Q3 2023 Enhabit Inc Earnings Call

Speaker 1: Yeah.

Good morning, everyone and welcome to inhabit home health and Hospice is third 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.

Speaker 2: Good morning everyone and welcome to inhabit home health and hospices 3rd 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. If you would like to ask a question during this time, simply press star one on your telephone keypad. You will be limited to one question and one follow-up.

After the Speakers' remarks, there will be a question and answer period. If you would like to ask a question. During this time simply press star one on your telephone keypad, you will be limited to one question and one follow up.

Speaker 2: 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 Jordan Lloyd and have it Home Help and Hospice Director of Invest Relations.

<unk> conference call is being recorded.

Have any objection you may disconnect at this time I will now turn the call over to Jordan, Lloyd and habit home health and hospice director of Investor Relations.

Speaker 3: Thank you, operator, and good morning, everyone. Thank you for joining and have at Home Health in Houses 3rd quarter, 2023, earnings conference call. With me on the call today, our bar of Jacob Smire, President and Chief Executive Officer, and Krispy Karr-Lyle, Chief Financial Officer.

Thank you operator, and good morning, everyone. Thank you for joining and have a home health and hospital third quarter 2023 earnings Conference call with me on the call today are Marc Jacobs Meyer, President and Chief Executive Officer, and Crissy, Carlisle <unk> Chief Financial Officer before we begin if you do not already have a copy the third.

Speaker 3: Before we begin, if you do not already have a copy, the third quarter earnings released supplemental information and related form 8K files with the SEC are available on our website at investors.eha.com.

Our earnings release supplemental information and related form 8-K filed with the SEC are available on our website at investors thought Ehow dotcom.

Speaker 3: On page two of the supplemental information, you'll find the safe harbor statement, which are also set forth on the last page of the earning clearly.

On page two of the supplemental information you'll find our safe Harbor statement, which are also set forth on the last page of the earnings release.

Speaker 3: During a call, we'll make forward-looking statements, which are subject to risks and uncertainties, many of which are beyond our control.

During the call, we'll make forward looking statements, which are subject to risks and uncertainties many of which are beyond our control.

Speaker 3: Certain risks and uncertainties that could cause actual results to differ materially from our projections at summits and expectations are discussed in the SEC's filing under the Form 10K and subsequent quarterly reports on Form 10Q, each of which will be available on the company's website once filed. We encourage you to read them.

Risks and uncertainties that could cause actual reserve results.

Differ materially from our projections estimates and expectations are discussed in the Sec's filings under the Form 10-K, and subsequent quarterly reports on Form 10-Q each.

Two of which will be available on the company's website. Once filed we encourage you to read them you're 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.

Speaker 3: Your caution not to place undue reliance on the estimates, projections, guidance, and other forward-looking information presented, which are based on current estimates, a future event, and speak only out of today. We do not undertake a duty to update these forward-looking.

Speaker 3: Our supplemental information and discussion on this call will include certain non- GAAP financial

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 in the earnings release.

Speaker 3: For such measures, reconciliation to the most directly comparable gap measure is available at the end of the supplemental information and earnings release. I would like to remind everyone that we would hear to one question and one follow-up to allow everyone to ask a question. If you have additional questions, please feel free to rejoin the queue. With that, I'll turn the car over to Bar.

I'd like to remind everyone that we would hear to one question and one follow up to allow everyone to ask a question. If you have additional questions. Please feel free to rejoin the queue with that I'll turn the call over call over to Bart.

Thank you Jordan good morning, and thanks for joining us.

Speaker 4: Thank you Jordan. Good morning and thanks for joining us.

Speaker 4: Let me open by thanking our 11,000 employees. This is an incredibly dynamic operating environment, and I'm so proud of our staff remaining focused on providing a better way to care for our patients, their families, and each other.

Let me open by thanking our 11000 employees. This is an incredibly dynamic operating environment and I'm. So proud of our staff remaining focused on providing a better way to care for our patients their families and each other.

Speaker 4: We are excited to be listed as number 42 in the US News Fast Healthcare Companies to work for. US News ranked the top 379 publicly traded companies spanning 20 industries, analyzing publicly available employee sentiment, and other data that demonstrates how a company supports the everyday experience of its workers.

We are excited to be listed as number 42 in the U S News best health care companies to work for.

U S news ranked the top 379 publicly traded companies spanning 20 industries analyzing publicly available employee sentiment and other data that demonstrates how a company supports the everyday experience of its workers.

Speaker 4: Recognitions like this are important and reflect our commitment to our team and their commitment to our patients.

Recognition like this are important and reflect our commitment to our team and their commitment to our patients.

Speaker 4: I want to remind everyone that the purpose of today's call is to discuss our financial and operational results and outlook.

I want to remind everyone that the purpose of today's call is to discuss our financial and operational results and outlook.

Speaker 4: As previously announced, we commenced a strategic review process.

As previously announced we commenced a strategic review process.

Speaker 4: Our board is conducting a thorough process with the assistance of our advisors and discussions with interested parties are ongoing.

Our board is conducting a thorough process with the assistance of our advisors and discussions with interested parties are ongoing we.

Speaker 4: We will not be commenting beyond that, and so we ask that you keep your questions focused on our business and our results.

We will not be commenting beyond that and so we ask that you keep your questions focused on our business and our results.

Speaker 4: We have a lot of important updates to discuss with you today, including the final home health rule, continued improvements in labor recruitment, retention and cost, and progress with payer innovation. Let's begin our update.

We have a lot of important updates to discuss with you today, including the final home health rule continued improvements in labor recruitment retention and cost and progress with payer innovation.

Let's begin our update with the final home health rule.

Speaker 4: CMS finalized a permanent adjustment cut that will result in a negative 2.6% impact offset by a positive market basket update of 3.3%.

CMS finalized a permanent adjustment cut that will result in a negative two 6% impact.

All set by a positive market basket update of three 3%.

Speaker 4: After productivity adjustments and fixed dollar loss ratio adjustments, the result is a positive 0.8% versus the proposed negative 2.2%.

After productivity adjustments and fixed dollar loss ratio adjustment. The result is a positive <unk>, 8% versus the proposed negative two 2%.

