Q4 2024 Encompass Health Corp Earnings Call
Speaker Change: Please standby your conference is about to begin should you require operator assistance simply press star zero on your telephone.
Speaker Change: [music].
Speaker Change: Good morning.
Speaker Change: Everyone and welcome to encompass Health's fourth quarter 2024 earnings conference call. At this time I would like to inform all participants that their lines will be in a listen only mode. After the speakers' remarks, there will be a question and answer Stephanie if you would like to ask a question. During this time, Please press star and one on your telephone keypad.
Speaker Change: You will be limited to one question and one follow up question Today's conference call is being recorded and 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.
Mark Miller: Thank you operator, and good morning, everyone. Thank you for joining encompass health's fourth quarter 'twenty 'twenty four earnings call before we begin if you do not already have a copy the fourth quarter earnings release supplemental information and related form 8-K filed with the SEC are available on our website at <unk> com.
Mark Miller: Health Dot com on page two of the supplemental information you will find the safe Harbor statements, which are also set forth in greater detail on the last page of the earnings release. During this call. We will make forward looking statements such as guidance and growth projections, which are subject to risks and uncertainties many of them.
Mark Miller: Which are beyond our control certain risks and uncertainties like those relating to regulatory developments as well as volume bad debt and cost trends that could cause actual results to differ materially from our projections estimates and expectations are discussed in the company's SEC filings, including the.
Mark Miller: Earnings release and related form 8-K, and the Form 10-K for the year ended December 31, 2024, 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, we 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 reconciliations to the most directly comparable GAAP measure is available at the end of the supplemental information at the end of the earnings release and as part of the form 8-K filed yesterday with the SEC.
Mark Miller: All of which are available on our website.
Mark Miller: Like to remind everyone that we will adhere to the one question and one follow up question rule to allow everyone to submit a question. If you have additional questions. Please feel free to put yourself back in the queue.
Mark Tarr: With that I'll turn the call over to Mark Tarr encompass Health's, President and Chief Executive Officer. Thank you Mark and good morning, everyone.
Mark Tarr: The fourth quarter was a great finish to a very positive 2024 characterized by strong financial performance.
Mark Tarr: Rod based volume growth and significant advancement of our strategic positioning.
Mark Tarr: Hitting the highlights for Q4 revenue increased 12, 7% adjusted EBITDA increased 13, 6%.
Mark Tarr: Adjusted EPS increased 23, 2% and adjusted free cash flow increased 103, 7%.
Mark Tarr: Total discharge growth for the quarter was seven 8% once again exhibiting strength across patient mix payers and geographies same store discharge growth was five 8%.
Mark Tarr: Our primary focus remains on serving the Medicare beneficiary population, which for more than a decade has been the fastest growing segment of the U S population.
Mark Tarr: It is estimated that by 2031 in five Americans more than 70 million people will be aged 65 or older.
Mark Tarr: The 65 or older population has been growing consistently at a CAGR of approximately 3%.
Mark Tarr: And the population and our average Medicare patient age range of 75 to 79 has been growing at approximately 5%.
Mark Tarr: You have to supply of license Earth beds in the U S has increased only nominally.
Mark Tarr: As a result, the demand for treatment of complex medical conditions, such as stroke.
Mark Tarr: Suffocating Earth care intensity is significantly underserved.
Mark Tarr: Far too many Medicare beneficiaries, who would benefit from the clinical services required by law to be administered in an earth are being being denied access to this care.
Mark Tarr: In addition to the demand supply imbalance of Earth capacity.
Mark Tarr: The access to care issue is exacerbated by ill informed and lengthy preauthorization requirements by Medicare advantage plans and faulty assumptions regarding a service equivalents between Earth and sniffs by some hospital discharge planners and attending physicians.
Mark Tarr: We are one of few providers with the means to alter this equation.
Mark Tarr: We have the clinical expertise to successfully treat medically complex patients.
Mark Tarr: Even with the high acuity of patients we serve during 2024 hour discharge to community rate was 83, 6%.
Mark Tarr: Up nearly 200 basis points from 2022.
Mark Tarr: We are helping these patients recover and sending them home without subsequent 30 day acute care hospital Readmissions.
Mark Tarr: Acute care hospitals know they can reliably send complex patients to us when the time is right.
Mark Tarr: Thereby reducing the number of unnecessary patient days and that relatively expensive acute setting.
Mark Tarr: Our attractiveness as a partner to acute care hospitals is further evidenced by the fact that 65 about 166 hospitals are operated as joint ventures.
Mark Tarr: There are important benefits attendant to scale that better enable us to serve patients in need of inpatient rehabilitation services.
Mark Tarr: We treat more patients with earth appropriate conditions than any other provider.
Mark Tarr: This allows us to develop and refine best in class clinical protocols, which are then extrapolated across our hospitals via our continue.
Mark Tarr: Best practices processes.
Mark Tarr: The identification and development and implementation of these clinical protocols is enhanced by the state of the art information systems, we have invested in.
Mark Tarr: Including our specific electronic medical record.
Mark Tarr: Our scale also contribute significant cost efficiencies positioning us as a low cost provider of high quality <unk> services.
Mark Tarr: The right place to be in the value chain.
Mark Tarr: Finally, we have the financial administrative and operational resources to add much needed capacity to the earth industry.
Mark Tarr: We have been deploying capital and talent to extend our services into new geographies and to increase our capacity in existing markets with untapped unmet patient needs for <unk> services.
Mark Tarr: We accelerate our growth efforts beginning in 2020, and importantly, and uniquely our commitment to do so did not waiver during the two years of the pandemic, even as we promptly returned to approximately $240 million of cares Act funding we received.
Mark Tarr: From 2020 through 2024, we opened 36, new hospitals and added 474 beds to existing hospitals, increasing our total bed supply by 1845 beds or approximately 20%.
Mark Tarr: During 2024, we invested more than $450 million into capacity expansions.
Mark Tarr: Turning seven new hospitals, and adding 107 beds to existing hospitals.
