Q1 2025 Encompass Health Corp Earnings Call
Please stand by, your program is about to begin.
Speaker Change: Good morning everyone and welcome to Encompass Health's first quarter 2025 earnings conference call. At this time, I'd 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. If you would like to ask a question during this time, please press the star and one on your telephone keypad. You will be limited to one question and one follow-up question. Today's conference call is being recorded. If you have any objections to potentially being recorded, you may disconnect at this time. If you have any questions, please press the star and one on your telephone keypad.
Speaker Change: 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 in Compass Health's first quarter 2025 earnings call. Before we begin, if you do not already have a copy, the first quarter earnings release supplemental information and related form 8K filed with the SEC are available on our website at encompasshealth.com.
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.
During the call, we will make forward-looking statements.
Mark Miller: First quarter total discharge growth of six 3% was a strong result, particularly in light of Q1, 2020 force, 10% discharge growth.
Mark Miller: Recall that Q1 of 2024 benefitted from an extra day due to leap year and because the quarter ended on Easter Sunday.
Mark Miller: First quarter of 2025 same store discharges grew four 4%.
Mark Miller: Once again, the efforts of our dedicated and highly competent clinical team allowed us to accommodate this volume while maintaining outstanding patient outcomes.
Mark Miller: Our Q1 discharged community rate was 84% are discharged to a cute rate was eight 9% and our discharged to sniff rate was down to six 4%.
Mark Miller: Our performance on each of these quality metrics compare favorably to the industry average.
Mark Miller: We continue to invest in our clinical team.
Mark Miller: By providing professional growth and development programs, such as our clinical ladder and in house continuing education opportunities.
Mark Miller: These programs contribute to the continuing improvement in our clinical turnover trends.
Mark Miller: Q1 of 2025 annualized are in turnover.
Mark Miller: Was 21% down from previous years, 24% and annualized therapists turnover rate was six 3% down from prior year seven 7%.
Mark Miller: Due in large part to our Q1 results, we are increasing our 2025 guidance.
Doug: Doug will go into greater detail in his comments.
Doug: Demand for our services remained strong and we're continuing to invest in capacity additions to meet the needs of patients requiring inpatient rehabilitation services in.
Doug: In Q1, we opened a new 40 bed joint venture Hospital in Athens, Georgia, Our settlement JV Hospital in partnership with Piedmont.
Doug: We also added 25 beds to existing hospitals.
Doug: Over the balance of the year, we plan to open six de novo's with a total of 300 beds as well as a 50 bed freestanding satellite hospital.
Doug: Consistent with our historical practice the satellite will be accounted for as a bed addition.
Doug: We anticipate adding another 125 to 145 beds to existing hospitals in 2025 inclusive of the aforementioned satellite.
Doug: We continue to build and maintain an active pipeline of de Novo projects, both wholly owned and JV, while also monitoring and assessing bed expansion opportunities.
Doug: Our pipeline of announced de Novo projects with opening dates beyond 2025.
Doug: Currently consists of 10 hospitals with 500 beds and we anticipate additional projects will be announced over the balance of the year.
Doug: In response to strong volumes and current occupancy levels at some of our hospitals, we had increased our bed expansion plans and now expect to add approximately 120 beds to existing hospitals in both 2026 and 2027.
The demand for inpatient rehabilitation services remains considerably underserved and continues to grow as the U S population ages.
Doug: We intend to continue to expand our capacity and capabilities to help meet this need.
On April 11th of this year CMS released the 2026 <unk> proposed rule.
Doug: This included a proposed net market basket update of two 6%, which we estimate would result in a two 7% increase for our Medicare patients beginning October one 2025 based on our current patient mix.
Doug: Based on historical practice, we expect the final rule to be released in late July or early August.
Doug: Yesterday, we announced that Pat tour has been promoted to the newly established position of Chief operating officer, where he will oversee hospital operations across the organization.
Doug: Ask promotion was prompted by our significant growth and robust development pipeline.
Doug: Since joining encompass health in 2018 pad has held several leadership roles. Most recently group president overseeing three of our geographic operating regions with a total of 69 hospitals.
Doug: That has been instrumental in shaping our operational success and driving the delivery of exceptional care to the patients and communities we serve.
Speaker Change: Many of you met Pat at our Investor Day in 2023, and at Investor conferences and meetings since then.