Speaker 4: The continued march of these cuts, where the home health community does not know what to expect from Medicare year after year, is not helpful in creating a stable home health landscape.

The continued March of these cuts where the home health community does not know what to expect from Medicare year. After year is not helpful and creating a stable home health landscape.

Speaker 4: In fact, it is detrimental to larger policy goals of providing equitable, high-quality healthcare to seniors in their homes.

In fact, it is detrimental to larger policy goal of providing equitable high quality health care to seniors in their home.

Speaker 4: While this final rule means we will be receiving less of a cut than under what was proposed, it does not restore home health reimbursement to where it should be.

While this final rule means we will be receiving lots of a cut then under what was proposed it does not restore home health reimbursement to where it should be.

Speaker 4: We know for a fact that CMS's market basket projections have missed actual market basket increase figures by more and more each of the past few years.

We know for a fact that cms's market basket projections have missed actual market basket increase figures by more and more each of the past few years.

Speaker 4: Between 2021 and 2022, CMS's final market basket projections missed the actual market basket increase by a combined 5.2%, but no corrective action has been taken.

Between 2021, and 2020 to Cms's final market basket projections, Miss the actual market basket increase by a combined five 2%, but no corrective action has been taken.

Speaker 4: We anticipate this year's update ultimately will also fall short of the actual market basket cost increase.

We anticipate this year's update ultimately will also fall short of the actual market basket cost increase.

Speaker 4: Importantly, the advocacy efforts that we and the entire home health community are presently undertaking with Congress, the administration, and in the courts will not stop merely because Medicare decided to cut home health marginally less than what was proposed.

Importantly, the advocacy efforts that we and the entire home health community are presently undertaking with Congress and the administration and in the courts will not stop merely because Medicare decided to cut home health marginally less than what was proposed.

Speaker 4: While the cut amounts are concerning at any level, the bigger issue is the fact that the permanent cuts and the ongoing threat of future temporary cut clawbacks create a damaging overhang on the industry and adversely affect the availability of home health care services.

While the cut amounts or concerning at any level. The bigger issue was the fact that the permanent cuts and the ongoing threat of future temporary cut clawbacks create a damaging overhang on the industry and adversely affect the availability of home health care services.

Speaker 4: While our payment update does not cover our inflationary costs, we are working diligently to remain competitive for our highly skilled workforce.

While our payment update does not cover our inflationary cost we are working diligently to remain competitive for our highly skilled workforce we.

Speaker 4: We will continue to manage our resources as efficiently as possible to meet the needs of our patients and the needs of our partners in the care continuum.

We will continue to manage our resources as efficiently as possible to meet the needs of our patients and the needs of our partners in the care continuum.

Speaker 4: Turning now to an update on staffing, we are very pleased with the continued success of our recruitment and retention of clinical staff.

Turning now to an update on staffing we are very pleased with the continued success of our recruitment and retention of clinical staff.

Speaker 4: Recall that during the second quarter of this year, we had 200 net new full-time nursing hires.

Recall that during the second quarter of this year, we had 200 net new full time nursing hires.

Speaker 4: During the third quarter, we added another 166 net new home health full-time nurses and we continue to hire for additional growth.

During the third quarter, we added another 166 net new home health full time nurses and we continue to hire for additional growth.

With this success, we have eliminated all hospice nursing contract labor and are on track to have substantially all home health nursing contract labor eliminated by the end of the year.

Speaker 4: With this success, we have eliminated all hospice nursing contract labor and are on track to have substantially all home health nursing contract labor eliminated by the end of the year.

Speaker 4: Our home health team continues to do a great job managing productivity and optimization of our clinical staff.

Our home health team continues to do a great job managing productivity and optimization of our clinical staff.

Speaker 4: Our cost per visit increased 1.1 percent year over year as improved nursing productivity and optimization offset the impact of merit and market increases for clinical staff.

Our cost per visit increased one 1% year over year as improved nursing productivity and optimization offset the impact of merit and market increases for clinical staff.

For hospice the implementation of the case management model and industry standard provides and habit with a platform for growth driving positive recruitment and retention and addressing capacity constraints.

Speaker 4: For hospice, the implementation of the case management model and industry standard provides InHabit with a platform for growth, driving positive recruitment and retention, and addressing capacity constraints.

Speaker 4: This platform will allow us to grow and control our average daily cost per day.

This platform will allow us to grow and control our average daily cost per day.

Speaker 4: While cost per day increased year over year, it has now been stable over the past three quarters.

While cost per day increased year over year. It has now been stable over the past three quarters.

Speaker 4: With our hospice locations now fully staffed, we hired three new business development leaders with a combined 50 years of experience working with other hospice companies in the industry.

With our hospice locations now fully staffed we hired three new business development leaders with a combined 50 years of experience working with other hospice companies in the industry.

Speaker 4: We are pleased to be able to turn our focus to growth versus managing capacity challenges and are optimistic as we head into 2024.

We are pleased to be able to turn our focus to growth versus managing capacity challenges and are optimistic as we head into 2024.

And now lets talk about our continued success with payer innovation.

Speaker 4: And now let's talk about our continued success with payer innovation.

Speaker 4: The strongest value proposition in our negotiations with payers continues to be our low 30-day hospital readmission rate, which is 20% better than the national average.

The strongest value proposition in our negotiations with payers continues to be our low 30 day hospital readmission rate, which is 20% better than the national average.

Speaker 4: Our payer innovation team has continued to succeed in demonstrating this value proposition to Medicare Advantage payers.

Our payer innovation team has continued to succeed and demonstrating this value proposition to Medicare advantage payers.

Speaker 4: We had another strong quarter, negotiating 11 new contracts. Ten of the 11 are episodic agreements.

We had another strong quarter negotiating 11, new contracts 10 of the 11 are episodic agreement.

Speaker 4: Since the inception of the payer innovation team last summer, we have successfully negotiated 48 new agreements. Two-thirds of these are at...

Since the inception of the payer innovation team last summer we have successfully negotiated 48, new agreements two thirds of these are in episodic rates.