Mark Tarr: In aggregate, we added 427 beds last year.
Mark Tarr: In 2025, we expect to open seven new de Novo hospitals were 340 beds, one satellite hospital with 50 beds and add approximately 100 beds to existing hospitals.
Mark Tarr: Included in our 2025 openings are five hospitals stay in Florida.
Mark Tarr: Prior to Florida, eliminating its certificate of need requirement in July of 2021, we operated 13 hospitals in the state.
Mark Tarr: With the C. O N ratification then pending we announced that we had identified and prioritized 15 markets for New hospital activity in Florida.
Mark Tarr: By this time next year, we expect to have opened 13, new hospitals in the state of Florida since the relocation of the C. O N requirement and we have additional Florida opportunities in our active development pipeline.
Mark Tarr: We have already added beds to one of our new Florida hospitals and plan to do so and another in 2025.
Mark Tarr: We've continued to expand beyond Florida as well since 2020, we've added five new states to our map and we'll add another Connecticut in 2025.
Mark Tarr: We now operate herbs in 38 states in Puerto Rico, and still the market for <unk> services remains substantially underserved.
Mark Tarr: During 2024, we complemented our investments in growth with the return of approximately 63.
Mark Tarr: $63 million to our shareholders through cash dividends on our common stock and repurchased more than 350000 shares of our common stock.
Mark Tarr: Our strong free cash flow generation allowed us to fund these investments and shareholder distributions, while still reducing our net leverage to two two times at year end 2024.
Mark Tarr: Our investments in clinical innovations continue to advance our ability to consistently produce quality outcomes for medically complex high acuity patients in need inpatient rehabilitation care for.
Mark Tarr: For example, we have further enhanced our fall prevention model, which combines predictive modeling with our core clinical practice protocols.
Mark Tarr: Our fall prevention model was initiated in 2021, and we have since seen our fall rates per 1000 patient days improved by more than 30%, including an approximately 8% decline in 2024.
Mark Tarr: We also continue to refine our react predictive tool, which measures a patients risk of being transferred back to an acute care hospital.
Mark Tarr: Our react 2.0 was implemented in January 2023, and through year end 2024, we experienced a more than 100 basis point decline in our acute care transfer rate.
Mark Tarr: Our clinical interventions.
Mark Tarr: And experience continue to extinguish us from our peers.
Mark Tarr: Now I'll turn it over to Doug to provide details about our Q4 and full year results as well as our 2025 guidance.
Doug: Thank you Mark and good morning, everyone revenue for the quarter increased 12, 7% to $1 4 billion and adjusted EBITDA increased 13, 6% to $289 $6 million.
Doug: The revenue increase was comprised of seven 8% discharge growth and a four 2% increase in net revenue per discharge.
Doug: As Mark stated volume strength was broad based across geographies and patient and payer mix.
Doug: Adding a bit of color on discharge growth for the quarter Medicare increased six 8%.
Doug: Medicare advantage 14, 7%.
Doug: And managed care eight 9%.
Doug: Within patient mix stroke discharges increased 12, 6%.
Doug: And neurological disorders seven 7%.
Doug: Net revenue per discharge for Q4 benefited from a decrease of 200 basis points and bad debt expense to two 1%.
Doug: Recall that Q4 2023 bad debt included an approximately $22 million reserve related primarily to claims denied prior to 2018.
Doug: S. W. B per FTE for Q4 increased six 4%.
Doug: Within this salaries and wages per FTE, excluding contract labor and sign on and shipped bonuses increased four 8%, resulting from merit increases market adjustments and a change in our clinical license mix.
Doug: This latter factor is related to our implementation of nursing and therapy career, ladders, which encourage our clinicians to seek incremental accreditations, which are then accompanied by compensation increases.
Doug: We believe these career ladders are contributing to our improved turnover results.
Doug: For 2024 are are in turnover was 24% compared to 23, 1% in 2023.
Doug: And therapist turnover was seven 7% compared to seven 8% in the prior year.
Doug: Our Q4 benefits expense per FTE increased 36%.
Please recall that in Q4 of 2023 benefits per FTE decreased nine 6%. So some of this year's increase is attributable to lower base.
Doug: Similar to Q3 of this year within our group medical we continued to experience a higher incidence of large dollar claims and an increase in utilization of high specialty high cost specialty drugs.
Doug: While the incurrence of large dollar claims is sporadic and the frequency of such claims tends to be mean reverting we.
Doug: We expect group medical prescription drug cost growth to remain elevated at least through the first half of 2025, when we anniversary the increase in utilization of the specialty drugs.
Doug: For 2024, our benefits expense per FTE increased 12, 4%.
Doug: This increase comes off of two very good years as in 2022 benefits expense per FTE declined <unk>, 8% and in 2023. The increase of this lower base was only <unk>, 2%.
Doug: Premium labor cost comprised of contract labor and sign on a ship bonuses were $29 $7 million in Q4.
Doug: A decrease from $39 million in Q4 23.
Doug: During Q4 contract labor Ftes comprised one 4% of total ftes.
Doug: Net preopening and ramp up costs were $1 $3 million in Q4 dollars 24, as compared to an adjusted EBITDA contribution of $1 million from the 2023 openings in Q4 'twenty three.
Doug: Our Q4 adjusted EBITDA included approximately $7 $7 million in favorable reserve adjustments for workers' comp and general professional liability insurance.
Doug: On a full year basis 2024 included approximately $13 million in favorable reserve adjustments for the self insured programs.
Doug: We continue to generate significant free cash flow.
Doug: Q4, adjusted free cash flow increased 103, 7% to $195 million, bringing our 2020 for full year total to approximately $690 million, a 31, 3% increase from 2023.
Doug: Our leverage and liquidity remained very favorable as.
Mark: As Mark cited net leverage at year end was two two times.
Mark: Moving on to guidance.
Mark: 2025 guidance includes net operating revenue.
Mark: Five eight to $5 9 billion.
Mark: Adjusted EBITDA of 116 to $1 two zero billion dollars.
