Q1 2024 Addus HomeCare Corp Earnings Call
Good day and welcome to the Adage Homecare first quarter 'twenty 'twenty four earnings conference call.
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I would now like to turn the conference over to drew Anderson. Please go ahead.
Dru L. Anderson: Thank you.
Dru L. Anderson: And welcome to the Atlas Homecare Corporation's first quarter 2024 earnings Conference call today's call is being recorded.
Speaker Change: To the extent any non-GAAP financial measure is discussed in today's call. You will also find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP by going to the company's website and reviewing yesterday's news release.
Speaker Change: This conference call May also contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995, including statements among others regarding out as expected quarterly and annual financial performance for 2024 or beyond.
Dru L. Anderson: For this purpose any statements made during this call that are not statements of historical fact may be deemed to be forward looking statements.
Dru L. Anderson: Without limiting the foregoing discussions of forecast estimates targets plans beliefs expectations and the like are intended to identify forward looking statements.
Dru L. Anderson: You are hereby cautioned that these statements maybe affected by important factors among others set forth in Addison filings with the Securities and Exchange Commission and in its first quarter 2024 news release.
Dru L. Anderson: Consequently, actual operations and results may differ materially from the results discussed in the forward looking statements. The company undertakes no obligation to update any forward looking statements, whether as a result of new information future events or otherwise.
Dru L. Anderson: I would now like to turn the call over to the company's Chairman and Chief Executive Officer, Mr. Dark Allison. Please go ahead Sir.
Dark Allison: Thank you drew good morning, and welcome to our 2024 first quarter earnings call.
Dark Allison: With me today are Brian Poff, our Chief Financial Officer, and Brad Bickham, Our President Chief operating officer.
Dark Allison: As we do on each of our quarterly calls I will begin with a few overall comments and then Brian will discuss the first quarter results in more detail.
Dark Allison: Following our comments the three of us would be happy to respond to any questions.
Dark Allison: Yesterday, we announced our results for the first quarter of 2024.
Dark Allison: These results highlight the continued strong financial performance.
Dark Allison: Yes.
Dark Allison: This performance is made possible by the hard work and dedication of all our employees as they continued to provide quality care to our clients and patients by helping to fulfill our mission of taking care of individuals in their homes.
Dark Allison: <unk> said many times in the past I'm very thankful for all the employees for all that the employees do for our company.
Dark Allison: As we announced yesterday, our total revenue for the first quarter of 2024 was $287 million, an increase of 11, 6% as compared to $251.6 million for the first quarter of 2023.
Dark Allison: This revenue growth resulted in adjusted earnings per share of $1 21.
Dark Allison: As compared to adjusted earnings per share for the first quarter of 2023, 97 cents, an increase of 24, 7%.
Dark Allison: Our adjusted EBITDA of 32 4 million, that's an increase of 24, 6% over the first quarter of 2023.
Dark Allison: During the first quarter 'twenty 'twenty four we continued to experience strong cash flows, allowing us to reduce our debt balance.
Dark Allison: And $1.4 million.
Dark Allison: At quarter end, our cash balance was approximately $77 million, which together with our availability under our existing credit facility continuing to give us the financial flexibility to be opportunistic as we see potential acquisitions come to market.
Dark Allison: It remains our primary focus is to use our financial capacity to acquire strategic operations that align with our overall growth strategy of adding clinical services, where we have strong personal care presence.
Dark Allison: Enhancing our existing personal care markets, and adding new personal care markets, where we can enter at scale.
Dark Allison: We also believe this acquisition strategy will be well continued to strengthen our ability to participate in value based contracts with our players and to adapt to potential reimbursement changes.
Dark Allison: I want to provide some thoughts related to the final Medicaid access rule that was issued on April 22nd.
Dark Allison: As we anticipated the proposed 80% compensation requirement was retained in this rule. Despite an overwhelming number of comments submitted detailing the changes challenges this would present.
Dark Allison: Of course, we and other providers are disappointed with the result, even though we support the overall policy aims at providing higher wages and increasing access to home and community based services.
Dark Allison: However, several significant positive changes were made in the final rule and I would like to touch on a few of these.
Dark Allison: First the implementation period was extended by 50% from four years to six years.
Dark Allison: Realistically, we believe this substantially increases the likelihood that the rule will not be implemented in its current form or parse or possibly at all for a variety of reasons, including as a result of legal or congressional action or potential administrative changes in either of the next two.
Dark Allison: Residential election cycles.
Dark Allison: As important this extended implementation timeframe, it states and providers, a better opportunity to plan and adjust to the specific requirements of any rule that may ultimately be implemented.
Dark Allison: Second a number of technical adjustments were made between the original draft and final rule, we spoke clarify and improve the definition of allowable cost for providers like Atlas for example, certain costs such as training mileage M. P. B E will be deducted from total payments before calculating.
Dark Allison: For calculating compliance with the 80% requirement.
Dark Allison: Similarly, refunded, a recruit recouped payments will be excluded.
Dark Allison: Also the categories of items.
Dark Allison: Constituent.
Dark Allison: Compensation had been clarified to include P. T O retirement insurance, including workman's compensation and tuition payments not previously address.
Dark Allison: Rural also clarified and expanded certain pass it now can as direct care work and expands the definition of direct care workers to add clinical supervisors.
Dark Allison: All of these changes combined to lessen the potential impact of the rule on our margins.
Dark Allison: While these items were addressed in the final rule there we're still not a complete specific set of definitions. Although additional commentary was included in an effort to protect against the possibility of setting a definition that could be construed as too narrow.
Dark Allison: We believe this gives states a certain level of flexibility in working with providers and deciding on other potential costs that should be considered in the calculation.
Dark Allison: Stepping back to the bigger picture.
