Q4 2023 Enhabit Inc Earnings Call

Operator: Good morning, everyone. Welcome to Enhabit Home Health and Hospice's Fourth Quarter 2023 Earnings Conference. Today's conference call is being recorded. If you have any objections, you may disconnect at this time.

Good morning, everyone welcome to inhabit home health and hospice is a fourth quarter 2023 earnings conference call.

Today's conference Call's being recorded.

Have any objections you may disconnect at this time I will now turn the call over to Kristy, Carlisle and habits Chief Financial Officer.

Operator: I will now turn the call over to Crissy Carlisle, Enhabit's Chief Financial Officer. Thank you, operator. Good morning, everyone.

Thank you operator, good morning, everyone. Thank you for joining inhabit home, helping hospitals fourth quarter of 2023 earnings conference call.

Crissy Buchanan Carlisle: Thank you for joining Enhabit Home Health and Hospices' fourth quarter 2023 earnings conference call. With me on the call today is Barb Jacobsmeyer, President and Chief Executive Officer. 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 investors.ehab.com. On page 2 of the supplemental information, you will find the Safe Harbor Statements, which are also set forth on the last page of the Earnings Relief section.

With me on the call today is Bob Jacobs, Meyer, President and Chief Executive Officer.

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 investors thought he had dot com.

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

Crissy Buchanan Carlisle: During the call, we will make forward-looking statements, which are subject to risk and uncertainty, many of which are beyond our control. Certain risks and uncertainties that could cause actual results to differ materially from our projections, estimates, and expectations are discussed in our SEC filings, including our annual report on Form 10-K, which is available on our website. We encourage you to read, but you are cautioned not to place undue reliance on the estimates, projections, guidance, and other forward-looking information presented, which are based on current estimates of future events and speak only as of today. We do not undertake a duty to update these forward-looking statements.

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 that could cause actual results to differ materially from our projections estimates and expectations are discussed in our SEC filings, including our annual report on Form 10-K, which are available on our website. We encourage you to read them.

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

We do not undertake any update these forward looking statements.

Crissy Buchanan Carlisle: 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 and the earnings release. With that, I'll turn the call over to Barb. Thanks, Crissy.

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 and earnings release with that I'll turn the call over to Bob. Thanks, Christy Good morning, and thanks for <unk>.

Barbara Ann Jacobsmeyer: Good morning, and thanks for joining us. Persistent focus on our company strategies drove our positive fourth quarter results. PayorInnovation's success, including the execution of another new national contract, continued success with our people strategy, and strong performance and quality outcomes are but a few of our high points for the end of 2023 and the start of 2024. I cannot thank our employees enough for the high-quality care they provide to our patients every day.

Joining us.

Persistent focus on our company strategy drove our positive fourth quarter results.

Are your innovation success, including the execution of another new national contracts continued success with our people strategy and strong performance and quality outcomes are but a few of our high point for the end of 2023 and our start to 2024.

I cannot thank our employees enough for the high quality care they provide to our patients every day.

Barbara Ann Jacobsmeyer: Our strongest factor in negotiating with payers and conveners and in creating strong referral relationships remains our 30-day hospital readmission rate that is 20.5% better than the national average. This quality is a solution to the challenge of rising health care costs and helps payers manage their MLRs. Helping to control emergency room visits, hospitalizations, and readmissions results in higher patient and family satisfaction and control of health care dollars. However, significant dollars are also spent at the end of people's lives. High-Quality Hospice Care, and in particular, consistent and attentive clinician visits during the last days of life, are critical in preventing revocations and unnecessary hospitalizations because of the benefit it provides our patients and their families.

Our strongest factor and negotiating with payers and convenience Andy.

And in creating strong referral relationships remains our 30 day hospital readmission rate that is 25% better than the national average.

This quality is a solution to the challenge of rising health care costs, and helping payers manage them their MLR.

Helping to control emergency room visits hospitalization, and Readmissions, resulting higher patient and family satisfaction and control of health care dollars.

Significant dollars are also stand at the end of People's lives.

Quality hospice care and in particular, consistent and a ton of clinician visits during the last days of life are critical in preventing revocation and unnecessary hospitalization because of the benefit it provides our patients and their families.

Barbara Ann Jacobsmeyer: We are proud that our team provides hospice visits in the last days of life 53.2% better than the national average. We anticipate our home health and hospice quality will continue to drive our future growth, as well as employee retention. Now, let's talk about some of our key 2024 focus areas and how the fourth quarter set us up for success. With our traditional Medicare mix of home health revenue now in line with peers, we expect the continued decline in our traditional Medicare volume to slow at a rate consistent with the industry in 2024. Episodic admissions are beginning to stabilize, as our sequential episodic admissions were down only 0.8% in the fourth quarter compared to the third quarter.

We are proud that our team provides hospice visits in the last phase of life 53, 2% better than the national average.

We anticipate our home health and hospice quality will continue to drive our future growth as well as employee retention.

Now, let's talk about some of our key 'twenty 'twenty four focus areas and how the fourth quarter set us up for success.

Without a traditional Medicare mix of home health revenue now in line with peers. We expect the continued decline in our traditional Medicare volumes to slow at a rate consistent with the industry in 2020 for.

Episodic admissions are beginning to stabilize and that's sequential episodic admissions were down only 0.8% in the fourth quarter compared to the third quarter.

Barbara Ann Jacobsmeyer: With our strong quality metrics and our increased list of the payers we can accept, we expect an increase in referrals as we improve our status as a preferred provider. Our payer innovation team continues to succeed in demonstrating our value proposition to Medicare Advantage payers and has set us up for success with these payers in 2024. We had another strong quarter negotiating a total of 11 new agreements, with eight of those negotiated at episodic rates.

With our strong quality metrics and our increase less of the payers. We can accept we expect an increase in referrals as we improve our status as a preferred provider.

Our payer innovation team continues to succeed and demonstrating our value proposition to Medicare advantage payers and has set us up for success with these payers in 2024.

We had another strong quarter negotiating a total of 11, new agreements with eight of those negotiated and episodic rate.

Barbara Ann Jacobsmeyer: Specifically, we are extremely excited to announce a new national agreement that became effective on January 1, 2024. This new national agreement is an advanced episodic model that allows us to prioritize access to home care for patients discharged from institutional settings. In another way, it aligns our incentives with the payers' needs for member access to skilled home care for a successful transition to home following an institutional admission. This contract allows us to further increase our focus on moving volumes away from lower paying agreements that do not recognize the value of our high quality outcomes. Since the inception of the payer innovation team in the summer of 2022, we have successfully negotiated 59 new agreements, and over two-thirds of those are episodic rates.

Specifically, we are extremely excited to announce a new national agreement that became effective January one 'twenty 'twenty four.

This new National agreement is an advanced episodic model.

How's us to prioritize access to home care for patients discharged from institutional settings.

But in another way it aligns our incentives with the payers need for member access to skilled home care for a successful transition to home following an institutional admission.

This contract allows us to further increase our focus on moving volumes away from the lower paying agreements, but do not recognize the value of our high quality outcomes.

Since the inception of the pair innovation team in the summer of 'twenty 'twenty. Two we have successfully negotiated 59 new agreements.

Over two thirds of those are episodic rate.

Barbara Ann Jacobsmeyer: Our home health business development and branch operations teams continue to be successful in moving volume to our payer innovation agreement. In the fourth quarter, approximately 25% of our non-episodic visits were in new payer innovation contracts. That is up from 5% in quarter one 2023.

Our home health business development and branch operations team continue to be successful and moving volume to our payer innovation agreement.

In the fourth quarter, approximately 25% of our non episodic visits where in new pair innovation contract.

That is up from 5% in quarter one 2023.

Barbara Ann Jacobsmeyer: We are confident in our ability to make continued improvement in Medicare Advantage pricing and in the shift of our Medicare Advantage admissions to these improved contracts. With an advanced episodic model added to our payer contract versus a traditional episodic structure, we will now update how we report our payer groups in 2024, separating traditional Medicare from all other episodic contracts. Our rollout of Metallogix Pulse to all of our branches was complete by the end of quarter three.