Speaker 4: Our home health business development and branch operation teams have been successful in moving volume to our payer innovation agreement.

Our home health business development and branch operation teams have been successful in moving volume to our payer innovation agreements.

Speaker 4: During the third quarter, we admitted over 6,000 patients within our new contracts. That's 72% sequential growth in admissions under these agreements.

During the third quarter, we admit it over 6000 patients within our new contracts.

That's 72% sequential growth in admissions under these agreements.

Speaker 4: Remember that in Quarter 2, our new 2023 National Agreement was effective for only two months.

Remember that in quarter, two our new 2023 National agreement was effective for only two months.

Speaker 4: In the second quarter of this year, 10% of our non-episodic visits were in the new payer innovation contract.

In the second quarter of this year, 10% of our non episodic visits where in the new payer innovation contracts.

Speaker 4: In the third quarter, this grew to 22% of our non-episodic visits.

In the third quarter. This grew to 22% of our non episodic visits.

Speaker 4: We continue to estimate that every 5% of visits that shift from previous non-episodic payer contracts to new non-episodic payer innovation contracts represents an approximate 2 million increase to revenue and adjusted EBITDA annually.

We continue to estimate that every 5% of visits that shift from previous not episodic payer contracts to new non episodic pair innovation contracts represents an approximate $2 million increase to revenue and adjusted EBITDA annually.

We are confident in our ability to make continued improvement in Medicare advantage pricing and in the shift of our Medicare advantage admissions to these improved payors.

Speaker 4: We are confident in our ability to make continued improvement in Medicare Advantage pricing and in the shift of our Medicare Advantage admissions to these improved payers.

Speaker 4: Some payers are now recognizing the variation of quality results within the industry and are willing to pay for access to high quality providers like InHabit.

Some payers are now recognizing the variation of quality results within the industry and are willing to pay for access to high quality providers like in habit.

Our success in staffing and nursing productivity and implementing the hospice case management model and.

Speaker 4: Our success in staffing and nursing productivity, in implementing the hospice case management model, in our ongoing payer innovation contracting, and in building on the quality of our services are examples of our continuing investment for the future to meet the growing needs of home health and hospice services.

In our ongoing payer innovation contracting and in building on the quality of our services are examples of our continuing investment for the future to meet the growing need of home health and hospice services.

Speaker 4: I will now turn it over to Chrissy to further discuss this quarter's results, guidance, and the 2024 Outlook.

I will now turn it over to Christie to further discuss this quarters results guidance and the 2020 for outlook.

Speaker 5: Thanks, Barb. Consolidated net revenue was $258.3 million for the third quarter, down $7.4 million or 2.8% year-over-year. Adjusted EBITDA was $23.2 million, down $8.5 million or 26.8% year-over-year.

Barb consolidated net revenue was $258 3 million for the third quarter down seven 4 million or two 8% year over year.

Adjusted EBITDA was $23 2 million down $8 5 million or 26, 8% year over year.

Speaker 5: We estimate the continued shift to more non-episodic payers in home health decreased revenue and adjusted EBITDA approximately $8 million year-over-year.

We estimate the continued shift to more non episodic payers in home health decreased revenue and adjusted EBITDA approximately $8 million year over year.

Speaker 5: In our Home Health segment, total admissions increased 1.6% year over year as continued strong growth in non-episodic admissions offset a reduction in episodic admissions.

In our home Health segment total admissions increased one 6% year over year as continued strong growth in non episodic admissions offset a reduction in episodic admissions.

Speaker 5: Our non-episodic visits grew to approximately 31% of our total home health visits in the quarter.

Our non episodic visits grew to approximately 31% of our total home health visits in the quarter.

Speaker 5: This represents an approximate 800 basis point increase year over year and is consistent with the percent we reported in Q2 of 2023.

This represents an approximate 800 basis point increase year over year and is consistent with a percent we reported in Q2 of 2023.

Speaker 5: While we are making significant progress demonstrating our value proposition to payers as we negotiate new agreements with improved rates and are successfully shifting Medicare Advantage volume into our payer innovation agreement. The revenue and adjusted EBITDA impact from this volume shift has not been enough to overcome the financial impact from the erosion of Medicare fee-for-service volume.

While we are making significant progress demonstrating our value proposition to payers as we negotiate new agreements with improved rates and are successfully shifting Medicare advantage volume into our payer innovation agreements the revenue and adjusted EBITDA impact from this volume shift has not been enough to overcome.

The financial impact from the erosion of Medicare fee for service volumes.

Speaker 5: We estimate the impact of this payer mix shift was approximately $8 million net of the impact from improved pricing and payer innovation contracts on revenue and adjusted EBITDA during the third quarter.

We estimate the impact of this payer mix shift was approximately 8 million net of the impact from improved pricing and payer innovation contract on revenue and adjusted EBITDA during the third quarter.

In our hospice segment admissions decreased three 4% year over year, while average daily census decreased two 8% year over year succumb.

Speaker 5: In our hospice segment, admissions decreased 3.4% year over year, while average daily census decreased 2.8% year over year.

Speaker 5: Sequentially, admissions increased 1.6% over the second quarter. Our monthly average daily census trended up each month of the third quarter and this positive trend continued in October .

Sequentially admissions increased one 6% over the second quarter.

Our monthly average daily census has trended up each month of the third quarter.

This positive trend continued in October.

Speaker 5: This is the first positive trending we've experienced since November of last year.

This is the first positive trending we've experienced since November of last year.

Speaker 5: And as a reminder, the Hospice Final Rule for fiscal year 2024 went into effect on October 1, 2023 and is expected to increase our reimbursement rates by 2.9 percent.

And as a reminder, the hospice final rule for fiscal year 2024 went into effect on October one 2023 and is expected to increase our reimbursement rates by 2.9%.

Over the past two quarters, you've heard us talk about the diversification of our referral sources and the expansion of the number of admissions coming from facilities.

Speaker 5: Over the past two quarters you've heard us talk about the diversification of our referral sources and the expansion of the number of admissions coming from facilities.

Speaker 5: These patients tend to be admitted to hospice care later in their journey.

And these patients tend to be admitted to hospice care later in their journey.