Doug: And we are excited to have him in this new role.
Doug: He's with US here in the room this morning.
Doug: Now I'll turn it over to Doug.
Doug: Thank you Mark and good morning, everyone.
Doug: Revenue for the quarter increased 10, 6% to 1.4 dollars 6 billion and adjusted EBITDA increased 14, 9% to $313 6 million.
Doug: Revenue growth for the quarter was driven by a six 3% increase in total discharges and a three 9% increase in net revenue per discharge.
Doug: Same store discharges grew four 4%.
Doug: Our volume strength continues to be broad based across geographies and patient and payer mix.
Net revenue per discharge growth of three 9% was higher than anticipated due in part to payer mix.
Doug: Q1 S. W. B per FTE increased three 2%.
Doug: Premium labor cost comprised of contract labor and sign on and ship bonuses declined $5 million from Q1, 24 to $28 6 million.
Doug: Contract labor in the quarter was $16 4 million down $2 9 million from Q1, 'twenty four and sign on and shipped bonuses were $12 2 million down $2 1 million.
Doug: Contract Labor Ftes as a percent of total Ftes was one 3% for the quarter.
Doug: Consistent with our recent trend benefits expense per FTE increased 14%.
Doug: Growth in benefits expense per FTE is being driven by an increase in the severity and frequency of group medical claims.
Doug: Group Medical expense growth is expected to remain elevated in Q2 and begin to ease in the second half of the year as we anniversary the increase experienced in 2024.
Doug: It's also worth noting that Q1 has benefits for FTE increase comes off a low base as benefits per FTE growth in Q1 of 24 was 7%.
Doug: Net preopening and ramp up costs were $2 1 million.
Doug: As previously stated we expect these costs to be heavily weighted towards the second half of the year due to the timing of our new hospital openings.
Q1, adjusted free cash flow increased 32, 7% to $222 4 million.
Doug: We now expect full year, adjusted free cash flow of $620 million to $715 million.
Doug: Our primary use of free cash flow continues to be capacity expansions.
Doug: As Mark mentioned, given the growing demand for our services and our increasing occupancy rates. We have increased our pipeline of bed addition projects.
Doug: This is reflected both in our raised growth related capex assumptions for 2025.
Doug: And our estimated bed additions through 2027.
Doug: For 2025, we now anticipate adding 100 to 120 beds to existing hospitals for 'twenty six 'twenty seven we now anticipate adding approximately 120 beds to existing hospitals.
Doug: During Q1, we repurchased 333679 shares of our common stock for a total of $32 1 million and declared a cash dividend of <unk> 17 cents per share.
Doug: Our.
<unk> and liquidity remain well positioned.
Doug: Net leverage at quarter end was two one times compared to two two times at year end.
Doug: We ended the quarter with $95 8 million in unrestricted cash and no amounts drawn on our $1 billion revolving credit facility.
Doug: Moving onto guidance as Mark stated based primarily on our Q1 results. We are raising our 2025 guidance as follows.
Doug: Net operating revenue of $5 85 to $5 92 5 billion.
Doug: Adjusted EBITDA.
Doug: One 185 to one point Q2 zero billion.
Doug: And adjusted earnings per share of $4 85 to $5 10.
Doug: The key considerations underlying our guidance can be found on page 11 of the supplemental slides.
Doug: With that we'll open the lines for questions.
Doug: At this time, if you'd like to ask a question. Please press the star and <unk> on your telephone keypad.
Doug: Keep in mind, you will be limited to one question and one follow up question at a time. He may also remove yourself from the question queue at any time by pressing star and two.
Doug: Again star and wanted to ask a question.
Speaker Change: We will take our first question from <unk> Chickering with Deutsche Bank. Please go ahead. Your line is open.
Chickering: Good morning, good morning.
Speaker Change: Hey, good morning, guys great quarter.
Chickering: First question here on payer mix.
Chickering: It's been a long time since we've seen such a big move up in Medicare fee for service.
Chickering: Is this due to any strategic.
Chickering: Strategic actions that you guys have put in place or something else.
Chickering: Does he added such a nice revenue per discharge in the quarter.
Chickering: Yes, Peter your observation is absolutely correct as a matter of fact, we havent seen Medicare fee for service charges grow faster than Medicare advantage discharges since the middle of 2022, and it was somewhat of a surprise to us. It is not the result of any deliberate strategic actions in which we are.
