Q4 2023 Encompass Health Corp Earnings Call

Operator: www.EncompassHealth.com Good morning, everyone, and welcome to Encompass Health's fourth 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 speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, please press star 1 on your telephone keypad. You will be limited to one question and one follow-up question. This conference call is being recorded. If you have any objections, you may disconnect at this time.

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Speaker Change: Good morning, everyone and welcome to encompass Health's fourth quarter 2023 earnings conference call.

Speaker Change: 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'll be a question and answer period, if you'd like to ask a question. During this time. Please press star one on your telephone keypad.

Speaker Change: You'll be limited to one question and one follow up question.

Speaker Change: Today's conference call is being recorded if you have any objections you may disconnect at this time.

Speaker Change: I'll now turn the call over to Mark Miller encompass Health's, Chief Investor Relations Officer.

Mark Miller: I'll now turn the call over to Mark Miller, Encompass Health's Chief Investor Relations Officer. Thank you, operator. And good morning, everyone.

Yes.

Mark Miller: Thank you operator, and good morning, everyone. Thank you for joining encompass health's fourth quarter 2023 earnings calls.

Mark Miller: Thank you for joining Encompass Health's fourth quarter 2023 earnings call. Before we begin, if you do not already have a copy, the fourth quarter earnings release, supplemental information, and related Form 8K filed with the SEC are available on our website at encompasshealth.com. On page two of the supplemental information, you will find the Safe Harbor Statements, which are also set forth in greater detail on the last page of the earnings release.

Speaker Change: Before we begin if you do not already have a copy the fourth quarter earnings release supplemental information and related form 8-K filed with the SEC are available on our website at encompass health Dot com.

On page two of the supplemental information you will find the safe Harbor statements, which are also set forth in greater detail on the last page of the earnings release.

Mark Miller: During the call, we will make forward-looking statements that are subject to risks and uncertainties, many of which are beyond our control. Certain risks and uncertainties, like those relating to regulatory developments as well as volume, bad debt, and labor cost trends that could cause actual results to differ materially from our projections, estimates, and expectations, are discussed in the company's SEC filing, including the earnings release and related Form 8K and the Form 10K for the year ended December 31, 2023 when filed. We encourage you to read them.

Speaker Change: During the call we will make forward looking statements, which are subject to risks and uncertainties many of which are beyond our control certain risks and uncertainties like those relating to regulatory developments as well as volume bad debt and labor cost trends that could cause actual results to differ materially from our projections S.

Speaker Change: The Mets and expectations are discussed in the company's SEC filings, including the earnings release and related form 8-K, and the Form 10-K for the year ended December 31, 2023, when filed we encourage you to read them.

Mark Miller: Please use caution not to place undue reliance on the estimates, projections, guidance, and other forward-looking information presented, which is based on current estimates of future events. I speak only as of today. We do not undertake a duty to update these forward-looking statements based on the supplemental information.

Speaker Change: You are cautioned not to place undue reliance on the estimates projections guidance and other forward looking information presented which are based on current estimates of future events and speak only as of today we.

Speaker Change: We do not undertake a duty to update these forward looking statements.

Mark Miller: On the supplemental information.

Mark Miller: Our supplemental information and discussion on this call will include certain non-GAAP financial measures. For such measures, reconciliation to the most directly comparable gap measure is available at the end of the supplemental information, at the end of the earnings release, and as part of the Form 8K filed yesterday with the SEC, all of which are available on our website. I would like to remind everyone that we will adhere to the one question and one follow-up question rule to allow everyone to submit a question. If you have additional questions, please feel free to put yourself back in the queue. With that, I'll turn the call over to Mark Tarr, Encompass Health's President and Chief Executive Officer. Thank you, Mark, and good morning, everyone. The fourth quarter was a strong finish to a great 2023 for our company.

Mark Miller: Our supplemental information and discussion on this call will include certain non-GAAP financial measures for such measures reconciliation to the most directly comparable GAAP measure is available at the end of the supplemental information at the end of the earnings release and as part of the form 8-K filed yesterday with the SEC.

Mark Miller: All of which are available on our website.

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

Mark Tarr: You Mark and good morning, everyone.

Mark Tarr: Fourth quarter was a strong finish to a great 2023 for our company.

Mark Miller: I'll discuss key highlights for the year, and then Doug will provide details about our Q4 results and 2020 Forward Guidelines. Our 2023 revenue increased 10.4%, driven by strong volume growth, with total discharges of 8.7%, inclusive of same-store growth of 4.8%. Our strong volume growth continues to provide evidence that our value proposition is responding with referral sources, payers, and patients. Our 2023 adjusted EBITDA increased 18.5%, driven by revenue growth and prudent expense management. Persistent vigilance on premium labor utilization facilitated a 32.9% decrease in contract labor plus sign-on and shift bonuses, on a dollar basis. These premium labor expenses decreased $67.3 million from $204.3 million in 2022 to $137 million in 2023. We reduced contract labor FTEs from an average of 547 in 2022 to 425 in 2023, and contract labor FTEs as a percent of total FTEs from an average of 2.2 to 1.6 percent over the same period. Other operating expenses as a percent of revenue declined by 50 basis points, from 15.3 to 14.8%, owing in part to scale efficiency.

Mark Tarr: I'll discuss key highlights for the year and then Doug will provide details about our Q4 results and 2020 forward guidance.

Mark Tarr: Our 2023 revenue increased two 4% driven by strong volume growth with total discharge is up eight 7% inclusive of same store growth of four 8%.

Mark Tarr: Our strong volume growth continues to provide evidence that our value proposition is resonating with referral sources payors and patients.

Mark Miller: Our 2023, adjusted EBITDA increased 18, 5% driven by revenue growth and prudent expense management.

Mark Miller: Persistent vigilance on premium labor utilization facilitated a 32, 9% decrease in contract labor plus sign on and shift bonuses on a dollar basis.

Mark Miller: These premium labor expenses decreased $67 3 million from $204 3 million in 2000 $22 million to $137 million in 2023.

Mark Miller: We reduced contract labor Ftes from an average of 547 in 2022 to 425 in 2023 and.