Speaker 5: This diversification of referral sources is lowering our hospice cap exposure.

This diversification of referral sources is lowering our hospice cap exposure.

Speaker 5: With the Hospice Medicare fiscal year ending on September 30th, we're pleased to report that we had only one location with approximately 20,000 of cap exposure. This is a significant improvement from 2022, during which we had four locations with a combined cap exposure of approximately $1 million.

With the hospice Medicare fiscal year ending on September 30th we're pleased to report that we had only one location with approximately 20000 of cap exposure.

This is a significant improvement from 2022 during which we had four locations with a combined cap exposure of approximately $1 million.

Speaker 5: Our home office general and administrative expenses increased to 10.2% of consolidated revenue primarily due to merit increases, investments in talent acquisition and employee development, and a declining revenue base.

Our home office General and administrative expenses increased to 10, 2% of consolidated revenue, primarily due to merit increases investments in talent acquisition and employee development and a declining revenue base.

We have now Anniversaried, our Standalone company cost these costs totaled $5 8 million in the third quarter of this year compared to $5 5 million in the prior year period.

Speaker 5: We have now anniversaried our stand-alone company cost. These costs totaled $5.8 million in the third quarter of this year, compared to $5.5 million in the prior year period.

Speaker 5: By the end of June this year, we transitioned all services from Encompass Health except for certain technology services.

By the end of June this year, we transitioned all services from encompass health, except for certain technology services.

Speaker 5: All that remains as of today is the transition of our PeopleSoft financials and HR systems, and we expect to complete that transition of those services by the end of Q1 2024.

All that remains as of today is the transition of our people solve financial and HR systems, and we expect to complete that transition of those services by the end of Q1 2024.

Let's transition now to the balance sheet.

Information on our debt and liquidity metrics is included on page 15 of the supplemental slides.

Speaker 5: Information on our debt and liquidity metrics is included on page 15 of the supplemental slide.

We regularly assess our financial performance and evaluate that performance against our obligations, including those in our credit agreement.

As we continue to work with our advisors as part of our strategic review and with uncertainty in the debt markets. Prior to the close of the third quarter, we proactively reached out to our bank group and received a waiver for the Q3 2023 covenant period.

Speaker 5: As we continue to work with our advisors as part of our strategic review and with uncertainty in the debt markets, prior to the close of the third quarter, we proactively reached out to our bank group and received a waiver for the Q3 2023 Covenant period.

Speaker 5: This waiver was obtained out of an abundance of caution.

This waiver was obtained out of an abundance of caution. We ended Q3 with a leverage ratio of 5.14 times versus a covenant of 5.25 times.

Speaker 5: We ended 2-3 with a leverage ratio of 5.14 times versus a covenant of 5.25 times.

Speaker 5: As you can see from our financial performance in Q3 leverage position, the waiver we proactively obtained was ultimately not needed.

As you can see from our financial performance in Q3 leverage position. The waiver, we proactively obtained was ultimately not needed.

Speaker 5: Over the last few weeks, we continue to work with our bank group to amend our credit agreement to provide additional cushion to the financial covenant.

Over the last few weeks, we continue to work with our bank group to amend our credit agreement to provide additional cushion to the financial covenants.

Speaker 5: As part of this amendment, and as shown on page 16 of the supplemental slides, we secured financial covenant relief for the six quarters ending Q1, 2025.

As part of this amendment and as shown on page 16 of the supplemental slides.

We secured financial Covenant relief for the six quarters, ending Q1 2025.

Speaker 5: The levels we requested and received, like the waiver, were done out of an abundance of caution as we continue to operate in an industry with shifting dynamics in payer sources and reimbursement.

The levels, we requested and received like the waiver we're done out of an abundance of caution as we continue to operate in an industry with shifting dynamics in payer sources and reimbursement.

Speaker 5: It's notable that the financial information provided to the bank group for the amendment process was before the issuance of the final home health rule.

It's notable that the financial information provided to the Bank group for the amendment process was before the issuance of the final home health rule.

The amendment to our credit agreement includes a permanent reduction in our revolver commitment to 220 million.

Speaker 5: The amendment to our credit agreement includes a permanent reduction in our revolver commitment to 220 million. As of today, we have 180 million drawn on the revolver, leaving us with 40 million of availability.

As of today, we have 180 million drawn on the revolver, leaving us with $40 million of availability.

Speaker 5: As a reminder, we have drawn on the revolver only once since our separation from Encompass. That draw was made in the fourth quarter of 2022 when we had three acquisitions and a $15 million deferred payroll tax payment associated with COVID relief efforts.

As a reminder, we have drawn on the revolver only once since our separation from encompass that draw was made in the fourth quarter of 2022, when we had three acquisitions and a $15 million deferred payroll tax payment associated with Covid relief efforts.

Speaker 5: That represented over 50 million of stacked payments and we only drew 20 million on the revolver.

That represented over $50 million of stacked payment and we only drew 20 million on the revolver.

Speaker 5: Since that time, we've repaid 10 million of that draw. With cash on hand of approximately 30 million and the 40 million of availability under our revolver, we believe we have adequate liquidity to support our operations, including our de novo strategy.

Since that time, we've repaid 10 million of that draw.

With cash on hand of approximately $30 million and the $40 million of availability under our revolver. We believe we have adequate liquidity to support our operations, including our de Novo strategy.

Let's turn now to guidance.

Speaker 5: Our greatest challenge in forecasting relates to the shift of Medicare eligibles into Medicare Advantage and forecasting not only the mix of traditional Medicare admissions versus Medicare Advantage admissions, but also forecasting the shift of Medicare Advantage into our payer innovation contract.

Our greatest challenge in forecasting relate to the shift of Medicare eligible into Medicare advantage and forecasting not only the mix of traditional Medicare admissions versus Medicare advantage admissions, but also forecasting the shift of Medicare advantage into our payer innovation contracts.

Speaker 5: While our progress with our payer innovation agreements has been strong, it has not been enough to overcome the negative impact of the continued erosion of Medicare fee-for-service volumes.

While our progress with our payer innovation agreements has been strong it has not been enough to overcome the negative impact of the continued erosion of Medicare fee for service volumes.

