2.
During the quarter, we produced revenue $38 9 million.
A 15, 9% increase over the prior year.
Revenue was driven by approximately 85000 unique patients served.
And revenue per GPS, a $457 and 26.
Gross margins were $16 $16 8 million.
A $2 8 million or 19, 7% improvement over the prior year period.
Gross margins, which were 43, 3% in the quarter represented a one 4% increase as compared to the prior year period.
We continue to evaluate ways to be more effective and efficient in our back office to leverage our overhead as we continue to grow.
While other providers decided to exit the market, we see this as an opportunity to expand our national Entrail presence and to further our payer partnerships.
In summary, we continue to fight through a difficult labor and inflationary environment, while keeping our patients care at the center of everything we do.
It is clear to us that shifting caregiver capacity to those preferred payors, who value our partnership as the path forward at Avianca.
As Jeff stated.
Our primary challenge is reimbursement rates.
With the positive momentum we saw in Q2, we are optimistic that such trends will continue into the second half of 2023.
As we make progress in 2023 with the rate environment, we will pass through wage improvements and other benefits to our caregivers and the ongoing efforts to better improve volumes.
Now moving to our balance sheet and liquidity.
At the end of the second quarter, we have liquidity in excess of $205 million.
Representing cash on hand of approximately $28 million.
$15 million of availability under our securitization facility.
And approximately $162 million of availability on our revolver.
Which was undrawn as of the end of the quarter.
Lastly, we had 38 million of outstanding letters of credit at the end of Q2.
While we analyze the 2023 earnings timetable and their related cash flows.
There is a possibility of us utilizing the revolver for the short term due to timing related needs.
However, our primary goals are to have the revolver undrawn as of the end of the year and achieve positive operating cash flows during the latter half of 2023.
On the debt service front, we had approximately $1 four 8 billion of variable rate debt at the end of Q2.
Of this amount $520 million is hedged by fixed rate swaps.
$880 million to subject to interest rate cap.
Which further limits our exposure to increases in sofa above to 96%.
Accordingly substantial substantially all of our variable rate debt is hedged our.
Our interest rate swaps extend through June 2026, and our interest rate caps extend through February 2027.
One last item I will mention related to our debt is that we have no material term loan maturities until July 2028.
Looking at cash flow.
Cash provided by operating activities was negative $3 million for the quarter as a result of certain one time working capital items.
Free cash flow was approximately negative $9 5 million.
We also expect to see cash flow benefits throughout 2023, as our top line and cost management initiatives come to fruition.
Before I hand, the call over to the operator for Q&A.
Let me take a moment to address a refreshed outlook for 2023.
As Jeff mentioned, we are comfortable raising our full year revenue guidance to a range of $1 85 to $1 86 billion.
And adjusted EBITDA guidance range of $132 million to $135 million respectively.
If the trends we saw in the second quarter continue and we are successful in obtaining our additional rate increases along with expanded preferred payer arrangements.
We would expect to further update our guidance in the back half of the year.
As we think about seasonality, we expect our revenue to grow as rate increases are implemented throughout the year, which drives our volumes.
As we now have more clarity into the annual rate increases we will receive their effective date, we now expect approximately 25% to 26% of our full year guidance adjusted EBITDA to be recognized in the third quarter.
Our EBITDA is expected to further ramp in the fourth quarter as we realize the benefits of our cost savings initiatives.
I am proud of all of our Avianca team members and our hard work achieving these results I look forward to our two the continued execution of our 2023 strategic plans and updating you further at the end of Q3.
Let me turn the call over to the operator.
Sure.
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Our first question comes from the line of Joe.
Hi, guys.
<unk> with bank of America.
Please proceed with your questions.
Hi, Thanks for taking the question. This is Neil on for Jon Gacek.
The first question I had was just about operating cash flow being negative this quarter. So I just wanted to get a sense for what your outlook was for a year and if you still expect it to be negative in the third quarter of a positive in the fourth.
Yes, good morning, and thanks for joining us as we said last quarter, we expected our second quarter to be slightly negative and our operating cash flow and it was.
$3 million.
Our goal all year has been to reach positive operating cash flow by the end of the year and I think everything that we know today tells us we're still on that on that trend.