Dark Allison: There are other points worth making on the rule and its impact when.
Dark Allison: We continue to believe the rule disproportionately impacts small providers and encourage us scale, which will lead to further consolidation opportunities.
Dark Allison: The rule allow states to develop separate minimum compliance levels for small providers and to provide hardship exemptions, but two important factors should be noted.
Dark Allison: First.
Dark Allison: The exemption and the hardship exception both require states to create additional reporting requirements and these requirements can only be way by CMS at its option to the extent applicable to less than 10% of providers.
Dark Allison: Even more crucially the room require states to develop a plan subject to CMS approval to reduce in a reasonable period of time the number of providers to qualify these exemptions or exceptions.
Dark Allison: At Best we believe these are temporary band AIDS not long term solutions for small providers.
Speaker Change: Second and I want to emphasize this point.
Speaker Change: Small providers relying on these provisions will be able to pay less to workers, but they will be at a competitive disadvantage for labor with large providers like at us who will likely be required to pay a higher rate.
Speaker Change: We believe these exceptions will provide us more access to labor, which as we know regularly is the primary limiting factor on revenue growth.
Speaker Change: So I'll repeat what I said last quarter we.
Speaker Change: We believe that personal care providers must have scale in each state where they operate to be successful under the rule is finalized.
Speaker Change: This will not only allow the larger providers to spread their costs over a bigger revenue base, but also will provide more opportunity for meaningful advocacy with states in which they operate while also promoting a favourable hiring and retention dynamic.
Speaker Change: Before I leave this topic I also want to note that we expect Congress and individuals stage to review their options and take actions. They believe are appropriate in reaction to the rule.
Speaker Change: Individual members of Congress already have issued calls to withdraw the rule or have introduced legislation to block finalization of certain aspects of the rule and more may follow.
Speaker Change: Some states May Institute than litigation to block the rule the outcome of which is unknown.
Speaker Change: States May also look at opportunities to increase funding in an effort to meet the aims of the rule, causing less impact to providers and clients.
Speaker Change: So in summary, six years, there's a very long time.
Speaker Change: We expect many more curves in the road before then but we are confident in our strategic approach to both manage and thrive in this dynamic landscape.
Speaker Change: We are currently in the process of looking at personal care opportunity that would give us a larger presence in our current states.
Speaker Change: We are also looking for opportunities, where we can enter new states in a material way.
Speaker Change: Personal care is a valuable service to our elderly and disabled population and we are optimistic that states will evolve their programs to remain viable regardless of the room.
Speaker Change: During the first quarter, we continued to experience good results related to our ability to hire caregivers, especially in our personal care segment.
Speaker Change: During the first quarter of 2020 for our personal care hiring was equal to what we saw in the first quarter of last year at 84 hires per business day.
Speaker Change: Sequentially, our highest per day were up 5% over the fourth quarter of last year. Despite some weather difficulties in January.
Speaker Change: In addition to our strong hiring numbers, we continue to see consistent momentum in the starts per business day over the past few quarters.
Speaker Change: As for our clinical segments.
Speaker Change: <unk> has continued to improve over what we experienced in the early part of 2023.
Speaker Change: As we have over the past couple of years, we continued to utilize the funding we received from the American Rescue plan Act or ARPA.
Speaker Change: To date, we have received approximately $38 million.
Speaker Change: Hub, which we have over 13 million remaining to be utilized.
Speaker Change: We continue receiving these funds in the first quarter of this year and as we've previously shared.
Speaker Change: These funds have been helpful with our caregiver recruitment and retention efforts to support the delivery of personal care services.
Speaker Change: In addition to utilizing the ARPA funds for direct recruitment and retention of caregivers. We continued to utilize the funds to improve our caregivers experience through the implementation of enhanced caregiver training and continued development of our caregiver application that we believe will improve our retention and overall.
Speaker Change: Service delivery.
Speaker Change: In our personal care segment, our services continuing to receive favorable reimbursement support for many of the states in which we operate.
Speaker Change: Although some of the bedroom financial support the states have been reduced we feel confident that personal care services continuing to show real value to state Medicaid programs as well as our managed care partners through a reduction in overall cost of care.
Speaker Change: As for our clinical segments effective October one 2023, Medicare hospice reimbursement was increased by approximately three 1%.
Speaker Change: On January one of this year home health Medicare reimbursement was increased by approximately 8%.
Speaker Change: Although this year's home health rate increase was below what is required to cover ongoing operating cost increases we believe that traditional Medicare home health reimbursement pressures are likely to moderate over the next few years.
Speaker Change: Now, let me discuss our same store revenue growth for the first quarter of 2024.
Speaker Change: For our personal care segment, our same store revenue growth was nine 3% when compared to the first quarter of 2023.
Speaker Change: During the first quarter of 2024, we saw personal care same store hours for business. They remained flat as compared to the same period in 2023, as we experienced difficult weather winter weather in a couple of our key markets early in the first quarter of this year.
Speaker Change: We did see a sequential improvement in hours each month in the quarter as we moved past the early weather challenges.
Speaker Change: We continue to see our investments in hiring and scheduling optimization initiatives take hold and contribute to our growth.
Speaker Change: Turning to our clinical operation our hospice same store revenue increased five 8% when compared to the first quarter in 2023.
Speaker Change: Yeah.
Speaker Change: While our same store ADC was down <unk>, 9% when compared to the same quarter last year and flat sequentially. We did see a nice improvement in our same store ADC during February and March.
Speaker Change: Do you see growth has continued into April.
Speaker Change: As of the end of the first quarter of 2024, our hospice medium length of stay exclusion of our journey care and recently acquired Tennessee quality care operations was 27 days as compared to 25 days for the fourth quarter of 2023 for.