Speaker 5: As a result, we revised our full year 2023 adjusted E-B-DOT guidance to a range of 93 million to 98 million.

As a result, we revised our full year 2023, adjusted EBITDA guidance to a range of 93 million to 98 million.

In regards to free cash flow, we generated approximately $48 million during the first nine months of 2023 free.

Speaker 5: In regards to free cash flow, we generated approximately $48 million during the first nine months of 2023.

Speaker 5: Free cash flow in the fourth quarter is dependent on the timing of working capital needs, specifically accounts receivable. Based on our revised guidance, we expect to generate between 50 and 67 million of adjusted free cash flow in 2023, which equates to a free cash flow conversion rate of approximately 54% to 68%.

Free cash flow in the fourth quarter is dependent on the timing of working capital needs specifically accounts receivable based on our revised guidance, we expect to generate between 50 and $67 million of adjusted free cash flow in 2023, which equates to a free cash flow conversion rate of approximately.

54% to 68%.

Before opening it up for Q&A I want to touch briefly on our outlook for 2024.

Speaker 5: Before opening it up for Q&A, I want to touch briefly on our outlook for 2024.

Speaker 5: It's too early to provide specifics, but these are the factors we are considering as we think about next year. Let's start with our home health.

It's too early to provide specifics, but these are the factors we are considering as we think about next year.

Let's start with our home health segment and pricing.

Based on our preliminary analysis of the final rule, we expect our Medicare pricing to increase approximately one 2% in 2024.

Speaker 5: Based on our preliminary analysis of the final rule, we expect our Medicare pricing to increase approximately 1.2% in 2024. And we expect our Medicare Advantage pricing to improve, based on the success of our payer innovation team, including a full year of impact from the national agreement that became effective May 1, 2023.

And we expect our Medicare advantage pricing to improve based on the success of our payer innovation team, including a full year of impact from the National agreement that became effective may one 2023.

Speaker 5: In regards to volumes, we expect the success we have with our payer innovation team and our recruitment and retention of clinical staff to drive volume growth in 2024.

In regards to volumes, we expect the success, we've had with our payer innovation team and our recruitment and retention of clinical staff to drive volume growth in 2024.

Speaker 5: With our traditional Medicare mix of home health revenues now in line with our peers, we expect the continued decline in our traditional Medicare volumes to slow to a more industry life rate in 2024. And the new episodic pay your innovation contracts will provide an avenue of growth to offset some of the continued erosion of traditional Medicare in the future.

With our traditional Medicare mix of home health revenues now in line with our peers. We expect the continued decline in our traditional Medicare volumes to slow to a more industry like rate in 2024.

And the new episodic pay your innovation contracts will provide an avenue of growth to offset some of the continued erosion of traditional Medicare in the future.

Speaker 5: On the cost side of the equation, we believe a 3% wage increase will be sufficient to maintain our success with recruitment and retention. We are also closely monitoring the results of the MetaLogix Pulse rollout that was completed in Q3 to determine what impact it may have on our 2024 visits per episode.

On the cost side of the equation, we believe a 3% wage increase will be sufficient to maintain our success with recruitment and retention.

We are also closely monitoring the results of the Metalogic pulse rollout that was completed in Q3 to determine what impact. It may have on our 2024 visits per episode.

For our hospice segment for pricing, we expect our reimbursement rate will increase approximately two 9% for the first three quarters of the year based on the final rule.

Speaker 5: For our hospice segment, for pricing, we expect our reimbursement rate will increase approximately 2.9% for the first three quarters of the year based on the final rule.

Speaker 5: For volumes, we are clinically staffed to grow and are working with our talent acquisition team to further build our business development team for growth.

Core volumes were clinically staff to grow and are working with our talent acquisition team to further build our business development team for growth.

Speaker 5: And we are starting to see the results of those efforts with monthly sequential increases in average daily census.

And we are starting to see the results of those efforts with monthly sequential increases in average daily census.

In regards to cost we expect our cost per day will not increase in 2024, as we expect volumes to increase without the need to hire a significant number of additional staff, resulting in operating leverage against our fixed costs associated with our case management staffing model.

Speaker 5: In regards to costs, we expect our costs per day will not increase in 2024, as we expect volumes to increase without the need to hire a significant number of additional staff, resulting in operating leverage against the fixed cost associated with our case management staffing model.

Speaker 5: Based on these factors, we believe the company is well positioned for revenue and adjusted EBITDA growth in 2024. With that, I'll ask the operator to open the lines for Q&A.

Based on these factors, we believe the company is well positioned for revenue and adjusted EBITDA growth in 2024 with that I'll ask the operator to open the lines for Q&A.

Speaker 2: At this time, if you would like to ask a question, press star one on your telephone keypad. You will be limited to one question and one follow-up. Our first question will come from the line of Brian Tanculet with Jeffries. Please go ahead.

At this time, if you would like to ask a question press Star one on your telephone keypad, you will be limited to one question and one follow up our first question will come from the line of Brian <unk> with Jefferies. Please go ahead.

Speaker 6: Hi, good morning. Christy, thanks for all the color that you shared with us. So maybe just to kind of like dig a little deeper into some of these comments. As I think about cost per visit.

Hi, good morning.

Christy Thanks for all the color that you shared with us so maybe just to kind of like to dig a little deeper into some of these comments.

Think about cost per visit.

Speaker 6: What do you think operationally, you guys will need to do between now and you know, into next year to drive even that growth, especially as we think about the CV line.

What do you think operationally you guys will need to do between now and into.

Into next year to drive EBITDA growth.

Especially as we think about the <unk> line.

Speaker 5: Well, I think again it gets down to productivity and optimization, Brian . You know, we really focused on the density and scale of our market.

Well I think again, it gets down to productivity and optimization, Brian you know, we we really focused on the density and scale of our markets.

Speaker 5: And we've demonstrated our ability to offset that 3% wage increase even in 2023. And again, we expect to continue to do that in 2024, again as our volumes continue to grow.