We'll have some certain one timing things that will play through through Q3, and Q4, but we still feel very optimistic on reaching that positive operating cash flow and ultimately heading into 2024 is a positive operating cash flow and free cash flow company as we really move through 'twenty, four but anything you'd add.
You said it well, Jeff a couple of one time working capital items. This quarter resulted in a negative $3 million that we saw but you know given our outlook of where we're where we're looking at with continued rate improvements as well as our continued cost food cost initiatives that we will continue to take I think <unk>.
Movements in the business will continue and from there we should see a positive.
Operating cash flow going forward.
Okay perfect. Thank you I just have one follow up question.
Separate question on Pds volume and how I guess your 10-Q said that it was primarily.
<unk> been able to growth in demand for non clinical services. So what was the volume change year over year and quarter over quarter for these clinical services and where do you expect volumes to be for the rest of the year. Thank you.
It's a great question and yes, we saw we saw a nice uptick in some of our lower skilled in some of our.
Less less nurse driven businesses I would tell you that as we first of all positive two 7% year over year growth for US is a good thing because it's been a couple of years since we've had positive growth in our Pts business.
I'll take us back to a preferred payers that at the end of the day, we see our preferred payer strategy working both in rate and in and beginning to work and volume.
Obviously, we've made a strong commitment to shifting caregiver capacity to those payers that are leaning into us.
Both of our Pds and I think you heard it in our home health and hospice line of business as well that we're we're committing to those payers that are paying us either on an episodic basis or or an aligned preferred payer, but yes, I think as we think of the back half of the year. We see continued progress in our Pds business, both in rate and volume.
<unk>.
Really proud of our Pds team that they have recovered well in 2023 from from.
The COVID-19 hanging hanging around and I think we just see a clear path forward with our preferred payers to really driving the business forward. So we're really pleased with where we're sitting today. Thank you.
Thank you.
Our next question comes from the line of Brian <unk> with Jefferies. Please proceed with your question.
Hi, Good morning, you've got Tashi on for Brian . Thank you for taking my question. So my first one relates to the raised guidance right. So I'm just looking at revenue first.
If we're looking at first half versus second half that implies a ramp down in the back half at the same time, we're hearing some strong momentum in Pts in your other segments. So maybe if you can just kind of talk through the moving pieces and you know what.
Yeah.
Informing the I guess ramp down on the back half and then on EBITDA as well I know that you guys had kind of called out a couple of cost savings, but as we reconcile this with the different margin profiles for Tds Triple H and MFS. Just curious if you can talk about the areas where you have.
More leverage to improve the margin profile across the three different segments, especially in PDF. If I know that you guys said you expect that to normalize I think.
<unk> factored that into my model I'm still getting to the lower end.
The margin you guys had kind of loosely.
Commented on so we'll start there.
Good morning, guys Thats, a lot to unpack, there, but well do our best.
Let's start with Q3, so so from a seasonality standpoint, and I would say from the first time since Covid hit we see a seasonal impact of our Q3 business. So pre pre Covid Q3 for US was when schools are out and both are our PDL and our Pds business schools being out is a little bit less volume for us.
And we're experiencing that in Q3, so we expect Q3 to be seasonally a little bit light on revenue.
And ultimately probably relatively in line with earnings as we think of think of Q2, maybe a little bit softer and I think Matt and his prepared remarks kind of led you to what we think Q3 EBITDA, while it might be.
I think to the second half of your question the back half of the year. The rate increases majority of our rate increases are either effective July one or September or October one both on the Pds as well as obviously the hospice rate increase coming so we will see a lift in the I'll call. It the back four months of the year, So I'll call. It September .
<unk> kind of through December , we'll see a nice volume lift and our and all three of our businesses as well as continued rate lift. So yes, I think where we sit today <unk>. It's still early in our transformation story I think we use words like prudent conservative on purpose that we understand that this.
This guidance guidance revision as is prudent in nature I think Matt ended his comments by saying if things play out the way we think they will that we would plan to to readdress guidance in our November earnings call as well so.
I would tell you youre not missing anything other than just keep in mind Q3 is our seasonally low period and I think everything we know today tells us that it will play out to be that way both in both in our Pds business as well as our home health and hospice business is our seasonal seasonal low point.
Matt anything you want address on the cost side of their margins on.