Speaker Change: For comparison purposes, we have historically excluded our journey care operation as it is a higher proportion of shorter length of stay patients new to our inpatient units in the Chicago area.
Speaker Change: We are encouraged by the steady sequential improvement in both ADC and admission volume in our hospice segment, earning this year and anticipate those favorable trends continuing in 2024.
Speaker Change: Our home Health segment same store volume decreased three 1% over the same quarter in 2023, but did increase one 7% on a sequential basis.
Speaker Change: As most home health providers have experienced we continued to be affected by the movement of Medicare beneficiaries for Medicare fee for service to Medicare advantage, but we feel we may be seeing a leveling off of the shift in the markets. We currently serve.
Speaker Change: We are continuing to work with our Medicare advantage payers to obtain a higher per visit rates as we work in parallel to transition to episodic.
Speaker Change: Prosodic where case rates.
Speaker Change: We are also continuing to focus on process improvements to increase our efficiency around staffing referral conversion range and collections.
Speaker Change: While home health is our smallest segment and only 5% of our revenues, we feel like complements both our personal care services, particularly where we participate in value based contracting models.
Speaker Change: And our hospice services.
Speaker Change: Boeing is to provide the full continuum of Homebase clinical care.
Speaker Change: Acquisitions will continue to be important part of our growth strategy at Atlas.
Speaker Change: Even with the various challenges we have seen we are committed to using our capital to make sure. We meet the strategic goals, we have publicly discussed.
Speaker Change: With the Medicaid access rule finalized we are focused on opportunities that will help us obtain the needed scale in our current personal care markets to operate more efficiently.
Speaker Change: We are also open to entering select new states with personal care services. If we can do so through transactions, which will give us the scale, we feel it's important to be successful under the new Medicaid access rule.
Speaker Change: As for our clinical segment, we are focused on the home health opportunities, which operate in certain of our personal care states, where we have the opportunity to continue our growth and value based care and to complement our existing hospice operations.
Speaker Change: As far as our value based care efforts I noted last quarter that we continue to gather data, which demonstrates material reductions in both emergency room visits as well as the percentage of patients readmitted to the hospital at various post discharge intervals.
Speaker Change: We continue to believe our success is due to our ability to provide both non clinical personal care services to identify changes in condition and clinical resources as needed.
Speaker Change: Pacific skilled patient care interventions.
Speaker Change: We're now utilizing this information as part of our conversation with various Medicare advantage and commercial payers to demonstrate how high this can be an integral part of providing quality cost effective care to plan members that can reduce the overall medical loss ratio, while simultaneously improving overall quality of care.
Speaker Change: During the first quarter of 2024, we began to use our new value based care management system. We are excited about this technology as it will allow us to increase both the scale and efficiency of our value based programs, which we believe is important to further develop these type of relationships.
Speaker Change: With our large payers.
Speaker Change: Before I close my remarks, I want to once again say, how proud I am of our team for the care they are providing to our elderly and disabled consumers and patients.
Speaker Change: There's no question that the majority of clients and patients want to receive care at home, which remains one of the safest and most cost effective devices to receive this care.
Speaker Change: We believe the heightened awareness of the value of home based care is favorable for our industry and will continue to be a growth opportunity for our company.
Speaker Change: We understand and appreciate that our operations and growth are dependent on both our dedicated caregivers and other employees, who worked so incredibly hard providing outstanding care and support to our clients patients and their families.
Speaker Change: With that let me turn the call over to Brian.
Brian W. Poff: Thank you Dirk and good morning, everyone. I just had a strong start to 2020 for continuing our momentum with an impressive financial and operating performance for the first quarter.
Brian W. Poff: Our results included solid year over year organic growth of nine 3% and personal care services, well above our long term expected range of 3% to 5%, but in line with our expectations. This growth reflects steady volumes as well as continued favorable rate support for personal care services in some of our larger markets.
Brian W. Poff: We were pleased to see consistent positive year over year trends of our hospice business in the first quarter inclusive of our Tennessee quality care acquisition.
Brian W. Poff: Or asked the same store revenue growth of five 8% was our third consecutive quarter of sequential increase.
Brian W. Poff: As a percentage increase we have seen since prior to the Covid pandemic.
Brian W. Poff: We continue to see favorable admission trends as we have experienced three consecutive quarters of sequential same store admission growth.
Brian W. Poff: Same store revenue for our home health services, which was 6% of our business was down 15, 1% from the same period a year ago as we continue to intentionally limit admissions from payers with less favorable reimbursement rates.
Brian W. Poff: We remain focused on maintaining a consistent margin profile in our home health business as it complements our personal care and hospice services.
Brian W. Poff: Acquisitions remain an important part of our growth strategy with our primary focus on markets, where we can leverage our strong personal care presence and a clinical services or enhance and expand our personal care services and strategic geographies.
Brian W. Poff: With our size and scale and the support of our strong balance sheet, we are well positioned to execute our strategy and we are optimistic we will see attractive acquisition opportunities in 2024.
Brian W. Poff: As Dirk noted total net service revenues for the first quarter were $287 million.
Brian W. Poff: The revenue breakdown is as follows.
Brian W. Poff: Personal care revenues were $208 million or 71% of revenue.
Brian W. Poff: Hospice care revenues were $55 $9 million or 19, 9% of revenue.
Brian W. Poff: Home health revenues were $16.9 billion or 6% of revenue.
Brian W. Poff: Our first quarter results include the operations of our most recent acquisition <unk>.
Speaker Change: Alrighty here a provider of home health hospice private duty nursing services, which we acquired on August one 2023.
Brian W. Poff: Other financial results for the first quarter of 2024 includes the following.