Chickering: We're favoring referrals or patient admissions from fee for service versus Medicare advantage.
Chickering: We like the rest of the world have heard anecdotally about the fact that perhaps MA growth based on new enrollment may have slowed a little bit, but we really don't think that that was having a discerning impact on the mix for the quarter.
Chickering: One trend or one quarter does not a trend make so we're not necessarily anticipating that this is the new normal on a go forward basis as a matter of fact, our our revised guidance assumes that we get back into the the kind of payer mix dynamic that we were seeing prior to this quarter, but it's certainly something we'll keep an eye on.
Chickering: As a reminder, over 90% of our admissions come directly from the acute care hospitals referral sources in our marketplaces. So.
Chickering: As Doug noted, we don't know if this is a major trend or not but we were pretty much.
Chickering: There to try to service to referral sources that are existing in our marketplaces.
Chickering: It is interesting if you look at the payer mix in totality for the quarter.
Chickering: And even with the <unk>.
Chickering: Reversal in terms of the trend between fee for service and Medicare advantage.
Chickering: Medicare fee for service and Medicare advantage together as a percentage of our payer mix increased about 150 basis points and those are our two highest reimbursement payors.
Chickering: And then Medicaid and managed care, which are below that in terms of reimbursement decline by about 140 basis points and so it was those factors that really contributed significantly to the three 9% increase in revenue per discharge.
Chickering: Okay, Great and then can you talk about your employee per occupied bed occupancy, it's a high class problem, but your occupancy hit a new high and your employees per occupied bed hit a new low you've provided a lot of leverage on the P&L.
Chickering: Are you guys sort of behind on hiring with the current demand or is this a seasonal and can you just give us the dynamics between occupancy employees per occupied bed and how you think about planning for hiring the next few quarters.
Chickering: <unk> demand and productivity. Thank you.
Chickering: Yes, Peter.
Chickering: We are.
Speaker Change: <unk> committed to that 3.4 number on <unk> clearly we've got some leverage in the first quarter. As you noted that's the highest occupancy rate.
Chickering: We've had.
Chickering: A couple of notes on that would be as I remember, we only had one de Novo hospital came online in Q1. So you didn't have the.
Chickering: The delevering.
Chickering: <unk> ramp up we will have obviously, a higher number of de Novo is coming up particularly in the third and fourth quarter. So that's going to impact <unk> as we bring on staff with those new hospitals, but had not yet opened.
Chickering: With patients.
Chickering: We're.
Speaker Change: No I don't think were behind we remain committed we have the talent acquisition team that continues to hire particularly focused on nurses, but they've done a great deal with.
Chickering: With other positions.
Chickering: We did redirect some of those resources that were staffing new hospitals on to existing hospitals and markets.
Chickering: We continue to run a higher percentage of contract labor that may have continued to that.
Chickering: Contributing to the decrease in the contract labor dollars you saw.
Chickering: In the first quarter were just able to to fill more of those open positions that those hospitals with permanent staff versus contract labor. So.
Chickering: I wouldn't read a whole lot into the <unk> will continue to focus on running as efficient as we can.
Chickering: But we still think the $3 four numbers good number Peter you hit on a couple of key relationships in that number.
Chickering: One is that there is some seasonality factored in Q1 is normally a very good.
Chickering: Volume quarter for us and that proved to be the case this year as well. So there is some seasonality factored in that said I would say that overall the discharge growth in the quarter was higher than our initial expectations.
Chickering: Second thing is that there is definitely a correlation between labor productivity and occupancy because youre, creating patient density when you run at higher levels of occupancy and that gives rise to coverage issues, but to Mark's point, we're not anticipating that this is a new sustainable run rate and when.
You factor in the seasonality in the business and the timing of new capacity additions through the course of the year, we expect that number to gravitate a little bit north.
And we will take our next question from Andrew Mok with Barclays. Please go ahead. Your line is being recorded.
Andrew Mok: Hello, Andrew.
Chickering: Hi, Andrew.
Chickering: Yeah.
Chickering: Or not.
Chickering: Jason.
Chickering: Sure.
Chickering: I believe Andrew May have disconnected.
Speaker Change: We'll take our next question from Whit Mayo with Leerink partners. Please go ahead and open.
Whit Mayo: Hey, guys. Good morning, Congrats congrats to Pat.
