Q3 2024 Encompass Health Corp Earnings Call
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Speaker Change: [music].
Speaker Change: Please standby we're about to begin.
Speaker Change: Good morning, everyone and welcome to encompass Health's third quarter 2024 earnings conference call.
Speaker Change: At this time I would like to inform all participants that their lines will be in a listen only mode.
Speaker Change: After the Speakers' remarks, there will be a question and answer period.
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Speaker Change: Today's conference call is being recorded if you have any objections you may disconnect at this time.
I will now turn the call over to Mark Miller encompass Health's Chief Investor Relations Officer. Please go ahead.
Mark Miller: Thank you operator, and good morning, everyone. Thank you for joining encompass health's third quarter 2024 earnings call.
Mark Miller: Before we begin if you do not already have a copy the third quarter earnings release supplemental information and related form 8-K filed with the SEC are available on our website at encompass health Dot com on.
Mark Miller: On page two of the supplemental information you will find the safe Harbor statements, which are also set forth in greater detail on the last page of the earnings release.
Mark Miller: During the call we will make forward looking statements, which are subject to risks and uncertainties many of which are beyond our control certain risks and uncertainties like those relating to regulatory developments as well as volume bad debt and labor cost trends that could cause actual results to differ materially from our project.
Mark Miller: <unk> estimates and expectations are discussed in the company's SEC filings, including the earnings release and related form 8-K.
Mark Miller: <unk> Form 10-K for the year ended December 31, 2023, and the Form 10-Q for the quarters ended March 31, 2024 June 30th 'twenty 'twenty four and September 32024, when filed we encourage you to read them.
Mark Miller: 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.
Mark Miller: Do not undertake a duty to update these forward looking statements.
Mark Miller: Our supplemental information and discussion on this call will include certain non-GAAP financial measures for such measures reconciliation to the most directly comparable GAAP measure is available at the end of the supplemental information at the end of the earnings release and as part of the form 8-K filed yesterday with the SEC.
Speaker Change: All of which are available on our website I would like to remind everyone that we will adhere to the one question and one follow up rule to allow everyone to submit a question. If you have additional questions. Please feel free to put yourself back in the queue with that I'll turn the call over to Mark Tarr encompass health's pre.
Speaker Change: Didn't and Chief Executive Officer.
Mark Tarr: Thank you Mark and good morning, everyone.
Mark Tarr: We're very pleased by our third quarter performance.
Mark Tarr: Highlighted by an increase of 11, 9% in revenue and.
Mark Tarr: 13, 4% and adjusted EBITDA.
Mark Tarr: Q3, total discharges increased eight 8%, including six 8% and same store.
Mark Tarr: Once again discharge growth was broad based across geographies payers and patient type.
Mark Tarr: Neurological and stroke are two most common primary conditions treated grew 9% and nine 7% respectively.
Mark Tarr: Within our Paramax Medicare discharges increased eight 8% for the quarter, while Medicare advantage discharges grew 12, 6%.
Mark Tarr: Owing largely to our Q3 results we are again, increasing our 2020 for guidance.
Mark Tarr: Doug will cover the details of the quarter and guidance in his comments.
Mark Tarr: The demand for inpatient rehabilitation care is underserved and growing.
Mark Tarr: For more than a decade, the age cohort most in need of these services has grown at a 4% to 5% CAGR, while the total supply of licensed beds has been essentially static.
Mark Tarr: It's estimated that by 2031 in five Americans more than 70 million people will be aged 65 or older.
Mark Tarr: Older adults disproportionately experience chronic health conditions, which is likely to continue to drive strong demand for inpatient rehabilitation services.
We are continuing to invest in capacity additions to meet the needs of patients requiring such services.
Mark Tarr: During Q3, we added 99 beds to our capacity.
Mark Tarr: Priced at two de Novo hospitals with a total of 89 beds and the addition of 10 beds to existing hospitals.
Mark Tarr: We expect to open one additional de Novo in 2024, a 61 bed hospital in Houston that will be our first fully pre fabricated hospital.