And we've demonstrated our ability to offset that 3% wage increase even in 'twenty two 'twenty three and again, we expect to continue to do that in 2024 again as our volumes continue to grow and Brian I'll add to that I think the other thing to keep in mind is that we did use more contract labor. This year, mainly because we had success.

Speaker 4: And Brian , I'll add to that, I think the other thing to keep in mind is that we did use more contract labor this year, mainly because we had success with hiring. So as we kind of talked about before, we tended to use contract labor more when we knew that there was an end in sight in employees coming out of orientation. So being able to now get rid of that by the end of the year will also create an opportunity for us on that cost per visit in 2024.

With hiring so as we kind of talked about before we tended to use contract labor more when we knew that there was an end inside in employees coming out of orientation, so being able to now get rid of that by the end of the year will also create an opportunity for us on that cost per visit in 2024.

That's really helpful and then maybe on <unk>.

Speaker 6: That's really helpful. Then maybe I just think about the top line, right? Your comments on P for service volumes and the new pair of innovation contracts.

Think about the topline Randy your comments on fee for service volumes.

New paint renovation contracts.

How do you think at all number one how should we think about the remaining opportunity to drive.

Speaker 6: How do you think, well, number one, how should we think about the remaining opportunity to drive new contracts into the system and then within the existing contracts, obviously, there's a ramp there. How should we be thinking about, you know, the runway left on that ramp and what the right sort of mature level would be for some of these wins that you've had over the last year?

New contracts into the system and then within the existing contracts, obviously, there's a ramp there how should we be thinking about.

The runway left.

That ramp and what the right sort of mature level would be for some of these wins that you've had over the last year.

Speaker 4: I mean, I would say other than the national agreement, you know, many of these are at a regional level. So it's really, you know, hard to give numbers consolidated when we look at so many of the regional contracts that cover, you know, multiple states. What I would say is that, you know, the branch directors and the business development folks in each individual market have now the tools and place to be able to prioritize that. We also have gotten continued feedback from our sales team in the field on what other payer agreements would be helpful to be on to be seen as a more full service provider. So in addition to our success, we still have another 40 contracts in our pipeline that are being worked today.

Yeah, I mean, I would say other than the National agreement you know many of these are at a regional level. So it's really hard to give numbers consolidated when we look at so many of the regional contracts that cover multiple states. What I would say is that you know the the branch directors and the business development folks in each individual market have.

Now the tools in place to be able to prioritize that we also have gotten continued feedback from our sales team in the field on what other payer agreements would be helpful to beyond to be seen as a more full service provider. So in addition to our success. We still have another 40 contracts in our pipeline that are being worked today.

Speaker 4: So, again, it's about really the execution at that local level on driving the volume, not only into the new payer innovation, but to utilize that longer list of payers that we can take to also continue to earn that fee-for-service business.

So again, it's about really the execution at that local level on driving the volume not only into the new payer innovation, but to utilize that longer list of payers that we can take to also continue to earn that fee for service business.

Awesome. Thank you.

Uh huh.

Your next question comes from the line of Joanna gauge with Bank of America. Please go ahead.

Speaker 2: Your next question comes from the line of Joanna Gajek with Think Up America. Please go ahead.

Yeah.

Speaker 7: Hey, good morning. Thanks so much for taking the questions. So I guess follow up to the comments around the medic every update, right? So is it 1.2% and the wage is growing 3%? So you're saying, essentially, the volume growth will help you offset or the 3% cost inflation, right? And in the end, a combined entity, you're actually able to add the growth. How do you think about it?

Hey, good morning. Thanks, so much for taking the question. So I guess a follow up to the comments around Oh, the Medicare rate update right. So you said one 2%.

The wages growing.

We so you're saying essentially you assumed the volume growth will help you offset or that 3% cost inflation rate in Indiana.

And do you expect EBITDA to grow instead of wait how to think about it.

Well, certainly I think as we look to giving guidance in 2024 will certainly have more details around them, but I would say it's volume growth is continued focus on productivity and optimization. It's the getting rid of all the contract labor and then it's also the visits per episode that we rolled out in biologics pulse to all of the.

Speaker 4: Certainly, I think as we look to giving guidance in 2024, we'll certainly have more details around them, but I would say it's volume growth, it's continued focus on productivity and optimization, it's getting rid of all the contract labor, and then it's also the visits per episode that we rolled out in metallurgics post to all of the locations by the end of the third quarter. So there will be kind of a combination of the offsets that will have a lot more color on as we prepare for 24 guidance.

Our locations by the end of the third quarter. So there will be kind of a combination of the offsets that will have a lot more color on as we prepare for 'twenty for guidance.

Speaker 7: No, obviously I understood the other. It's going to be a more detailed ahead and soon, but I think I just asked that. And then my other question, and I guess I'll follow up to some comments around pricing and segments. In the slides you talk about.

No, obviously I understood, yeah, theres going to be a more detailed guidance soon but I figured I'd just ask that and then my my other question on I guess, a follow up to some comments around pricing and are in segments.

The slides you talk about.

Speaker 7: revenue reserves, I guess benefiting the pricing in segments. So what was this, I guess benefit, I guess in the quarter, in million dollars, and how should we think about this impacting Cun you move away, in the end?

Our revenue of reserves I guess benefiting the pricing in that segment. So what was this argus a benefit I guess in the quarter are in millions of dollars and how should we think about this impacting Q4 if at all.

Yeah, So Joanna remember that.

Speaker 5: Yes, so Joanna, remember that in the spring of this year, we disclosed a material weakness in regards to our accounts receivable reserves and revenue reserves, and took a $12 million adjustment in the fourth quarter of 2022 based off of that analysis.

In the spring of this year, we disclosed a material weakness in regards to our accounts receivable reserves in revenue reserves and took a $12 million adjustment in the fourth quarter of 2022 based off of that analysis. We noted at the time that as we continue down.

Speaker 5: We noted at the time that as we continued down the path of remediating that material weakness and redesigning our controls around that process.

The path of remediate that material weakness and redesigning our controls around that process.

Speaker 5: that if and when we got to a point that we believe the 12 million was overly conservative that we would inform the community and we take that back into revenue. And that's what we did in the third quarter. We redesigned the controls at this point and they're still in the process of being tested.