Hey, Tom It's a great question altogether I think there's improvements throughout all three business segments in there and I'm going to say that's above gross margin and below that we're focusing on and so I think as we continue to kind of dig into it and be transformational in nature and lean into technology in certain segments. But then also make sure that we're delivering the appropriate amount of cash.
The right amount of care with the right amount of overhead supporting it as well we will continue to be prudent in that one and I'll part portions of our business and I think thats will lead to year, a little bit of margin expansion as well.
Anything else sorry to hit that.
Yes, just one more question from me and I appreciate the detail on my first question and then kind of get into this conversation around labor. Maybe you can provide a couple of kpis as to how your labor force stands today in terms of recruitment retention turnover things like that and how that's trended over the past year and then one follow up to that you know I know you mentioned Jeff.
If you it's not a demand issue, it's really capacity. So if you had sufficient labor how much more volume percentage wise do you think you can field.
Great great.
I think we think of labor as a function of rate and a lot of people try to drive us towards.
What's the inflation rate of caregivers on both the <unk> as well as home health Hospice. We just we just refuse to think of it that way because we don't control inflation, we do control reimbursement rate and we do control.
Where what partners, we ultimately put our mirror capacity with and so it just brings us back to our preferred payer and government affairs strategy, which is as we've been crystal clear with the last few quarters. Our job is to drive appropriate reimbursement rates, both on the government affairs side and the and the preferred.
Payor strategy and in turn invest those caregiver wages and in those relationships. We're demonstrating we can grow the business and be a good business partner the flip side of it all of that is true tashi end markets or payers, who are not paying us above market preferred rates.
We're not seeing incremental hires we're not seeing that our staffing rates and so it just drives us and I'll use Texas as the example, we used in this call.
Just drives us to align our capacity both current and the future with those payers that want to be long term business partners of ours, and we talked in Texas 50.
50% of our PD and volumes in Texas are now aligned with a preferred payer we are aggressively driving that towards the end of the year to be 70% of our Texas PGM business to be aligned with the preferred payer because the only way we can truly live out the story that we tell which is to improve clinical outcomes lower total cost of.
Care and just staff more hours.
Which are which are payers want us to is to partner with those payers that will ultimately give us higher rates and include us in value based bonus payments as we earn them.
I do want to touch lastly, because you brought up the idea of home health and hospice and I think it's important.
We were pretty crystal clear on this that we have we have committed to also aligning our home health.
Michael workforce with preferred Payors, obviously episodic payers in home health is the way, we measure preferred payers, but we're approaching 70%. Some weeks we have been in low seventy's on episodic admissions and even though our missions are down year over year, even quarter over quarter sequentially, even though our revenue was down year over year.
We have made a commitment in home health to not give away our capacity to low dollar low margin payers and I think you'll find us firing terminating more contracts as we align ourselves in home health to those payers, who will ultimately pay us a fair rate market fair rate <unk> episodic rate and I'm real.
Really proud of our home health team and hospice team.
They have turned our business around in the last two quarters, Matt talked about.
48, 6% gross margin that for Avianca is as good as it's gotten in the last year and equally.
Important we can now see our clinical outcomes also improve in home health and hospice, because we're not chasing low dollar low margin business. So again I think youre hearing us just beat the same drum, which is in all three of our businesses. Our resources are scarce in nature, and we're going to align them with the payers who want to.
Partner with us on a long term basis and be a good good business partner and we're going to be a good business partner to them in return.
Thanks Rajiv.
Thank you.
Our next question comes from the line.
<unk> Chickering with Deutsche Bank. Please proceed with your question.
Yes.
Morning, guys.
So looking at guidance can you help us quantify the headwinds and tailwind on the rate increases versus your prior guidance I believe.
That you are looking for mid to high single digit rate increases in California, and Texas. It sounds like Thats, a headwind if anyone's got rate increases from others. So can you just help us I guess.
Model sort of these moving parts between what was better versus worse. When you look at your last guidance.
And on Texas do you feel about some of those payers will be will be.
And the preferred network within guidance in Texas.
Thanks, Pete and good morning, Yes, I think.
Let me start with <unk>.
Clearly we are disappointed that we were not included in the fiscal year 2023, California buys it because that was a big deal for us.
I'm going to flip that to a positive <unk>, we're the largest provider of PD and the state of California, We have been in California for over a decade, we're going to be in California, a decade from now. So we are committed to the long term success of California, and we're going to get a rate increase for PDI and in California. It's the right thing to do we've made really.