Mark Tarr: And add approximately 22 more beds to existing hospitals.
Mark Tarr: The Houston project marks an important milestone in our de Novo construction strategy.
Mark Tarr: Full pre fabrication will facilitate lower cost and shorter design and construction times, but the process is not without complexities.
Mark Tarr: Together with our primary pre fab partner blocks, we have learned a great deal on the Houston project paving the way for efficiencies on future de novo's. These.
Mark Tarr: These efficiencies are starting to materialize on our Athens, Georgia de Novo scheduled to open in the first quarter of 2025.
Mark Tarr: We currently anticipate that at least to de novo's per annum will be built with full pre fabrication.
Mark Tarr: With 15 development projects beyond 2024 are already announced and underway.
Mark Tarr: Our pipeline remains robust and balanced between wholly owned and joint ventures.
Speaker Change: Many areas in the southeast and mid Atlantic regions of the U S were significantly impacted by hurricane totally and Milton.
Speaker Change: We operate numerous hospitals within these geographies.
Speaker Change: We're very proud of our leadership and how they prepare for and performed during and in the aftermath of these hurricanes.
And we are humbled by the resiliency of our dedicated employees, some of whom experienced damage to their homes and personal property as well as electricity and water outages.
Given our presence in hurricane prone markets, we have well defined protocols for dealing with large storms.
Speaker Change: These protocols prioritize the safety and wellbeing of our patients and employees.
Speaker Change: Our physical plants withstood hurricanes very well.
Speaker Change: 25 of our hospitals, including 10 that incorporated at least one element of pre fabrication as part of the either the initial build or bed addition.
Speaker Change: Or in some way impacted by the Hurricanes.
Speaker Change: Yes in total experienced only relatively minor damage.
Speaker Change: This is a testament to the quality and strength of our hospitals.
Speaker Change: We are still gathering estimates on required repairs, which we currently believe will amount to less than $1 million of expenses to be incurred in Q4.
Speaker Change: For the safety of our patients and staff.
Speaker Change: We chose to evacuate our Largo and Cape Coral, Florida hospitals ahead of Hurricane Milton.
Speaker Change: With our Largo Hospital closing for five days and Cape Coral for six days.
Speaker Change: Many patients from these two hospitals were evacuated safely to other encompass health hospitals and were accompanied by members of our clinical staff as needed.
Speaker Change: Again, a testament to our hospital staff.
Speaker Change: For additional Florida locations did not admit patients prior to and immediately after hurricane Milton pass through Florida on October 9th and 10th.
Speaker Change: By Saturday October 12, all of our hospitals have resumed normal operations and we're admitting patients.
Speaker Change: Although our operations are back to normal so many communities. We serve are still in recovery mode.
Speaker Change: Disruptions to the health care systems in those communities may impact our volumes and length of stay in Q4, and we have attempted to account for that as well as the aforementioned facility repairs and our updated guidance.
Speaker Change: Now I'll turn it over to Doug.
Speaker Change: Okay.
Doug: Thank you Mark and good morning, everyone.
Doug: As Mark stated Q3 was another strong quarter with revenue, increasing 11, 9% to 135 billion and adjusted EBITDA, increasing 13, 4% to $269 3 million.
Doug: Total discharges increased eight 8% and net revenue per discharge increased two 5%.
Doug: As we saw in Q2 discharge growth in Q3 was skewed somewhat more towards same store based primarily on the timing of de novo openings.
Revenue growth in Q3 included a $7 9 million increase in provider tax revenues, partially offset by $4 5 million increase in associated expense netting to a $3 4 million adjusted EBITDA benefit.
Doug: Bad debt expense as a percent of revenue was one 9%.
Doug: Down 30 basis points from Q3 dollars 23, and 100 basis points from Q2 24.
Doug: Recall that in Q2, we had a substantial increase in claims requested for review by our primary Mac.