We are confident in our ability to make continued improvement in Medicare advantage pricing and in the shift of our Medicare advantage admissions disease improve contracts.

Within advanced episodic Mano added to our payer contracts versus a traditional episodic structure. We will now update how we report our payer groups in 2020 for separating traditional Medicare from all other episodic contracts.

Our rollout of metallurgical pulse to all of our branches was complete by the end of quarter three our visits per episode in quarter, four was flat year over year at $14, three and down sequentially from quarter 314.9.

Barbara Ann Jacobsmeyer: Our visits per episode in quarter four were flat year over year at 14.3 and down sequentially from quarter three's 14.9. We continue to work with our leaders on how to best use this tool for clinical resource management based on our patients' acuity and complexity. In regards to hospice, moving to the case management model has helped us recruit and retain our hospice staff, resulting in the elimination of all contract nursing and eliminating staffing capacity constraints. The sales team can now focus on further referral source development. We continually analyze our hospice business in an effort to increase efficiency in the referral to admission process and improve our ability to respond quickly to our referral sources. Recently, we reallocated certain hospice resources to form centralized admission departments with a sole focus on those efforts.

We continue to work with our leaders on how to best use this tool for clinical resource management based on our patients acuity and complexity.

In regards to hospice moving to the case management model has helped us recruit and retain our hospice staff, resulting in the elimination of all contract nursing and eliminating staffing capacity constraints.

The sales team can now focus on further referral source development.

We continually analyze our hospice business and efforts to increase efficiency and the referral to admission process and improve our ability to respond quickly to our referral sources.

Recently, we reallocated certain hospice resources to form centralized admission departments with a sole focus on those efforts.

Barbara Ann Jacobsmeyer: We complement our organic growth strategy with our de novo strategy, which allows us to enter a new market with low capital costs. The main investment is in staffing as we hire the clinical team to build the patient census to obtain our licensing survey. We added one Home Health and one Hospice de Novo location in quarter four, bringing our 2023 total to eight. Two additional locations are complete with the necessary preparation steps and are awaiting regulatory approval.

We complement our organic growth strategy with our de Novo strategy. This allows us to enter a new market with low capital cost.

The main investment is in staffing as we hire the clinical team to build the patient census to obtain our licensing survey.

We added one home health and one hospice de novo locations in quarter, four bringing our 2023 total to eight.

Two additional locations are complete with the necessary preparation steps and are awaiting regulatory approval.

Barbara Ann Jacobsmeyer: We expect to finalize these two in 2023 and open another 10 de novo locations in 2024. Our operational and sales teams are focused on ramping up referral and admissions growth in the de novo locations opened in 2023. Continued progress with our people strategy remains a priority, and we believe we're winning the battle for labor. During the fourth quarter, our full-time nursing candidate pool increased 21.5% year-over-year and resulted in the addition of 119 net new full-time nurses.

We expect to finalize these two from 'twenty two 'twenty three and to open another 10 to novo locations in 2024.

Our operational and sales teams are focused on ramping up referral and admission growth in the de Novo locations opened in 2023.

Continued progress with our people strategy remains a priority and we believe we are winning the battle for labor.

During the fourth quarter, our full time nursing candidate pool increased 21, 5% year over year and resulted in the addition of 119 net new full time nurses give.

Barbara Ann Jacobsmeyer: Given our strong nursing hires in 2023, we eliminated all hospice nursing contract labor by the end of quarter three and all home health nursing contract labor by the end of the year. Our focus in 2024 will be on employee engagement, so we can continue to improve retention. In particular, we are focused on our clinicians' satisfaction with their schedules.

Given our strong nursing hires in 2023, we eliminated all hospice nursing contract labor by the end of quarter, three and all home health nursing contract labor by the end of the year.

Our focus in 2024 will be unemployed engagement. So we can continue to improve retention in particular, we are focused on our clinician satisfaction with their schedules.

Barbara Ann Jacobsmeyer: Given our success with nursing hires, we are now able to turn some talent acquisition resources to recruiting additional therapists as our improved nursing workforce is allowing us to grow and add therapy team members. Before I turn it over to Crissy, I want to remind everyone that the purpose of today's call is to discuss our financial and operational results and outlook. The board, with the assistance of our advisors, is being comprehensive in its assessment of strategic alternatives, and discussions with interested parties are ongoing.

Given our success with nursing hires we are now able to turn some talent acquisition resources to recruiting additional therapist about improved nursing workforce, it's allowing us to grow and add therapy team members.

Before I turn it over to Christy I want to remind everyone that the purpose of today's call to discuss our financial and operational results and outlook.

The board with the assistance of our advisors has been comprehensive and its assessment of strategic alternatives and discussions with interested parties are ongoing.

Barbara Ann Jacobsmeyer: We are in the later stages of our strategic review but don't intend to disclose developments unless and until we determine that further disclosure is appropriate or necessary. We will not be commenting beyond that. And so we ask you to keep your questions focused on our business and our results. In summary, our success in our payer strategy, in our ongoing payer innovation contracting, in our people strategy, in hospice growth strategies, and in our de novos are examples of our continuing investment for the future to meet the growing need for home health and hospice services. I will now turn it over to Crissy to further discuss the quarter's results and 2024 guidance. Thanks, Barb.

We are in the later stages of our strategic review, but don't intend to disclose developments unless and until we determine further disclosure is appropriate or necessary.

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

In summary, our success in our Payor strategy and our ongoing payer innovation contracting piece.

People strategy and hospice growth strategy and our de Novo's are examples of our continuing investment for the future to meet the growing need of home health and hospice services.

I'll now turn it over to Christie to further discuss the quarters results and 2020 for guidance.

Thanks, Barb consolidated net revenue was $268 6 million for the fourth quarter down $2 6 million or 1% year over year.

Crissy Buchanan Carlisle: Consolidated net revenue was $260.6 million for the fourth quarter, down $2.6 million or 1% year over year; suggested EBITDA was $25.2 million, down $5.1 million or 16.8% year over year. We estimate the continued shift to more non-episodic payers in home health decreased revenue and adjusted EBITDA by approximately $8 million year-over-year, net of the impact from improved pricing of payer innovation contracts. In our Home Health segment, total admissions growth of 3.9% year over year was driven by 34.2% growth in non-episodic admissions. Our non-episodic visits grew to approximately 33% of our total home health visits in the quarter.

Adjusted EBITDA was $25 2 million down $5 1 million or 16, 8% year over year.

We estimate the continued shift to more non episodic payers in home health decreased revenue and adjusted EBITDA approximately $8 million year over year net of the impact from improved pricing a payer innovation contract.

In our home Health segment total admissions growth of three 9% year over year was driven by 34, 2% growth in non episodic admissions.

Our non episodic visits grew to approximately 33% of our total home health visits in the quarter.

Crissy Buchanan Carlisle: While we are making significant progress demonstrating our value proposition to payers as we negotiate new agreements with improved rates and are successfully shifting Medicare Advantage volumes into our payer innovation agreements, the revenue and adjusted EBITDA impact from this volume shift has not been enough to overcome the financial impact from the erosion of Medicare fee-for-service volume. Our home health team successfully managed cost services, resulting in cost per visit flat year over year as a reduction in nursing contract labor offset the impact of merit market increases. For the full year 2023 compared to 2022, the cost per visit increased approximately 2%.

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

From the erosion of Medicare fee for service volumes.

Our home health team successfully managed cost of services, resulting in cost per visit flat year over year as a reduction in nursing contract labor offset the impact of merit and market increases.

Full year 2023, compared to 2020 to cost per visit increased approximately 2% that's less than the 3% average merit and market increase for the year, thus demonstrating our ability to control costs through productivity and optimization of staff.