Mark Miller: And contract Labor Ftes as a percent of total ftes from an average of 2.2 to one 6% over the same period.

Mark Miller: Other operating expenses as a percent of revenue declined by 50 basis points from 15.3 to 14, 8% owing in part to scale efficiencies.

Mark Miller: The strong growth in adjusted EBITDA.

Mark Tarr: The strong growth in Adjusted EBITDA facilitated an adjusted free cash flow increase of 54.6% to $525.7 million. We continue to invest in capacity expansions to meet the needs of a significantly underserved and growing market for inpatient rehabilitation services. In 2023, we invested more than $350 million in Growth CapEx, opening 8 De Novos with a total of 395 beds and adding 46 beds to existing hospitals, a net 4.1% increase in licensed beds. We also continue to invest in our facility-based technology through initiatives like our Tableau on-site dialysis rollout. We now offer in-house dialysis capabilities in 83 of our hospitals and will continue the rollout to new locations in 2024.

Mark Miller: Facilitated an adjusted free cash flow, an increase of 54.6% to $525 $7 million.

Mark Miller: We continue to invest in capacity expansion to meet the needs of a significantly underserved and growing market for inpatient rehabilitation services.

Mark Miller: In 2023, we invested more than $350 million and growth Capex.

Mark Miller: Opening eight to know those with a total of 395 beds, and adding 46 beds to existing hospitals, a net four 1% increase in licensed beds.

Mark Miller: We also continued to invest in our facility based technology through initiatives like our tableau onsite dialysis rollout.

Mark Miller: We now offer in house dialysis capabilities, and 83 of our hospitals and we'll continue the rollout to new locations in 2024.

Mark Miller: We complemented these investments in the growth of our business with the return of approximately $60 million to our shareholders through cash dividends on our common stock.

Mark Tarr: We complemented these investments in the growth of our business with the return of approximately $60 million to our shareholders through cash dividends on our common stock. Our strong free cash flow generation allowed us to fund these investments and shareholder distributions with internally generated funds, all while reducing our net leverage to 2.7 times at year-end 2023 from 3.4 times at the end of 2022. The Reviewed Choice Demonstration, or RCD, began on August 21 in Alabama. Our company was well prepared to address the administrative requirements of this program. Recall that under RCD, every Medicare claim is reviewed for documentation and medical necessity.

Mark Miller: Our strong free cash flow generation allowed us to fund these investments and shareholder distributions with internally generated funds.

Mark Miller: All while reducing our net leverage to two seven times at year end 2023 from three four times at the end of 2022.

Mark Miller: We view choice demonstration or RCD began on August 21st in Alabama.

Mark Tarr: Our company was well prepared to address the administrative requirements of this program.

Mark Tarr: Recall that under our C. D. Every Medicare claim is reviewed for documentation and medical necessity.

Mark Tarr: The affirmation rate target set by CMS under RCD is 80% of claims submitted during the first six months of our affirmation rate remains above that level.

Mark Tarr: The affirmation rate target set by CMS under RCD is 80% of claims submitted during the first six months of our contract. Our affirmation rate remains above that level, turning to objectives for 2024. We continue to build and maintain an active pipeline of de novo projects, both wholly owned and joint ventures with acute care hospitals. We expect to open six De Novos in 2024, as well as a 40-bed freestanding hospital licensed as a satellite location of an existing hospital that will be accounted for as a bed addition. To date, we've announced an additional 11 De Novos with opening dates beyond 2024.

Mark Tarr: Turning to our objectives for 2024.

Mark Miller: We continue to build and maintain an active pipeline of de Novo projects, both wholly owned and joint ventures with acute care hospitals.

Mark Tarr: We expect to open six de Novo as in 2024 as well as a 40 bed freestanding hospital licensed as a satellite location on an existing hospital that will be accounted for as a bed addition.

Mark Miller: To date, we've announced an additional 11 de novo's with opening dates beyond 2024.

Mark Tarr: We anticipate adding approximately 150 beds to existing hospitals in 2024, including the aforementioned satellite and 80 to 120 beds per year from 2025 through 2027.

Mark Tarr: We anticipate adding approximately 150 beds to existing hospitals in 2024, including the aforementioned satellite, and 80 to 120 beds per year from 2025 through 2027. We continue to focus on enhancing patient outcomes by investing resources in clinical innovation. One such innovation is our fall prevention model, which combines predictive modeling with our core clinical practice protocols.

Mark Tarr: We continue to focus on enhancing patient outcomes by investing our resources and clinical innovations.

Mark Miller: One such innovation is our fall prevention model, which combines predictive modeling with our core clinical practice protocols.

Mark Tarr: Our fall prevention model was initiated in 2021, and we have since seen our fall rates per 1,000 patient days improve by 24%. We have an array of additional clinical innovations and enhancements underway which are intended to advance our ability to consistently produce quality outcomes for medically complex, High Acuity Patients in Need of Inpatient Rehabilitation Care. Now, I'll turn it over to Doug.

Mark Miller: Our fall prevention model was initiated in 2021, and we have since seen our fall rates per 1000 patient days improved 24%.

Mark Miller: We have an array of additional clinical innovations and enhancements underway, which are intended to advance our ability to consistently produce quality outcomes for medically complex high acuity patient in need of inpatient rehabilitation care.

Mark Tarr: Now I'll turn it over to Doug.

Doug: Thank you, Mark, and good morning, everyone. As Mark stated, Q4 was a strong finish to 2023. Revenue for the quarter increased 9.6% over the prior year, driven primarily by volume. Total discharges grew 8.3%, inclusive of 5.3% same-store growth.

Doug: Thank you Mark and good morning, everyone. As Mark stated Q4 was a strong finish to 2023.

Doug: Revenue for the quarter increased nine 6% over the prior year, driven primarily by volume growth.

Doug: Total discharges grew eight 3% inclusive of five 3% same store growth.

Doug: Volume strength was broad based across geographies and patient mix and exceeded our expectations.