Mark: And adjusted earnings per share of $4 67 to $4 96.
Mark: The key considerations underlying our guidance can be found on page 11 of the supplemental slides.
Mark: There are a number of factors to keep in mind as you contemplate quarterly and year over year comparisons.
Mark: Recall that Q1, 'twenty four discharge growth benefited from an extra day due to leap year and because the quarter ended on Easter Sunday.
Mark: Yeah.
Mark: We are anticipating 18% to $22 million of hospital, net preopening and ramp up costs.
Mark: We expect these costs to be heavily weighted towards second half of the year because five of our eight hospitals are expected to open between September and year end.
Mark: This estimate also includes costs related to openings in early 2026.
Mark: 2024 included approximately $13 million in favorable reserve adjustments for workers' comp and general professional liability insurance.
Mark: Our second half 2024, adjusted EBITDA included approximately $2 $3 million.
Mark: In Oracle fusion implementation costs, and approximately $3 $2 million in NCI expense related to the addition of our Augusta hospital to the Piedmont joint venture.
Mark: 2025 will include a full year impact of these which we expect to be five five to $6 $5 million for Oracle fusion implementation cost and $6 million to $7 million and NCI expense related to the Augusta joint venture.
Mark: And with that well now open the lines for Q&A.
Speaker Change: Ladies and gentlemen at this time, if you would like to ask a question simply press star and one on your telephone keypad you may remove yourself from the queue at any time by pressing star and to once again that is star and wanted to ask your question and we will pause for a moment to allow questions to queue.
Speaker Change: We will take our first question. This morning from Whit Mayo at Leerink partners.
Whit Mayo: Hello there.
Whit Mayo: Good morning, guys. Thank you my question first just on the MA growth. This has been outpacing other payer classes for some obvious reasons with all of the health plan scrutiny of the fewer denials and such but is the growth youre seeing more apparent than in certain states or certain markets versus other or is it more broad based is it <unk>.
Whit Mayo: Across the portfolio I'm, just trying to get a sense of sort of when you unpack the business, where we're seeing that level of growth come from.
Whit Mayo: Yes, it's been a little bit of both we are seeing same store growth.
Whit Mayo: Medicare advantage as well, but it's definitely being assisted by our movement into new markets.
Whit Mayo: Continue to believe that there is a lot of upside within the Medicare advantage book of business, both because of the enrollment trends and also due to the fact that our admissions to referral rate remains substantially lower within Medicare advantage than it does within fee for service and there's really no reason for that discrepancy.
Whit Mayo: Do exist.
Whit Mayo: But if we just kind of look at some of the discharge growth patterns for.
Whit Mayo: For the quarter Medicare advantage was up 14, 7% up.
Whit Mayo: 12% on a.
Whit Mayo: On a year to date basis.
Whit Mayo: Same store growth within that for the full year of 2024 was nine 9% and we're looking at a five year CAGR and the Medicare advantage discharge growth of 11, 6%. So we really do feel like we're making substantial inroads there.
Whit Mayo: As you know it's been a multiyear process for us in terms of making sure that we are loaded with data show our outcomes and our value proposition. So that's what we'd lead with whenever we go in to meet with the plans and make sure that they're aware of the outcomes, we're able to get in our facilities. So we continue to refine.
Whit Mayo: And that process and would expect to continue to see growth in Medicare advantage going forward and I think it is also important to note that it doesn't mean that Medicare fee for service is not growing again Medicare discharges in the quarter up six 8% year to date, which is the full year of 2020, 486% same.
Whit Mayo: Store for 2024 up five 7%.
Whit Mayo: And the five year CAGR, there is a little bit lower but still impressive at three 4%.
Whit Mayo: Yeah. That's that's helpful. Just my follow up on free cash flow and priorities here. The cash flows hit an inflection the last two years with presumably a lot of the earnings from the prior year investments now over coming the incremental capital investments, which you've made with <unk>, which is which is nice but.
Whit Mayo: I just wanted to hear any.
Whit Mayo: Hughes on buybacks as a larger priority going forward and Doug If you could just maybe comment on total capex expectations for the year I don't know if I caught that number thanks.
Whit Mayo: Yes, so capex is going to be up this year, it's probably going to be up on the order of about $100 million most of that is in growth related capex.
Whit Mayo: Specifically related to our continued capacity expansion, it's going to be a big year. We expect those this year and next year with regard to bed additions, which as you know is our highest returning form of capital deployment. So we're excited about the opportunities to bring more beds on and we've got also got an increased spend.
Whit Mayo: <unk>.
Whit Mayo: <unk> de Novo activity some of that is related to the fact that we're opening one additional hospital this year, but it also gets to the timing of the 2026 openings. So that number will be up and it's probably approaching what we think will be a run rate for the next several years.
Whit Mayo: With regard to deploying cash flow beyond that we.
Whit Mayo: We did it.
Whit Mayo: Increase and began utilizing the share repurchase authorization midyear of 2024, and we would expect continued and probably more consistent utilization of that program with excess free cash flow going forward and we do have the cash dividend.
Whit Mayo: That gets adjusted from time to time at the discretion of the board its not specifically policy a formulaic driven.
Whit Mayo: But I think once you move beyond our spend on growth related discretionary capital expenditures, the most likely utilization of excess free cash flow given where we sit from a leverage perspective is going to continue to be shareholder distributions.
Whit Mayo: Okay. Thanks, guys.
Speaker Change: Next we'll hear from the line of Matthew Gilmore at Keybanc.
Speaker Change: Good morning, Matt, Matt Hey, good morning.
Speaker Change: Hey, I wanted to ask about the pace of the bed additions and 25. It seems like that's accelerated a little bit this year compared to last year and I. Appreciate Mark's comments at the top of the call about the supply and demand imbalance. So should we think about 2025 and is this in terms of the pacing more of just a timing issue it happens to be a good year.
Speaker Change: Or is there anything more to discuss in terms of your ability to move projects forward and meet the demand and maybe even accelerate the pace of bed additions over time.