Doug: Consistent with our historical practice, we established a reserve against those claims in Q2 as the review is still pending.
During Q3, a substantial majority of those claims was resolved favorably contributing to strong collections.
Doug: We had a relatively small number of new claims selected for review under GPA in Q3.
Doug: Moving on to review choice demonstration or our C D.
As a reminder, Alabama was the first state to implement RCD inclusive of seven encompass health hospitals.
Doug: RCD began with cycle, one which ran from August 2023 until February 2024, and had a minimal required affirmation rate of 80%.
Speaker Change: Michael One participants were given an option of 100% prepayment claims review or 100% post payment claims review for all Medicare claims.
Speaker Change: We elected 100% prepayment claims review and all seven of our hospitals completed cycle, one with an affirmation rate of approximately 89% exceeding the 80% required threshold.
Speaker Change: Accordingly, we were given the option for cycle to a remaining on 100% prepayment claims review changing to 100% post payment claims review or being subject to a 5% spot Audi.
Speaker Change: Given the processes, we have established and the success we had achieved in cycle. One we elected to remain on 100, 100% prepayment claim review.
Speaker Change: Cycled two began in May 2024, and then conclude on October 31.
Speaker Change: The required affirmation rate in cycle, two increased from 80% to 85%.
Speaker Change: We do not expect any of our seven hospitals to achieve that target by October 31.
Speaker Change: Many of our RCD non affirmations or based on the application of improper standards for requirements that directly conflict with the Medicare coverage criteria for inpatient rehabilitation facilities.
Speaker Change: We are appealing incorrect determinations, and we are working directly with CMS to address our concerns related to these improper standards.
We are still early in this process, but we believe our approval rates of approximately 90% cycle, one better reflect our long term affirmation rates than the lower initial approval rates, we have thus far experienced and cycle too.
Speaker Change: There is no financial penalty for not meeting the affirmation rate cycle too.
Speaker Change: Rather as we enter cycle III, we will remain at 100% prepayment claim review.
Speaker Change: The required affirmation rate and cycle III increases to 90%.
Speaker Change: FWB per FTE increased four 1% in Q3 inclusive of a three 5% increase in salaries and wages per FTE and a 14% increase in benefits per FTE.
Speaker Change: The large increase in benefits per FTE in Q3 was driven by group medical costs, which included several large dollar claims and an increase in prescription costs.
Speaker Change: The incurrence of large claims sporadic and the frequency of such claims tends to be mean reverting.
Speaker Change: Yeah.
Speaker Change: Total premium labor expense for Q3 was $32 6 million down 2% from Q3, 'twenty three and flat sequentially.
Speaker Change: Q3 contract Labor Ftes were one 5% of total ftes.
Speaker Change: These metrics are consistent with our expectations of a stable labor market.
Speaker Change: Net preopening and ramp up costs were $5 4 million in Q3 dollars 24 as compared to an adjusted EBITDA contribution of 900000 from the 2023 openings in Q3 23.
Speaker Change: We continue to generate significant free cash flow.
Speaker Change: Adjusted free cash flow increased 27, 1% to $189 7 million, bringing our year to date total to approximately half of $1 billion.
Speaker Change: We now expect full year, adjusted free cash flow of $560 million to $620 million.
Speaker Change: Our leverage and liquidity remained very favorable.
Speaker Change: Net leverage at quarter end was two three times compared to two seven times at year end 'twenty three.
Speaker Change: We ended the third quarter was approximately $148 million in unrestricted cash and no amounts drawn on our $1 billion revolving credit facility.
Speaker Change: <unk>.
Speaker Change: On October 22nd we issued a notice of redemption for an incremental $100 million of our 575% senior notes due in September 2025.
This redemption will settle next month.
Speaker Change: Following which we will have a remaining balance of $100 million on these notes.
Speaker Change: We are again, raising our 2024 guidance, we now assume net operating revenue of five three to five to five 375 billion.
Speaker Change: Adjusted EBITDA of 107 to $1 9 billion.