Doug: Volume strength was broad-based across geographies and patient mix and exceeded our expectations. Q4 adjusted EBITDA also increased 9.6% over the prior year as the contribution from increased volume in favorable operating expenses was partially offset by an incremental bad debt rate. Our 2023 de Novos outperformed in Q4, generating approximately $1 million in adjusted EBITDA compared to our expectation of approximately $2.5 to $4.5 million of net pre-opening and ramping up. The favorable performance relative to our expectations was driven primarily by the joint venture de novo.

Doug: Q4, adjusted EBITDA also increased nine 6% over the prior year as the contribution from increased volume and favorable operating expenses was partially offset by an incremental bad debt reserve.

Doug: Our 2023 de novo's outperformed in Q4, generating approximately $1 million and adjusted EBITDA compared to our expectation of approximately $2 five to $4 $5 million net preopening and ramp up costs.

Doug: The favorable performance relative to our expectations was driven primarily by the joint venture de novo's.

Doug: For the full year 2023, our de Novo net preopening and ramp up costs were $6 $6 million.

Doug: For the full year 2023, our de novo net pre-opening and ramp-up costs were $6.6 million. Within our 2024 guidance considerations, we are anticipating $15-18 million of de novo net pre-opening and ramp-up costs. The year-over-year difference is largely attributable to the timing of new hospital openings and the balance between joint venture and wholly-owned denominations. However, we continue to see improvement in year-over-year premium labor. On June 4, contract labor plus sign-on and shift bonuses totaled $30.6 million compared to $35.4 million last year. Within premium labor costs, Q4 contract labor was $17.7 million, and sign-on and shift bonuses were $12.9 million as compared to $19.7 million and $15.7 million in Q4 of 2022. On a sequential basis, premium labor decreased by $2.7 million.

Doug: Within our 2024 guidance considerations, we are anticipating $15 million to $18 million of de Novo net preopening and ramp up costs.

Doug: The year over year difference is largely attributable to the timing of new hospital openings and the balance between joint venture and wholly owned de Novo.

Doug: We continue to see improvement in year over year premium labor costs.

Doug: Q4 contract labor plus sign on and shipped bonuses totaled $36 million compared to $35 4 million last year.

Doug: Within premium labor costs, Q4 contract labor was $17 7 million and sign on and shipped bonuses were $12 9 million as compared to $19 7 million and $15 7 million in Q4 of 2022.

Doug: On a sequential basis premium labor decreased by $2 $7 million.

Doug: Yeah.

Doug: Our Q4 adjusted EBITDA included approximately $6.8 million in favorable reserve adjustments for workers' comp and general professional liability insurance. On a full year basis, 2023 included approximately $11.2 million in favorable reserve adjustments for these self-insured programs. These reserve adjustments are out of period as they relate to claims prior to 2023.

Doug: Our Q4, adjusted EBITDA and <unk>.

Doug: <unk> approximately $6 8 million in favorable reserve adjustments for workers' comp and general professional liability insurance.

Doug: On a full year basis, 2023 included approximately $11 $2 million and favorable reserve adjustments for these self insured programs.

Doug: These reserve adjustments or out of period as they relate to claims prior to 2023.

Doug: Our Q4-adjusted EBITDA also benefited from favorable trends in group medical claims under our self-insured program. Q4 revenue reserves related to bad debt as a percent of revenue increased 170 basis points to 4.1% as a result of an approximately $22 million reserve related to appeals pending before the Departmental Appeals Board and various federal district courts. These appeals relate to claims denied primarily prior to 2018 and under review programs that are different from TPE and RCD.

Doug: Our Q4 adjusted EBITDA also benefited from favorable trends in group medical claims under our self insured program.

Doug: Q4 revenue reserves related to bad debt as a percent of revenue increased 170 basis points to four 1% as a result of an approximately $22 million reserve related to appeals pending before the departmental Appeals board and various.

Doug: Federal District courts.

Doug: These appeals relate to claims denied primarily prior to 2018 and under review programs that are different from T. P E and RCD.

Doug: We now have a full year of experience at the departmental Appeals board and have updated our reserve assumptions given our experience to date.

Doug: We now have a full year of experience at the Departmental Appeals Board and have updated our reserve assumptions given our experience to date. After giving effect to minority interest, the Q4 adjusted EBITDA impact of this incremental bad debt reserve was approximately $16 million. Adjusted free cash flow for the quarter increased 103.3% to $93.5 million due to higher adjusted EBITDA.

Doug: After giving effect to minority interest the Q4 adjusted EBITDA impact of this incremental bad debt reserve was approximately $16 million.

Doug: Adjusted free cash flow for the quarter increased 103, 3% to $93 $5 million.

Doug: Due to higher adjusted EBITDA.

Doug: Lower maintenance Capex.

Operator: Lower Maintenance Cap Act and Favorable Changes in Working People. Moving on to Guy. Our 2024 guidance includes net operating revenue of $5.2 to $5.3 billion, adjusted EBITDA of $1.015 to $1.055 billion, and Adjusted Earnings Per Share of $3.77 to $4.60. The key considerations underlying our guidance can be found on page 13 of the supplemental slide. With that, we'll open the line for Q&A at www.EncompassHealth.com. Thank you. At this time, if you would like to ask a question, please press the star and one on your telephone keypad. You may remove yourself from the queue at any time by pressing star two.

Doug: Favorable changes in working capital.

Operator: Moving on to guidance.

Operator: Our 2024 guidance include net operating revenue of five two to $5 $3 billion.

Operator: Adjusted EBITDA of $1.015 billion to $1.055 billion.

Operator: And adjusted earnings per share of $3 77.

Operator: The $4 six.

Operator: The key considerations underlying our guidance can be found on page 13 of the supplemental slides.

Operator: With that we'll open the line for Q&A.

Speaker Change: Thank you at this time, if you'd like to ask a question. Please press the star and one on your telephone keypad you may remove yourself from the queue at any time by pressing star to once again that is star one to ask a question.

Operator: Once again, that is the star and one to ask a question. And we'll take our first question today from Kevin Fischbeck with Bank of America. Hello Kevin, good morning. Hi, good morning. Actually, this is Johanna filling in for Kevin today.