Crissy Buchanan Carlisle: That's less than the 3% average merit market increase for the year, thus demonstrating our ability to control costs through productivity and optimization of staff. In our hospice segment, revenue increased 3.7 million, or 7.8% year over year, primarily due to an increase in revenue per day that resulted from changes in our estimated recoverability of net service revenue in the fourth quarter of 2022 and increased Medicare reimbursement rates that went into effect on October 1 of 2023. Admissions decreased 1.5% year-over-year, while the average daily census decreased 4.3% year-over-year.

In our hospice segment revenue increased $3 7 million or seven 8% year over year, primarily due to an increase in revenue per day that resulted from changes in our estimated recoverability of net service revenue in the fourth quarter of 2022 and increased Medicare reimbursed.

And at rates that went into effect on October one 2023.

Admissions decreased 1.5% year over year, while average daily census decreased four 3% year over year sequentially. Our average daily census increased one 3% over the third quarter.

Crissy Buchanan Carlisle: sequentially, our average daily census increased 1.3% over the third quarter. Adjusted EBITDA increased 6.1 million year-over-year, primarily due to the increase in revenue per day and a reduction in general administrative costs for the segment. Cost per day improved sequentially to $76 after stabilizing at $77 for the prior three-quarters as the elimination of nursing contract labor and increased census helped gain leverage against the fixed costs associated with the case management staffing model. General and Administrative expenses decreased $2.1 million year-over-year, primarily due to changes in back-office staffing needs as a result of the implementation of the case management staffing model.

Adjusted EBITDA increased $6 1 million year over year, primarily due to the increase in revenue per day, and a reduction in general and administrative costs for the segment.

Cost per day improved sequentially to $76 after stabilizing at $77 for the prior three quarters as the elimination of nursing contract Labor and increased census helps gained leverage against the fixed costs associated with the case management staffing model.

General and administrative expenses decreased $2 1 million year over year, primarily due to changes in back office staffing needs as a result of implementation of the case management staffing model.

Crissy Buchanan Carlisle: Our Home Office General and Administrative Expenses increased $4.3 million year-over-year to 10.3% of consolidated revenue, primarily due to a declining revenue base, investments in information technology and talent acquisition, and annual merit increases. Our standalone company cost in 2023 approximated $23 million, which is less than the 26 to 28 million original estimate at the spend date. At this time, we have transitioned all services from Encompass Health except for our PeopleSoft financial and HR systems, and we expect to complete the transition of those services by the end of Q1 2024. Let's transition now to the balance. Information on our debt and liquidity metrics is included on page 17 of the supplemental slide. We ended 2023 with a leverage ratio of 5.4 times, well within our covenant maximum of 6.75. We had available liquidity of approximately $61 million, including approximately $27 million of cash on hand.

Our home office general and administrative expenses increased $4 3 million year over year <unk>, 3% of consolidated revenue, primarily due to a declining revenue base investments in information technology and talent acquisition and annual Merit increases.

Our Standalone company costs in 2023, approximated $23 million, which is less than the 26 to 28 million original estimate at the spin date at this time, we have transitioned all services from encompass health, except for our people solve financial and HR systems.

And we expect to complete the transition of those services by the end of Q1 2024.

Let's transition now to the balance sheet.

Information on our debt and liquidity metrics is included on page 17 of the supplemental slides.

We ended 2023 with a leverage ratio of five four times well within our covenant maximum of 675 times.

We have available liquidity of approximately 61 million, including approximately 27 million of cash on hand, we believe this is adequate to support our operations, including our de Novo strategy.

Crissy Buchanan Carlisle: We believe this is adequate to support our operations, including our de novo strategy. We generated approximately $59 million of free cash flow during 2023, which equates to a free cash flow conversion rate of approximately 60%. Let's now turn to 2024. Our 2024 guidance and related guidance considerations can be found on pages 19 and 20 of the supplemental slides that accompanied our earnings release. Our 2024 guidance range for net service revenue is $1,076,000,000 to $1,102,000,000, with adjusted EBITDA in a range of $98,000,000 to $110,000,000. In our home health segment, and as Barb mentioned in her remarks, we are focused on achieving growth through destabilization of Medicare as a percent of total home health revenue, continued progress with our payer innovation strategy, and increased utilization of our clinical resources. We expect our Medicare pricing to increase by approximately 1.2% in 2024, based on the home health final rule.

We generated approximately 59 million of free cash flow during 2023, which equates to a free cash flow conversion rate of approximately 60%.

Let's now turn to 2024.

Our 2024 got it and related guidance considerations can be found on pages 19, and 20 of the supplemental slides that accompanied our earnings release.

Our 2024 guidance range for net service revenue is 1.076 billion to 1.102 billion with adjusted EBITDA in a range of 98 million and $110 million.

Within our home health segment and as Barbara mentioned in her remarks, we are focused on achieving growth with the stabilization of Medicare as a percent of total home health revenue continued.

Progress with our pay your innovation strategy and increased utilization of our clinical resources.

We expect our Medicare pricing to increase approximately one 2% in 2024 based on the home health final rules.

Crissy Buchanan Carlisle: And we expect our Medicare Advantage pricing to improve based on the success of our payer innovation team, including a full year of impact from the national agreement that became effective on May 1, 2023, and the additional benefit of the new national agreement that became effective on January 1 of this year. For volumes, we expect the success we've had with our payer innovation team and our recruitment and retention of clinical staff to drive volume growth. With our traditional Medicare mix of home health revenue now in line with our peers, we expect the continued decline in our traditional Medicare volumes to slow to a more industry-like rate in 2024. And the new episodic payer innovation contract will provide an avenue of growth to offset some of the continued erosion of traditional Medicare. For our hospice segment, we are focused on growing the census, which will also allow us to gain operating leverage against the fixed cost structure associated with the case management staffing model.

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

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

With our traditional Medicare mix of home health revenue now in line with our peers.

Expect a continued decline in our traditional Medicare volumes to slow to a more industry like rate in 2024.

And the new episodic payer innovation contract will provide an avenue of growth to offset some of the continued erosion of traditional Medicare.

For our hospice segment, we are focused on growing census, which will also allow us to gain operating leverage against our fixed cost structure associated with the case management staffing model for.

Crissy Buchanan Carlisle: For pricing, we expect our reimbursement rate to increase approximately 2.9% for the first three quarters of the year based on the hospice final rule effective October 1, 2023. For volumes, we are clinically staffed to grow, and we are working with our talent acquisition team to further build our business development team for growth. On the cost side of the equation, we face two primary headwinds in 2024, wage inflation and increased costs associated with durable medical equipment.

For pricing, we expect our reimbursement rate will increase approximately 2.9% for the first three quarters of the year based on the hospice final rule effective October one 2023.

For buying we are clinically staff to grow and we are working with our talent acquisition team to further build our business development team for growth.

On the cost side of the equation, we face two primary headwinds in 2020 for wage inflation and increased costs associated with durable medical equipment.

Crissy Buchanan Carlisle: A 3% average merit and market increase results in an approximate $10 million net headwind for our company year over year. This represents the impact of wage inflation above the net reimbursement rate increases we receive from Medicare in both segments. In our home health segment, we believe we can partially offset wage inflation through productivity and optimization improvements and currently believe our cost per visit will increase between 2% and 3% year over year. In our hospice segment, we estimate our cost per day will increase between 2% and 4%. This increase is primarily due to service issues we encountered with our durable medical equipment provider in the fourth quarter of 2023. To avoid disruption to our patients and to ensure they receive the equipment they need, we made alternative arrangements in the affected market.

3% average merit and market increase resulted in an approximate 10 million net headwind for our company year over year.

This represents the impact of wage inflation above the net reimbursement rate increases we received from Medicare in both segments.

In our home Health segment, we believe we can partially offset wage inflation through productivity and optimization improvements and currently believe our cost per visit will increase between 2% and 3% year over year.

In our hospice segment, we estimate our cost per day will increase 2% to 4%.

This increase is primarily due to service issues, we encountered with our durable medical equipment provider in the fourth quarter of 2023.