Speaker Change: Hey, Matt So we're adding one more hospital in 2025 than we did last year, we have seven de novo through one satellite coming on this year. We're also adding 100 beds. So both of those it's one additional hospital.
Speaker Change: And it's a higher number of total bed additions to you're just going to see some.
Speaker Change: <unk> from one year. The next one that I think we've done a really nice job.
Speaker Change: Showing our ability to meet our growth target in terms of bringing on new hospitals.
Speaker Change: As we said we are bringing on five and the state of Florida. This year.
Speaker Change: Which it.
Speaker Change: Certainly has some benefit when we see that that market density in terms of staffing and having.
Speaker Change: Experienced members of senior management teams may be flow from one hospital over to a new hospital to to help that startup process, but.
Speaker Change: We feel pretty good about the pace that we're bringing them on and yes. This year is a little bit a little bit higher pace than what we had last year and that if I can elaborate on that.
Speaker Change: Have more hospitals today that are candidates for bed expansions than we've had in recent history and that is largely due to the fact that we are coming off of two years really three years of very strong total discharge growth. If you roll all the way back to 2022 up six 8% 23%.
Speaker Change: Up eight 7% and 24 up eight 3% and as a result, our occupancy level has been increasing now some of that is also attributable to the fact that we continue to push the percentage of our overall portfolio comprised of private beds up but this has started to create more opportunities.
Speaker Change: More hospitals that are on our list for future period bed expansions, our ability to move quickly on those.
Speaker Change: Two primary constraints or limitations one is.
Speaker Change: A significant number of those bed expansion opportunities are subject to.
Speaker Change: That hurdle is a lot lower than it is for a new hospital, but it still exists and it takes some time to navigate in the second quite frankly is that the number of projects that is on our plate.
Speaker Change: Somewhat limited the capacity within our design and construction Department, we're adding resources. There. This is a high class problem to have but that's why some of what youre starting to see in this year's number and then what we're anticipating for 2026 as well.
Speaker Change: That's great and then.
Speaker Change: Doug maybe asking about the <unk> per FTE assumption in the guide I know you've got a little bit I think of a deceleration in growth down to three 5% at the midpoint I was hoping maybe you could unpack that a little bit it sounds like you've got a really easy comp on the benefit side, but is there anything you can call out in terms.
Speaker Change: What youre seeing in terms of other factors, whether that's wage growth or turnover, that's helping to explain that modest deceleration.
Speaker Change: I think all of that.
Speaker Change: It gets tossed in and so that SW be inflation range that we have a 3% to 5% to 375% is on total SW b. So that also includes those premium labor categories, and we're making an assumption that our spend in those premium labor categories.
Speaker Change: We'll still stay relatively constant.
Speaker Change: In terms of total dollars, so thats going to give us a point of leverage in the inflation rate as well your comment on benefits as appropriate.
Speaker Change: As I noted in.
Speaker Change: In my comments, just a moment ago, we do expect that group medical inflation to continue through the first half of this year, but then youre going to anniversary it in the second half of the year.
Speaker Change: We do expect to see some benefits related to lower turnover rates. So all of that kind of in the mix I will note that the range is just slightly higher than what I had alluded to as a potential range in our Q3 call, but its really just based on the trends that we witnessed in Q4 that are carrying into into 2002.
Speaker Change: Five.
Speaker Change: Alright, Thanks, a lot.
Operator: Our next question today comes from AJ Rice with UBS. Please go ahead.
Speaker Change: And then AJ.
AJ Rice: Hi, everybody.
AJ Rice: First of all maybe just to ask you about your <unk>.
Speaker Change: Florida has been a great opportunity for you.
AJ Rice: How has.
AJ Rice: The primary person, adding IRA.
AJ Rice: Stay healthy overall market look now is it.
AJ Rice: Is it.
AJ Rice: Any risk of being somewhat over better than people overshot the target or you feel like that relative to other markets.
AJ Rice: Beds per thousand and so forth are still in a good spot.
AJ Rice: Yes.
Speaker Change: How much of your how much of your overall.
Speaker Change: Once you get these all up and running will be Florida.
Speaker Change: So let me take your first question AJ, it's mark So we feel good about our growth in Florida, we are the.
We've taken the lead.
Speaker Change: I've been in the lead in terms of adding beds, there that was by design.
Speaker Change: When we stated we had 15 marketplaces that that we were prioritizing for future growth, we went out and bought the real estate and were first to market.
Which was an important part of our strategy and the state of Florida, as we said we already had.
Speaker Change: Hospitals that were legacy hospitals, there. So we knew exactly what markets. We wanted to go into and where we would add beds too. So it's been very intentional.
Speaker Change: Our accelerated pace in the <unk>.
Speaker Change: State of Florida, as you know the demographics for the state of Florida play into our line of business. There continue to be a strong growth in the markets that were.
Speaker Change: Entering and so we don't see that stayed as being over bedded if anything as I noted we have additional opportunities instead of Florida, whether that's through new hospitals or adding beds to our existing hospital and <unk>.
Speaker Change: Jay maybe just to piggyback on that a little bit first of all because of the C. O N was in place until 2021, there was an artificial cap on the number of Earth beds in the state of Florida and as the population continues to grow even during that period preceding 2021, particularly amongst the senior population.
Speaker Change: The supply demand gap really opened up pretty significantly so they were starting in a very significant deficit as mark noted in his comments as well and I think it's important to go back to that 2020 timeframe.
Speaker Change: Obviously, when the pandemic hit most operators in the business kind of lost visibility into the near term operating trends of their business, but as we have recounted previously we made the decision in April of 2020, even in the midst of all of that to begin pushing forward with this accelerated de Novo program and doing things like purchasing.
Speaker Change: Land in the state of Florida for de Novo's, because we had identified those markets previously that had the effect of creating a first mover advantage and frankly made a lot of our competitors shy away from adding capacity because they werent in a position to do so the final thing that I would add is if you just look at the current rate in <unk>.