Johanna: And we'll take our first question today from Kevin Fischbeck with Bank of America.

Johanna: Hello, Kevin.

Johanna: Hi, Good morning, actually this is Joanna <unk> filling in for Kevin today.

Johanna: Thanks for taking the questions. Yeah, there's too many things going on at the same time. So we have got to do it this way. But thank you for your questions. So I guess my question around volumes, because Chloe, you highlighted volumes also came in better than your internal expectations and obviously very robust growth year over year. So I guess the question is, you know, is that sustainable? What do you assume for same-stove volumes growth in 2024? And I guess I understand you mentioned that the strength was growth-based geographically, but can you talk about maybe whether there was any category that stood out, or maybe the payer as well? And flu, I guess, or any impacts, you know, kind of seasonal in Q4. Thank you. This is Mark.

Johanna: For taking the questions yeah, there's too many too.

Johanna: So many things going on at the same time seller, we got to do the same but thank you for your question. So I guess my question around volumes because clearly you highlighted volumes also came in better than your internal expectations.

Johanna: This is very robust with year over year.

Johanna: So I guess the question is is that sustainable what do you assume for same store volumes growth in 2020 for guidance and I guess I understand you mentioned that the strength was broad based geographically, but can you talk about maybe whether there was any.

Johanna: Category.

Johanna: Where maybe the payer as well.

Johanna: And flu I guess or any impacts you know kind of seasonal in Q4. Thank you.

Johanna: Hey, Joanna this is mark I'll take a shot at this first.

Mark: I'll take a shot at this first. As you noted, we saw nice volume growth across all eight of our geographic regions. I think there are a number of things. One, we continue to see where we've taken market share from nursing homes. I think that going back to the last two or three years, we've proven ourselves very capable of taking higher-acuity patients and having great outcomes with them. So that has been a primary driver for us. I think that it's no secret that the acute care hospitals have had strong volumes, and we get the downstream impact from that. Relative to program mix, it was another quarter of continued growth in our stroke program and other neurological conditions. We did see some pickup on a small base in our orthopedic categories.

Mark: As you noted we saw a nice volume growth across all eight of our geographic regions and we think Theres a number of things one we continue to see where we've taken market share from nursing homes I think that you know going back to the last two or three years, we've proven our.

Mark: Sells very capable of taking a higher acuity patient and haven't in and having Greg outcomes with them. So that is a has been a primary driver to us I think that it's no secret that the acute care hospitals have.

Mark: I have seem to have.

Mark: We had strong volumes, which we get the downstream impact from that relative to program mix.

Speaker Change: Yeah. It was.

Mark: Another quarter of continued growth in our stroke program and other neurological conditions, we did see.

Mark: Some pick up.

Mark: On a small base in our orthopedic categories.

Mark: Nonetheless, we did see a percentage increase in our lower extremity joint placements and other orthopedic as well so.

Speaker Change: It was very broad based in terms of our overall growth and we're confident that we're building a good foundation.

Speaker Change: Yes, just to add a couple of other things too.

Speaker Change: Round out your question in terms of the expectations for volume growth in 2024, if you kind of parse through the guidance considerations you get a range of the discharge growth that is kind of in line with our our longer term target of 6% to 8% obviously.

Mark: Coming off a number of strong years, the low end of the range would be slightly above that but the rest of the range is solidly within that in terms of the breakdown between same store and new store.

Mark: Obviously, you had the eight units that we opened this year that'll be a new store and so that's a bit of a tailwind there and it's worth recognizing that if you look at the four year CAGR and same store growth that extends from 2019 2023, that's north of 5%. So we continue to.

Mark: To demonstrate very positive numbers, there, but it's not to suggest that we're going to be in a position to generate 5% same store growth on a year over year basis, there will be some fluctuations from year to year.

Mark: The patient mix was very broad based as Mark mentioned.

Mark: We did continue to see outsized growth in some of the smaller categories like ortho, but saw an excess of 5% growth in neurological and just about 5% growth in stroke. So those are big numbers and then finally as it relates to payer mix on a year over year basis, we saw the meta.

Mark: Care advantage payer mix increased by 90 basis points, but importantly.

Mark: 50 basis points of that growth came out of.

Mark: General managed care and another 20 or 30 basis points came out of Medicaid. So those were both representing a positive trade out of our lowest.

Mark: Reimbursement categories into a higher imports and burson category.

Speaker Change: Thank you for the call Christine.

Mark: Next we'll hear from <unk> Chickering with Deutsche Bank.

Mark: Well Peter Good morning, Peter.

Mark: You've actually got Kieran Ryan on here for so Paedo I've seen idea Joanna lots of calls, but I. Appreciate you taking the question.

Speaker Change: Just wanted to ask on on margins it looks like the guidance is implying about.

Mark: 50 bps of year over year contraction on on your reported 2023 figure is maybe a little bit less than that when adjusting for the reserve benefits and novo outperformance, but just broadly when we think about what could drive margins lower year over year, how should we think about.

Mark: These headwinds from some labor and that didn't know about it as compared to the fixed cost leverage that you should get on this very strong volume growth you're seeing.

Speaker Change: Well, Jerry I think you hit exactly on it which is we.

Mark: <unk> got all in and assumed 45% increase in <unk> per FTE and so what's driving that is an assumed 45% increase in general internal SW per FTE and then the benefits of getting some leverage with volume growth across assumed relatively calm.

Mark: <unk> premium labor cost is being offset by an increase in benefits costs, which is largely attributable to the fact that we have such a favorable outcome. This year and so that nets to the 4% to 5% for an SW be increase and then it's a pretty significant swing going from a little over $6 million net preopening costs.

Mark: For 2023, and assumes $15 million to $18 million in 2024, and that's got a number of factors implied in that in 2023, we had a much heavier weighting towards the first half of the year in terms of both things and we are anticipating for 2000.

Mark: 24.

Mark: And five of the eight facilities that opened in 2023 were joint ventures, including a couple of those that were with existing joint venture partners. So those ramped faster than the balance that we're anticipating in 2024, but those are the two Mary two primary factors.

