Q3 2023 U.S. Physical Therapy Inc Earnings Call
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Good day, and thank you for standing by welcome to the U S physical therapy third quarter 2023 earnings conference call.
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I would now like to turn the call over to Chris spreading President and CEO. Please go ahead Sir.
Thank you good morning, and welcome everyone towards U S physical therapy third quarter earnings call with me on the call. This morning include Carey Hendrickson as CFO, Eric Williams, and Graham Reeve, our chief operating officers, Rick <unk>, Our executive Vice President and General Counsel Mark <unk>.
He is our senior Vice President accounting and finance before we begin our discussion around our third quarter and year to date performance, we need to cover a brief disclosure Jake if you would please.
Thank you Chris.
This presentation contains forward looking statements, which involves certain risks and uncertainties. These forward looking statements are based on the company's current views and assumptions the company's actual results may vary materially from those anticipated.
Please see the company's filings with the Securities and Exchange Commission for more information.
Thanks, Jay So my commentary. This morning is going to be at a high level and falling that Terry will cover our cover the majority of our very detailed release more completely.
Let me start with where where volume is overall.
Been a number of really good things, which a team of clinicians partners and support staff were able to deliver this quarter and there are few challenges, which we are continuing to work on as well Firstly and importantly volumes have been very strong this year and will remain so throughout the third quarter, including during a normally seasonally.
Slower summer months visits per clinic per day came in at $29 seven which is an all time high for us for any third quarter in our company's history.
Service is the best indication related to both the overall demand for our services in a way where you viewed by patients and referral sources alike. The market, where there is abundant and abundance of choice.
Truly a partners.
Our staff locally or providing care, which is not just excellent, but which are patients and referral sources around the country are seeking out.
My sincere thanks to all of you who are listening.
That carry you provide is not only changing lives for the better but it is being recognized for driving the highest level of volume ever delivered payoffs at this time of the year.
For the quarter that throughput coupled with the strong development work.
We've continued to produce helped drive volumes year over year by 10, 8%.
Those volumes have come through de Novo and tuck in acquisitions with 31 additional clinics, so far through October which as you know depresses our volume for clinic averaged some drags a little bit on results early on.
We've added nine de novo clinics in the quarter and five.
Five of those were added in September.
Keeping that strong de novo growth in mind, it's a bit of a near term drag through the nine months. Our P. T. Operating income in spite of this strong de novo opening since grown pinpoint 9% for the year.
So looking back to the quarter revenue grew 9%, which was impacted by the Medicare rate reductions we have absorbed this year.
With a slightly higher percentage of P. T A's on boarded over the past 18 months or so.
Two the nationally type staffing market. So let me explain.
If you recall.
Having ppas.
Touch a Medicare patient in the course of care results and a 15% reimbursement reduction.
And while we are focusing on that and in the middle.
Particularly in Q3 rolled out some new retraining, because we have a slightly higher proportionality and ptas compared to where we've historically wrong, that's increased the Medicare rate reduction ever so slightly.
Yeah.
So our challenge at present is to offset the hole in the bucket that Medicare has created with additional and better paying business higher negotiated rates. This is an area, where we expect to see continued improvement as we work and achieve additional successes in our contract negotiations and some longer term initiatives around.
Further diversifying away from Medicare.
Additionally, we have added to our leadership on our revenue cycle area and we are optimistic we will identify some opportunities to further enhance our already strong collections effort.
Further bolster our net rate and time.
We have renegotiated them, a very significant number of contracts in a very positive way.
As we explained last night to a couple of different analysts who follow the company.
From the time of negotiation until the time that those contracts those new rates get implemented oftentimes, there's a several month delay.
But we are making progress I think good progress I'm happy with the percent rate increases, we just need to see them pick up and gain traction as they are implemented.
On the injury prevention side of our service offering we let the market know at the beginning of this year that we expected growth to be a little bit more muted with pauses in some limited drops from a few of our customers who are expecting their business to be negatively impacted by the heavy inflationary environment, coupled with the fear of.
A coming recession.
Good news is is that our <unk> team has been able to replace that lost business with new business.
Well again provide us with growth when moving forward into the 'twenty 'twenty four year, while a progressive partnership is added a great deal of new business as well, while suffering a loss of one plant and the auto industry, which as you know that industry has been hit particularly hard this year on a variety of fronts from my.
The perspective, the majority of the accounts.
Well, we've done exemplary exemplary work.
Over the years.
But maybe who have paused their drop some service component temporarily I expect many of those will come back once our economy is in a more stable growth mode.
Furthermore, we recently.
Just added to our injury prevention core with the recently announced acquisition and includes both traditional injury prevention business as well as a new service offering delivered via a well developed recently introduced software program and ergonomics, which fills the service gap existed previously.