That if and when.

We got to a point that we believe the 12 million was overly conservative that we would inform the community and when you take that back into revenue and that's what we did in the third quarter.

Redesigned the controls at this point and they are still in the process of being tested.

Speaker 5: But again, based off of this redesign, we determined that we were able to take back 1.5 million on a consolidated basis of that reserve. And so that was the net impact to the company in the third quarter of this year. It's too early to say what would happen in the fourth quarter. It's something that we're continuing to look at again as we test the operating effectiveness of the redesign control. But again, the Q3 impact was a 1.5 million dollar good guy.

But again based off of this redesign we determined that we were able to take that $1 5 million on a consolidated basis of that reserve.

So that was the net impact to the company in the third quarter of this year is too early to say what would happen in the fourth quarter. It's something that we're continuing to look at again as we test the operating effectiveness of the redesigned control.

But again, the Q3 impact was a $1.5 million good guy.

Hmm.

Okay.

Speaker 5: But it sounds like you do not assume a similar benefit in Q4, correct? I think it would be premature to assume such.

Sounds like you do not assume a similar benefit in Q4, correct, but I think it would be premature to assume such.

Great. Thank you I'll hop back.

Okay.

Your next question will come from the line of Whit Mayo with Leerink partners. Please go ahead.

Speaker 2: Your next question will come from the line of with mail with leering partners. Please go ahead.

Speaker 8: Hey, thanks. Good morning. I'm just looking at the 10 new MA contracts that you guys signed in the third quarter. This is a cover where you have, you know, 1% of your current admissions, 50% of your admissions. I'm just trying to visualize the coverage aspect of these new contracts to, you know, figure out how impactful this...

Hey, Thanks, Good morning, just looking at the 10, new contracts that you guys saw in the third quarter does this cover where you have 1% of your current emissions, 50% of your admissions I'm just trying to visualize the coverage aspect of these new contracts.

You can figure out how impactful this really could be thanks.

Speaker 4: I don't know that I know it by admissions. That's why we're looking at, as we look at our visits, what percentage of our visits from our prior ones can we move in. I think we talked about in the past, the initial goal is...

I don't know that I know it by admissions that's why we're looking at as we look at our visits what percentage of our business visits from our prior ones can we move in.

We've talked about in the past the initial goal is not necessarily to focus on those for additional growth, but to be able to move from some of those really poor paying non episodic agreements into these new agreements.

Speaker 4: Not necessarily to focus on those for additional growth, but to be able to move from some of those really poor paying non-episotic agreements into these new agreements. So at this stage, that's been the focus, and that's why the plan is continue to update everyone on where we are with that percent of non-episotic that are in these new payer innovation contracts.

So at this stage that's been the focus and that's why you know the plan is to continue to update everyone on where we are with that percent of non episodic better in these new pair innovation contracts.

Speaker 8: I know Chris here in the middle of the planning process or beginning the process. But how do you think of the right corporate overhead costs for? Actually, I didn't hear you talk about that. Presumably, you probably need to reload for.

No that's good.

Helpful. Appreciate it and then maybe my follow up question I know Christy you're in the middle of it.

The planning process, we're beginning the process.

But how do you think.

Corporate overhead costs for next year I didn't hear you talk about that presumably you probably need to reload for.

Speaker 8: Some of the bonus accruals, maybe there's some opportunities to bring that down with some of the transition costs from the former parent company or something, I don't know. But just in me, thoughts there would be...

Some of the bonus accruals, maybe theres some opportunities to bring that down with some of the transition costs from our former parent company or something I don't know, but just any thoughts there would be would be helpful.

Speaker 5: Yeah, you're absolutely right. It's a little too early for me to give specifics on that. I think the best guide that I would tell you right now is, again, we're really closely monitoring all of our corporate costs. And you've heard about some of the actions that we've taken in the latter part of this year in regards to items like virtual clinical orientation, even not the home office, but looking at some of the back office staffing of our hospice locations and such and the moves that we've made in order to control those costs.

Yeah with it you're you're absolutely right. It's a little too early for me to give specifics on that I think the you know the best guide that I would I would tell you right. Now is again, we're really closely monitoring all of our corporate costs and you've heard about some of the actions that we've taken in the latter part of this year in regards to items like virtual clinical.

Orientation, even not the home office, but looking at some of the back office staffing of our our hospice locations and such and the moves that we've made in order to control those costs.

Speaker 5: I do think it's important to note that you can look at the $5.8 million of standalone company costs that were in the third quarter. That may increase slightly.

I do think it's important to note that you know you can look at kind of the $5 $8 million of Standalone company cost that were in the third quarter.

That may increase slightly.

Speaker 5: And the fourth quarter and first quarter of next year again is we kind of continue to roll off of the final big piece, the people saw piece being the biggest piece of IT from encompass. But it may be what I'm looking at right now is are we running towards the lower end of that original 26 to 28 million dollar estimate of standalone cost and even possibly running under it on a go-forward basis. So I think that's what I'm very interested in at this point.

The fourth quarter and first quarter of next year again, as we kind of continue to roll off of the final big piece that people saw piece being the biggest piece of it from.

From encompass them, but you know it may be what I'm looking at right. Now is are we running.

Towards the lower end of that original <unk> $26 million to $28 million estimate of Standalone cost and even possibly running under it on a go forward basis. So I think that's that's what I'm very interested in at this point.

Okay. Thank.

Thank you.

Okay.

Again to ask a question simply press Star one on your next question will come from the line of Jamie Pierson with Goldman Sachs. Please go ahead.

Speaker 2: Again, to ask a question, simply press Star One. Your next question will come from the line of a Jamie Perce with Goldman Sachs. Please go ahead.

Okay.

Speaker 9: Hey, thank you. Good morning. I wanted to get a little bit more color on just what you think is going on with the Medicare fee for service business that being down 11%. I know you guys have been asked about this in the past.

Hey, Thank you good morning, I wanted to get a little more color on just what you think is going on with the Medicare fee for service business that'd be down 11% I know you guys have been asked about this in the past.