Nice inroads with both the legislature and the Governor staff and we're going to continue to lead in to the Governor and his his key leadership as we move into 'twenty. Four I think is if you think about the timing of California.
Which as we talked about going into <unk> is a big mover for IV Ana I think of it now in the back half of 'twenty, four and potentially as late as January one 'twenty five that rate improvement.
How it plays out in our 2023 guidance compared to the rate increases that we did get some Peter that we were not expecting some came in significantly higher than we expected on a per day basis.
It's roughly a wash for us in 'twenty three so I think as we as we think of the back half of the year it will be roughly a wash.
Now we won't have the seven one of 23, California rate increase so we didn't have that step.
In Q3 of 'twenty three we didnt have that immediate step up so it's a little bit more of a layered in approach as we move from Q3 into Q4.
And then I think as Matt talked about the nice part for US right. Now is we have a couple of levers we can pull our cost our cost.
I'll call. It tenacity has significantly ramped up and we just we just found within the company. There were some areas that we really could address overall contribution margin.
And the businesses and so I think as you think about its impact on guidance.
Ultimately I think will land in about the same place in <unk> and 'twenty three.
And then we're still we're still early on 'twenty four right. We're still probably three months early from really really focusing on 24.
Have the California rate increase in early 'twenty four right. So so we will look at other measures like the continued acceleration of the preferred payer strategy to make sure that as we roll into 'twenty four we really have good momentum on our preferred payer mixes.
I think I got most of the question there yes perfect.
Sticking I guess on the same topic.
You'll get that every contract is different here, but because preferred networks are becoming increasingly important for four year growth engine.
Can you help quantify as you quantified for us how much preferred.
Partner pays versus service standard contract.
And sticking with Texas again, just because you brought it up earlier.
Like I said in the script that demand remains very high.
And if you are not be treated or they're just being stuck in acute hospitals ensure what's happens patients specifically in Texas today.
Yes. Thank you ask a question.
It goes back to we've got studies to prove it both in California and in Texas.
And we've presented those studies to the both the government governors' offices as well as Medicaid Department and many legislatures.
PD PD and saves between five and $6000 a day compared to acute care acute care setting right holistic cost cost to cost.
It takes time to kind of get that messaging through legislatures. It doesn't take time to get that through to MCR is they absolutely understand that.
East, Texas to your question, our MTO partners in Texas understand that they have to get these kids out of the hospitals and that some studies are suggesting that that medically fragile children are remaining in hospital is up to 54 days on average longer than they need to be there. So you just do the math, it's two or $300000 per stay greater or <unk>.
Lately more so yes, we feel our MCU partners understand that in the markets like Texas, where we have scale and size and true specification.
We really are the market mover right. So you need aviano to partner with you from a nursing standpoint so.
We've gone into this wanting to be good long term business partners with our payer partners. We don't want to flip partners payer partners every quarter. Our goal was to align with partners over a multiyear period to really build sustainable relationships.
The fact that we already had 50% of our volume in Texas with MTO preferred payer I think demonstrates that we were already well aligned there. The fact that we only got a 2% rate increase effective September one.
Oh, it's almost embarrassing from the state of Texas. So it just highlighted that pay preferred payer strategy was the path forward and our <unk> partners have have graciously align we talked about signing additional preferred payer it was in Texas in July .
I think we will sign one or two more by the end of the year and ultimately be somewhere around 70%.
Lastly, Peter you asked kind of what's the market difference.
When we're earning our value based payments most of those are established on a quarterly basis, when we're earning not only the rate the higher market rate, but also the value based payment it's material in nature compared to the Medicaid rate. So it's.
It's in the range of.
25% to 30% greater than the Medicaid market market right. So it's it's.
It's important for us not only to have the preferred rate. It's also important for us to add value based components. So that the preferred payer sees that we're aligned with them long term.
Hopefully that was helpful.
Perfect.
One superfast cash flow question, just a follow up to the previous question.
<unk> negative and <unk> positive <unk> is the difference there is simply those rate increases flowing through the last four months of the year.
Or is it something else that we should.
I'd be thinking about.
So the shift from cash flow negative to cash flow positive.
No. It's just a little bit of the volume as you think about the business itself veto, we're a little bit light in volumes in Q3, primarily in the core businesses of home health and MPD and that ramps kind of backup September through the end of the year.