Brian W. Poff: Our gross margin percentage was 31, 4% compared with 31, 2% for the first quarter of 2023.
Brian W. Poff: As expected gross margin was affected in the first quarter of our annual merit increases and the annual reset of payroll taxes as well as compression from certain collective bargaining negotiations.
Brian W. Poff: In the absence of any additional mixed changes from M&A, we anticipate our gross margin percentage to remain materially stable over the next few quarters and consistent with our historical annual pattern.
Brian W. Poff: G&A expense was 21, 8% of revenue compared with 22, 4% of revenue for the first quarter, a year ago and declined sequentially from 22% in the fourth quarter of 2023.
Brian W. Poff: Adjusted G&A expense for the first quarter of 2024. It was 19, 9% a decrease from 28% in the comparable prior year quarter and down sequentially from 26% in the fourth quarter of 2023, primarily as a result of lower legal expenses and the normal timing of certain accruals.
Brian W. Poff: The company's adjusted EBITDA increased 24, 6% to $32 $4 million compared with $26 million a year ago.
Brian W. Poff: Adjusted EBITDA margin was 11, 6% compared with 10, 4% for the first quarter of 2023, reflecting continued leverage our increasing revenues.
Brian W. Poff: With a solid start to 2024, we continue to expect our adjusted EBITDA margin percentage for the full year to remain above 11% consistent with 2023.
Brian W. Poff: Adjusted net income per diluted share was $1 21, compared with 97 for the first quarter of 2023.
Brian W. Poff: The adjusted per share results for the first quarter of 2024 excludes the following.
Brian W. Poff: Acquisition expenses of 12 cents and noncash stock based compensation expense of 12.
Brian W. Poff: The adjusted per share results for the first quarter of 2023 exclude the following.
Brian W. Poff: Acquisition expenses of six cents and noncash stock based compensation expense of 13 cents.
Brian W. Poff: Our tax rate for the first quarter of 2024 was 25, 7% in line with our expectation for calendar 2024, we continue to anticipate our tax rate will be in the mid 20% range.
Brian W. Poff: Dsos were $34 six days at the end of the first quarter of 2024, compared with 39, one days at the end of the fourth quarter of 2023.
Brian W. Poff: Primarily as a result of continued consistent cash collections from the majority of our peers as well as some ordinary course tiny differences from certain barriers.
Brian W. Poff: Our dsos for the Illinois Department of aging for the first quarter were 32 days compared with 49.5 days at the end of the fourth quarter of 2023.
Brian W. Poff: Our net cash flow from operations continues to be very strong coming in at $38 $7 million for the first quarter.
Brian W. Poff: We received approximately $10 $2 million in ARPA funding during the quarter, partially offset by $2 $4 million in ARPA funds utilized.
Brian W. Poff: Net of the ARPA activity, our cash flow from operations in the first quarter would have been $39 million.
Brian W. Poff: While we continue to see strong cash flows we benefited from approximately $8 $4 million and net working capital changes in the first quarter, which was primarily related to favorable timing on receivable payments.
Brian W. Poff: We would anticipate these timing differences to normalize over the course of the full year and continue to expect our cash flow to represent approximately 80% of unadjusted EBITDA.
Brian W. Poff: As of March 31, 2024, the company had cash of $76 $7 million with capacity and availability under our revolver of $486 $9 million and $377 $5 million respectively.
Brian W. Poff: With our strong cash flow, we have continued to pay down debt and reduced our revolver balance by an additional $25 million in the first quarter.
Brian W. Poff: Importantly, we have the financial flexibility to continue to pursue our strategic growth initiatives, including acquisitions.
Brian W. Poff: As mentioned, we will continue to selectively pursue acquisitions in 2024 that are consistent with our goal of bolstering our personal care services and adding complementary clinical services.
Brian W. Poff: At the same time, we will continue to diligently manage our net leverage ratio, which is currently well under one times net of cash on hand.
Speaker Change: This concludes our prepared comments this morning, we'd like to thank you for being with US I'll now ask the operator to please open the line for your questions.
Speaker Change: We will now begin the question and answer session.
Speaker Change: To ask a question you May Press Star then one on your Touchtone phone.
Brian W. Poff: If youre using a speakerphone please pick up your handset before pressing the keys.
Brian W. Poff: If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
Brian W. Poff: At this time, we will pause momentarily to assemble our roster.
Speaker Change: The first question today comes from Brian Tim Quillin with Jefferies. Please go ahead.
Speaker Change: Hey, good morning, guys.
Speaker Change: I guess my first question for Derek or Brian.
Speaker Change: Think about your comments on acquisitions and obviously the rule is out now how are you thinking about the kinds of assets that you'd be interested in.
Speaker Change: Would you be focused more on the personal care side or is it still an interest in the home nursing side and then maybe sizing.
Speaker Change: I hear you loud and clear you want to scale and density. So just curious how you're approaching the acquisition strategy here.
Speaker Change: Yeah, Brian I think our focus remains largely on continuing to bolster our personal care services in markets that we currently operate and I think with the 80 20 rule access real I guess, the more normal term for it out now it's clear to us that size and scale is going to be important I think we've always kind of had that.
Speaker Change: Approach generally anyway, but this further reinforces that in our minds. So I think acquisitions in personal care that continue to build scale in markets. We operate in today are important. We also would look at selective you know additional markets that we could interest scale would also be a we think good opportunities for us and then.
Speaker Change: Where we can continue to add clinical services, where we have strong personal care to help with some of the things. We're doing on value based is also still important though so I think those are kind of our focus areas, but I'll, let you got little how would it be like I think that's great I I think the real key would be mitigated access rule that we've seen is we do believe to emphasize what Bryan said, we believed sizes import.
Speaker Change: So we'll be looking to add a backfill in markets in which we currently operate but at the same time, we're looking for new markets in states, where we are today.