Speaker Change: Okay.
Speaker Change: I guess my first question I'm curious just.
There's a lot of conversation around tariffs and wanted to just get what your updated thoughts are on either supply cost or construction expenses. So I'll just start there.
Speaker Change: Yes.
Speaker Change: Like probably everybody else in this country were a little bit and wait and see mode.
Speaker Change: We've done a pretty thorough assessment based on the information that is available to us and it's obviously a very dynamic environment.
Speaker Change: Right now we don't believe that we have much if any in the way of near term risk either with related to construction costs or more generally speaking within our supply chain.
Speaker Change: Of the material that is that is related to the projects that are currently under construction has already been procured and he hasnt been subject to any of the tariffs and within our broader supply chain based on some of the reconfiguration that we originally did out of Covid and based on the underlying contracts that are in place.
Speaker Change: We're fairly insulated against that at least for fiscal year 2025.
Speaker Change: We will continue to keep an eye on this but right now we're not any we're not estimating any kind of significant impact.
Speaker Change: Okay and then.
Speaker Change: It sounds like you guys are.
Speaker Change: Increasing a little bit the commitments on.
Speaker Change: That growth and additions next year just was wondering if you had any initial expectations around startup costs for 2026 and also if you could just remind us on Medicaid supplemental sort of what the exposure is there. Thanks.
Speaker Change: Yeah.
Speaker Change: Don't have an initial range for you on the 26 startup cost my guess is that.
Speaker Change: I'd have to look more specifically compare timing from quarter to quarter and.
Speaker Change: And specifically look at what some.
Speaker Change: The timing around early 2027, but I wouldn't expect the number to be markedly different than what we're anticipating for 2025 into 2026.
Speaker Change: In terms of the Medicaid supplemental payments.
Speaker Change: As we've said previously for US, it's just not nearly as big a deal.
Speaker Change: As it is for the acute care hospitals I want to remind you of some of the.
Speaker Change: Historical context.
Speaker Change: We'll go back to 2023.
Speaker Change: Total EBITDA impact for us from provider tax revenue minus the provider tax expense was a negative $800000. The year. Prior in 2022 was a positive $2 million last year was a bigger number with a $15 $4 million impact.
Speaker Change: Favorable impact on EBITDA, but even that pales in comparison to that which you are experiencing with some of the acute care hospitals and for the quarter for Q1. The total impact was three $3 million to EBITDA, which was a decrease of $1 $9 million from the $4 9 million.
Speaker Change: EBITDA impact in Q1 of 'twenty four.
Speaker Change: Great. Thanks.
Speaker Change: Oh.
Speaker Change: We will take our next question from Matthew Gilmore with Keybanc. Please go ahead. Your line is open.
Speaker Change: Hey, Matthew.
Matthew Gilmore: Hey, good morning, guys and congrats as well as Pat.
Speaker Change: Maybe going back to labor efficiency, and asking you about the SBB per FTE metric it seemed like that.
Speaker Change: Ran relatively modestly in the first quarter so favorable.
Speaker Change: Curious how that played out versus your expectations and it sounded like from Doug's comments that labor and sign on and shifts bonuses with favorable and I was curious sort of how you felt about the sustainability of that going forward.
Speaker Change: Yes, so youre absolutely right at three 2% in terms of the total SW be inflation rate for the first quarter, we were slightly below the low end of the guidance range that we had for the full year.
Speaker Change: The benefits piece being up 14% was pretty much in line with our expectations and again was consistent with the trend that we saw at least in Q4 of <unk>.
Speaker Change: Last year the points of leverage that got us below the low end of the range were twofold. One you. Just mentioned was we had anticipated that across the course of the year and we continue to have this anticipation that the total spend on the premium labor categories from $24 25 would remain essentially flat.
Speaker Change: From a nominal dollar perspective, and we saw year over year decrease were not sure again that I've no I've used this phrase already once today, but we're not sure that one quarter makes a trend. So we're still building into our guidance the anticipation that flat is a good assumption.
Speaker Change: And then the second is that our just removing the premium labor categories. R. S. W per FTE inflated and a more modest rate than we had recognized in the second half of the year.
Speaker Change: Again, we're not ready to call that a new trend, but it was a favorable outcome for the quarter.
Speaker Change: Just I would say that I mean, we have a history of running relatively low contract labor clearly the the volume growth that we've had.