You see with our offering.
We're excited about the team and we look very forward to helping them to meet the needs of this growing and important market.
Finally, our injury prevention teams have done a very nice job overall, adjusting and responding to the tighter than usual labor market, which has allowed our quarter over quarter margin percentage to improve 80 basis points from 21, 9% in Q3 last year and 22 point.
7% this most recent quarter.
Okay.
Last week.
Myself and a few of our executive and development team members attended the annual private practice section meeting, which this year was held in Austin, Texas. This is for US the most important meeting of the year.
On the development side of things these past 12 months.
When I say 12 months I'm looking from November really current period, two a year ago.
Been a very active period for us we've purchased an additional 54 clinics over that period.
And in that same period, we're on pace or we've currently opened 72 clinics.
Added 72 clinics overall.
Well many of our competitors are hamstrung, a bit right now with extremely high debt levels, which can impact a lot of factors.
Including.
Their ability to sometimes even close on deals where you've got a clean balance sheet and we're working hard to put money. We raised at the end of our quarter two secondary offering to war.
This past week was the busiest we've ever been at the private practice conference. We scheduled double the number of individual meetings and held two large offsite gatherings, which we believe will continue to help us.
To drive and differentiate our partner centric model.
Model, which distributes cash to these newly acquired partners throughout the entirety of their partnership month in and month out.
With no on top that burden from the acquisition itself.
That in the back and flexibility and guarantee regarding purchase methodology gives us another meaningful difference with our competitors.
Which should further aid us as we work to significantly grow our partner centric company.
One final bit of commentary there.
I know Karen I want to speak to really directed toward.
Our analysts and our shareholders, we've been fielding a lot of questions related to the impact of a <unk> like drugs on her.
Physical therapy business.
Taking a step further there'd been a number of articles in the Wall Street Journal. Another notable publications relative to the massive in some cases negative impact on multiple areas of the health care system through the expanded use of these drugs, which as you know help people lose weight among other uses.
So let me hopefully help create some perspective here first.
I truly believe physical therapy is going to continue to grow with or without these drugs.
Estimated that currently only about 10% of people with muscular skeletal issues ultimately end up in a physical therapy office that number is growing and changing.
That number will grow and change in time, because there are numerous studies indicate that physical therapy done early before other much more costly and invasive treatments or worse with the only palliative narcotic only pain treatment not only visit save the patient as well as the payer system significant.
But results in better overall health unless downstream cost of medical care for that person for an extended period of time.
Presumably because they get moving again, you get there hope back related to things that they enjoy doing either work or at home with family socially with friends, resulting in a healthier happier person that message will be hammered and marketed through groups like our alliance for physical therapy Koala.
And innovation, which we referred to as <unk> and I believe with grassroots marketing will continue to expand the physical therapy first initiatives that we have across our space.
Second lien importantly, the vast majority of our business comes about the injuries caused by activity not simply because somebody is obese unfortunately their disease of obesity.
And people.
Well ultimately results in them not being able to do a lot of the things that they otherwise might enjoy.
But for the limitations created by their weight, while obesity can result in hip and knee arthritis overtime and some of these end up as joint replacements bigger majority of joint replacement has come as a result of activity created injury often to the meniscus.
Or the fibrocartilage in that joint.
Which eliminates the padding and then creates osteoarthritis over time. These injuries are current sports and daily activities, just like squatting in pushing gardening running in various types of sports, which are done by people a bit more fit.
And three as a general rule don't see hip replacements very often in our clinics, you're really only talking about knee replacement says potential impact I think the market is ignoring all the other possible activity based injuries.
Often not severe.
As a result of enjoying life in a physical way hiking gardening running.
Of course, our beloved pickle ball. So many of the things that people can participate in and enjoy their non obese. So I believe the potential exists. These drugs are successful long term don't create unintended health issues, whether it'd be more patients as a result not less.
So that concludes my prepared comments this morning, Gary go ahead.
Walk us through the financials in greater detail and then we'll open it up for questions.
That's great. Thank you, Chris and good morning, everyone.
In the third quarter, we had continued strength in patient volumes strong growth and revenue growth in our physical therapy in total operating income and year over year growth in both adjusted EBITDA and operating results per share in.
In addition, we added 19 clinics during the third quarter through acquisitions and de Novo's, which has three closures. We've now added 72, new clinics since the third quarter of last year through acquisitions and to downloads, which is 14 closures, which is a net addition of 58 clinics over the past year.
We reported adjusted EBITDA for the third quarter up $18 $6 million, which was an increase of $1 $6 million up $17 million, we reported in the third quarter of 2022.
Our operating results were <unk> 62 per share in the third quarter of 2023, which was the <unk> <unk> increase over the 58 since we reported in the third quarter of last year.