Speaker Change: With the qualification that we could enter with us.
Speaker Change: I understand and then maybe Brian just any comments or color you can share with us in terms of how we should be thinking about the sequential change.
Brian: And trajectory in earnings or revenues for Q2 and into Q3 as well.
Brian W. Poff: Yeah, I think from Doug's comments, I think particularly in personal care and hospice. We had you know a little bit of probably volume softness early in the quarter horse was coming off of the holiday season, a little bit of weather impacted our personal care services early but we actually saw a nice growth through the quarter and into a into April and into <unk>.
Speaker Change: Q2, so I think we would expect that trajectory to continue as I think we feel good where we are coming out of the quarter, Tom on the volume side and just thinking about it from a margin perspective, obviously, we have a reset in Q1 traditionally with payroll taxes and our annual merit increases keep in mind. Most of those you know go into into place you know March.
Speaker Change: One so not a full quarter impact a little bit will will go into Q2 for the first full quarter there, but we also get a leaves a little relief on the payroll tax hikes you want into Q2. So we would expect margins to remain relatively stable Q2 into Q3, and then Q4 is usually always the best margin order for us as we get our hospice rate increase.
Brian W. Poff: With no kind of offsetting costs for for those three months.
Speaker Change: Awesome. Thank you guys.
Brian W. Poff: The next question comes from Scott Fidel with Stephens. Please go ahead.
Scott J. Fidel: Hi, Thanks, good morning.
Scott J. Fidel: Had a couple of follow up questions just on the 80 20 roll wanted to ask you.
Scott J. Fidel: The first would be if you've been able yet to come up with sort of what the overall adjustment would be that you think you can make on gross margin.
Scott J. Fidel: When considering the add backs and some of these other.
Scott J. Fidel: Exclusions in terms of how that would compare when.
Scott J. Fidel: When thinking about I guess, the sort of 80 20 rule adjusted gross margin for.
Scott J. Fidel: For personal care compare to your GAAP margin in personal care.
Speaker Change: Yeah, you know I think obviously as we stated at the changes that came out in the final rule around some of the expenses and revenue definition, we're very positive Ah well will be helpful. As we go forward, we still let me let me make sure you understand that we still believe that the 80 20 rule is.
Speaker Change: Difficult for smaller providers.
Speaker Change: But for a company our size a.
Speaker Change: We feel very comp, especially when you consider the fact that this is a six year implementation.
Scott J. Fidel: That between.
Scott J. Fidel: Market share growth, which we anticipate will occur in all of our markets due to this rule along with our ability to invest in technology and do some of the things. We're looking at on the cost side. We believe we'll be able to handle any impact that the 80 20 would have on our margin over that period of time.
Speaker Change: Okay, and then one other on.
Speaker Change: The wall.
Speaker Change: As we've been doing some checks on this.
Speaker Change: He'd been getting some feedback that would seem to suggest that.
Speaker Change: Revenues that are based on value based care contracting may have different treatment in the role.
Speaker Change: And May you know kill it could be sort of largely sort of not affected by the role Dirk just Brian just just interested in sort of how you guys are are ascertaining that piece in terms of the value based care and that'll also if that's the case, whether there'll be more opportunity.
Speaker Change: Do you think to shift more of your revenues to value based care contracts.
Speaker Change: Whether it be with payers or even with sort of how the states are our structuring their contracts.
Speaker Change: Hey, Scott this is Brad.
Scott J. Fidel: That's our understanding as well that the value based care revenue is excluded.
Brad Bickham: I think there is certainly an opportunity and it's something that we've been doing before the rule was implemented is working on those value based arrangements looking at being able to scale. Those are from a payer appetite standpoint, there's a lot of appetite out there for these types of arrangements. So that is certainly an opportunity.
Brad Bickham: Entity that we'll be looking at are not just because of the rule, but just because I think it just makes good business sense overall.
Brad Bickham: It also has got to follow up with Brad said, it's one of the reasons, we're looking in markets not only where we operate today, but potentially in new markets.
Brad Bickham: Where there might be a real opportunity to work with providers in a value based care approach. So that's another part of our overall acquisition strategy.
Brad Bickham: Well it certainly seems to validate some of the investments that you've been making on the BBC side at in personal care and Dirk just on that sort of other part on.
Brad Bickham: Thoughts on.
Brad Bickham: The potential for states to start may be moving over.
Brad Bickham: Sort of structuring these more as a value based or some level of risk sharing in them. Obviously in other business lines across both Medicare and Medicaid we have a tremendous amount of that going on so just curious if that will be sort of a key area of focus are flattish.
Brad Bickham: In terms of I guess communicating some of that opportunity maybe take them.
Brad Bickham: And just modernizes the contracting anyway.
Brad Bickham: Around personal care type.
Speaker Change: Yeah, you know, it's something we started three or four years ago, we really.
Speaker Change: We're on the front end up saying that payers wanted to start looking at a different way of having these contracts some of the states we're moving towards that direction. So we made the investment we talked about this is the first full quarter with our new technology, our software system one of the limiting factors we had before on our <unk>.
Speaker Change: <unk> to grow value based care contracting was the pack a lot of it was still done manually. While we were looking for the system now that that's you know we believe we will have additional opportunities to grow that business and it will continue to be a focus of add us along with the other things that we're doing but certainly value based care is one.
Speaker Change: One of the main reasons, why we're trying to get size and coverage in a state.
Speaker Change: Okay, and then just one quick follow up just on that sort of size and scale point, you're making.
Speaker Change: So currently at if it's in 21 states for personal care.