Speaker Change: For the past couple of years has put some upward pressure on that but our operating teams are very focused on.
Speaker Change: Filling their full time, and part time physicians and continuing to drive down the need for for contract labor and they have the tools to do that so as we continue to see some of labor markets normalize or even soften a bit where they were in previous years.
Speaker Change: We remain very focused on.
Speaker Change: Driving down those numbers and we were pleased with the one 3% of total ftes being contract labor Ftes in the quarter. That's the lowest we've been at in a while I'll remind you that our run rate prior to the initial peak and labor conditions, which really occurred in the third quarter of 2021.
Speaker Change: One had been just below 1%. So we're not to that level. We don't know that we're getting back to that level. The rate for contract Labor also has really stabilized kind of in that 175 to $180000 on an annualized basis again, that's higher than it would have been prior to this peak conditions arising in Q1 of 'twenty.
Speaker Change: One which was closer to 145 to $150000, but it's substantially down from the peak, which we hit in the first quarter of 2022, which was $240000.
Speaker Change: That's great. Thank you and then one quick one on flu I think in the past, sometimes you've called out blue leading to more patients with debility.
Coming to our facilities just curious if there was any of that impact in the quarter and anything to flag there.
I don't think there was anything that's material yes.
Speaker Change: To be a pretty active flu season.
Speaker Change: The ability to measure that impact.
Speaker Change: On our on our volumes for Q1, I think it's negligible, but it was out there, but I can't say, it's a N a.
Speaker Change: A more significant or less significant than in previous years, Yes, I think within the patient mix.
The strike was actually more broad based and wasn't driven as much by flu volume and you actually see that in the fact that the ability.
Speaker Change: You are correct.
Speaker Change: Matthew.
Speaker Change: Its typically where youll see some of those flu volume show up and the ability on a year over year basis, only increased one 2% in the quarter.
Speaker Change: Had good growth in stroke again, roughly 4% brain injury was up 8% neurological up almost 7%.
Speaker Change: Got it thank you.
Speaker Change: We'll take our next question from Ann Hynes with Mizuho Securities. Please go ahead. Your line is open good.
Speaker Change: Good morning Ann.
Speaker Change: Morning.
Speaker Change: Getting back to the capacity because it was so high in the quarter.
Speaker Change: This de Novo strategy.
Speaker Change: Obviously, it's working and what at what point do you think you could.
Speaker Change: Wanted to accelerate our growth strategy.
Speaker Change: Current.
Speaker Change: Current over the next couple of years since the strategy has been successful.
Speaker Change: Well, we are accelerating the growth strategy, starting with the bed expansions and that's the most.
Speaker Change: That's the most direct way to alleviate any pressures arising from higher occupancy rates I do want to point out that because we have been increasing steadily.
Speaker Change:
Speaker Change: A portion of our portfolio that is comprised of private rooms versus semi private rooms are theoretical occupancy rate has been increasing along the way to give you. Some specifics on that if we go back to 2020, just over 40% of our total beds were in private rooms.
Speaker Change: At the end of the first quarter, 56% of our total beds were in private rooms, so that 78, 8% occupancy rate that we experienced was the highest that we can recall ever having occurred.
Speaker Change: And it does suggest that we need to accelerate some of these bed expansions over a multiyear period of time, which Fortunately we have both the the access to capital and the capabilities within our design and construction team to be able to do.
Speaker Change: With regard to accelerating de novo activity beyond the current range.
Speaker Change: That's got a longer lead time associated with it.
Speaker Change: It's typically from the time, we ideate on a particular market to getting the doors opened its about three years as mark alluded to in his comments, we would expect that through the course of this year, we're going to be announcing additional de novo projects that'll be opening.
Speaker Change: Beyond 2025, but for the immediate time being we believe staying in this range of 6% to 10 per year, perhaps trying to operate at the midpoint or higher is the appropriate place for us to be and I'll remind you beyond just the spend.
Speaker Change: And the demands on our design and construction team each one of those hospitals has to be staffed with.
Speaker Change: With a trained clinical workforce.
Speaker Change: At capacity, a 50 bed hospital was running about 100, Ftes and about two thirds of those are clinical we want to make sure that as we are adding capacity into this demand curve, which is very real out there that we're doing so in a way that is also ensuring the.
Speaker Change: We produce high quality patient outcomes.