To avoid disruption to our patient into ensure they receive the equipment. They need we made alternative arrangements in the affected markets.

Crissy Buchanan Carlisle: We estimate these new arrangements will result in an approximate $2 million of additional costs associated with durable medical equipment year over year. We expect patient volumes to increase without the need to hire a significant number of additional staff, resulting in operating leverage against the fixed costs associated with our case management staffing model. We expect our home office costs to stay relatively flat at the percent of consolidated revenue as merit increases and increased incentive compensation year over year are partially offset by the implementation of a cost structure and other savings in 2023. As we've noted previously, our greatest challenge in forecasting relates to the shift of Medicare eligibles into Medicare Advantage and forecasting not only the mix of traditional Medicare admissions versus Medicare Advantage admissions but also forecasting the shift of Medicare Advantage admissions into our payer innovation contract.

We estimate these new arrangements will result in an approximate $2 million of additional cost associated with durable medical equipment year over year.

We expect patient volumes to increase without the need to hire a significant number of additional staff, resulting in operating leverage against our fixed costs associated with our case management staffing model.

We expect our home office costs to stay relatively flat as a percent of consolidated revenue as merit increases and increased incentive compensation year over year are partially offset by the implementation of cost structure and other savings in 2023.

As we've noted previously our greatest challenge in forecasting relates to the shift of Medicare eligible into Medicare advantage and forecasting not only the mix of traditional Medicare admission versus Medicare advantage admissions, but also forecasting the shift of Medicare advantage admissions into our payer innovation contrasts.

Crissy Buchanan Carlisle: With this in mind, the difference between the low and high end of our guidance range primarily is dependent upon our payer mix. We expect to generate 36 to 62 million of free cash flow in 2024. As shown on page 21 of the supplemental slides that accompanied our earnings release, free cash flow in 2024 will be impacted by our return to cash income tax payments, which represents a $12 to $14 million swing in use of free cash flow year over year. In addition, free cash flow generation will be dependent on the timing of working capital, specifically accounts receivable.

With this in mind the difference between the low and high end of our guidance range, primarily is dependent upon our payer mix.

We expect to generate 36 to 62 million of free cash flow in 2024 as shown on page 21 of the supplemental slides that accompanied our earnings release.

Free cash flow in 2024 will be impacted by our return to cash income tax payment, which represents a $12 million to $14 million swing. It uses of free cash flow year over year.

In addition, free cash flow generation will be dependent on the timing of working capital specifically accounts receivable.

Operator: With that, I'll ask the operator to open the lines for Q&A. The floor is now open to your questions. To ask a question at this time, simply press star followed by the number one on your telephone keypad.

With that I'll ask the operator to open the lines for Q&A.

The floor is now open for your questions to ask a question at this time simply press star followed by the number one on your telephone keypad. We offer you. Please limit yourself to one question and one follow up question and re queue if necessary.

Brian Gil Tanquilut: We ask that you please limit yourself to one question and one follow-up, and ReQ if necessary. We'll now take a moment to compile a raw. Our first question comes from the line of Brian Tanquilut, with Jeff. Please go ahead.

Well now take a moment to compile a roster.

Our first question comes from the line of Brian <unk> with Jefferies. Please go ahead.

Barbara Ann Jacobsmeyer: Hey, good morning, and congratulations on the quarter. I guess, maybe Barb, my first question is, you announced that national episodic contract, and it sounds like you're gaining traction with expanding or shifting the contracting strategy a little bit here. So just curious, number one, how are you thinking about the remaining opportunity there and what it would take to ramp that business up or that relationship up? And then, maybe broadly speaking, how are you thinking about, you know, how the pressures on Medicare Advantage plans are translating to you guys? And how does that impact your ability to negotiate or renegotiate your biggest Medicare Advantage relationship? Thank you.

Hey, good morning, and congrats on the quarter.

Guess, maybe Barb My first question, you know you announced that national.

Caught episodic contract and it sounds like Youre, gaining traction with expanding we're shifting the contracting strategy a little bit here. So just curious number one how are you thinking about the remaining opportunity there and what it would take to ramp that business up or that that relationship up and then maybe broadly speaking how are.

Are you thinking about you know how the pressures on Medicare advantage plans are translating to you guys and.

And how does that impact your ability to negotiate or renegotiate your biggest Medicare advantage relationship. Thank you.

Barbara Ann Jacobsmeyer: Sure. Well, I think the ability to ramp it up, particularly with the new national agreement, is strong. It's been good that we always had care transition coordinators that are inside a facility. So they can actually help us really ramp up quickly in being able to accept this payer, particularly from these institutional settings. So I think there's already the ability and the staff there to take advantage of that. I do think actually some of the challenges that the payers are facing actually work to our benefit as we're sitting at the table, particularly because of our high quality outcomes. I think if they're really looking to control those high-cost areas like hospitalizations and emergency room visits and things like that, we can help with that. But a provider has to have high quality to be able to help with it.

Sure well I think the ability to particularly ramp up with the new National agreement is strong.

It's been good that we have always had that care transition coordinators that are inside a facility. So they actually can help us really ramp up quickly and being able to accept this payer, particularly from these institutional settings. So I think there's a they're ready the ability and the staff there to take advantage of that.

I do think actually some of the challenges that the payers are facing them almost work to our benefit as we're sitting at the table, particularly because of our high quality outcome I think if they're really looking to control those high cost areas like hospitalizations and emergency room visits and things like that we can help with that.

But a provider has to have the high quality to be able to help with it. So it really has.

Crissy Buchanan Carlisle: So it really has given us, I think, an advantage sitting at the table with these payers. And then maybe, Crissy, my follow-up, just as I think about guidance, right, so just curious what your assumptions are in terms of, I know you said you're still expecting the payor mix to shift there, but what should we be thinking about? You know, the moving pieces on payer mixed shift, maybe a little bit on wage inflation. I know you talked a little bit about cost per visit, but what are you seeing there?

Given us I think an advantage sitting at the table with these payers.

And then maybe Christie my my follow up just as they think about guidance right. So just curious what your assumptions are in terms of I know you said you're still expecting.

Payer mix shifting there, but how should we be thinking about.

The moving pieces on payer mix shift, maybe a little bit on wage inflation I know you talked a little bit of cost per visit but what are you seeing there and then the other area would be like what does the recruitment pipeline look like for both nurses and.

Crissy Buchanan Carlisle: And then the other area would be like, what does the recruitment pipeline look like for both nurses and therapists? Thanks. Yeah, so I'll take kind of the guidance part of that and then turn it back to Barb for the recruitment and retention aspect of the question. When I think about, you know, 2024, and guidance and kind of bridging 2023 to 2024, I'm really focused on the expected increase due to increased reimbursement rates and in both segments, volume growth, and efficiency improvement in our cost per visit cost per day. And then some of that will be partially offset by wage inflation, that new DME contract that I just talked about, as well as some of that payer mix shift. Again, Brian, you know, we're not expecting what I've historically referred to as the healthcare cliff.

Thanks.

So I'll I'll take kind of the guidance part of that and then turn it back to Bob for the recruitment and retention aspect of the question. When I think about you know 2024 and guidance and kind of bridging 2023 to 2024, I'm really focused on the expected increase due to increased reimbursement rates and in both segments.

Volume growth.

You should see improvements in our cost per visit cost per day.

And then some of that will be partially offset by wage inflation that new DMA contracted I just talked about as well as some of that payer mix shifts again, Brian you know, we're not expecting what I've historically referred to as the inhabit cliff.

Remember that we've now entered that zone, where our Medicare be.

Fee for service and Medicare advantage mix is very similar to our peers. So we're expecting a more industry likes yet we're not saying that Medicare is not going to continue to decline. They continue to choose Medicare eligible continue to choose Medicare advantage plans, but were saying we shouldn't have the same double digit declines that you're seeing for us.