Speaker Change: You know obviously, you've got a few states like Illinois that drive a lot of the revenue. So you definitely have some of the smaller states as well in and is there maybe you can give us an update just on your thinking around are there. Some of those 21 states, where where do you think you may need to exit because of the role and if you have a sort of estimate on I guess, what the Rev.
Speaker Change: Can you contribution would be from those states that may no longer be sustainable under the new Ross and that's it for me. Thanks.
Speaker Change: Yeah, I think the difficulty Scott in in determining whether or not a state as viable today is we don't know over the next six years, what's going to happen with the payment rate at that stage. The various rules required we do know that most states in which we operate and said I'd say to all the states. We operate the program is very valuable to that to the state to the.
Speaker Change: Medicaid program. So today there are some smaller states. We're in that we'll be looking at and we will be monitoring to see how they change, but I would say adds up to date Theres no state that we've identified that cannot be successful in this particular with this particular room.
Speaker Change: Okay. Thank you.
Speaker Change: The next question comes from Andrew Mok with Barclays. Please go ahead.
Andrew Mok: Hi, just wanted to good morning, just wanted to follow up on the 80 20 rule first is that despite some of the changes in the final rule that you're more constructive on it still sounds like there's still a fair amount of uncertainty hanging.
Andrew Mok: Hanging over the industry and even the likelihood that this.
Speaker Change: It gets finalized in six years or so so one are you able to share with us a preliminary estimate of the unmitigated impact of the rule as it impacts your P&L today.
Speaker Change: No we can't because again it it it with so much still out there we're still looking for cure clarification of definitions are we're talking to states about what they're going to do as it relates to the rule it would be unfair to try to give a number because again with a six year time frame there.
Speaker Change: There is so much that will change not just with <unk>, but with the state's himself so but we're approaching it from is truly standing back Andrew and saying with our size and coverage in our markets, we're going to be fine and the way to be for us to work with this rule.
Speaker Change: Is to continue to do the things that we've been doing.
Speaker Change: Grow our markets in those states look at our technology and tried to get more efficient with our cost basis and one thing that I think people are truly are probably missing. The fact is.
Speaker Change: Market share growth.
Speaker Change: As small providers are not able to work under this rule and we believe strongly that is a problem as exists today.
Speaker Change: As you bring margin from that market share move you will mitigate the issue related to your margin with this rule.
Speaker Change: Yeah.
Speaker Change: Got it Okay, and then it sounds like one of the Big death initial swing factors of the roll up of clinical supervision do you have a sense for how much clinical supervision costs are sitting in your G&A line today that would potentially be re classed to direct care for the purposes of the pass through adjustment. Thanks.
Speaker Change: Well I think the difficulty there is what's the definition of clinical I think some of the folks in it there's different thoughts in the industry is about what may qualify in that particular line and so we don't know today, we don't have enough information from the rule to tell you exactly what that percentage would be we can't tell you.
Speaker Change: Well it'll be positive so I think that that's certainly one of the nice changes in the rule is that clinical supervision salaries I've got put into the definition, which will be helpful. As we continue to mitigate any issues.
Speaker Change: Great. Thank you.
Speaker Change: The next question comes from Jerry <unk> with William Blair. Please go ahead.
Jerry: Yeah, Hey, guys. Good morning, Thanks for taking the questions I'll, maybe ask one just sticking with value based care opportunity to use them. You'll appreciate the comments around having the technology system in place to sort of help that scale I was hoping or are you able to kind of level set for us just today kind of what the penetration is within your book of.
Jerry: In terms of value based contracts either on a sort of a percentage of revenue basis or maybe the number of partners that you have in a value based contract and then having the technology system in place do you have a sense as to maybe how quickly that could scale over the next handful of years.
Speaker Change: Yeah, We've got you know on the value based third.
Jerry: Third pointed out you know.
Jerry: This is the first quarter, where we've had our new <unk> software in place that allows us to really start scaling. This program. We currently have seven value based contracts in effect and.
Jerry: And we certainly could add more theres not theres certainly is not a lack of interest in doing it and we're talking with several of those payers about actually expanding those programs are we covered currently a little over 6000 clients that are in value based arrangements now from a revenue standpoint still immaterial.
Jerry: But there is certainly I think this is an opportunity to grow as I've mentioned, we have several payers that we're currently in that are very pleased with how these arrangements are working are looking for us to actually expand those significantly.
Speaker Change: That's great I appreciate that and then maybe I'll just ask a follow up on the home health segment and it sounded like from the prepared remarks, there is some.
Jerry: Process improvements you guys are implementing I think you mentioned around staffing and referral referral conversion rates. So would love to just hear a little bit about maybe what some of those workflows look like from an improvement perspective, and then also sticking with kind of the referral dynamic.
Jerry: If you take a step back and think about all those sort of structural pressures facing Medicare advantage plans on.
Jerry: Their rates and Mlr's in some of the issues that they're working through have you guys noticed any changes just in terms of post acute care referral trends with those plans are they getting a bit more restrictive in terms of prioritizing new quality with the post acute care providers that they're referring to anything really changed on that front.
Jerry: <unk>.
Speaker Change: Uh huh.
Speaker Change: First of all I'll start with the whole milk process improvement a question.
Speaker Change: If you think about our home health operations is certainly our smallest segment is the one where.
Speaker Change: We've done a handful of acquisitions, none of which I would necessarily characterize it as kind of a platform acquisition and so when you think about kind of integrating and looking at process within that segment of our business. You know, there's certainly a lot of opportunities to really get more consistency in how we do things and so we're looking at.
Speaker Change: One looking at centralizing intake looking at centralizing scheduling and when we say centralizing is really kind of focusing that these are your task you know that the the whether youre in the office.