Our total company revenues increased seven 5% in the third quarter growing from $139 6 million in the third quarter of 22 to one.
$50 million in the third quarter of 2023 and.
And our total company gross profit increased $1 $1 billion from $26 $8 million in the third quarter of 22 to $27 $9 million in the third quarter of 'twenty three.
As Chris noted in his remarks, our average visits per clinic per day in the third quarter were $29 seven which is the highest volume in the company's history for the third quarter and is up three 1% increase of our average visits per day at $28 eight in the third quarter of last year.
July was at $29 nine visits per day August was a little lower as expected based on normal seasonality at $29 six and then September came back up to $29 nine.
All three of those months were higher than the same month in the previous year.
Our net rate was $102.37 in the third quarter of 23, which was lower than last year's $104.01 per visit but it was sequentially an increase from the second quarter of 2023, which had a net rate of $102 in <unk>.
The decline in net rate as compared to the prior year was due to the reductions in Medicare rates, which represent about one third of our payer mix as Chris noted in his remarks.
All other payer categories, including commercial and workers comp increased over the prior year.
As we've talked about on the last couple of earnings calls, we've either renegotiated or terminated a subset of our Medicare advantage contracts that reimburses at a rate that's less than what it cost us to serve our patients and we will continue to focus on renegotiations of commercial workers comp and Medicare advantage contracts, and we're making other message necessary adjustments to address.
Net rates as well.
Our physical therapy.
$128 $1 million in the third quarter of 23, which was an increase of $10 7 million or nine 1% in the third quarter of 2022 due to the addition of 58 net new clinics since last year and a record high third quarter average basis visits per clinic per day, partially offset by the decrease in net rate.
Our physical therapy operating costs were $105 million, which is an increase of nine 9% over last year. That's also due to the addition of 58 net new clinics since the third quarter of last year.
On a per visit basis, our total operating costs were $84 49 in the third quarter, which is a decrease of just less than 1% compared to $85 in 2014 cents per visit in the third quarter of the prior year.
Our salaries and related cost per visit also decreased about 1% in the third quarter of 2023 versus the prior year from $60.99 in the third quarter of 22 down to $60 35 in the third quarter of 2003.
This is the fourth quarter in a row that we've reported year over year decreases in both total physical therapy operating cost per visit.
And salaries and related cost per visit the.
The increase in total operating cost per visit on a sequential basis from the second quarter from $80 61 to $84.49 as a normal seasonal occurrence salaries on a per visit basis are higher than the third quarter than the second quarter due to covering the vacations of our employees during the summer months and then other significant costs like rent and depreciation.
They don't vary by the number of visits are spread over a lesser number of visits.
Physical therapy margin with 18% in the third quarter 'twenty three as compared to 18, 7% in the third quarter of 2022 with the change due to the decrease in our net rate versus the prior year.
Even with the decline in our net rate versus last year, our PT gross profit increased five 4% over the third quarter of the prior year.
And it has increased 10, 9% over the first nine months of this year versus the prior year.
Our IP revenues and expenses were both approximately $700000 less than last year. So we ended up with $4 $4 million of IP income in both years.
<unk> margin increased from 21, 9% in the third quarter of last year to 22, 7% in the third quarter of this year.
Our balance sheet remains in an excellent position, we have $147 million of Denmark, well excuse me $145 million of debt on our term loan with a five year swap agreement in place that places the rate on our debt at $4 six 5% and we expect it to remain at that 646, 5% going forward.
As you know this is a very favorable rate in today's market and below the current fed funds rate.
Third quarter 2023 alone the swap agreement saved us $800000 in interest expense with cumulative savings of $2 $3 million over the first nine months of 2023.
Our interest expense was $2 $1 million in the third quarter of 2023.
In addition to the term loan we also had $175 million revolving credit facility that nothing drawn on it during the third quarter and we have approximately 120 $520 million or so of excess cash over and above what we need for working capital ready for deployment into growth initiatives.
In the release, we noted that we expect our full year 2023, adjusted EBITDA to be within our originally stated guidance of $75 million to $80 million most likely in the low to mid areas that's range.
We expect to have continued strong volumes in the fourth quarter as we've had all year, where we fall within the range, it's going to depend ultimately on the strength of our volumes in the fourth quarter and how much sequential growth rate, we're able to achieve and our net rate from the third quarter to the fourth quarter.
Our operations team has produced solid results in the first nine months of 2023, and we will all work to continue to produce the best results possible for all of our stakeholders as we finish out this year and with that I'll turn the call back to Chris.
Gary Thank you great job.
Operator, let's go ahead and.
Open it up for questions.
Thank you, ladies and gentlemen, if you would like to ask a question. Please press star one on your telephone keypad.