Speaker Change: Great and just on guidance, obviously, you beat consensus by a healthy margin.
Speaker Change: Doug I think I believe you said during the call is that volume with ahead of your expectation what is.
Speaker Change: You beat your internal expectations by and I guess the guidance may and it's persistent b is that just conservatism on your part or is there something we should model that may be the streets mis modeling for the rest of the year.
Speaker Change: Well that is a series of really loaded question.
Speaker Change: You knew in advance I wasn't going to answer.
Speaker Change: The quarter was ahead of our expectations I'm not going to give you a specific number on that but I cited some of the specific areas where it was ahead earlier, which is we did a little bit better on volume that we anticipated.
Speaker Change: And the two biggest upside surprises for us where that revenue per discharge based on the payer mix that we hadn't anticipated.
Speaker Change: And then also the fact that.
Speaker Change: We've got a lot of leverage in the <unk> line. Some of that was the <unk> coming down based on the higher volume and the occupancy rate and some of it was the leverage that we've got against premium labor. So certainly that was a favorable outcome for Q1.
Speaker Change: It's uncertain to us how much of that is sustainable for the balance of the year and so we've maintained a lot of the annual assumptions that we had in the guidance considerations. Another area of favorability. We were at the low end of the of the bad debt assumption right at 2% that owed in large part to the fact that we.
Speaker Change: Only a de minimis amount of tpa activity during the quarter and as we all experienced last year, we know that TCE audit activity can be very lumpy and so we left that assumption for the full year. The same it's only the first quarter, obviously will be more informed about the sustainability of the entities trends. After we are able to book another.
Speaker Change: Sure.
Speaker Change: Great. Thank you.
Speaker Change: Yes.
Speaker Change: We'll take our next question from Joanna <unk> with Bank of America. Please go ahead. Your line is open.
Speaker Change: Good morning, Joanna Hi, Joe Hi, good morning.
Speaker Change: Hey, good morning, Thanks, so much for taking my question so.
Speaker Change: Maybe.
Speaker Change: Man I just spoke about a lot of online demand for the services, where you like you said, you'll keep expanding your expansion plans.
Speaker Change: Can you give us a little bit more there.
Speaker Change: Buffy assistant that or is it built base can you talk about maybe also competitive environment like why are you. The only one I guess aggressively building and adding that.
Mark Miller: Yes, Joanna this is mark.
Speaker Change: I'll start I'll say that.
Speaker Change: The demand was.
Speaker Change: Across all geographies as you know we have a geographic operating regions and we saw nice growth in the majority of our markets and certainly across the all of those operating regions. As we've noted before I mean, we certainly benefit from the aging demographic and I think that's exactly what we're seeing with <unk>.
Speaker Change: Non discretionary patients and patients that have.
Speaker Change: We have multiple comorbidities and the issues that.
Speaker Change: Require.
Speaker Change: First in large part acute care level of care and then are ready for our inpatient rehabilitation care. So.
Speaker Change: The demand continues to grow closely linked to the aging demographic, yes to give you some specifics that we've cited before if you if you look.
Speaker Change: Going backwards for more than a decade. The age cohort that is most served by us and by herbs in general has been growing at a CAGR of close to 4%.
Speaker Change: Over that same decade, plus period, the total supply of Earth beds in the U S has increased less than 3% in total that's not a CAGR. That's total so what already started as an inadequate supply of earth beds in this country widened substantially over that period.
Speaker Change: Why are.
Speaker Change: We're not the only one who is adding capacity here I think if you look at select medical Dave announced plans to substantially ramp up their capacity on the <unk> side as well, but perhaps the two of us kind of a stand alone and why is that the case well, it's really difficult to do this.
Speaker Change: First of all it requires very substantial capital outlays to build a freestanding hospital even to add capacity to existing hospitals. We've mentioned before we feel good about we've been able to stabilize the cost per bed on de novo construction at about $1 $2 million and even for bed expansions the cost per bed.
Speaker Change: Now is north of $800000. So the capital outlay is very extensive clinical expertise.
Speaker Change: Is.
Speaker Change: To treat these very medically complex patients is also a barrier to entry as is the need for a robust compliance function and one of the things that we really benefit from is the fact that we enjoy substantial economies of scale that allows us to get operating leverage across these platforms and also to extrapolate best.