Speaker Change: You know in a central office or in a office out in the field. This is what you do to really kind of increase that the efficiency of that workflow and particularly on the intake side. We think there's certainly opportunities to accept more cases and improve those conversion rates. So looking forward to that project are getting completed I think we're looking at.
Speaker Change: Q3, Q4 are two to really get that wrapped up but they're very optimistic on where we stand with home health and when you look at the on the referral process, we really haven't seen significant changes or any changes related to Medicare.
Speaker Change: Medicare advantage are focusing on just a handful.
Speaker Change: <unk>, if you will we.
Speaker Change: We still get.
Speaker Change: A lot of referrals from payers on the Medicare advantage side that are you know, we're not going to accept just because rates aren't there or we're going to prioritize where we have episodic rates.
Speaker Change: Okay. That's great I appreciate all the color. Thanks.
Speaker Change: The next question comes from Ryan Levenson with Cowen. Please go ahead.
Ryan M. Langston: Hi, Good morning, just following up maybe on Brian's earlier question in terms of kind of a scale you would need to get into a new market. I guess, if you did move into a new geography, especially in the Pcs side, how do we think about that in terms of necessary size, whether it be revenues or maybe compare.
Ryan M. Langston: Travolta, maybe recent deals like TQ C or other size parameters. Just so we can get a sense on maybe you know.
Ryan M. Langston: The minimum scale that you believe you need to move into a new geography.
Ryan M. Langston: Well to go into a new market, we would really like to see either immediately or are clear.
Ryan M. Langston: Clearly defined timeline to get to the top one two.
Ryan M. Langston: One or two.
Ryan M. Langston: <unk> market share providers in that particular state. We believe you need to be very large we believe you need to have the ability to have a voice with the states. So if you see us entering into any new states. I think you can assume and again remember states are different so it's hard for you to give you just to give you a revenue because what might be.
Ryan M. Langston: Number one market share in one state certainly might not be in another but in those various states that we're looking at we would like to be number one or number two going into the market.
Speaker Change: Got it and then just one more for me maybe more of a philosophical question.
Ryan M. Langston: Obviously in the New York State budget, there was some changes to the.
Ryan M. Langston: P D. Pap program, that's coming in the twenty-five budget I know that it's kind of low single digit operating income exposure, but it's still a pretty decent sized state I think the third largest in terms of revenues I guess do those changes and kind of maybe some of the tone that the governor took maybe that change your longer term strategy and.
Ryan M. Langston: The state going forward or is it kind of just steady state from from here.
Ryan M. Langston: Well realize that CD, perhaps about 4% of our overall revenue. It's a it's a very small part I I know you'd say that's material, but it's for US. It's very small it's a very very low single digit margin. If that you know from an EBIT dollar standpoint, and that's not even from a bottom line standpoint, So you know for us.
Ryan M. Langston: As we look at New York, which they've tried changes before I think three or four years ago. They were going to minimize the number of folks in C. D. Pap that never got implemented I think for them.
Ryan M. Langston: To go to one out by the end of March beginning of April of next year is gonna be a really a tough task.
Ryan M. Langston: So for US we're going to continue to operate and do the best we can in that market, but just understand that it is one of our you know one of the markets, where it's very difficult for us and it's not from a strategy standpoint, it's not a market. We can do the things we're trying to do which is three levels of care and value based care.
Ryan M. Langston: So from that standpoint, it takes a back seat as far as acquisitions and other items and investments.
Speaker Change: Got it and just squeeze one quick one in hospice revenue per day up I think three 7% that's pretty strong.
Speaker Change: Certainly above the latest fee for service Medicare rate anything to call out there maybe in terms of acuity changes or geographic distribution anything else there.
Speaker Change: No Brian I think you know, we obviously have a little bit of mixed shifts I'm pretty consistently so theres a little bit of contribution there, but I think overall in hospice, we saw a little better implicit price concessions as some of our revenue adjustment in the quarter than what we saw the same quarter last year and I think that was beneficial this quarter to a certain extent.
Brian: Got it thank you.
Speaker Change: As a reminder, if you would like to ask a question. Please press Star then one to be joined into the question queue.
Brian: The next question comes from Joanna <unk> with Bank of America. Please go ahead.
Joanna: Hey, good morning, Thank you for taking the question so I'm good.
Joanna: First a follow up here on the.
Joanna: On the margin and I guess some of the cost.
Joanna: So gross margin in the quarter was especially in line with what do you.
Joanna: Of course Vicki.
Joanna: Prior comments on the Q4 call and but that was that's good G&A lets me there at that.
Joanna: So excluding stock comp and acquisition expense many dimensions G&A was close.
Joanna: Close to 20%.
Joanna: Hum.
Joanna: Timing, but how should we think about the next couple of quarters.
Joanna: But maybe that's a it's a low point from here we should.
Joanna: Our increase in that ratio.
Speaker Change: Yeah, John I think just under 20% on adjusted G&A for the quarter, you know I think as I mentioned earlier, our merit increases and some of those costs typically come out on March one. So you haven't seen a full quarter impact and majority of those are through our corporate staff. Our branch staff. So that's in our G&A line not a direct costs. So I think you'll see a little bit.
Joanna: You know go into the first full quarter in Q2, but I think overall as a percentage of revenue we would expect adjusted G&A to kind of still be in that you know twentyish per side it might be a little tick up from what we saw in Q1, but fairly close and consistent.
Speaker Change: Okay that makes sense and and the other one so.
Speaker Change: Volume. So you said there was some weather impact in person, okay wait, but sounds like you kind of exited the quarter.
Speaker Change: I'm kind of back to where they were where you thought you would be is that the way to think about it that kind of thought this was a temporary maybe Hugh you can recoup some of that some of those blocks.
Speaker Change:
Speaker Change: And kind of you know.