Crissy Buchanan Carlisle: Remember that we've now entered that zone where our Medicare fee-for-service and Medicare Advantage mix is very similar to our peers, so we're expecting a more industry-like shift. We're not saying that Medicare is not going to continue to decline. Instead, they continue to choose, Medicare eligibles continue to choose Medicare Advantage plans. But we're saying we shouldn't have those same double-digit declines that you've seen for us because we made that shift over 12 to 18 months, whereas the peer group made it over six to, you know, seven to eight years. So we think that we've kind of, again, normalized ourselves into the peer group now.

Because we made that shift over 12 to 18 months, whereas the peer group made it over six to seven to eight years.

So we think that we kind of again normalized ourselves into the peer group now and so that you know the $30 million of payer mix impacts that we saw in 2023, we don't expect to recur at that same level, given where we are with our volumes and in the payer mix as well as just the improved rates that we're getting and you know I think.

Crissy Buchanan Carlisle: And so, you know, the $30 million payer mix impact that we saw in 2023, we don't expect to recur at that same level, given where we are with our volumes in the payer mix, as well as just the improved rates that we're getting. And, you know, I think it's also important, Brian, to remember that we're starting 2024 with two national contracts. We weren't in that position at the beginning of 2023.

It's also important to remember that we're starting 2024 with two national contracts, we weren't in that position at the beginning of 2023, we'll have the full benefit from the National agreement that became effective may one of 2023, and then of course, the one that we announced last night.

That became effective January one so we feel we're in a much better position.

And then on your question Brian on Labor. It was good to see quarter four tends to be a slower quarter on labor. Just you know folks. It's all looked a switchover of the holiday. So we were pleased to see year over year that our applicant pool was up over 21%. So that was that was really good to see and then again, we had another successful quarter with those full time now.

Barbara Ann Jacobsmeyer: We'll have full benefit from the national agreement that became effective on May 1, 2023, and then, of course, the one that we announced last night. That became effective on January 1. So we feel we're in a much better position. And then on your question, Brian, on labor, it was good to see quarter four tends to be a slower quarter on labor, just, you know, folks just don't look to switch over the holidays. So we were pleased to see, year over year, that our applicant pool was up over 21%. So that was something that was really good to see.

New hires.

Awesome. Thank you guys.

Thank you.

Our next question comes from the line of Jason Consortia with Citigroup. Please go ahead.

Great. Thanks, Good morning, maybe just a follow up on Brian's question, just any other color or consideration for us.

Earnings cadence right you just drugs.

Our fee for service kind of volumes.

Barbara Ann Jacobsmeyer: And then again, we had another successful quarter with those full-time net new hires. Awesome. Thank you, guys.

Turning closer to industry norms.

I guess you know.

Are you guys positioned kind of exiting 'twenty three 'twenty four work that should developed kind of in line with that expectation or do you think that you're going to still see outsized kind of moderation and in that context, yeah. So anything else on the earnings cadence would be helpful to start thanks.

Operator: Thank you. Our next question comes from the line of Jason Casoria with Citigroup. Please go ahead. Great, thanks. Good morning.

Jason Paul Cassorla: Maybe just to follow up on Brian's question, just any other color or consideration for us as we think about earnings cadence, right? You discussed fee-for-service kind of volumes, kind of returning closer to industry norms. But I guess, you know, are you in a position kind of exiting 23 and into 24 where that should develop kind of in line with that expectation? Or do you think that, you know, you're going to still see an outsized kind of moderation? In that context,

Sure Jason So we expect what I would call a moderate adjusted EBITDA build throughout the year you know I think when when we attended your conference last spring, we talked about a steep ramp in 2023, Oh, we're not really expecting that in 2024 again, it's more of a moderate adjusted EBITDA build throughout the year.

Q1, and Q4 tend to have higher volumes a little bit.

One of the things that we're excited about 'twenty 'twenty four is given the success, we've had with the recruitment and retention of our clinical staff.

Crissy Buchanan Carlisle: Yeah, just so anything else on the earnings cadence would be helpful to start. Sure, Jason. So we expect what I would call a moderate adjusted EBITDA bill throughout the year. You know, I think when we attended your conference last spring, we talked about a steep, you know, ramp in 2023. We're not really expecting that in 2024.

When you have more staff, you're able to manage through some of those summer anomalies around you know pay time off and vacations and such that we expect to be able to manage the labor needs in Q2, and Q3 around P. D O I'm, just the increased staffing and productivity.

And then of course, there will be a you know a slight ramp of some of these new Medicare advantage contracts, especially when you when that came into effect January one.

Crissy Buchanan Carlisle: Again, it's more of a moderate adjusted EBITDA bill throughout the year. You know, Q1 and Q4 tend to have higher volumes a little bit. I think one of the things that we're excited about in 2024 is given the success we've had with the recruitment and retention of our clinical staff. When you have more staff, you're able to manage through some of those summer anomalies around paid time off and vacations and such. So we expect to be able to manage those labor needs in Q2 and Q3 around PDO just via increased staff and productivity. And then, of course, there will be a, you know, a slight ramp-up of some of these new Medicare Advantage contracts, especially the new one that came into effect January. Okay, great. Thank you. That's, that's very helpful.

Okay, great. Thank you that's helpful and I guess.

Don't forget about the agreements you signed right in the 25% of your non episodic.

Do you think maybe just building on your comment Barbara just do you think you're perhaps you were in a strong position to really balk against you know taking volumes from these lower paying contracts, it's kind of without sacrificing the volume done see within your markets or how should we think about that balance between generating volume density against.

The reimbursement dynamics within your overall book and then just really quickly on a follow up on the hospice costs per day could you give us a sense on what that would have been otherwise if it wasn't for the CMA issue for us to get a sense.

Barbara Ann Jacobsmeyer: And I guess, you know, thinking about the 59 agreements you signed, right in the 25% of your non-episodic visit, do you think, maybe just building on your comments, Barbara, do you think perhaps you're in a strong position to really balk against taking volumes from these lower paying contracts kind of without sacrificing the volume density within your markets, or how should we think about that balance between generating volume density against kind of the reimbursement dynamics within And then just really quickly, on the hospice cost per day, can you give us a sense of what that would have been otherwise if it wasn't for this PME issue, just so we can get a sense? Sure.

Sure.

All of them as it relates to the the contracts that we sign I do think that there is an ability to grow the volume a lot of it particularly the regional contract. We sign has really been based on feedback from the field on which then could make a meaningful difference for them with their referral sources. I also think an opportunity for US now if you think back to last year. This.

We had a really short list to bring into referral sources on the payers, we could take and frankly. It was you know we hear from our referral sources as we need to have a partner that can really help us take almost all of our patients not just one or two particular kind and so I think were you know annually referrals versus today very differently with a much longer.

Or lift and that should help us to be able to frankly grow all volumes, but particularly focused on those are in the pair innovation contract and fee for service Medicare.

Barbara Ann Jacobsmeyer: On volume as it relates to the contracts that we've signed, I do think that there's an ability to grow the volume. A lot of it, particularly the regional contracts we've signed, have really been based on feedback from the field on which things could make a meaningful difference for them with their referral sources. I also think an opportunity for us now, you know, if you think back to last year at this time, we had a really short list to bring to referral sources on the payers we could take. And frankly, it was, you know, we'd hear from our referral sources that we needed to have a partner that could really help us take almost all of our patients, not just one or two particular kinds.

And on your question regarding the hospice calls per day, I think what you're asking me is it 2024 number because this new DNA contract was really a Q1.

2024 effective on date.

Date, and so I think it's fair to say, Jason that if it weren't for this this durable medical equipment agreement that we had to sign that instead of our cost per day guidance consideration being 2% to 4% I think it would have been in the range probably zero to 2%.

Okay, great. Thank you.

Our next question comes from the line of Joanna <unk> with Bank of America. Please go ahead.

Hi, good morning. Thank you. So hi, good morning. Thank you for taking my question. So I guess first on the follow up when it comes to the episodic. So you know you said you expect that sort of Michigan stabilize.