Speaker Change: <unk> versus what it was several years ago.
Speaker Change: Those are.
Speaker Change: Earth operators that are owned by private equity sponsors that had been heavily reliant on levered transactions with refinancing the economics of just become a lot less palatable. If you combine elevated construction cost with higher cap rate cost embedded in those leases.
Speaker Change: Difficult, particularly without enjoying the same economies of scale that we do to make the numbers work.
Speaker Change: Okay, Great maybe just as my follow up obviously, there is a lot of focus across.
Speaker Change: Their services on the New administration, and the New Congress and what they might do it seems like you are fairly insulated from a laundry list of Medicaid reforms, and so forth, but are there any areas, where you're watching a better.
Speaker Change: A particular area of focus and then as well on the you mentioned prior authorization. There's been some chatter about that are you advocating for some relief.
Speaker Change: Well I would say MAA and the other health plans on prior authorizations and what's the prospects for that.
Speaker Change: So as you know theres not a lot of specifics comment out relative to policy from D. C. Right now until the confirmation of it.
Speaker Change: HHS and CMS or RFK junior and Doctor Oz.
Speaker Change: But we've spent some time up there we've had a chance to meet some of the incoming.
Speaker Change: Bob.
Speaker Change: Senior staffs.
Speaker Change: Staffers for CMS and otherwise in and we've made the point.
Speaker Change: Of wanting to make sure that there is not regulatory overreach and those are unnecessary expenditures and and have no positive benefits for the patients.
Speaker Change: So we're watching it closely we're not hearing anything of concern right now that are specific policy changes or regulatory changes facing the industry.
But we will absolutely remain a act.
Speaker Change: Active and involved in D C and want to be on the front edge of meaning the new incoming leaders of CMS.
Speaker Change: I would say that with regard to conversations that we have with CMS and then also with our elected representatives on the subject of Medicare advantage. Our two primary focus points are improvements in preauthorization processes.
Speaker Change: And philosophies and then the second is <unk>.
Speaker Change: <unk> discussed before right now there is no requirement for Medicare advantage plans to include <unk> in their definition of network adequacy.
Speaker Change: And we think that that is simply an oversight that should be corrected.
Speaker Change: Okay. Thanks.
Speaker Change: Andrew Mok with Barclays you have our next question.
Hello, There Andrew good morning, Andrew.
Speaker Change: Hi, Good morning, you noted that group medical prescription drug costs are expected to continue to increase through the first half of 'twenty five before you anniversaried. Some of the acceleration can you give us a bit more detail on the trends youre seeing there are there any specific drugs or categories that you would call out as driving the increase in the group medical line. Thanks.
Speaker Change: Yes, there are three so the two largest there'll be no surprise to anybody on this call. One is certainly G. L. P. One.
Speaker Change: And it is just getting even though we limit that to those.
Speaker Change: Those that are at risk or have diabetes.
Speaker Change: Physicians are prescribing it much more.
Speaker Change: Much more widely as even somewhat of a prophylactic. So we're seeing increased utilization there and it remains expensive we're hopeful that given the number of entrants.
Speaker Change: Into the <unk> category that over time, the cost of that drug will decrease right now what we're counting on is anniversarying. The stepped up usage in the second half of the year.
Speaker Change: Second is there are a and this is a good thing, but there are a number of notable enhanced cancer related drugs that were seeing increased utilization of those are expensive as well I'd make similar comments with regard to cost trend in utilization trend there and then the third and.
Speaker Change: I don't know that I can pronounce the name it even if I wanted to is there is one drug that are specifically related to eyesight and <unk> health that has popped up a little bit more frequently.
Speaker Change: Got it that's helpful and if I could just follow up I think the total net benefit from provider taxes. This year totaled $16 million I think for the year, how should we be thinking about this for 2025 is there an explicit assumption around these items in guidance and is that benefit in 2024 are largely expected to recur any color there would be helpful. Sure.
Speaker Change: So the EBITDA impact from net provider taxes, so the revenue less the associated expense for 2024.
Speaker Change: Was $15 $4 million as we've noted previously approximately $5 million of that was related to prior periods and so there really isn't any reason to expect that that portion would repeat itself.
Speaker Change: The balance of about $10 million as we've talked about before has a low level of predictability to it and to reinforce that point, we just we point to the net impact from provider taxes in the two prior years in 2023, the net provider tax impact to EBITDA was a decrease of $800000.
Speaker Change: 2022, it was an increase of $2 million. So this feels a little bit like an outlier.
Speaker Change: We'll just have to wait to see in terms of the 2025 guidance. We haven't included a point estimate.
Speaker Change: Or provider taxes within that guidance range. It is highly variable and wherever provider taxes winds up falling in 2025 will obviously be a determinant as to where we land within that $40 million EBITDA guidance range.
Speaker Change: Great. Thanks for all the color.
Speaker Change: Okay.
Speaker Change: We will hear next today from the line of Joanna <unk> at Bank of America. Please go ahead. Your line is open.
Speaker Change: Alright, Yes, hi, how are you. Thanks, so much for taking my questions. So I guess first a follow up on that.
Speaker Change: Capex.
Speaker Change: In the slides you talk about major renovation projects that programmatic hospital asset replacement.
Speaker Change: Or is there something that you do this you differently than priors.
Speaker Change: Yeah. So.
Speaker Change: We've got more hospitals now the hospitals utilize.
Speaker Change: A lot of the same equipment and we have programs that will in order to leverage our scale by that equipment and replacement on a regular basis, sometimes in cycles across the hospitals and sometimes more uniformly the spend specifically in that programmatic category for 2025 relates to bed replace.
Speaker Change: Smith.
About every five to seven years all of the beds need to be replaced.
Speaker Change: In order to ensure safety and comfort for our patients other categories that will occasionally fall into that wheelchairs are pretty significant spend sometimes the machinery that we utilize to dispense narcotics narcotic drugs prescription drugs is a better term.