Speaker Change: And adjusted earnings per share of $4 19 to $4.33.
Speaker Change: The key considerations underlying our guidance can be found on page 12 of the supplemental slides.
Speaker Change: There are a number of factors to keep in mind as you contemplate year over year comparisons for Q4.
Speaker Change: Q4 of 23 included a $22 million revenue reserve related to bad debt stemming from the write off of older claims predominantly pre 2018.
Speaker Change: After giving effect to minority interest the impact of this revenue reserve on Q4 23, adjusted EBITDA was $16 million.
Speaker Change: Q4, 'twenty three also included $6 8 million and favorable reserve adjustments for workers' comp and general professional liability insurance.
Speaker Change: We are anticipating net preopening and ramp up costs of $3 to $3 5 million in Q4 dollars 24, as compared to $1 million and adjusted EBITDA contribution from 2023 openings in Q4 23.
Speaker Change: And we anticipate a Q4 adjusted EBITDA impact of 3% to $3 5 million related to the addition of our Augusta hospital to the Piedmont joint venture together with Oracle fusion implementation costs.
Speaker Change: With that we'll open the lines for Q&A.
Speaker Change: Thank you at this time the floor is now open for your questions. If you would like to signal to ask a question. Please press star one on your telephone keypad.
Speaker Change: At any point. Your question has been answered you may remove yourself from the queue by pressing star keel.
Speaker Change: Once again that is star one to signal for a question and star two to remove yourself.
Speaker Change: For just a moment to assemble the question queue.
Yes.
Speaker Change: Well go first to the line of Joanna <unk> with Bank of America Securities. Please go ahead.
Joanna: Good morning, Jonathan.
Speaker Change: Hi, This is Christian quarter on the line for Joanna. Thank you guys. So much for taking our question.
Christian Quarter: I was wondering because same store volumes were very strong and accelerated quarter over quarter, just wondering what drove that strength and how much of this was from the addition of new beds. Thank you.
Speaker Change: Yeah.
Speaker Change: Chris This is mark Tarr is no.
Noted in my comments it was.
Very broad across geographies all of our eight.
Speaker Change: Geographic operating regions had had nice growth we saw.
Speaker Change: Nice growth in our stroke and other neurological categories.
Speaker Change: We saw the continued ramp up of the facilities you brought on for the past couple of years.
Speaker Change: So we believe that we continue to take market share, we believe that our value proposition continues to be out there relative to the.
Speaker Change: The quality outcomes that we're able to achieve and is recognized as our ability to get patients back.
Back home and not readmitted back to the acute care hospitals.
Speaker Change: I do think the bed additions had a favorable impact.
Speaker Change: Prior to Q3 on a year to date basis, we have added 115 beds, including 40 beds in the satellite location and so those are counted in same store.
Speaker Change: It's also the case that in the first half of the year.
The 23 de Novo openings, we're rolling into same store and those are still in ramp up mode. So that provides a little bit of a tailwind at the same store number as well.
Speaker Change: And we'll hear next from Andrew Mok with Barclays. Please go ahead.
Speaker Change: Good morning.
Andrew Mok: Hi, how are you total ftes have been up about 7% to 8% for the last year or so should we expect that to continue to increase in that ballpark to keep up with the discharge growth growth or should we expect that to moderate as we distance ourselves from some of the severe labor issues at 21, and 2022 and then Relatedly.
Andrew Mok: It sounded like there are some additional group medical expenses hitting the SW B line in the quarter, what was the underlying wage inflation and what's the outlook for that going forward. Thanks.
Speaker Change: Yes, I'll take the second part of the question first.
Speaker Change: S W b per FTE or SW.
Speaker Change: Per FTE was up three 5% so pretty consistent with what we saw in Q1 and Q2.
Speaker Change: With regard to the total ftes.
Speaker Change: Pretty much stabilized <unk> are at about three four now youll have some noise from quarter to quarter based on the timing of new openings, but generally speaking we would expect that the growth in total ftes will be pretty highly correlated to discharge growth and as we've noted in the past.