Mark: Create a little bit of Rob on the margin and as we've said repeatedly we are in EBITDA and EBITDA growth story, we are not necessarily a margin story will always seek to gain leverage as we're growing volume.

Mark: But the most important thing that we can do is get out there and provide extremely high quality care to more patients who are in need of inpatient rehabilitative services and we continue to believe that the market is underserved.

Mark: Appreciate that and then just a quick follow up on the labor side 55, net R&D hires and <unk>.

Speaker Change: Solid obviously down a bit from the last two quarters, where you were up in the 200 range, but should we think about this as kind of the right pace as to what you're targeting heading into 'twenty four given where volumes are running.

Mark: And that you already cut down.

Mark: I play it down to that 151, 4% of Ftes or.

Speaker Change: Do you see it accelerating from here.

Mark: So we're actually very pleased with that number in Q4, if you look back at prior year that was a that was a negative net and if you think about the period of the year, that's extremely difficult to hire new staff.

Mark: It's around the holidays and particularly in Q4, so our talent acquisition team has been very successful in helping to support the hospitals as well as the the new ramp ups in finding and hiring nurses week.

Mark: <unk> talked about in past calls too that we have a real focus on retention.

Mark: In our hospitals to retain the nurses that are that we already employ with particular focus on those that have been hired in the last year or so so we're.

Mark: We're very pleased with the.

Mark: The progress that we've made.

Mark: Our hiring of our ends and would accept this year too.

Mark: To be another strong year with that yes.

Speaker Change: Yes, we can.

Mark: Can't necessarily assume that the run rate that we saw on new hires in Q4 is going to stay steady across all four quarters in 2024, because there will be some seasonality to that but.

Mark: But as Mark said, we're very pleased there.

Mark: Specifics on turnover or are in turnover for all of 2023 was down 500 basis points from 2022 and therapy, which has always been best of class and low turnover perspective was down 130 basis points on a year over year.

Mark: Year basis on a combination of new hires and reducing reducing turnover rate is really allowing us to manage those premium labor cost better now frankly, the one 4% that we saw in terms of contract labor Ftes as percentage of total ftes in the fourth quarter was better than we had anticipated we have.

Mark: Soon.

Mark: The stabilization point around one 5% as we've noted previously we had run just below 1%.

Mark: Pre Q3 of 2021, when the spike occurred for the overall industry, we'd like to see continued progress.

Mark: Towards that number.

Mark: But it's just very hard to predict embedded in our guidance assumptions for 2024 is it from a total dollar perspective premium labor cost in 2024 remained relatively consistent with the run rate that we established in in Q4, which was down an aggregate of $2 7 million.

Mark: Sequentially from Q3.

Speaker Change: Thanks, so much.

Mark: Our next question will come from Ben Hendrix, with RBC capital markets.

Speaker Change: Good morning.

Mark: Hi, This is Mike Mike Murray on for Ben Thanks for taking the question.

Speaker Change: So it sounds like internal SW be per FTE growth.

Mark: It is expected to moderate in 2024 after a few years out acceleration.

Speaker Change: Just broadly.

Mark: Can you talk a little bit more about the labor market and what you're seeing for wage inflation and do you think this will continue to moderate moving forward.

Mark: As I said back we've got it.

Mark: Internal SW per FTE assumption is an increase of 45% and frankly, that's that's probably a point higher on both ends of the range and I was thinking about at the end of Q3, what we are seeing is that although overall labor market conditions are improving it's important to really stay on top of March.

Mark: What adjustments and as were bringing in these larger number of new hires if theyre coming in at a market rate that is different than what we're paying the <unk> workforce, we've got to make sure that there is parity across that.

Mark: We again across all of the metrics that we cited were seeing improving labor market conditions, we're optimistic that that will improve particularly as we progress into the second half 2024, but its difficult to bank on that so we went with a set of assumptions I think reflect the current environment and no further improvement as we progress.

Mark: The year, Mark we've tried to make sure that our hospitals have stayed at the market in terms of the rates with the <unk>.

Speaker Change: And analysis, we have you know what.

Mark: Did you get behind market, it's awfully difficult to catch up and it typically costs you more once you get behind and then if you had stayed at the market level all walk through through Mark adjustments. If you look at between the market adjustments, we've done the last year and a half and the new staff that we brought on.

Speaker Change: There's a pretty high percentage of our overall staff they've had some adjustment or another so that's part of the logic that we took going into the assumptions for this year and I think it's all proving to be a very good trade I mean, you tie together a bunch of these metrics our metrics look at the volume growth.

Mark: At no point during 2023 did we find ourselves constrained in being able to take volume and to take it safely and in the best interest of the patient because of labor constraints.

Mark: Our turnover rates as I cited before are down markedly from both our ends and therapist on a year over year basis, and our salaries are competitive enough that we're continuing to have made great progress in recruiting new clinicians into our workforce.

Mark: One final note on labor it should be noted that our talent acquisition team has helped us.

Mark: <unk> opened up the vast majority of the of the de Novo's last couple of years with zero contracts layer at the time of openings. So.

Mark: It's been a huge support.

Mark: In terms of our ability to take the volume that Doug alluded to.

Mark: And to start off in these markets among them new markets.

Mark: On a good solid footing.

Mark: The efficacy of that centralized talent recruiting function also comes with an efficiency and to their credit our HR team has been very creative and looking at the ways that we're spending dollars across the recruiting function to find out where those were having the greatest impact and then concentrating the dollars in those areas.

Mark: So even with the success, we had on new hires during the course of 2023, we actually did that with a year over year decrease in recruiting costs.

Speaker Change: Okay, that's very helpful.

Speaker Change: Just shifting gears a little bit.

Mark: I know you're working at moving more contracts towards a case mix.

Speaker Change: Wanted to see how this is progressing.

Speaker Change: Yes, we continue to make great progress there.

Mark: About 90% of our MA contracts are on a.

Mark: An episodic versus a per diem basis, and the rate differential even as we continue to grow Medicare advantage at a rate greater than our other payer categories as compared to fee for service.