And so if you follow the revenue there and earnings it just fit it we expect Q4 to be very very strong quarter for us and we expect to end the year on a great trajectory, but Q3 is just a little bit.
<unk> for us.
And that's how we've laid out the cash flow for either in Q4 alright.
Alright, great. Thanks, so much.
Thanks Peter.
Our next question comes from the line of Ben Hendrix with RBC capital markets. Please proceed with your.
Hey, Thanks, guys definitely appreciate the commentary about your preferred payer mix in Texas I think for overall you had noted that you were expecting preferred payers to account for 18% to 20% of nursing hours for the year I'm wondering if this July contract in Texas gets you there or are there still kind of wood to chop on that front.
That's my first question.
Yes, Ben it's.
As we think of as we think of the year. We started the year, 10%. We are about 13% by the end of Q1 I think our actual number was 16, 5% by the end of Q2.
Yes that one agreement we signed in Q, both Q2, and then when we sign July is helpful. But no. We still have wood to chop, we will sign another three or four between now and the end of the year.
I believe Matt May head, Jimmy a little bit, but I believe we'll comfortably be at that 20% by the end of the year and then we'll reset and we'll reset that go over one for 24 to continue to push that story. So so we're we're not done and we're not stopping at 20%.
We want to continue to drive that to be the more and more meaningful part of our business, but anything you'd add no I think thats well said, Jeff on the preferred payers are the answer for Aviano to answer for our caregivers and if the answers for our patients.
Moving now to 20% and above is what we're focused on as an organization because it allows us to pay that higher rate higher wage rates of our caregivers, which allows us to drive more volume and provide more clinical care for them. So as we kind of check the box on that 80% to 20% in the back half of the year and say that that's where we're going to be we will set a new Gulf for 2020 for us.
Well and continue to push forward.
Thank you and just a follow up on one of your prepared comments, you mentioned protect us and California.
Planning to include you in state budget next year, how much visibility does that realistically give you is that something that kind of the.
Negotiation process just starts all over or is there kind of a real indication that those double digits.
Double digit increases will be realistically considered next year.
Yes.
My question, but let me separate the two Texas as a biannual, let's say a process of Texas has done for the next two years and our strategy in Texas is what we just talked about working with the MTO. So we're not waiting on any any rate increase in Texas, we're driving our own destiny, California, we are in active conversations continuing Ed.
Every day, we will spend time this fall with the governor and the Governors key leadership team as we continue to move forward. This story, California is in every single year right since the January resets another legislative process for us.
And we were 15 16 months in California now focused on this.
There is still plenty of wood to chop, but using your words plenty of wood to chop in California, but Ben.
Don't think of it as if I just think of it as when and how long it will have taken us to tell our full story.
We are at we are an absolute total cost health care cost save or to California, and our studies show that and I think that's resonated really well we've gotten good feedback from the Governor staff.
And I think partnering with them. This fall as they go into the 2024 legislative cycle is the best thing that we can do is both the company and an industry in California.
It is the right thing to do we need to be on the Governor's key legislative initiatives to really see this rate increase through as I said, the Taj or Pete Peto.
That would be a late 2024, so as you think about when would that come to fruition. The earliest would be July of 'twenty for the more likely outcome would be probably one 125 as most rate initiatives are right investments from California start on the first day of the following fiscal year.
But as you step back then.
As we talked in our prepared remarks, we've had a great year for me from a government affairs advocacy standpoint, 17 state rate increases and we got 30 33 States total so 17 states slightly better than we expected certainly would've loved California to be on that list, but I think it's I think it sets up well for us as we.
As most of those rate increases will flow into 'twenty, four and really I'm kind of excited at California's kind of on that horizon right because it gives us the next step in and as Matt as Matt reminded us at the end of the day. The only way we can pay the caregivers the fair rate and truly take patients home and fulfill our mission is to have.
If an appropriate rate and I feel confident that we'll see that through with California here over the next next six months.
Anything else Ben.
Alright.
And we have we see end of the question and answer session I'll now turn the call back over to Jeff for closing remarks.
Awesome. Thank you. Thank you so much for joining our earnings call in one point. Thank you for your interest in our Avi on a story, we certainly look forward to updating you on our continued progress at the end of Q3 in November . Thank you and have a great day.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
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