Speaker Change: This epo level, we feel like it's.
Speaker Change: At a level that is conducive with us being able to continue to retain staff and also produce the outstanding outcomes. So we have put a lot of focus on that in the past couple of years as well and we do believe that we are seeing tangible evidence of the impact of <unk> as well as the number of the other initiatives.
Speaker Change: We have been pursuing on our turnover rates. The Q3 annualized turnover rate for Rins was 27% and for therapists seven 6% and those are very strong numbers.
Speaker Change: Great. Thanks for all the color.
Speaker Change: Okay.
Speaker Change: Next we'll hear from the line of Ben Hendrix with RBC capital markets. Please go ahead.
Speaker Change: Hello, Dan.
Speaker Change: Hi, This is Mike Murray on for Ben.
Mike Murray: Congrats on the quarter and I.
I appreciate all the commentary you gave on the Hurricanes.
Mike Murray: Just given your expectations for lower volumes could you provide a ballpark estimate for revenue impact in the fourth quarter.
Speaker Change: Yes, we really can't because.
Speaker Change: As we said our hospital resumed normal operations very quickly so the impact of discharge growth into revenue.
Speaker Change: From those disruptions would have been relatively minor.
Speaker Change: What we're still evaluating is whether or not the systems and the communities in which we operate hospitals have been an impact in any way that might causes for instance to see a longer length of stay because there arent available places for patients who have been treated in our facilities to be discharged we are confident that the updated guidance.
Speaker Change: <unk> for revenue and adjusted EBITDA incorporate any impact we're going to see from the hurricanes, whether it's the volume whether it's the length of stay or making the repairs to the facilities that will be expensed in Q4.
Speaker Change: Okay, and just a follow on so you had some de novo's and development in areas that were impacted by the Hurricanes and sorry, if I missed this but are you expecting any delays in construction as a result thanks.
Speaker Change: We are not those and Youre right. We are scheduled to open five hospitals in the state of Florida next year and those are those sites were all secured in advance of the storm and came through very well. So any of the relatively minor disruptions that we may have experienced there. We believe we will be able to make up and stick with the <unk>.
Speaker Change: Frame that as depicted on the schedule in our supplemental slides.
Speaker Change: Awesome. Thank you.
Speaker Change: And now I will turn to the line of Brian <unk> with Jefferies. Please go ahead.
Speaker Change: Good morning, Good morning, Brian Good morning, guys.
Speaker Change: This is Megan on for Brian Congrats on the quarter, just going back to your bad debt really quick.
Speaker Change: We noticed that you are guiding pretty bad debt reserves to the mid point of two to two five is that a step up from Q3 is that just conservatism or is that.
Attributed to the small new audit claims that you guys mentioned in great detail.
Speaker Change: For Q3 that was for Q2 and Q3, we had some noise in each one of those that was kind of the run rate that we were at <unk>.
Speaker Change: So you don't think it's reflecting anything other than what we suggest is a normalized level of activity.
Speaker Change: In Q3.
We benefited from a decrease in our aging based reserve and some of that was attributable to processing. Some previously denied claims.
Speaker Change: Got it thank you so much.
Speaker Change: And next we'll hear from the line of Peter Chickering with Deutsche Bank. Please go ahead.
Speaker Change: Peter.
Speaker Change: Hey, good morning, everyone. This is Kieran Ryan on for Peter Thanks for taking the question.
Speaker Change: It looks like.
Speaker Change: <unk> EBIT margin guidance, maybe down somewhere about 50 bps from from three Q, excluding the provider taxes.
Speaker Change: I don't think theres any negative seasonality from <unk> to <unk> on margins. Your EBIT dollars. So just wanted to confirm is that kind of just the opening costs and any potential impact from hurricane headwinds or is there anything else, we should be thinking about sequentially.
Speaker Change: Yes, I think it's really that series of year over year considerations that I reviewed at the end of my prepared comments and those are laid out in the guidance considerations.