Mark: It remains less than 5%.

Speaker Change: Thank you.

Mark: Our next question will come from Brian <unk> with Jefferies.

Speaker Change: Good morning Andre.

Speaker Change: This is <unk> on for Brian.

Speaker Change: Thank you for taking my question and congrats on the quarter.

Speaker Change: So unfortunately, just one more question about labor.

Speaker Change: Currently are you able to fill all the demand that you are seeing in the market and if not how much more labor would you need to see you upsize.

Mark: Volume growth yes.

Mark: As I just mentioned at no point in 2023.

Speaker Change: We unable to take volume because of labor constraints.

Speaker Change: Okay, great to prioritize we are going to serve all of the patients who are in need of inpatient rehabilitative care and the markets in which we are in even if it means paying premium labor.

Speaker Change: Okay and then this is.

Speaker Change: A slight follow up from Joanna question I know you had called out differences, you're seeing in different condition categories.

Speaker Change: Just wanted to follow up and see if there are any special P series C that C is an incremental opportunity in terms of volume growth or revenue yield I know you called out.

Mark: Increasing investment and expansion.

Speaker Change: Expansion of your in house dialysis, the wanted to see if there's anything else you're thinking about.

Mark: Yes.

Mark: A big focus on the neurological categories as a whole for the past several years, we call out stroke, because we think we have a particular.

Mark:

Mark: Strong outcomes, we feel like there's a huge demand for stroke.

Mark: Our rehabilitation, we think we do a really good job in getting these patients.

Mark: Back to the community and we've partnered with American Heart American Stroke Association nationally to help promote the.

Mark: The need in education for stroke patients. So we call it stroke, specifically as Doug noted, we had almost a 5%.

Mark: Growth in that last year.

Mark: And it remains one of our top categories in terms of percentage of total discharges so between stroke and other neurological I would call those out.

Speaker Change: As areas that we see continued opportunities to grow I think the other one that I would point to you and perhaps one that we don't count enough and maybe don't get enough credit for it.

Mark: In a forum like this is dealing with brain injury patients and so brain injury typically runs between 10 and 12% of our overall patient mix and it was up 10, 5% in the quarter.

Mark: Obviously, that's a very medically complex patient and so they can't be treated effectively and too many settings.

Mark: Okay.

Mark: Thank you as a reminder press star one if you have a question here from Jared Haas with William Blair.

Speaker Change: Good morning.

Speaker Change: Hey, good morning, Thanks for taking the questions I appreciate all the detailed commentary thus far maybe I'll just take a step back and ask a bigger picture question I'm curious to hear your perspective, just around the outlook for Medicare advantage environment in general obviously, there's been a lot of focus lately just around rates for the plans.

Speaker Change: The broader utilization that those guys are experiencing would just love to get your perspective on the group in a general sense and then how you are sort of thinking about maybe potential leverage in terms of rate negotiations or just your general value proposition and partnering with clients.

Speaker Change: Yes. So again, we think that there continues to be significant upside in Medicare advantage for us.

Mark: Although the growth rate over the last several years has been very impressive. If you look again at the four year CAGR same store CAGR for Medicare advantage, extending from 2019 and I'll pick 2019, specifically to go back before Covid and run that through 2023, our Medicare advantage.

Mark: Tim stores up 15, 2%, so it's our fastest growing category.

Mark: We've been able to grow that while maintaining or increasing the number of those contracts that are paid on a case rate basis versus a per diem and keeping that narrowing and then keeping that payment differential versus fee for service at less than 5% I think the real opportunity is that we continue to see.

Mark: Conversion rates in Medicare advantage and that means the number of AD mix.

Mark: As <unk>.

Mark: Percentage of referrals that is lower significantly lower than Medicare fee for service and some of the pressures or some of the focus that you're now seeing from CMS on the MA plans is about denial of access to care and utilizing.

Mark: Utilizing internal metrics and algorithms to authorize care for Medicare Dash advantage patients, which is not necessarily directly in those patients to the place where they can expect the best outcome, we think that those trends.

Mark: Bode well for us in the future just based on the quality of outcomes that we're producing and the complexity of the patients that we're able to treat effectively.

Speaker Change: Got it that makes a lot of sense and then maybe I'll just ask a quick follow up thinking about specifically any priorities you guys would call out in 2024, just around technology investments or other workflow improvements I think you alluded to some of the things around predictive analytics and obviously you have the dialysis.

Mark: This technology that you are rolling out as well, but just would be curious to hear if anything new or incremental on the roadmap. This year that is focused on driving clinical or operational improvement.

Speaker Change: <unk> name that you've named a couple of them. We always look at innovations that are out there.

Mark: That is through the utilization of this.

Mark: Huge amount of data that we've been able to collect from.

Mark: Our clinical information system over the years and working with our clinical team on predictive analytics and driving our clinical outcomes.

Mark: We look at.

Mark:

Mark: New technologies that are out there, particularly on the clinical.

Mark: Aspects, you, therefore, nursing or therapies that that will help us assist in treating our patients. There are a number of them that were working in a full this year around <unk> and helping the patients on their swallowing difficulties, which is a common issue with stroke patients we have.

Mark: Wait assisted.

Mark: Our devices and our gens that can help our patients and ambulation.

Mark: Around so there are on any given year, including 2024.

Mark: We take a.

Mark: Access to innovation and.

Mark: A number of different studies, particularly if it enables our staff to get better outcomes or helps them become more efficient.

Mark: We believe our competitive advantage in this regard is self perpetuating.

Mark: Abiding that we operate under a philosophy of continuous improvement and by that I mean, if you look at the common conditions that are treated in the <unk> setting just based on our scale and our market share we see far more of those patients than any of our competitors by a very wide margin.

Mark: We utilize the data that comes from seeing that vast number of patients to get smarter about the clinical protocols and the outcomes that they produce and arc. Our clinical leaders have been really really focused they never rest on our laurels and they're focused on.

Mark: Tenuously getting better at what we do.