Final quick question has been answered you may remove yourself by pressing star two.
Thats Star one to ask a question star two to remove yourself, we will pause for just a moment.
Yeah.
We'll take our first question from Joanna <unk> with Bank of America.
Good morning. Good morning. Thank you so much fat hey, good morning. Thanks, so much for taking the question. So a couple of questions I guess here.
I guess on the last comment.
County around the outlook for this year that you slightly lowered it right youre talking about kind of being towards the middle or lower and so you kind of took off.
Hi, Ann from stable. So I guess what are the main drivers for this.
No more guidance sounds like Q.
Let's see.
Roughly in line. So I guess Q4, it seems like God, there's some indicators pointing to a.
Lower or lower number for Q4 is that the way to think about this.
Yes, so I mean I'd say.
Yeah.
The expectations that we've had for I mean.
It's probably a little bit lower than we expected.
We need a little more net rate growth to get us to the higher end of the range that we've had.
If we and if we get more growth will we will position ourselves to closer to that middle likely.
But you know.
You mentioned that it looks like the fourth quarter, it would be less than the third quarter given given the guidance that we provided and that's not an unusual pattern. I mean, if you look back the last few years in 2019, we went from $17 million of EBITDA is down to about $15 6 million in the fourth quarter same thing in third quarter.
'twenty, one we might for $19 90 in the fourth quarter 'twenty, one about $17 million last year. It went up a little bit but that was because we had some large acquisitions. We made we made four large acquisitions.
In the fourth quarter actually two really larger than two other acquisitions in the fourth quarter of last year, and so that bumped, our fourth quarter up a little bit but.
Yes.
It's a normal pattern for us.
It's somewhat impacted by the holidays, which can happen.
Bring down R. R.
Volume some in late December, particularly and then also in our IP business. There is some seasonal decline because some of the big manufacturers auto in particular closed down their plants in the last part of December because of the holiday. So they're just shutting down a plant and when that happens we don't have people on site that can bill so last year.
On the <unk> business, if you look back at it.
Income went down about $1 billion yourself in the third quarter, the fourth quarter I don't expect it to go down that much this year, but it will likely come down some in the fourth quarter because of that phenomenon, Chris anything you would add.
No I think you've covered it Terry.
Joanna the business is solid kind of fall as our normal seasonal pattern.
And and we're just trying to be clear about why we think we're going to finish.
Right no it makes sense and I guess, just a follow up on that comment around that.
The netbank vote.
It sounds like that's where maybe things are a little bit softer. So I guess the question is because <unk> been talking about you know Douglas.
Negotiating contracts with commercial and exiting some of the MMA contracts improve money.
This comes from come out when will we see that the benefit to that.
Matt right.
Yeah, well, we have seen benefit from it.
Our commercial rates and our workers comp rates are both up about one 5% on a year to date basis, we'd like that to be more of it but some of the negotiations have taken place during the year and it takes a little Washington to take effect and so we're hoping to see more of that in the fourth quarter and certainly into 2024.
The rate for.
Our personal injury and self pay which is our other thoughts about that's about 6% of our revenue that's up about two 5% year to date Medicaid even its up about 1% year to date.
Only the only payer category Thats down is Medicare and Thats because of the things we've noticed more.
The higher ratio of Ptas, and Pts that's increased a bit over the last 18 months or so and we've had to do that and in some cases, because the market is tough from a hiring standpoint, but also we've had such heavy volumes. So we needed to hire what we get higher to cover the volume.
And.
And then the heavy volumes are also caused a little bit of a downtick in build units for our Medicare So.
And then Medicare advantage, that's growing as a percent of our total Medicare visits there's a big push out there for Medicare advantage.
Our Medicare patients to move to Medicare advantage and that pays us less than traditional Medicare. So some of those things are factored in our Medicare rate. This year like I said everything else is up medic.
Medicare has been down about three 5%, 4% year to date.
So I always say Joanna when you look at the contracts.
We've redone a lot of them have been double digit increases some of those are spread over two or three years been pleased with the percent change.
Your point, we need to see that show up in the P&L.
We're working to make that happen.
Yes.
Alright, and if I may a last question on the Medicare rates are like a suite.
We get the final physician fee schedule.
Therapy, right, they're down 2% or so.
There is enough.
Potential work in Congress on the relief to this physician fee schedules. So.
And I know this way that this could differ depending on the geographic mix and whatnot. So can you talk about what they saw.
VAG means to you in terms of staying that way.
There is no relief and if there is relief what it would be and I guess anything else indirect where that could be impactful for rehab therapy. Thank you.
Terry you want me to take or do you want to take it. Yes. You go ahead and I'll fill in if that's.
That's fine so right now.