We will fall into that category as well. So we just we think it's really important that we maintain all facets of the of our hospitals.
Speaker Change: Okay. That's that's helpful and then if I may so the edge.
Speaker Change: Adjusted free cash flow came in Hum.
Speaker Change: The $100 million or so better than expected in your prior guidance.
Speaker Change: For the full year, so what what drove that was there some sort of a pull forward from 25, because now I guess your guidance for 25 kind of calls for decline from 24 24 came in so much better.
Speaker Change: Yes. So it was really two things one is the EBITDA came in better than we expected. The second is the favorable result in working capital was better than we expected and some of that will definitely be a pull forward because some of that relates to the increase in claims activity under our group medical where were seeing a liar.
Speaker Change: Ability and near term liability increase and it doesn't translate into cash until you get into subsequent periods.
Speaker Change: Great. Thank you so much.
Speaker Change: And Heinz at Mizuho. Please go ahead you have our next question.
Speaker Change: Hello, There Ann good morning, Ann Hi, how are you.
Ann: So I know post the pandemic encompass really benefited from gaining market share from nursing home what does that like now is that still a tailwind for the company.
Speaker Change: Yes, yes.
Speaker Change: Is I mean, we.
Speaker Change: I think we along with the industry as itself.
Speaker Change: Distinguish ourselves from the nursing homes and the differences that are in terms of patients that can be treated we continue to see increasing.
Speaker Change: Numbers of stroke and other neurological types of patients that are typically higher acuity and.
Speaker Change: In our hospitals.
Speaker Change: And we think the outcomes that we're able to get versus what previous referral sources saw from nursing homes.
Speaker Change: That has had some stickiness to it in terms of changing referral patterns in some of our marketplaces I think there's no perfect way to measure market share gains from the sniff industry, but I'd point to a couple of things. One is we've now had 10 straight quarters, where our same store discharge growth was north of 4% and that is growing.
Speaker Change: <unk> faster than the underlying demographic, which means that we are taking market share from someplace. The patients that were trading are not patients that were eligible for discharged directly home. So the most likely source is either from snips or other earths.
Speaker Change: But I think that's a pretty good indication of the fact that we are gaining market share.
Speaker Change: Great. Thank you and then just on the floor like Florida as it is and.
Speaker Change: And just interesting stayed just because they were able to lift the C. O. M was is there any other state that as on the Companys radar that would be something.
Speaker Change: Similar Florida.
Speaker Change: And if not do you have that type of expansion potential in other states that you currently operate like Florida.
Speaker Change: So.
Speaker Change: And there are other states that we have on our radar screen clearly we have a <unk>.
Speaker Change: Strong presence in the state of South Carolina and I.
Speaker Change: I only have one.
Speaker Change: The state of North Carolina, but if you look at the growth in the state of North Carolina would be.
Speaker Change: It would be a very attractive state for us to have a greater presence in than what we currently have and particularly when you consider the fact that South Carolina and North Carolina are really.
Speaker Change: Those are destination states for retiring seniors right now and they are considerably under bedded.
Speaker Change: Okay. Thank you.
Speaker Change: Our next question will come from Scott Fidel of Stephens.
Speaker Change: Hey, good morning, Scott Scott.
Scott: Hi, Sean.
Speaker Change: The implied.
Speaker Change: EBITDA margins.
Speaker Change: The guide at the midpoint it would imply.
Speaker Change: Modest around 30 basis point contraction year over year, obviously, a very strong year in 2024.
Speaker Change: Just I guess sort of put a fine Pat.
Speaker Change: Pat on that one.
Speaker Change: Can you say sort of be the drivers of that and then more importantly, maybe.
Speaker Change: Maybe some of the upside.
Speaker Change: Opportunities that you see tangible to potentially ultimately get margins landing at stable or even improving year over year in 2025.
Speaker Change: Yeah, So a number of things one is.
Speaker Change: We continue to believe that EBITDA dollars are better than EBITDA margin.
Speaker Change: It's tough to pay the bills with the margin.
Speaker Change: Some considerations in terms of the comparison from 24% to 25 as I mentioned in my comments 24 included $13 million in favorable self insurance.
Speaker Change: <unk> adjustments as we just mentioned when we were responding to Andrew's question.
Speaker Change: 24 benefited from $15 $4 million in provider tax impact, including $5 million of out of period. If you look at the startup and ramp up costs associated with new hospitals. The midpoint of the range is about $5 million higher in 2025 than it was in 2010.
Speaker Change: Four owing both to the fact that five of our hospitals in 2025 will open between September and the end of the year and right. Now we are targeting three new hospitals opening up in the first quarter of 2026.
Speaker Change: And then the delta on a year over year basis in terms of the G&A expense.
Speaker Change: On the NCI impact of Piedmont.
Speaker Change: Piedmont joint venture specifically, our contribution of the Augusta hospital to that infusion implementation cost is $7 million. So I think if I do the math right on all of those items, including just say the $5 million of out of period on provider tax impact right. There you've got about $30 million.
Speaker Change: Of EBITDA that needs to be overcome moving from 24% to 25.
Speaker Change: Okay. That's helpful and then for my follow up question.
Speaker Change: Especially given just all of the development activity playing out it would be.
Speaker Change: If you could give us an update just on sort of.
Speaker Change: Construction of any sort of inflation dynamics, obviously, that's been swinging around and then related to that just curious.
Speaker Change: Weather.
Speaker Change: You sort of think about that the prefab.
Speaker Change: The model that you've spent a lot of time putting into place have you been able to do any type of analysis around.
Speaker Change: It comes to <unk> and are there any sort of.
I guess.
Speaker Change: Elements of those pre Fabs that may come from.
Speaker Change: International sources that.
Speaker Change: That could be affected by the tariffs and have alternative.
Speaker Change: Options in the U S. Just curious on sort of what work you've been doing or if there is even any.
Speaker Change: On the tower side. Thanks.
Absolutely I'll try to take those in order what is construction new construction cost.