Speaker Change: What are your top companies hotspot for the whole year and when it comes to personal care volumes.
Hugh: Yeah, I mean, if you look on the BCS side, a weather event.
Speaker Change: If you have a snow and ice storm, particularly in kind of some of the downstate, Illinois markets or on some of the more rural markets.
Joanna: A lot of times caregivers can't make those visits.
Joanna: We attempt to try to reschedule those.
Joanna: But that's challenging and you can only reschedule that with them you know depending on if it's a weekly or monthly at.
Joanna: Determines when you can reschedule to have an opportunity to so you know, it's it's unfortunate I'm always rooting for bad weather on the weekends and those markets because I'm an operator. Unfortunately, we had somebody that was kind of early in the week Mondays are our worst than it would be if a summer Friday, so again kind of a temporary blip.
Joanna: So if you look at just where we progressed throughout the quarter on Pcs. As January was you know was impacted by the weather events, but we saw a nice pick up in February and actually exited pretty strong in March and expect those trends to continue and if you look at our hiring numbers as well kind of mirror that January was a little soft because of frankly the weather.
Joanna: Impacts there, we actually had a nice hiring in February and frankly, followed that up with what really was record hiring in March and our April hiring numbers look solid as well.
Speaker Change: Alright, good to hear that and if I may just.
Speaker Change: I'll follow up on the discussion around the 80 20.
Speaker Change: Quick question in the access right.
Speaker Change: Indirect.
Speaker Change: He you know CMS.
Speaker Change: I actually did say something along the lines of what they expected.
Speaker Change: Look at the way our wait to see the actual position I mean, theres a lot of requirement now dependent climates for states to.
Speaker Change: Disclose that information I keep updating though so do you expect states to actually before still based way to ensure their you know their fishing I'll provide is to deliver the parents.
Speaker Change: And should access you know they went up a paying a higher with any more money.
Speaker Change: Hum.
Speaker Change: Senior itself this is bill.
Speaker Change: People at this facility.
Speaker Change: So how do you think about that pushing some states with equal right.
Speaker Change: Yeah, John I'll start Matt dirt may add some color to it.
Speaker Change: From a that's one of the aspects of the rule that.
Speaker Change: I think we like others in the industry are in favor of I think having more transparency around how rates are calculated and formulated by states is very important I do think there will be some pressure on states to raise rates are because as you point out the alternative is actually putting individuals' in a much more costly institutional.
Speaker Change: Setting so I certainly think there's opportunities over the next six years.
Speaker Change: To really work with states are you know in what are those rates need to be in order to be able to maintain the programs at their current status and frankly and to try to grow that the the.
Speaker Change: Personal care programs in those states.
Speaker Change: Right exactly and then the last one so you mentioned you know there's obviously some classifications in the rack of wound isn't the submissions and then nominators and and things like that but there it sounds like there's still some additional clarity that you might be expecting so is this something you would expect.
Speaker Change: To come off from the states because that was another element of the reclamation rate. According to CMS gave a lot of authority what flexibility to the states to.
Speaker Change: You know when it comes to that's 80 20 provision is that how you really like that it's gonna be more information coming out from the states and that's when you could kind of be more clear when it comes to like what exactly is happening.
Speaker Change: Six years.
Speaker Change: You might not hear about it for a while but I guess that I Wanna say indirectly.
Speaker Change: Talks about that the states have to.
Speaker Change: They were I guess Tuesday, they are ready for it in four years or something like that so would that then mean that we kind of like you know four years from now we will hear more detail or do you think it's going to be sooner than that thank you.
Speaker Change: Yeah, I think you know.
Speaker Change: Unfortunately, the way states tend to work is they wait more to the back in so I don't expect to have any near term clarification on some of those elements and the rules and as you point out there were there were a lot of provisions that.
Speaker Change: Or left open for the states to determined to have some flexibility with the CMS said that they would provide I think technical assistance to help the states that go through that process, but you know this is something that I think states rule.
Speaker Change: The reality is though they'll probably take a little bit of a wait and see approach you know, even though some of the significant provisions for them actually kicked in in four years.
Speaker Change: But I don't anticipate getting anything in the near term I think we'll be kind of closer to the backend.
Speaker Change: Of that four year period.
Scott J. Fidel: Yeah. This is Scott.
Scott J. Fidel: Governments work when it comes to deadlines I went to fat last minute if I may just.
Scott J. Fidel: Please I'm sorry last one I'm sorry cause there was also discussion around some of the specific.
Scott J. Fidel: You know elements pulled.
Scott J. Fidel: Oh about it and and best regulation.
Speaker Change: I would check the by some some larger companies estimate at.
Speaker Change: Adjusting for that.
Speaker Change: I had the right cost could.
Speaker Change: Could be you know like 500 basis points for them. So I know you're not willing to give you specifics, but would it be in this range or are much smaller than that thank you.
Speaker Change: You know I think it depends on how companies are defining clinical supervision.
Speaker Change: To get to the number you specified takes a great deal of breadth in the definition.
Speaker Change: For those of us that operate in the industry.
Speaker Change: So I'm not sure that we would you know were agreeable with that number at this point in time until we get more clarification. However.
Speaker Change: However, I think what we said earlier applies the fact that they included CMS included clinical supervisory salaries and the definition was very helpful and it will give us some relief towards the 80 20.
Speaker Change: Great. Thank you for that thanks for taking the questions.
Speaker Change: Yeah.
Speaker Change: This concludes our question and answer session I would like to turn the conference back over to Dirk Allison for any closing remarks.
Dirk Allison: Thank you operator, I want to thank everybody for their interest today in Addison and for being part of our call I Hope you have a great week. Thank you.
Speaker Change: Yeah.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Speaker Change: Yeah.
Speaker Change: [music].