Speaker Change: Yeah.
Speaker Change: Okay and then.
Speaker Change: On free cash flow it looks like the working capital tailwind came down pretty pretty significantly, but you still raised your guidance quite a bit.
Speaker Change: The free cash flow dynamics in the quarter and if theres anything we should pay attention to there for 2025.
Speaker Change: I think prop.
Speaker Change: The most significant item in Q3 was just the strong collections, they or we had a lot of that was moving through that.
Speaker Change: That bolus of claims that had been selected for review under <unk> at the end of Q2.
Speaker Change: Thanks.
Speaker Change: And next we'll go to the line of Scott Field with Stephens. Please go ahead.
Speaker Change: Well, good morning, well fight al but close enough.
Scott Field: Good morning.
Scott Field: Wanted to first question just ask about just sky and understanding that youre not providing guidance at this point, but if you wanted to maybe frame that he had wins in tailwind for 2025, and just from I guess, the bigger picture any modeling considerations at this vantage point that you think it is important to call out for analysts and investors.
Scott Field: Okay.
Scott Field: So as we head into 2025, our starting assumption we've got.
Speaker Change: The better part of another quarter to continue to flush. This out is that we will see SW b per FTE inflation of somewhere in the 3% to three 5% range, we think it's kind of settling down there.
Speaker Change: We have not yet put up.
Speaker Change: John.
Speaker Change: Ed.
Speaker Change: Pencil to what Preopening and ramp up costs will be on a year over year basis, but it's probably not going to be two distinct from the impact that we're seeing this year and the last thing I'd call to attention is already on a year to date basis through Q3, we've had a favorable EBITDA impact from net provider taxes of $13 million.
Speaker Change: As we've mentioned previously it's difficult to have a lot of confidence in the visibility of those provider taxes on a go forward basis, because those programs vary from state to state and then typically implemented on an annual basis, we know of the $13 million. That's been included in EBITDA on a year to date basis.
Speaker Change: Then approximately $4 million to $5 million relates to out of period. So I think it's a fair assumption that that portion is not likely to repeat going into 2025.
Some portion of the balance may be even a substantial portion of the balance probably will.
Speaker Change: But those are the things that come immediately to mind Scott.
Scott Field: Okay. Thanks, that's helpful. And then just on my follow up question.
Speaker Change: I wanted to circle back just on some of the comments that Mark had made around.
Speaker Change: The sort of lessons learned on the prefabs.
Speaker Change: And then starting to see efficiencies realized more on the Athens facility I was hoping maybe you can sort of frame if theres any type of.
Speaker Change: Yes.
Speaker Change: Quantitative figures you can share with us in terms of like maybe the initial process how much maybe additional costs. You had just because you were sort of working your way through this this new format and then as you sort of moved towards the efficiencies. How much you think you could break down those costs for.
Speaker Change: For example on the Athens facility and then as you continue to launch more of the prefabs.
Speaker Change: Yes, so you've got two primary advantages that we're trying to achieve one is shortening the actual construction process does that obviously.
Speaker Change: Speed to market and the faster we get these things open the faster we can start to generate cash flow from those if we look specifically at Houston and again. This was a learning exercise for us because it was the first fully prefabricate facility. We did we laid the first module in Houston and in <unk>.
Speaker Change: June in the early part of June and we got all of the final permitting and licensing final final inspection will happen in the first week in November.
So that's that's really fast right youre talking about.
A little over five months, there or just about five months and that compares to conventional construction, which would be 11% to 12 months.
And we think we're going to be even a little bit faster than that for Athens.
Speaker Change: From an expense perspective, and so ultimately what we're looking at because the.
Speaker Change: The elements of the timeframe that you are not really able to impact much with prefabricated construction you get some savings with regard to the design process, because we're using a lot of replication from project to project.
Speaker Change: But permitting and site work are going to continue to vary.
Speaker Change: Pretty significantly from location to location and so there's not really an opportunity there, but again from laying the first module when the door openings is pretty substantial time improvement.