Speaker Change: Well have continued to stabilize right around $1 $2 million per bed for new hospitals somewhat lower closer to $800000 of bed for bed additions, but it depends on specific projects.
Speaker Change: We're not seeing.
Speaker Change: Any overt inflationary pressures on that cost right now if anything.
Speaker Change: I think with that we may be seeing some green shoots in terms of maybe some relief on that but it's too early to call the ball.
Speaker Change: The second is we remain very pleased with our pre fabrication effort.
Speaker Change: Rick mentioned earlier that in the fourth quarter, we brought on our first fully pre fabricated hospital that 61 bed facility in Houston, Texas, Our second fully prefabricated hospitals getting ready to open any day right now in Athens, Georgia, So that will continue to be part of our construction strategy along with hospitals.
Speaker Change: That are utilizing components prefab everywhere from head laws to bathrooms to the Uber modules, which are.
Speaker Change: Which are groups of rooms that are our cash by a corridor the cost for the pre fabrication right now from a per bed perspective is essentially right on top of conventional construction as well the primary benefit that we're seeing today is on a full prefab, we're getting about a 25%.
Speaker Change: Enhancements in terms of the speed to market, which is not insignificant with regard to the threat of tariffs in the near term its very low for us in terms of design and construction there could be some impact if you impose those upon.
Mexico in terms of our concrete cost, but that's a very small component of our overall construction cost with regard to steel.
Speaker Change: Use predominantly U S sourced steel and much of it is recycled specialty steel that comes out of the U S. We get a broader analysis of our potential exposure to tariffs coming out of Mexico, Canada, and China around overall supplies.
Speaker Change: Difficult to say what that might look like right now because we don't know how comprehensive it would be you should also bear in mind that in prior periods. When tariffs have been invoked typically medical supplies have been exempted from those tariffs having said that we do not believe that there is a lot of near term risk to the imposition of any.
Speaker Change: Tariffs certainly something we'll be we'll continue to monitor.
Speaker Change: Great. Thank you.
Speaker Change: Our next question comes from <unk> Chickering Deutsche Bank.
Speaker Change: Good morning veto veto.
Speaker Change: Hi, Thanks for taking my questions I guess looking at your 2024 provider taxes the medical fees.
Speaker Change: And then looking 25 with the headwinds the startup losses, and then the Oracle and fusion implementation can you just let me say that we're modeling the year right.
Speaker Change:
Speaker Change: Looking at quarterly EBITDA seasonality as 2025 different than a normal year and if so how should we how should we think about EBITDA in the first half of the year versus the back half of year and any thoughts on leap here and the oral confusion on the first quarter.
Speaker Change: Yes, so a couple of things one is in terms of our assumptions regarding specifically group medical expense and Oracle and Oracle fusion implementation in the NCI impact from the contribution of Augusta to the Piedmont Joint venture you had those second half expenses.
Speaker Change: In 2024.
Speaker Change: So it's really going to be a more pronounced impact on EBITDA from a comparison perspective in 2025.
Speaker Change: The second thing to keep in mind is one that I just alluded to with regard to the pace of the preopening and ramp up costs.
Speaker Change: And that is that it's going to be skewed more heavily towards the back half of the year because of the time of the timing of the openings in 'twenty five 'twenty six and then the other thing I'd ask you to remember is that we had that spike in bad debt expense in Q2, because of the timing of the GPU review by Palmetto.
Speaker Change: Subsequently then reversed itself in the second half of the year now, but there is a chance just based on what we've seen in terms of the historical review pattern from Palmetto over the last couple of years that you'd see a similar spike in Q2 of this year, but there's no really no real way for us to determine that.
Speaker Change: I think those are the primary pacing considerations I can think of.
Speaker Change: Okay, Great and then a follow up to <unk> question on leverage is there a minimum leverage ratio, where you deploy all excess free cash flow into repo just looking at the share guidance of $103 million.
Speaker Change: And looking at your EBITDA growth in the cash flow generation. It seems like a minimum leverage ratio would be helpful for investors to calculate how much cash could be returned via share repo. Thank you.
Yes, it's a fair question I wouldn't draw a hard line there, but I would say that certainly if we see the leverage dropped below two times, it's feeling like Theres a lot of inefficiency in our cost of capital.
Speaker Change: Alright, So two times is there a minimum where we'll model all of that going into <unk> going forward.
Speaker Change: Now minimal was your term not my term as I said I'm not putting a hard line there, but I would make the observation if we fall below two times, then we're going to be looking hard at what I would view as an unnecessary inefficiency in our weighted average cost of capital.
Speaker Change: Thanks, so much guys.
Yeah.
Speaker Change: Our next question comes from Ben Hendrix at RBC capital markets.
Speaker Change: Good morning, Ben.
Speaker Change: Morning, guys. Thank you very much I was just wondering if we could get a quick update on the mandate managed care contracting environment rate assumptions in guidance seem consistent with last year and I know you guys have historically maintained a favorable spread between MAA in Medicare rates, but with the ongoing margin pressure amongst some payers just anything changing in your negotiations.
Speaker Change: Separately any changes in how payers are assessing patient eligibility for a cure.
Speaker Change: Yes, I would say.
Speaker Change: Answer there is nothing new so we continue to do I think well with regard to our managed care, including Medicare Medicare.
Speaker Change: Medicare advantage contract negotiations the rates that we're seeing in terms of the update are pretty consistent with what we've seen in recent history, which is somewhere kind of call. It the mid to high 2%.
Speaker Change: We're not seeing any pressure against those based on some of the conditions that are facing Medicare advantage plans and some of that just relates to the fact that when they were seeing 6% to 8% increases they werent passing those on to it so it seems only appropriate.
Speaker Change: They appear to recognize this as well that they not try to reverse that trend when theyre seeing more pressures I think they also understand that we provide great value and finally, we continue to make progress, albeit it's more marginal just given the substantial improvement in our overall base on converting more of our per diem.
Speaker Change: Contracts to an episodic basis.
Speaker Change: We've got a really good team that oversees our Medicare advantage and our managed care contracting and they continue to make good progress.