I hate to say it but sometimes these tables that are published don't correspond with actual realities for the companies and so the expected reduction for US is three 5%.
24, all factors considered.
There are a couple of other things or and are in the final rule extends our ability to oversee physical therapy assistant.
Certain type of licensed facilities and do that on a remote basis, rather than physically present onsite.
Thats beneficial that's a continuation of something that was done during COVID-19. That's beneficial and then there have been some some mildly beneficial things around remote therapeutic monitoring which are net positive theyre not especially.
Dollar wise impactful, but but.
More sense and will make it easier to capture those charges, but on an average I think of this is somewhere between a three 4% three 5% reduction.
Now you asked what it would be if it gets mitigated.
I don't know the answer to that yet.
We've had success in getting it mitigated through Congress.
Every year since the original 9% nine 5% was proposed.
Leading into Covid.
I don't know what it'll be.
Forget suggests that we'll have to see.
And just as a reminder, joined it that's that's one third of our business.
Medicare is so thats.
On our overall rate that will have a lesser impact than the three 5%. If it were if it ended up at that rate.
And I think we've had momentum as I talked about in all of our other rate categories going into 2024.
Great. Thank you so much.
We'll take our next question from Brian <unk> with Jefferies.
Hey, good morning, guys. Good morning, Chris maybe I'll follow up with one of your comments.
Just made about remote.
Obviously, an area of part of your business. We haven't we haven't talked a lot about since COVID-19. So just curious how we should be thinking about your strategy on integrating remote to your workflow and the investments that you need to make to <unk>.
Really take advantage of that especially as we started down this Medicare rate cut.
Yeah, so remote therapeutic monitoring was introduced this year.
We've we've rolled it out it's been a little bit painful painful for a lot of companies just because the companies who have.
The infrastructure that we've all used to.
To be able to perform these additional codes oftentimes are set aside and settle alone from the infrastructure that exists in our billing and EMR systems and so that is that is and has been very recently addressed I think by the beginning of the year.
A year will be position, where all of our Medicare patients will be enrolled auto enrolled.
On our rain tree system much as <unk>.
About 90% of our company that integrations completed we believe that it'll be done.
And effectively out by the first of the year.
Well I'm, a much greater percentage of our company.
That is able to efficiently address.
Therapeutic issues and then beyond there.
Digital perspective, I think there's been a lot of companies that have come out that have had some really nice additions were not there yet on a fully digital basis, but we continue to work directionally to evaluate that opportunity.
Make decisions as we move forward, we expect at some point to have a digital offering working on some other high priority things at the moment.
But that's certainly on the list.
Got it and then Chris maybe since we're talking about virtual as anything about your IP business are you seeing anything that's changing in that world as some virtual offerings and emerge in the market.
On the prevention side not not so much we see.
We see continued adoption among and across companies of course companies go through ebb and flow.
<unk> is a great example company that at the beginning of of Covid, We had a very large contract the rollout with them and that got paused and then over the next couple of years it rolled out and became substantially bigger than we originally envisioned.
And then as an example, it kind of paused again not completely we still do a lot of work there and it's still one of our bigger customers but.
Again their outlook.
What what how they how they viewed the coming year that we're in right now.
Actually we.
We're hopeful that we can continue to expand that relationship.
As things again normalized so I don't see on the prevention side.
A lot of major technological changes again, we've added recently the software deployment.
Amex, which companies that want to cry.
To control and to roll out their own ergonomics program.
We can now do on a guidance basis with our software that's a new offering for us.
But this is really still in embedded model, where people need to be onsite and evaluating individuals certainly we can use technology.
And video.
And entering.
And certain aspects of evaluate of techniques, we can now use.
Cell phones.
Other forward camera devices.
Measurements and do things and I think that'll continue to evolve we're using some of that now.
Nothing that we see as disruptive to the core business.
Got it and then maybe Gary or Glen as I think about just tying it back to the.
The core business, how much productivity opportunity do we do you think there is left in terms of driving the visits per clinic grade area per clinic per clinic per day.
Well, let me let me, let me address part of that and then I'll, let Eric.
Graeme address.
The other part of what we really think of as productivity, but on the visits per clinic per day.
Any real constraints that we generally bump into them.
It's a it's a factor of <unk>.
Additional staffing oftentimes where were.
If we're currently staffed where we need to be so if we were to grow we've got to hire some increment.
On a part time basis for additional staff generally speaking our facilities can handle it.
It has grown this year about as we expected it to grow all things considered.
I think it's been pretty good.
I guess you guys refer to that as productivity I don't I think of productivity really is the amount.
Of.
People that are clinicians can see and Eric you might want to speak to that part.
Yes, Chris I think you summarized it really well I'll turn it over is at all time low.