Speaker Change: <unk>. So yes, if it were easy if it were easy to do given the attractiveness of the market.
Speaker Change: We'd probably see a lot more capacity coming in but that's just not the case it is highly complex and expensive.
Speaker Change: Alright, exactly thanks for that.
Speaker Change: I guess related question on your bed expansion right. So it sounds like.
Speaker Change: Alright.
Speaker Change: Generating more free cash flow, but then you're also raising your bed expansion outlook I mean, I guess quest.
Speaker Change: So by that occupancy being higher so should we expect the.
Speaker Change: Additional free cash flow tickets go come with Keith that ambition can you remind us the return on these net additions for maybe contracted with vanilla. Thank you.
Speaker Change: Yes, so consistent with our previous statements the highest and best use of capital for US is on capacity expansion through both de Novo and bed expansions and bed expansions are the highest return of capital we have because we're leveraging components of the fixed infrastructure and we're building into a market where we are.
Speaker Change: Already enjoy a presence and where the demand curve has already been established.
Speaker Change: The occupancy rates are driving our decision to put more capital into the bed expansions. Fortunately, we have the capabilities again within our design and construction area to push forward. Some of those projects as we Mark mentioned in his comments, we've now run 11 straight quarters with same store.
Speaker Change: Growth north of 4% and so as a result, the pipeline of our hospitals that are qualifying for bed expansions based on their occupancy rates has increased and so we're definitely going to give a prioritization with regard to capital allocation to adding capacity. So that we're able to serve the needs of the pay.
Speaker Change: <unk> in those markets.
Speaker Change: Okay.
Speaker Change: Thank you.
Speaker Change: We'll take our next question from Brian <unk>.
Speaker Change: With Jefferies. Please go ahead your line is open.
Speaker Change: Hey, Brian Hey.
Speaker Change: Hey, guys. Good morning, congrats on the quarter.
Speaker Change: Let me yes.
Speaker Change: Doug maybe ill follow up just on the comments I made to Joanna question. So as we think about some of these challenges that hospitals are staring down with DPP payments.
Speaker Change: Probably going away or getting cut and whatnot.
Speaker Change: Are you seeing anything in the market in terms of maybe either increased interest in partnering with you guys or the opposite where they're pulling back from plans to open or if that if that's the path that they were looking at just curious what you're seeing.
Speaker Change: Yes, I think it's the former I think we continue to see more and more interest from various acute care hospitals about wanting to partner.
Speaker Change: And that's reflected in our in our pipeline. So we continue to believe that probably at least half of the <unk> that will be opening over the next several years are likely to be in joint ventures.
Speaker Change: We've got a Great example, again Mark mentioned in his comments, we've now got seven hospitals as part of the Piedmont joint venture and that's the kind of success that really I think makes other acute care systems take notice of the effectiveness of these types of partnership relationships.
Speaker Change: Hey, Brian. So we also have as Doug noted I mean, there are a number of our existing partnerships systems.
Speaker Change: <unk> currently have one or more rehab hospital JV with us that continued to look at their marketplace and as they expand their presence. They are also taking into account the news for rotation. So.
Speaker Change: You can look at Piedmont, our partnership in the St. Louis marketplace with B J C.
Speaker Change: Those are two examples of partners, where we have multiple rehab hospitals as part of that overall relationship and I think with the acute care hospitals are increasingly awareness aware of is that either a formal or informal relationship with us in terms of having a freestanding earth and the market can.
Speaker Change: Increase their capacity in one of two ways. One as we have demonstrated consistently that we have the ability to take highly complex medical patients out of the acute care hospitals earlier than other providers in their stay without in any way endangering the patient's recovery path and so when we're doing.
Speaker Change: That we're allowing them to free up that bad more quickly the second of the mortality way is when we use our model of going in and removing a unit from an acute care hospital and folding it into a freestanding hospital, so that that space within the acute care hospital. It can be repurposed for general medical and surgical perp.
Speaker Change: <unk> and increase our overall capacity to address those patients' needs.
Mark Miller: I appreciate that and then maybe my follow up Mark as I think about maybe an economic slowdown here you guys have been there at encompass for awhile and an experienced previous recessions just curious how you're thinking about the durability of demand and maybe Doug just to kind of layer onto this any comment you can make on exchange subsidy.
Speaker Change: Military just exchange exposure within your patient populations.