Speaker Change: I appreciate that and just as a quick follow up to something you mentioned in your prepared remarks, I think you noted some misconceptions among discharge planners around her first is sniff care and I was wondering as youre entering new markets and ramping up to novo's. What is involved in that education process and how long does it take to break that muscle memory, among the discharge planners and still the.
Speaker Change: Value proposition of <unk> first is sniff care.
Speaker Change: That's a great question. So yes that is a.
Speaker Change: That's a priority whenever we enter new market will have our.
Speaker Change: Nurse liaisons, who will have our administrative staff will have our medical director to wherever we can get out and whoever will listen to what we described goes on at our hospitals and the differences twin on Earth.
Speaker Change: Had a sniff, especially in a marketplace that has no other.
Speaker Change: Sure.
Speaker Change: Or facilities in there, but just talking about the differences in the intensity of care the types of patients the length of stay what typically happens at the time of discharge that can vary.
Speaker Change: From market to market, but I.
Speaker Change: I think we've gotten really refined on that I think that has a proven and the ramp up of the de novo's, you've seen us bring on the the last several years.
Speaker Change: But what you identified is a that's a key priority as we go into new marketplace.
Speaker Change: With both the newly hired staff that are there as well as existing staff that may come from that region or the home office going in to educate the marketplace and that education process starts as early as six months prior to the projected opening.
Speaker Change: What we frequently encounters and some of the confusion is related to as simple a concept as the naming convention.
Speaker Change: Unfortunately, there is no prohibition within the Medicare regulations from a skilled nursing facility, calling itself a rehabilitation center.
Speaker Change: Call themselves a rehabilitation hospital, because you have to be licensed as an acute care hospital, which all of our <unk> are in order to be able to use that naming convention, but it's just things like that and we've demonstrated great success with being able to overcome those challenges part of that education that we can get people over to tour the hospital they'll see a big difference.
Speaker Change: Wayne a rehab hospital in a nursing home.
Speaker Change: Thank you very much.
Brian: Our next question will come from Brian <unk> at Jefferies.
Speaker Change: Hey, Brian Good morning, Brian.
Brian: Hey, good morning, guys and thanks for squeezing me in.
Speaker Change: Hey, Doug maybe just one question for me as I think about the vital carrying the ruling that came out how should we be thinking about the benefits to you guys or how you'd be recognizing that ruling on the P&L going forward.
Speaker Change: Yeah. So first of all great outcome for US. We're just really pleased with the judges ruling on that this is ongoing litigation. So were not really able to comment further and it's still playing out. So we can give you with any specificity specificity, what it's ultimately going to look like but.
Speaker Change: As it does and as it proceeds and we are able to share more with you we will do so in a timely manner.
Speaker Change: All right got it thank you.
Speaker Change: And our next question will come from Jared Haas at William Blair.
Jared Haas: Hey, good morning Gerry.
Jared Haas: Good morning, and thanks for squeezing me in as well I'll stick to one also just wanted to follow up on some of the comments you made about career ladders or career progression further workforce I thought that sounded interesting.
And I was just curious like what percent of the workforce. Today would you say is taking advantage of the progression opportunities that you offer and then you mentioned.
Jared Haas: That's supporting better turnover I was wondering if theres any way to I guess quantify or unpack what you see excuse me what you see in terms of turnover among those clinicians that pursue additional certifications versus those that don't.
Jared Haas: No Jerry I don't know that we have an exact number for you in terms of the participation level and the subsequent impact on our turnover you can if you just take our turnover for <unk> for 2024.
Jared Haas: We've taken that down to 24% for R&D and then therapists turnover was seven 7% so.
Jared Haas: Both of those.
Jared Haas: Our on the downtrend for Us certainly.
Jared Haas: At or below.
Jared Haas: Pre pandemic levels, specifically the RN.
Jared Haas: Turnover rate.
Jared Haas: The improvement.
Jared Haas: And retention is playing in a number of different ways.
Jared Haas: There's not one.
Jared Haas: Particular approach I think to addressing retention, but <unk>.
Jared Haas: <unk> appreciate having the opportunity to continue to learn and improve their skills.
Jared Haas: And providing those opportunities to them through clinical ladders.
Jared Haas: And exposure to different experiences.
Jared Haas: That has proven itself over the years to be a really effective way.
Jared Haas: To retain them and if they are interested in working in our rehabilitation hospital Theres strong chance there can be an encompass.
Jared Haas: And whether thats, a therapist or nurses.
Jared Haas: Put a lot of efforts in thought in terms of.
Speaker Change: The educational opportunities that we provide for these for these staff members Jarrett, you've given us something that we now need to add to our preparatory materials, because as I'm sitting here I know that.
Speaker Change: Our HR team tracks, both the percentage of our clinicians nurses and therapists, who participate in these programs I also know that they are tracking the change in turnover within those groups I simply don't have those at our disposal, but we won't be caught off guard on that question in future periods. So thank you for asking.
Speaker Change: I do want to note that when you consider our hospital staffing just a reminder, that about 36 about 36% of our overall ftes in a hospital are going to be comprised of nursing ftes and about 20%.
Speaker Change: <unk> therapy Ftes.
Speaker Change: So again, great question, and we will be better prepared to answer that with specificity in future periods. Thanks for giving us another metric Jared.
Of course, yeah happy to give you more work here.
Speaker Change: The other context thank.
Speaker Change: Thank you Youre welcome.
Speaker Change: And this does conclude today's tele or excuse me today's Q&A session. Mr. Mark Miller I am pleased to turn it back to you Sir for any additional or closing remarks, you have.
Speaker Change: Thank you and if anyone has additional questions. Please call me at 205 90 70560. Thank you again for joining today's call.
Speaker Change: Ladies and gentlemen, this does conclude today's teleconference, and we do thank you all for your participation you may now disconnect your lines.
Speaker Change: Okay.
Speaker Change: Yeah.
Speaker Change: Hum.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: Yeah.