Barbara Ann Jacobsmeyer: And so I think we're entering referral sources today very differently, with a much longer list. And that should help us to be able to grow all volumes, but particularly focused on those in the payer innovation contract and fee-for-service Medicare. And on your question regarding the hospice cost per day, I think what you're asking me is the 2024 number because this new DMA contract was really a Q1. 2024 effective date.

So going forward since the mix is a you know smoke appears but so you know when I look at the payer mix you know in terms of revenues.

I understand that the mix is shifting and growing the Ami that you did not have but then so the Medicare revenues, you know was down 14% for the year and I guess, 16% in this quarter.

Crissy Buchanan Carlisle: And so I think it's fair to say Jason, that if it weren't for this durable medical equipment agreement that we had to sign, that instead of our cost per day guidance consideration being two to 4%, I think it would have been in the range probably of zero to. Okay, great. Thank you. Our next question comes from the line of Joanna Gajuk with Bank of America. Please go ahead. Hi, good morning.

Year over year, and down 7% sequentially and when I look at the peers you know they they show you know either a smoke more smoking crack or even from some show growth year over year. So I guess my question is you know why and habit is losing market share.

Julien I don't think we're losing market share again, I think as part of the Medicare eligible are choosing to enroll in Medicare advantage and if you go back in history is as you will know about this company is historically this company did not pursue Medicare advantage and again, we made that shift over the last 12 to 18.

Joanna Sylvia Gajuk: Thank you. So, hi, good morning. Thank you for taking the question. So, I guess first, the follow-up when it comes to the episodic. So, you know, you said you expected the episodic admissions to stabilize going forward since the mix is, you know, small. But still, when I look at the payer mix, you know, in terms of revenues, I understand the mix, you're shifting and growing the NIH you did not have. But then, so the Medicare revenues, you know, are down 14% for the year, and I get 16% in this quarter, year over year and down 7% sequentially. And when I look at the peers, they show, you know, either a much smaller class or even some show growth year over year. So, I guess the question is, you know, why Enhabit is losing market share? Joanna, I don't think we're losing market share.

Months to pursue that business, whereas the peer group has been doing it over six to eight years. So there you know drop in the traditional Medicare wasn't like the inhabit cliff as I referred to it over the past year.

So I think that's what you're seeing and when you try to compare us to peers and what we're saying now is that we're not saying that you know we're going to suddenly start increasing traditional Medicare in 2024 again, there has been a market shift and it continues do more Medicare eligible choosing Medicare advantage, what we are.

Thing is that we think that we're starting to get in a path, where we're not on that cliffs anymore, and it's starting to stabilize more like the industry.

Okay.

And I guess, another follow up or maybe that's a new topic, but are related to this payer mix a switch.

Situation here when I look at the average revenue per visit for the non episodic visits right versus the revenue per visit for the episodic portion, which that includes obviously Medicare and that in may but still the average is like 43% below so like the non episodic.

Crissy Buchanan Carlisle: Again, I think it's part of this. Medicare eligible people are choosing to enroll in Medicare Advantage. And if you go back in history, as you well know, this company historically did not pursue Medicare Advantage. And again, we made that shift over the last 12 to 18 months to pursue that business, whereas the peer groups have been doing it for six to eight years.

Rich I wanted to.

42% below the average for the Ottens attic.

<unk> volumes, so how should we think about that metric I mean, it sounds like maybe you're going to change some disclosures and we will be able to kind of clear to see.

Crissy Buchanan Carlisle: So their, you know, drop in traditional Medicare wasn't like the cliff of the living standards, as I referred to it over the past, you know, year. So I think that's what you're seeing when you try to compare us to peers. And what we're saying now is that we're not saying that, you know, we're going to suddenly start increasing traditional Medicare in 2024. Again, there has been a market shift, and it continues with more Medicare eligible people choosing Medicare Advantage. What we're saying is that we think that we're starting to get on a path where we're not on that cliff anymore, and it's starting to stabilize more like the industry. Okay.

Medicare and then some other episodic separately, if that's what you're trying to do to kind of give us more visibility body I'm still surprised at that.

But you're still down much lower so I guess you know how should how should we think about this going forward.

Yeah. So I think one thing is part of the numbers you're seeing of course after revenue reserves and those can sometimes cause noise as you're well aware in any quarter end and for the year as well, especially given the adjustment we had to make in the fourth quarter of 2022.

And then throughout 2023 as we enhance those controls and updated our reserve methodology.

Yes going forward as far as mentioned, especially given the fact that we now have this national agreement that is in advance episodic model. When we start reporting Q1 later this year.

Crissy Buchanan Carlisle: And I guess another follow-up, or maybe that's a new topic, but related to this payer mix situation here. When I look at the average revenue per visit for the non-episodic visits, right, versus the revenue per visit for the episodic portion, which that includes, obviously, Medicare and the MA, but still, that average is like 43% below, so like the non-episodic average, 43% below the average So how should you think about that metric? It sounds like maybe you're going to change some disclosures, and we will be able to kind of clearly see Medicare and then some other episodic separately if that's what you're trying to do to kind of give us more visibility. I'm still surprised that that average is still that much lower.

Instead of just getting episodic admissions and non episodic admissions and information that way episodic will be broken out between traditional Medicare.

And then everything else is episodic and we believe that's important and again, primarily being driven by this new national agree.

And if I may squeeze in just on that National agreement anyway to help us quantify like incremental I guess revenue or volumes from their contract sounds like some of these markets you're already been serving so you kind of keep the volumes, but rate is higher but then it sounds like you're also added more markets, who kind of anywhere.

To help us give us some size.

Size of all of that the incremental thank you sure.

Sure. So we did not aggressively pursue that volume in the past I would say when we look back and 23 eight was about 5% of our admissions historically.

Crissy Buchanan Carlisle: So I guess, you know, how should we think about this going forward? Yeah, so one thing is that part of the numbers you're seeing, of course, after revenue reserves, and those can sometimes cause noise, as you're well aware, in any quarter and for the year as well, especially given the adjustment we had to make in the fourth quarter of 2022. And then throughout 2023, as we enhance those controls and update our reserve methodology. Yes, going forward, as Barb mentioned, especially given the fact that we now have this national agreement that is an advanced episodic model when we start reporting Q1 later this year.

And to your point now we do have coverage throughout the country and so that is certainly going to give us better access to those members. You know one thing that we've consistently said in our payer renovation contracting is that you know we were looking for rates that were you know much improved over the historic contracts and so this does align with.

The focus of the payer innovation team from a rate perspective.

Thank you.

Mhm.

Our next question comes from the line of a J rice with UBS. Please go ahead.

Hi, good morning, I'm, Joe or Jay.

Good morning.

Good morning.

So in Q4, the company got to around 24% of visits as a percentage of.

Total non episodic visits in these payer integration contracts.

Crissy Buchanan Carlisle: Instead of just getting episodic admissions and non-episodic admissions and information that way, episodic will be broken out between traditional Medicare and then everything else that's episodic. And we believe that's important, again, primarily driven by this new national agreement. Any way to help us quantify, like, incremental revenue or volumes from the contract? It sounds like some of these markets you have already been serving.

I mean, just run rating bad there will be a degree of a tailwind for next year.

The company expects the prospects to continue in 'twenty four as well.

And besides the momentum.

We're getting more visits into these higher grade contracts.

Yeah, I think it's a reason why it's going to be important for us to give you information as it relates to episodic fee for service and a pair innovation AR and non episodic because as we are having more success getting these payer signing with episodic Ah you may see some moderation in if not episodic.

Move mainly because our addressable market is becoming now greater than where we have our episodic contracts. So I think again, it's Chris you mentioned, that's why it can be important for us to give more detail on.

Barbara Ann Jacobsmeyer: So you kind of keep the volumes, but the rate is higher. But then it sounds like you have also added more markets. So kind of any way to help us give us the size of that incremental. Thank you. Sure. So we did not aggressively pursue that volume in the past. I would say when we look back at 23, it was about 5% of our admissions historically. And to your point now, we do have coverage throughout the country.