Mark: Analyzing the data that comes through on almost every patient and saying how do we refine our models how do we refine the protocols that we're using to become even more effective in treating these patients.

Mark: Our next question will come from Scott Fidel with Stephens.

Speaker Change: Good morning, we'd say, Scott, but we don't want to be presumptuous hi.

Mark: Hi, good morning, again, and its actually Scott here for.

Speaker Change: At this time.

Mark: Yeah.

Mark: Which is not.

Speaker Change: Any way to express disappointment regarding any of the others.

Speaker Change: Understood understood.

Speaker Change: One ask you just about balance sheet capacity here just given how you did end up with leverage down below the long term target range, obviously, a high interest rate environment. So that's not necessarily a terrible thing, but it does seem like you still have a lot of capacity incrementally here right, just how youre thinking about that for 2020.

Mark: Four and whether that would influence thinking about potentially ramping up capital returns such as the buyback more or further accelerating some of your growth investments or are you just comfortable keeping leverage.

Speaker Change: Hello target here, just just given the cost of capital environment.

Speaker Change: Yeah. So Scott if you go back to 2022, we were running just about $600 million in total Capex and we were essentially a breakeven from a cash flow perspective, as a matter of fact I think we.

Mark: Beyond funding almost all of that plus the dividend with internally generated funds I think our debt increased modestly maybe 25 or $50 million.

Mark: As we came into 2023 with a capex budget that was in aggregate pretty similar and with an assumption that the dividend would be relatively constant.

Speaker Change: Just on our initial guidance, we were assuming that we would once again be essentially breakeven in 2023, and we didn't necessarily at that time I think that it would be prudent given that we were starting the year with a three four times net leverage to start deploying capital towards other potentially utilizations life.

Mark: Further shareholder distributions well through the course of 2023.

Speaker Change: We underspent a bit.

Mark: Mostly based on timing with regard to Capex.

Mark: And we over performed with regard to EBITDA and adjusted cash flow so that not only brought the leverage down but it created more capacity for us earlier than we had anticipated to start.

Speaker Change: Really thinking about some of these additional uses of capital allocation and shareholder distributions is the one that comes immediately to mind once we get beyond funding our discretionary capex. So it is certainly something that the board is going to be considering through the course of this year.

Mark: We frankly got in a position to be able to have that consideration sooner than we had anticipated.

Speaker Change: Okay, great. So, we'll certainly keep an eye out for that and then just a follow up question just just around modeling for.

Mark: For seasonality any anything you'd want to call out just from either EBITDA or cash flow from the start of the quarterly moderate mark modeling progression.

Mark: That would be different than normal patterns, where should we think about it sort of consistent with typical patterns.

Mark: It really feels like after a period of some nor.

Mark: Normalization being required we've kind of gotten back into our regular seasonal seasonal pattern in terms of volume flows and so the biggest difference year over year is going to be the timing and the impact of the dose.

Mark: Okay.

Speaker Change: Okay. Thank you.

Mark: Our next question will come from Parker <unk> with Raymond James.

Speaker Change: Hey, good morning, guys.

Mark: Hey, Good morning. This is Parker on for John Ransom.

Speaker Change: To shift over to the 2024 guidance. So if I look at the guidance sorry, if I just look at your fourth quarter 2023, EBITDA you did $255 million of EBITDA, if I normalize that for the bad debt charge. That's $2 71, if you annualize that you get 1 billion 80, maybe there was some.

Speaker Change: De novo costs in there so maybe let's say a $1 65 is kind of the run rate, but your guidance is $1 $35 or maybe just talk about why would there be a difference there or is there a reason why we're there.

Mark: Certain items in the fourth quarter that were kind of more onetime in nature and why wouldn't the fourth quarter run rate would be a good kind of jumping off point as we look into 2024.

Speaker Change: Yes, so first you're backing out of that $9 million in workers comp in GPL.

Mark: Prior period reserve adjustments, then you'd normalized where favorable group medical.

Mark: Expense than as you suggested the de Novo's for 2023 contributed $1 million in EBITDA in Q4, the assumption for all of 2024.

Speaker Change: Is that youre going to have $15 million to $18 million. Some portion of that attributable to Q4. So you've got swing there and then again our core assumption is that you've got 4% to 5% labor inflation, which is going to delever to some extent against the pricing on top of that you've got more nuanced items.

Mark: We continue to believe that <unk> will normalize towards three four rate, we're pretty close there right now at 338 for fiscal year, 2023, and having to put the highly sensitive ratio. So even if you just moved up from $3 three eight to $3 four which is two one hundreds of an impact.

Mark: That's about a $14 million to $15 million impact on year over year EBITDA.

Speaker Change: So it's I think it's a combination of all those things and.

Speaker Change: We're here, we're a month into 2024.

Mark: And so what we have demonstrated consistently is particularly with regard with regard to guidance is.

Mark: We call balls and strikes very consistent.

Mark: Providing right now is according to our philosophy that we've consistently applied at the businesses out there and if the environment is better we will deliver better results, but we think that this is a reasonable set of assumptions starting the year.

Speaker Change: Okay, Yeah, that's fair and if I can just squeeze in one more just related to the bad debt charge. I know you guys said you change some of your of your reserving practices as you move into next year is there any chance that there could be another one of these kind of one off reserve charges or is it kind of the expectation that this was a one off and that shouldn't recur.

Mark: It's really the latter we didn't necessarily change our reserve methodology, because the reserve methodology. That's in place right. Now is really looking specifically at T. P, which had been suspended for a while and that came back on but the activity. There is a lot lower than it ever was under the widespread.

Mark: <unk> that does it stopped in 2018, the write off that we took this this quarter $16 million EBITDA impact related to those older claims that originated 97% of them were prior to 2018.

Mark: And it related specifically to the fact that when we started appealing these things up to the dam level.

Mark: Federal District Court, we didn't have any experience on which to base a specific reserve methodology, we're a year into it right now and unfortunately, what we found is that the claims denials that we're essentially rubber stamped as the ALJ ramped up its number of judges.

Mark: In an attempt to clear the backlog is dictated by the federal Court ruling.

Mark: That.