It hasn't been this low in years and so I think our partners have done a really really good job of hanging on to staff. We've had incredible growth when when you take a look at the <unk> that we opened up last year and a 32 facilities. We've added this year and all of those tuck ins that has been challenging to fill those growth positions for us and so so you are poor.
I mean, there is not a cap here I mean.
Look we were two years ago, we hit that 30, Mark for a couple of quarters. This year, we had a record first quarter second quarter and third quarter. So we still continue to see growth opportunities in front of US we've invested a lot of resources in recruiting we had eight recruiters that work for us.
We really leveraged social media as well those are our relationships with the various Google programs I think it was 200 and a credit of PT schools out there.
Have.
Political affiliation agreements with 155 of them.
So we're continuing to play the short game and the long game as it relates to staffing the long game be developing these relationships with the schools. So as these kids come out and do their clinical rotations, which is part of the program, they're more likely to end up working for us having done rotation. So that's a that's a big investment for US and then on top of that just for a more resources.
As it relates to reaching license staff out there but.
But the volume and demand as their staffing is what all of us and everyone else in the industry has got to solve for in order to continue to grow at the rate we've been wrong.
Awesome. Thank you guys.
Thanks, Brian.
And we'll take our next question from Larry Solow with CJS Securities.
Thanks, guys. Good morning, Hey, good morning, Chris Thanks, Paul Thanks for all the color.
Just a couple of follow ups I know, you're not ready to give guidance for 'twenty four but just from a high level as you think about sort of the components.
Pricing price will end up down this year, 1%, there's going to be a little bit more than that.
Pretty well documented the Medicare cut there.
But it feels like you have some good momentum in the commercial side. You mentioned you are on average got it.
Looks like.
Good job.
Onto increases on a lot of these.
Positive negotiation.
And I suppose some of them haven't actually.
Local P&L yet.
Suppose there is a lot more in the Q that you could start turning all of us out.
It's fair to say that just from a high level you think.
Pricing could actually all in go up next year, even with the.
The Medicare rate has not changed like Congress.
So maybe it's fair you want to address that one.
Sure sure, yes, so I would say first of all.
It's early for us to look at that and give any color really related twenty-four yet will be ready for that.
Certainly in the next time that we that we have our earnings call for the end of the year, but I would say.
We'll see where Medicare ends up right so how much of a.
Hurdle, we have there, but we do as I mentioned had momentum in the other payer categories and we have as Chris noted earlier put in place step increases. So it may be that we have an increase of a total of 12 or 13% and we have a step in over three years.
5% in year, one 4% in year three two and then another 3% year three we have those kinds of step increases that we're building into our contracts that will have continual increases. So I think we will have continued momentum in.
And in both commercial and workers comp.
And on both of those and so I think.
Certainly I feel I feel good about our ability to as we sit here today I feel good about our ability to offset the Medicare rate reduction going into 'twenty 'twenty four.
Yes, Larry the short answer is I.
I mean the.
The final rule just came out Thursday late Thursday afternoon last week.
Still in the middle of our budget and a lot of analysis and we're pushing really hard.
On these contracts.
We're not at a point, where we can give you a clear conclusion, yet Unfortunately for next year, it's just too many moving parts and too short a period of time, yet, but we're working hard at it.
No that's fair.
Just in terms of you mentioned a lot of good internal growth, especially.
Last year.
And this quarter on the de Novo side at the dementia.
In September alone no de Novo they don't call us.
Significant amount to.
To get on their feet.
Is there some inefficiencies initially and even with the acquired clinics that just by themselves but to any acquisitions on the.
And then the Novo ramp you have some sort of Oh.
Built in a little bit of dry powder to improve margins just from from those two things.
Is that a fair.
Yeah.
Yeah, Eric do you want to take that.
Chris sorry about that my phone blinked out a little bit can you. It's okay. That's okay. No I got it I got it got it.
Yes, Larry on the de Novo side.
While they don't cost a lot of money to get out of the ground. That's not really the issue. We do believe it's a little bit.
Particularly in the first six months before they are until they breakeven some breakeven much quicker than that but.
Early on certainly those ones, we and we opened in September we're going to be a drain for a bit.
And then on the acquired clinics.
Yes, there is.
You referred to as dry powder, there is usually some upside that occurs oftentimes in right.
Reset at the point, where we do the deal we credential that deal in 60 days before closing dates.
Date certain basis, and then we get a pickup in rate usually not across every contract certainly but across some of the contracts and then there are other things that take a little bit more time it may be.
May be a little slower.
<unk>.
Program development.
Typically our efficiency changes overtime, those take a little bit longer and more patient with those because we don't want to make sure the relationship, particularly at the clinical level, it's really strong.
And stay strong.