I know various groups into 2024.

Got it.

Follow up on that would be.

He's got married episodic contracts.

The non episodic contracts or how much of a rate increase looked at careers for the company.

And towards Florida.

So I think.

Albert J. William Rice: And so that was certainly going to give us better access to those members. You know, one thing that we've consistently said in our payer innovation contracting is that, you know, we were looking for rates that were much improved over the historic contracts. And so this does align with the focus of the payer innovation team from a rate perspective. Our next question comes from the line of AJ Rice with UBS. Please go ahead. Hi, good morning. This is Enja on for AJ.

Historically, we have talked about you know is zero to 10% rate differential to Medicare fee for service for our episodic M. A contract and we talked about kind of a 25% to 30% discount for the non episodic and they contract compared to Medicare fee for service.

Now this is part of that shift given that we now have an of a national advance episodic model contract.

We no longer can talk really about episodic versus non episodic. It's just gotta be one what's in these payer innovation contracts as we refer to them. So I think the the answer to your question is et cetera are all of our contract currently have somewhere between a zero and about 25% discount to Medicare fee for service.

Unknown Executive: So, good morning. So, in Q4, the company got to around 25% of visits as a percentage of total non-episodic visits in these payer innovation contracts. I mean, just one reading bad, a degree of a tailwind for next year.

Barbara Ann Jacobsmeyer: The company expects the fast pace to continue in 24 as well, just trying to size the momentum of getting more visits into these higher-paying markets. I think it's a reason why it's going to be important for us to give you information as it relates to episodic fee-for-service and payer innovation and non-episodic because as we are having more success getting these payers signing with episodic, you may see some moderation in So I think, again, as Crissy mentioned, that's why it's going to be important for us to give more detail on those various groups into 2024. I got it. I guess to follow up on that, in these MA episodic contracts versus the non-episodic contracts, how much of a rate increase would that create for the company? and then twenty-four.

Got it thanks, maybe one more just to clarify on the hospice side there seem to be.

Estimated recovery or ability of net service revenue in the quarter is that a one time benefit and how much of the revenue and EBITDA effect did that.

Thanks, Yeah, I think that that is it's more about Q4 of 2022, you may recall that there was a rather a significant adjustment made to our revenue reserves in the fourth quarter of 2022.

For the total company was about $12 million is $7 million of that went to the hospice segment. That's the noise that we're talking about in.

In the slide is talking about a year over year change.

The segment.

So that estimate and the change in the Recoverability really relates more to Q4 2022 and entry we made then.

So that anything that happened in Q4 of 2023.

Great. Thanks, a lot.

Our next question comes from the line of Brian Langston with PV Cowen. Please go ahead.

Crissy Buchanan Carlisle: So I think, historically, we have talked about, you know, a 0 to 10% rate differential to Medicare Fee-for-Service for our episodic MA contract, and we talked about kind of a 25 to 30% discount for the non-episodic MA contract compared to Medicare Fee-for-Service. Well, now, this is part of that shift, given that we now have, you know, a national advanced episodic model contract. We can no longer really talk about episodic versus non-episodic.

Yeah.

Alright, thank you.

Two quick ones for me and maybe I'll try the payer innovation question, a little differently. Obviously, it's jumped from I think 5% to 25% a year, which is pretty good success, maybe just more broadly what do we think about that percentage maybe into 'twenty four 'twenty five.

Where your staggered contracts are up for renewal or you can go for.

Outside of normal renewal schedules and then can you maybe.

Crissy Buchanan Carlisle: It's just got to be what's in this payer innovation contract, as we refer to it. So I think the answer to your question is that all of our contracts currently have somewhere between a zero and about a 25% discount on the Medicare fee. Got it.

Give us a little sense I mean, you've already had two months of experience now this year.

Sure.

Maybe more generally where the mix shift has.

You know a fee for service.

Unknown Executive: Thanks. Maybe one more, just to clarify: on the hospice side, there seemed to be an estimated recoverability of net service revenue in the quarter. Is that a one-time benefit and how much of a revenue and EBITDA effect did that have? Yeah, I think that that it's more about Q4 of 2022. You may recall that there was a rather significant adjustment made to our revenue reserves in the fourth quarter of 2022. The total company was about 12 million, and 7 million of that went to the hospice segment. So that's the noise that we're talking about.

Between <unk> and one can you just maybe give us a little help with the modeling. Thanks.

Sure well as it relates to that we do think there continues to be opportunity to move those non episodic visits are in the payer innovation contract.

You mentioned, you know going from 5% to 25%. We felt was really good improvement this year.

The piece, that's the hardest to determine what 24 looks like is really because of the success in getting the episodic contracts and in particularly a new national episodic. So as you think of the move it may be the move into payer innovation contracts not necessarily been non episodic into non episodic pay rent.

Patient contracts if that helps so that's that's why it's a little bit hard to talk about that percentage because historically, we've been focused on moving from kind of our really low paying which were all not episodic in the past and improving that whereas now we're gonna have a much more broader market to go after including a fair amount of episodic contra.

Crissy Buchanan Carlisle: In the slide that's talking about a year over year change for the segment, and so that estimate of the change in recoverability really relates more to Q4 2022 and the entry we made then than anything that happened in Q4 of 2023. Great. Thanks a lot. Our next question comes from the line of Brian Langston with TD Cowan. Please go ahead. Hi, thank you. Any questions for me? Maybe I'll try to pay her.

<unk> patients.

Got it and then.

Didn't know if you can give us a sense on just the first two months of this year just in terms of the mix. It sounds like you're obviously expecting that to moderate and I would expect that to but any sense on where that's actually gone into the first part of the first quarter.

Brian Langston: Obviously, it's jumped from I think 5% to 25%. Good success. Maybe just more broadly, what do we think about that percentage? Thanks for coming. Newell, www.hamskey.com, And then. Maybe, give us a little sense. I mean, you've already had two months.

I mean, I think we're going well, obviously have a lot more of that when we report quarter, one because again breaking this out in different buckets. I think is going to be helpful. I would say as it relates to quarter. One from a financial perspective that does take time, because you still have a fair number of patients that are on your census that started sometime within quarter four.

Any that could still be and maybe what would have been like are we said desirable our contracts and so it takes time for those patients to be discharged and replace those with with with the higher paying contracts.

Barbara Ann Jacobsmeyer: Just, More generally, where the M.A. has been. Thanks. Sure. Well, as it relates to that, we do think there continues to be an opportunity to move those non-episodic visits into payer innovation contracts. So, as you mentioned, going from five to 25% was a really good improvement this year. The piece that's the hardest to determine what 24 looks like is really because of the success in getting the episodic contracts and, in particular, a new national episodic.

Okay. Thank you very much.

Uh huh.

Our next question comes from alarm adjacent Cazorla with Citigroup. Please go ahead.

Oh, great. Thanks, My follow up I, just wanted to hone in on capital deployment priorities are more specifically around your leverage I guess, how should we be thinking about the uses of your free cash flow for 24 do you anticipate using the bulk of it for debt pay down on your revolver or are you anticipating leverage would just naturally.

Barbara Ann Jacobsmeyer: So as you think of the move, it may be the move into payer innovation contracts, not necessarily the non-episodic into non-episodic payer innovation contracts, if that helps. So that's why it's a little bit hard to talk about that percentage because historically we've been focused on moving from kind of our really low paying contracts, which were all non-episodic in the past and improving that. Whereas now, we're going to have a much broader market to go after, including a fair number of episodic contract patients. Amen. I don't know if you can give us a sense of God's will for just the first two months. Sounds like you're obviously expecting that to moderate.

Prove as EBITDA grows just any color around priorities and debt repayment.

Yeah. So we are more focused on deleveraging our free cash flow will go towards $20 million of required amortization on our term loan a we also have the de Novo strategy, which is probably you know two and a half to three and a half million dollars as disclosed in our supplemental slides.