Mark: They were getting rubber stamped at the higher levels as well. So it's frustrating we look back at that backlog of claims which is now largely resolved the balance it's still out there on our balance sheet is essentially fully reserved.

Mark: Look back at those claims and say we did the right things.

Mark: We admitted the right patients and we treated them effectively.

Mark: And yet we're going to take these write offs and move on.

Speaker Change: Alright, thank you so much.

Mark: Okay.

Mark: We have a follow up question from Kevin Fischbeck with Bank of America.

Mark: Hi, This is John yes. Thanks.

Speaker Change: I guess, a little bit different topic, but I guess the.

Mark: The proposed regulations cycle.

Speaker Change: Oh, so creeping up on us so kind of your expectations for 2025 propose.

Speaker Change: So what do you expect there when it comes to wait out there or anything else and I guess specifically the.

Mark: Home Health Trust for policy change that I guess.

Speaker Change: You know what slack.

Mark: Prior to 'twenty.

Speaker Change: 24 cycle. So do you expect this to show up in 'twenty five or would you expect the Sukarna died down because I guess when you think about it.

Mark: Hmm.

Mark: It would be here.

Mark: Why shouldn't CMS, just stewardess, because I guess the hospitals have the same.

Speaker Change: Transfer policy, so I would say definitely but any thoughts in terms of expectations for that thank you.

Mark: Joanne This is mark let me take the latter point, we've not heard any.

Mark: Any feedback relative to the whole milk transfer rule anymore from CMS.

Mark: <unk>.

Mark: Discussed last year as they did the RFID I think.

Mark: At that time, the industry made a pretty good case.

Mark: Why the whole milk transfer rule is a little bit different when you think about herbs.

Mark: The primary point being is that home health for an Earth patient is it's not a substitution of care.

Mark: And it's actually a normal progression of care for for rehabilitation patient and I think it was also pointed out that the average length of stay for Earth patients across Amg's has been remarkably consistent other words.

Speaker Change: Not seen it.

Mark: From our perspective that there was a financial motive to reduce our average length of stay and those are all different.

Mark: Aspects, then if you've looked at.

Mark: Other sectors.

Mark: And in healthcare, where there have been a transfer rule. So we've we've not heard anything.

Mark: There.

Mark: As information or an act are included within the proposed rule.

Mark: Or make it through the final rule will do what we've done with all the other regulatory changes in our history, we will.

Mark: Evaluate it we'll digest the new rule will understand it.

Mark: And.

Mark: We will adjust accordingly, just like we've done historically with other major changes.

Speaker Change: Not to beat our chest, but I don't know that you can point to another provider that over its history has demonstrated greater adapting this and agility at responding to regulatory changes.

Mark: And underlying all of this is the fact that the demand for inpatient rehabilitative services. In this country is currently underserved and is only going to continue to grow based on the underlying demographic those patients need to be treated by somebody and we are the most effective at treating those pay.

Mark: <unk> that needed the services and expanding the capacity to do that so regardless of what comes down the pipe from a regulatory perspective, we will adjust to it with alacrity and we will continue to grow our business.

Speaker Change: Thank you I appreciate the commentary.

Mark: Our final question will come from AJ rice with UBS.

Speaker Change: Good morning, everybody.

Mark: Couple of.

Speaker Change: Quick things here I know, you're saying in the deck that youre looking for 2% to 3% increase.

Speaker Change: And you managed care and that's a small piece of the overall business, but I was curious if any.

Speaker Change: Any updated commentary or discussions about value based arrangement incentive.

Mark: Type of programs are there any discussion along those lines.

A J: A J, it's I know, it's going to sound redundant with what we said previously we really just don't see much of that dialogue with the MA plans.

Speaker Change: A is complex and I think in terms of their overall book of business, we're still relatively small so the emphasis now if we get any inquiries from an M&A plan about our willingness and our ability to participate in those types of models.

Speaker Change: We are we expressed our great desire to do so.

Mark: Most of the discussions that were really centering on the efficacy of our outcomes. The overall value proposition and the benefits to all parties involved in moving to a case rate structure, where we're able we're able to manage the.

Mark: MA patients to what we believe is the greatest clinical efficiency.

Speaker Change: Okay and then.

Mark: You said your affirmation rates on the demonstration project is hitting the above 80%.

Mark: Which is the target I think that was supposed to be a six month project if I have it right.

Speaker Change: Any sense of where we go from here, but everyone. The major players are hitting the targets does it just get drop do you think theyre going to make a change on any of them do we have any idea.

Mark: Alright.

Mark: Hey, Jay it's Marc as it played out now.

Mark: The initial <unk>.

Mark: Six months will end.

Mark: At the end of February and so it's projected to go from 80 to 85, and then ultimately up to 90. So we would expect it to go up to 85.

Mark: Thank <unk>.

Mark: Certainly given the affirmation rate that the industry has seen in CMS is saying.

Mark: It's.

Mark: We'll see where that goes from here as it's noted the five year demonstration. So if they take the entire five years.

Speaker Change: We're not sure but as you note. It's the entire industry is performing quite well you'd wonder why they would continue on with it.

Mark: Had identified some of the states that they wanted to go to next following the initiation in Alabama, Pennsylvania, Texas, and then I think Florida were on that list not surprising given the number of <unk> in those states, but it's our understanding that they have given they being CMS has given notice to the Mac Nova cost about ultimately.

Mark: <unk> up this project without a date certain this demonstration excuse me in Pennsylvania, we have nine hospitals in Pennsylvania, when all of our nine hospitals or with a different Mac that is palmetto and so as it stands right now our hospitals in Pennsylvania would not be subject to the extension of that.

Mark: <unk> into Pennsylvania.

Speaker Change: Okay, alright, thanks, a lot.

Mark: Okay.

Mark: That will conclude the question and answer session I will now turn the call over to Mark Miller for any additional or closing remarks.

Speaker Change: Thank you operator, if anyone has additional questions. Please call me at 2059705860. Thank you again for joining today's call.

Speaker Change: This does conclude today's program. Thank you for your participation you may now disconnect.

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