Speaker Change: On the cost side Houston, because we were still sending the learning curve was essentially a breakeven with conventional cost we do expect that as we hold the process further and we will see a little bit of the impact on assets, it's really going to be for future projects. We will get there that will move towards an estimated 15.
Speaker Change: <unk> cost savings versus conventional construction.
Scott This is mark.
Mark: Pitch and there we've been at this now for a number of years on an incremental basis first starting with <unk>.
Bathrooms and head walls, and then work our way up to the Uber modules.
Mark: <unk> has really turned out to be.
Mark: <unk>, what we consider to be a competitive advantage in terms of.
Mark: Building our hospitals I also commented on the fact that these have been tested in a number of severe storms in terms of their quality and soundness of construction. So we just couldn't be happier in terms of the success and the way. This is working its way through our implementation phase.
Speaker Change: Okay, great. Thanks for the color.
Speaker Change: And now we'll hear from the line of Jared <unk> with William Blair. Please go ahead.
Speaker Change: Hey, Dara good morning.
Speaker Change: Hey, good morning, and congrats on a solid quarter.
Speaker Change: Maybe just taking a step back.
Speaker Change: And kind of really thinking about sort of the durability of growth again as we look out to 2025 I'm curious do you feel like the same store growth trends is that largely reflecting sort of the underlying demand environment for our services or do you feel like you're taking I guess more than your fair share capture.
Speaker Change: Capture market share from other care settings like snap.
Speaker Change: It's been kind of a focus area from recent years, so just any thoughts around that.
Speaker Change: I think it's I think it's both it's hard to put an exact number on what is taking additional market share versus just organic growth from a demographic tailwind.
Speaker Change: But.
Speaker Change: Some of both.
Speaker Change: Marketplaces its more evident.
Speaker Change: Than others in terms of where we're taking it from in terms of whether their nursing homes or other providers in the marketplace.
Speaker Change: As I noted in my general comments that the aging demographics and the increased demand just by the aging population.
For inpatient rehab services is certainly playing its way out and can be seen in our same store growth.
Speaker Change: As we've stated on a number of occasions, we believe that the traditional measure of looking at market share in the <unk> space.
Speaker Change: Which is to look at the number of discharges we have over the total industry discharges.
Speaker Change: Grossly under represents the the total addressable.
Speaker Change: Dressed bull market for <unk> services.
Speaker Change: One of the primary reasons, we think that is that we can look upstream at the number of annual discharges coming out of all of the acute care hospitals in the U S that are prime facie CMS 13 compliant.
Speaker Change: And obviously only 60% of the patients treated in any particular during the course of the year have to be CMS 13.
Speaker Change: Compliance, but only 14% of that total population of acute care hospital discharge is that CMS 13 compliant are winding up in an earth.
Speaker Change: We recognize that the number shouldnt be 100% for various reasons, including the fact that a portion of that population would not meet medical necessity criteria, but that the potential for that number to be a lot higher than 14% is out there.
Speaker Change: Important to note too that that 14% that winds up in the nerve bed includes existing encompass health facilities.
Speaker Change: And in virtually all of the markets in which we operate.
Speaker Change: We convert higher than 14% of the CMS 13 eligible discharged in that market into the Earth.
Speaker Change: If you strip us out that number on a national basis is probably at a high single digit.
And we know in more mature markets, where we've been operating for a period of time, it's not unusual for us to see that conversion rate at 30% or higher.
Speaker Change: Okay, Great I think that's super helpful.
Speaker Change: And then maybe I'll just ask a quick follow up on the quarter. It sounded like the Medicare advantage discharge growth was solid I think that was running a couple of points higher than the Medicare traditional Medicare discharge growth.
Speaker Change: Does it look like in the revenue mix for the quarter I may decline a little bit sequentially, just as a percentage of total revenue. So I am curious I assume thats related to sort of a mixed dynamic in terms of the conditions that were treated in the quarter or is there something else, we should be thinking about from a from a revenue mix perspective.