Speaker 9: have said the market are down four is per cent. So is there a reason that you think at this point you can diagnose why you're underperforming the market and then relatedly, I mean, just what gives you confidence in the comments for 24 that you'll be more in line with market growth and C for service?

I've said the markets are down 4%. So is there a way.

Do you think at this point you can diagnose why you're underperforming the market and then Relatedly just what gives you confidence in the comments for 2000 and for that you'll be more in line with.

With market growth in fee for service.

Speaker 4: Yeah, so I think, you know, probably the biggest thing to look at is where our peers have been as it relates to a percent of their home health revenues being fee for service Medicare. And our peers have been pre-consistently in that 60 to 65 percent range over the last few years.

Yeah. So I think probably the biggest thing to look at is where our peers have been as it relates to a percent of their home health revenues being fee for service Medicare and our peers have been pretty consistently in that 60% to 65% range over the last few years.

Speaker 4: As we noted, we were 65% this quarter. And so we are nearing more that normal range of our peers versus our historic 75 plus percent.

As we noted we were at 65% this quarter and so we are nearing more of that normal range of our peers versus our historic 75 plus percent.

Speaker 4: So that's what gives us confidence that we're really more to peer average now, so that what we should experience in the future will be more like what our peers are experiencing as folks move into MA from traditional fee for service Medicare.

So that's what gives us confidence that we're really more to peer average now so that what we should experience in the future will be more like what our peers are experiencing as as folks move into MA from traditional fee for service Medicare.

Okay.

Speaker 9: Okay. And then I also wanted to follow up on the comments next year around.

And then I also wanted to follow up on the comments next year around.

Medicare advantage pricing growth I don't think you gave a number that I. Just said you thought it would improve with the mix shift towards the payer innovation contracts, but.

Speaker 9: Medicare advantage, pricing growth. I don't think you gave a number there just said you thought I'd improve with the mix shift towards the pair innovation contracts, but I guess one, what's included in those comments with respect to the United contract and any color on...

I guess one what's included in those comments with respect to the United contract and any color on.

Speaker 9: where you are in the negotiating process and how we should think about the potential rate update for that contract next year. And then any more precision you can provide on MA pricing next year would be great. Thank you.

Where you are in that negotiation process and how we should think about the potential rate update for that contract next year and then.

Any more precision you can you can provide on MA pricing next year would be great. Thank you.

Speaker 5: Yeah, Jamie, it's too early and I don't know that we would provide precise pricing, especially on a specific contract because that's kind of forbidden via the agreements and sell.

Yeah, Jamie It is too early and I don't know that we would provide.

Precise pricing, especially on a specific contract because that's kind of forbidden via the agreements themselves.

Speaker 5: You know, we like the trends that we're seeing again as we continue to shift more visits into the payer innovation contract.

You know, we like the trends that we're seeing again as we continue to shift more visits into the payer innovation contracts, but I'll certainly keep your request in mind as we head into 2020 for guidance and determine what what we are willing to stay in what we can say within the confines of our agreements again from a from a per visit pricing.

Speaker 5: But I'll certainly keep your request in mind as we head into 2024 guidance and determine what we are willing to say and what we can say within the confines of our agreements. Again, from a per visit pricing, our agreements are kind of coming in at that 25 to 30% discount compared to the historic 35 to 40% discount.

Our agreements are kind of coming in at that 25% to 30% discount compared to the historic 35% to 40% discount.

Speaker 5: So we like what we're seeing there and our confidence and our ability based on what we've seen thus far in 2023 and our ability to shift into the higher pain con.

So we like what we're seeing there and are confident in our ability based on what we've seen thus far in 2023, and our ability to shift into the higher paying contracts.

Speaker 9: Okay, thanks. And if I could squeeze one last one and just following up on an earlier question, what's been your contract labor expense for 23 and would it be right to assume most that goes away next year? Thanks for the question.

Okay, Thanks, and if I could squeeze one last one and just following up on an earlier question.

What's been your contract labor expense for 'twenty, three and would it be right to assume most of that goes away next year. Thanks for the question.

I have oh, we could certainly get to the expense side I have the utilization side of it. So when you look at and this was this is quarter three information right now, but so for example in quarter, 313% of our home health visits were performed by contract nurses.

Speaker 4: I have the, you would get to the extent side. I have the utilization side of it. So when you look at, and this is quarter three information right now, but so for example, in quarter three, 1.3% of our home health visits were performed by contract nurses. That was compared to 2.2% last quarter.

That was compared to two 2% last quarter.

Speaker 4: And then hospice visits, there was only one percent of hospice visits performed by contract nurses and that was more in that beginning part of the quarter, but we've eliminated all hospice contract labor by the end of the quarter.

And then hospice visits there was only 1% of hospice visits performed by contract nurses in that was more in that beginning part of the quarter, but we don't we've eliminated all hospice contract labor by the end of the quarter.

Speaker 4: Class year this time, 6% of our hospice visits were done by contract labor just to give a comparison for hospice.

Last year. This time, 6% of our hospice visits were done by contract labor just to give a comparison for hospice.

Speaker 9: And Jamie, the only thing that I would add to that is when you look at our hospice cost per day, you see that the year over year increase was about 8.5%. You know, in the prior two quarters, it was in the double digit increase. Well, again, with the elimination of contract labor by the end of the third quarter for that segment, that was a reduction in our cost per day of about 200. That increase, I should say, of about 260 basis points. So you see the magnitude it can have. Certificated by opposition.

And Jamie the only thing that I would add to that is when you look at our hospice costs per day.

Say that the year over year increase was about eight 5% in the prior two quarters. It was in the double digit increase will again with the elimination of contract labor by the end of the third quarter for that segment that was a reduction in our cost per day of about 200 of that increase I should say of about 260 basis points. So you see the magnitude it can make.

Hal.

Okay, great. Thank you.

Okay.

And I will now turn the call over to Jordan for closing remarks.

Speaker 3: Thank you, Regina. If anyone has any additional questions, please feel free to call me at 469-860-6061. Thank you again for joining today's call.

Thank you Regina if anyone has any additional questions. Please feel free to call me at 469806061. Thank you again for joining today's call.

Yeah.

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