We're able to do that.
So there is upside in the acquired clinics. There is some short term downside.
Clinics.
And Chris one thing I would add to that the one comment I would add on the de Novo clinics is none of those de novo clinics are fliers.
It's not build it and they will come I mean, those clinics were built because of our established referral relationships in the community.
The biggest challenge and potential drag on those de Novo clinics goes back to staffing.
Typically its staff will might be relocating from an existing facility to help staff at a lot of times again those clinics, we take advantage of the opportunity to open them. When we have the support but sometimes very difficult to challenge right out of the gate and that tends to be the biggest hurdle in terms of how fast they ramp.
Okay.
To follow up on that how is the staffing.
Just a couple of years or pop stretch in staffing and labor.
Certainly labor pricing is much higher today, but it does feel like at least you guys are having much more success and get them.
Oh.
I don't know what quality, but hopefully quantity or whatever.
Go ahead Sir.
Yes, no no question I mean, I think our recruiters are doing a great job as I said earlier, our retention is at an all time low here over the course of the last five years and I think we do a better job filling positions than most other organizations, but theres no question. Its a challenge and Chris referenced this earlier in his opening comments as it relates to PGA usage.
I mean, our facilities our staff with licensed physical therapists and licensed physical therapist assistants, and we've had to rely especially with the growth spurt that we'd had in bringing <unk> onboard in order to service the patient volume as opposed to not servicing it and again with roughly 33% of our business being federally funded.
The PTA touches the patient that has an impact and you saw that if you see the breakdown on a rate every category has gone up from a net revenue per visit perspective with the exception of federally funded bucket that includes Medicare and Medicare advantage. We got very aggressive this year in terms of terming Medicare advantage programs that we felt did not pay us the appropriate.
That amount of money below our absolute cost of providing service. So I think we've done a nice job. There. We're just going to have to continue to have to push in this category and a Christmas point regarding these did all of those the rolling out of additional programs. It takes a little bit of time and in particular, the workers' compensation initiative, which has really been successful this year I mean, that's it.
That's really just over a year old we have drawn rate for three consecutive quarters and our third quarter 2003 was almost 4% higher than our third quarter 'twenty two in terms of workers' compensation rates. So these types of programs do you have an impact, but they take a little while the rollout in.
New de Novo clinics as well as newly acquired partners.
Okay I appreciate all that color, but if I could just sneak one more just on the acquisition.
Brian It sounds like that your Q the pizza side.
Hum.
Physical therapy side, it sounds like a queue of opportunities remains strong and that you want to put your capital to work.
Can you just comment just on.
The other one off the software the ergonomic sulfur in the sort of IP acquisition, you made a little bit different than your normal acquisition. How you any color on how you plan to leverage that.
Yeah. So.
These are these are some people that I've known for a number of years really really good folks they've been working on the software product software sales product.
<unk>.
Our software service product the number of years.
It's really really strong.
Enable us we have we employ are economists we do virtual.
<unk> programs, but some of our customers.
Don't want.
We wanted to they wanted to do it themselves. They don't have the tools really available to do that.
So we think.
<unk>.
We think that we can deploy this software.
Not just to new customers, who are new to us, but to existing customers across our portfolio and as well with many many many more salespeople than these.
These folks have had in their own company.
Utilize our sales force to sell.
We ramped that up.
And so that was part of the offering and the other part of the offering was more in line with what we already do which is just embedded people on the prevention side, but it's a nice fit for us.
A new offering.
And we should be able and expect to be able to sell it to our existing client base in many cases.
Yes, Chris.
One additional comment on this would be I mean, this is a niche that op reata team recognize this is a key.
Client profile that we weren't servicing today. These are folks that are going to be a little bit more cost conscious that not just want a man who doesn't want to manage these types of projects on their own the ergonomics projects, but need to from a financial perspective, we do see a cross selling opportunity but periodically.
Looking at going down the path of creating their own software spending the time and money to do it in order to chase. This market segment that they werent servicing today. So this <unk> plus represented an opportunity for us to go in feet first with software that was already developed and they were really under resource Ergo plus in terms of our ability.
To market and sell that software. So we feel we have an opportunity here to dump gas on a fire, it's a terrific product.
This is a great market opportunity for us and really excited about this acquisition.
Great I appreciate the enthusiasm thanks for all the color.
Well go next to Calvin <unk> with J P. Morgan.
Hey, Kevin good morning.
Good morning, Thanks for squeezing me in here.
Just one quick one for me on <unk> I know that.
Some of your customers have pulled back on spending just given some of the macro concerns.
The conversations are evolving our employers are still hesitant or are you seeing any signs of a shift in demand next year and I know you talked you talked about expecting net growth for 2024 is the expectation at this stage that the growth rate improves year over year, but still below the 20% just any color you could give on sort of what the <unk>.