Speaker Change: As Mark cited the.
Speaker Change: The growth has been broad based across the payers. So if you look at Q3 specifically.
Speaker Change: Medicare up eight 8% Medicare advantage 12, 6% and managed care saw solid growth at nine 1%.
Speaker Change: On a year to date basis through Q3, Medicare up nine three Medicare advantage 11, one in managed care up eight and a half.
Speaker Change: Looking at a three year CAGR from 2020 through 2023 again, it reflects very balanced growth.
Speaker Change: Medicare over that period of time of seven 4% Medicare advantage eight 9% in managed care of 11, 3% I think what this really demonstrates is that our value proposition really extends well across all payer classes.
Speaker Change: We ought to celebrate the case that we create more value for our referral sources, when we're not trying to cherry pick patients between payors.
Speaker Change: Okay.
Speaker Change: Absolutely it makes sense and thanks for all the color.
Speaker Change: <unk>.
As a reminder, ladies and gentlemen, if you would like to signal for a question simply press star one on your telephone keypad.
Speaker Change: We will turn to the line of Matthew Gillmor with Keybanc. Please go ahead.
Speaker Change: Hey, good morning, guys, just as a priority on for Matt.
Speaker Change: I appreciate you taking our question. So we've been getting questions on Alexia implications for hospitals, especially on the exchange subsidies and Medicaid supplemental payments I guess could you remind us.
Speaker Change: What your exposure is to these programs or if you see any other election related items that we should be aware of.
Speaker Change: Yes.
Speaker Change: From our perspective, the program that seems to be getting the most airplane because of its size is Tennessee, and it's really not a factor for us in the state of Tennessee.
Speaker Change: So we've talked quite a bit about our net provider tax numbers for us. These the the numbers are substantially smaller than they are for acute care hospitals or some other settings.
Speaker Change: They've been challenging to predict.
If you look at the last two years preceding this year the EBITDA impact from our net provider taxes was nominal it was give or take a couple of million Bucks.
Speaker Change: On a year to date basis. This years from $13 million of four to five of that relates to out of period. So as I stated in my earlier comments is it reasonable to believe that some amount of that continues into 2025.
Speaker Change: Yes, I think it probably is we just don't have a good estimate because of the lack of visibility.
Speaker Change: And relative to your question just around the whole presidential election, and if there's one preference over another and that we really don't see it.
Speaker Change: A threat from either one.
Speaker Change: And if you look back historically.
Speaker Change: While theres been Republican or Democrat it doesn't seem to have had.
Speaker Change: A significant an impact one way or the other.
Speaker Change: Okay. That's helpful. And then just as my follow up.
Speaker Change: Are you guys continuing to reduce leverage in the business is there a leverage ratio that you guys are targeting.
Speaker Change: There's not we're obviously very comfortable kind of in the current range. We used to say that we felt like a run rate leverage of about three times.
Speaker Change: It was appropriate obviously, we're substantially below that right now it feels like just based on some of the macro factors that are out there that the market is appreciating two five is the new 3.0.
We recognize that if we get much below the current level of leverage there is an inefficiency that kind of creeps in from a cost of capital perspective.
Speaker Change: To think that we have good opportunities to deploy cash towards capacity expansions and that will be our top priority and I think the our board of directors signaled some of the other potential utilization.
Speaker Change: <unk> of cash with the increase in the dividend that occurred in Q2 as well as the increase in the share repurchase authorization.
Speaker Change: Great I appreciate the time guys.
Speaker Change: As there are no further questions in queue at this time I would like to turn the floor back over to Mr. Mark Miller for any additional or closing comments.
Mark Miller: Thank you operator, if anyone has additional questions. Please call me at 205 90 705860. Thank you again for joining today's call.
Speaker Change: Ladies and gentlemen that will conclude the encompass health's third quarter 2024 earnings conference call. Thank you for your participation you may disconnect at this time and have a wonderful day.
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