But again, we think that's ample to do that anything above that would likely go towards revolver pay down.

Barbara Ann Jacobsmeyer: Any sense of where that's actually gone? I mean, I think we'll obviously have a lot more of that when we report quarter one because, again, breaking this out in different buckets, I think is going to be helpful. I would say as it relates to quarter one, from a financial perspective, that does take time because you still have a fair number of patients that are on your census that started sometime within quarter four, many that could still be in maybe what would have been like our least desirable contracts. And so it takes time for those patients to be discharged and replaced with those with higher-paying contracts. Okay, thank you very much. Our next question comes from Alana Jason Cassorla with Citigroup. Please go ahead.

And that's the kind of the easy way to think about it Jason is to think you know assume 50% free cash flow conversion you got 20 million of required amortization on the term loans.

That money for the de Novo spend as well and then everything else is a potential revolver pay down.

Okay, great. Thanks, if I could probably one more just from a de novo sites. You've opened up 23, just curious on how the ramp has progressed across those locations so far.

In the past you've mentioned a focus on hospice buildout and just in context of a building year co location strategy 2023 that the nobles were about evenly split between home health and hospice I guess from the time that you're planning out for 24, how should we think about those locations.

Jason Paul Cassorla: Great, thanks for the follow up. I just wanted to hone in on capital deployment priorities, more specifically around your leverage. I guess, how should we be thinking about the uses of your free cash flow for 24? Do you anticipate using the bulk of it for debt or to pay down your revolver? Or are you just, you know, anticipating leverage would just naturally kind of improve as EBITDA grows, any color around priorities and debt repayment?

We split between home health and hospital or just any color there would be helpful to the mobile front.

Yeah, they continue to be geared a little bit more towards hospice was our strategy being opening up hospice wherever we have an existing home health or they're geared a little bit more towards hospice you know that.

Crissy Buchanan Carlisle: Yeah, so we are more focused on deleveraging; our free cash flow will go towards 20 million of required amortization on our term loan aid. We also have the de novo strategy, which is probably, you know, two and a half to three and a half million dollars, as disclosed in our supplemental slide. But again, we think that's ample to do that. Anything above that would likely go towards revolver paydowns, you know, and that's kind of the easy way to think about it, Jason, is to think, you know, assume 50% free cash flow conversion. You got $20 million of required amortization on the term loan. That money is for the de novo stand as well. And then everything else is a potential revolver.

They didn't know about was that we opened up in 2022 and 2023 are doing well you know somewhere running at planned. Some are running ahead of plan and so in 2024 I think it's fair to say that the investments that we continue to make in the hand will be offset by the earnings of those that we opened up in 2022 and 2023.

Okay. Thank you.

Our next question comes from the line of Joanne I Gotcha.

Bank of America. Please go ahead.

Hi, Thank you for taking a follow up here. So I guess I have two one is on this prayer sources slide 31, where you have the fourth quarter.

Hospice and then Manish carries six 5%.

Crissy Buchanan Carlisle: Okay, great. Thanks, Rebecca. Follow up with one more on the DeNovo side.

So can you explain like why why there's such a big number because it also talks about yes, and an increase in the non Medicare admission revenue, but also again talks about this recoverability or estimated recoverable layoffs off the revenues. So can you help us understand like what is the six 5% really represents.

Crissy Buchanan Carlisle: The eight that you opened up in 23, just curious how the ramp has progressed across those locations so far. And, you know, in the past, you've mentioned a focus on hospice, built out in different contexts of building your co-location strategy. In 2023, the DeNovos are about evenly split between home health and hospice. I guess for the 10 that you're planning on for 24, how should we think about those locations? Again, are they evenly split between home health and hospice? Or would any color there be helpful in the DeNovo?

Yes, so it represents exactly what it what it says it is managed care in our hearts system or the EBIT contract and the other and other contracts that were in 2023, you'll notice that the 2022 column is it's like it's zero and again that's caused a lot of that reserve for hospice that we made in the fourth quarter.

Crissy Buchanan Carlisle: Yeah, they continue to be geared a little bit more towards hospice with our strategy being to open up hospice wherever we have an existing home health care. So they're geared a little bit more towards, You know that the de novos that we opened up in 2022 and 2023 are doing well, some are running at plans, and we're running ahead of plan. So in 2024, I think it's fair to say that the investment that we continue to make in the 10 will be offset by the earnings of those that we open up in 2022. Okay, thank you. Our next question comes from the line of Joanna Gajuk with Bank of America. Please go ahead. Hi. Thank you for taking the time to follow-up here. So I guess I will have two.

22 went to that line item.

Okay. Thank you and my other question I guess when it comes to regulations. So what is what do you expect to see in 2020 five home health proposal that Oh, it's going to be coming out I guess, a couple of months, but.

Any initial thoughts around.

You know productivity adjustments and recoupment and also I guess the first we're gonna go to hospice proposal now for 2025, so so ex any thinking around what do you expect to see that one thank you.

Sure I would say for home health I mean, I think they already kind of signaled last year that they would go after the other half of the adjustments that they ended up cutting in half last year. So I think that we anticipate that being part of the proposed rule I think it's a good question on the Temporaries I don't know at this point as you know and in the previous.

Joanna Sylvia Gajuk: One is on this payer sources slide 31 where you have the fourth quarter hospice and managed care is 6.5%. So can you explain why there's such a big number? Because it also talks about, yes, an increase in non-medical patient revenue, but it also again talks about this recoverability, the estimated recoverability of the revenue. So can you help us understand, like, what this 6.5% really represents? Yeah, so it represents exactly what it says. It is managed care in our hospice, some of the VBID contracts, and other other contracts that were in 2023. You'll notice that the 2022 column is blank; it's zero.

Rules that hasnt been discussed or mentioned, yet on how if and when and what that would look like so I think that is a big question Mark on whether that will appear in the proposed for 25 or if that's something that will happen after they finish the permanent adjustment.

So I think for sure what we would expect to see something about the permanent continuing but a big question Mark I think on the temporary.

And then on hospice item, we at this point don't really anticipate there's going to be anything different as far as their proposed rule.

Crissy Buchanan Carlisle: And again, that's because a lot of that reserve for hospice that we made in the fourth quarter of 2022 went to that line. Okay, thank you. And my other question, I guess, when it comes to regulations, so what is what do you expect to see in the 2025 home health proposal that is going to be coming out, I guess, still a couple of months, but any initial thoughts around, you know, productivity adjustments and recruitment. And also, I guess, first, we're going to get a hospice proposal for 2025. So, so any, anything around what do you expect to see in that one? Thank you. Sure, I would say for home health care. I think they already kind of signaled last year that they would go after the other half of the adjustment that they ended up cutting in half last year. So I think that we anticipate that being part of the proposed rule. I think it's a good question on the temporaries.

Thank you.

Yeah.

There are no further questions at this time I would now like to turn the call over to Kristy Carlisle.

Closing remarks.

Thank you operator, and thanks to each of you for joining today's call. If you have additional questions. Please email investor relations at <unk> Dot com.

Yeah.

This concludes today's call you may now disconnect.

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Barbara Ann Jacobsmeyer: I don't know at this point, as you know, in the previous rules, it hasn't been discussed or mentioned yet how, if, and when that would look like. So I think that is a big question mark on whether that will appear in the proposed for 25, or if that's something that will happen after they finish the permanent adjustment. So I think for sure we would expect to see something about the permanent continuing care, but a big question mark, I think, on the temporary. And then on hospice, at this point, I don't really anticipate there's going to be anything different as far as their proposed rule goes.

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Barbara Ann Jacobsmeyer: Thank you. Uh-huh. There are no further questions at this time. I would now like to turn the call over to Crissy Carlisle for closing remarks. Thank you, Operator. And thanks to each of you for joining today's call. If you have additional questions, please email InvestorRelations at ehab.com. This concludes today's call. You may now disconnect.

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