The revenue growth rate looks like for next year would be helpful. Thanks.
Yeah. Thanks.
I guess on a macro basis I would say, yes, I expect the growth rate to pick up next year.
I actually expect 24 from a macroeconomic standpoint, we will not.
Be great for the country.
I think we still have some headwinds.
But we're making good progress with sales that will carry us through next year I think in terms of the exact percentage of growth as Kerry mentioned before that's done.
Their budget yet.
We're still working through that we havent guided to that yet and it would be premature for me to peg that number at this point in time.
We certainly haven't used the 20% number.
That was the number that we had coming out of 'twenty one.
What was the last most recent number.
Maybe finishing 22, finishing 22 I guess before we guided to 23. So bottom line is we're not there yet.
Should be there sooner than later and once we have that number.
We'll work that into our guidance and give you a little bit more transparency than we're able to right now.
Okay.
Great and then maybe one more on workers comp I know you've had a couple of quarters there.
Volumes have been increasing in payer mix improving.
I'm, just wondering how youre thinking about that trend continuing into next year.
The momentum in Workers' comp really is there opportunity for us to accelerate because we're thinking about it is basically sort of steady progress year over year.
We are working on something I can't really talk about right now.
We're working hard let me just say, we're working very hard on the comp side to do something that would.
<unk>.
That would be a difference maker for us, but we've got some more work to do.
It's certainly a focus and we have the resources and the attention on it and I expect to make continued progress.
Alright, great. Thanks.
Once again, ladies and gentlemen, if you would like to ask a question that is star one.
We'll go next to Mike <unk> with Barrington Research.
Hey, Mike Hey, good morning, Mike.
Good morning so.
Chris on the.
The meeting you all attended private.
P T.
You know what what we've sort of heard out there not not in terms of P. T. Specifically, but in terms of health care in general has a lot of the private owners have not gotten the memo that valuations have come down.
And in transactions and that our expectations are sort of out of whack with reality of interest rates et cetera, I'm just curious.
You know you guys have Kari pointed out you've got a lot of.
Opportunities from a balance sheet perspective, the revolver. It yeah do something what I guess, what what was the by about at the at the private meeting I mean do you think this you know in the next 12 months.
Do you hope to be as active more active than the last 12 months.
Let me just say we have we have more really strong discussions that are going on right now.
Than we've ever had.
And there's a good mix not just smaller practices, but some larger practices as well.
<unk> to be a good year.
A very good year, we had one deal that we still expect to get on.
It was there was bigger in size for us.
Got hung up or around.
Yes.
A divorce proceeding.
Scott slowed everything down this would've been a fantastic year, if not for that.
I expect next year to be even better based upon the activity that we have right now.
And in terms of valuations look I think it depends on.
A lot of things there are a lot fewer buyers in the market right now because individual private equity companies.
Really at kind of limit Manny are.
And so it's a good time for us and we expect to make hay, while the Sunshine as they say.
And.
Sort of pivoting, but staying on the Ida.
Idea of making hay, how far along would you estimate in terms of your.
Efforts at getting better pricing in commercial and workers comp I mean, if this was a nine inning baseball game are we in the third inning seventh inning, where would you say in terms of your efforts to sort of renegotiate rates with with your various customers argue.
Sure Yes.
Yes.
It's hard to put it in that kind of measurement, but.
Good.
I'd say, we're about the fourth inning or so we still have some work to do but we've done a lot of good work fourth and fifth inning is somewhere in that in that range, but we haven't necessarily seen all the impacts of that come into our net rate yet.
That's where we are from a negotiation standpoint that makes sense.
Yeah, I thought in honor of the Texas Rangers I would throw the baseball analogy there you go.
[laughter], sorry Astros, okay. So.
I guess in it.
I didn't hear if you guys mentioned October patient volumes.
Any insight into that and sorry, if I missed it if you mentioned in her life.
I don't think I don't think we mentioned go ahead Sir.
Yes, we didnt mentioned, but I'd say it came in it's coming in strong I mean, we don't have the final numbers yet for exactly where it was based on we get weekly reports on the progress through the month and its come in at our expectations for Matt and continuing to be strong just like it has been all year long.
Very good thanks, guys appreciate it.
Thanks, Mike.
At this time, we have no additional questions I'd like to turn the conference back over to management for any additional or closing comments.
Thank you well thanks, guys I know this is a little bit longer call than normal carry and I are standing by and happy to take additional questions offline. Thank you for your time. This morning, and hope you have a great rest of your week.
Thank you everyone.
And once again, ladies and gentlemen that does conclude today's program. Thank you for your participation you may disconnect at this time.
Yeah.
Okay.
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