Speaker Change: So first question I mean are the demand for our services does not fluctuate with the economic status in minutes and our patients are non discretionary and therefore, if you look back historically during periods of recession.
Speaker Change: Or high growth in the economy it doesn't necessarily reflect.
Speaker Change: And influence the need for our services. So I would not anticipate any decline in a recessionary economy.
Brian: And your second question, Brian we have there.
Speaker Change: We have de Minimis exposure to the exchanges.
Speaker Change: Awesome. Thank you.
Speaker Change: We'll take our next question from AJ Rice with UBS. Please go ahead. Your line is open.
Speaker Change: Ajay.
Speaker Change: Hi, Thanks, everybody.
Speaker Change: Okay.
Speaker Change: Look everybody.
Speaker Change: First I guess on the benefit expense I think you called out that it was up 14% as sort of the second quarter.
Speaker Change: Call that al I Wonder.
Speaker Change: How much of a headwind is that I don't know if you've sized benefit as a percentage of your SWM be but it would be just interesting to know that it is there anything you can do.
Speaker Change: Just have to wait till you anniversary that and then.
Speaker Change: Then it will moderate as a pressure point or is there anything you can proactively do to manage that as a different way.
Speaker Change: Yes. So first part of your question is that.
Speaker Change: <unk> expense in total typically runs about 10 or 11% of total SW Dave.
Speaker Change: In terms of what we can do we proactively work with our third party consultants.
Speaker Change: Kind of assessing our trends versus broader trends within the U S with large employers and specifically within the health care community. We look at things like any changes to the composition of our benefits programs the relationship between employee employee and employer.
Speaker Change: <unk> and so forth and so on a regular basis, we're making changes to those programs to try to contain the cost but also to make sure that we're offering the most competitive.
Speaker Change: Benefits program, we can from an employee perspective, because thats a big aspect of Retentions and we will continue to do that proactively we do think and you pointed this out a J that we're going to see that growth rate begin to moderate as we move into the second half of the year simply because we saw that step up in the second half of last year.
Speaker Change: In our discussions with our consultant what we're seeing in our program apparently is pretty consistent with the peer group that's out there.
Speaker Change: Okay.
Speaker Change: Follow up question I know a lot last year about this time.
Speaker Change: There was some noise in the numbers with the Palmetto audits and the TP program and how that was playing out any.
Speaker Change: Updated thoughts on where all that stands at this point and are you back sort of a normal.
Speaker Change: Situation.
Speaker Change: Much of the year.
Speaker Change: Yes.
Speaker Change: Think there's the potential for some of the same dynamic to exist and so this is the interplay specifically with palmetto between RCD in Alabama, and PPE and as a reminder, palmetto is our largest Mac responsible for approximately 80% of our overall hospitals, including the seven that we have in.
Speaker Change: In Alabama, and so they remain consumed with the RCD program in Alabama under which by the way our performance has gotten better but it is not where it ought to be and it remains a lot of hand to hand combat and trying to overcome very inconsistent treatment by palmetto on those claims.
Speaker Change: But with regard to <unk>, what we've seen at least since RCD has been in place is that they seem to lack the capacity to run a consistent PPE program and administer RCD and so the TBE activity at least last year proved to be very lumpy.
Speaker Change: Left some room for that kind of lumpiness in our assumption regarding bad debt for the full year.
Speaker Change: As corollary to that I'll remind you we had that big step up when those claims were selected by Palmetto under PPE for review of the second quarter, but what we've seen is those have played out over a multi quarter period of time is that our recovery rate against those claims are our success rate against those claims selected from review has been highly <unk>.
Speaker Change: So theres the chance that you might see a blip just based on our reserve methodology. If we see the same kind of pattern under PPE that we saw last year, but I don't think it causes us concern that the aggregate level of bad debt expense is on the rise.
Speaker Change: Okay. Thanks, a lot.
Speaker Change: And as a reminder, if you'd like to ask a question today. Please press the star and one key on your telephone keypad.
Speaker Change: We'll take our next question from Jared <unk> with William Blair. Please go ahead. Your line is open.
Speaker Change: Good morning Jared.
Jared: Hey, good morning, Thanks for taking the questions and I'll Echo the congrats on a strong quarter.
Speaker Change: Maybe I'll ask one on the quarter just to kind of put a fine point on things and specifically the strong EBITDA performance I know, we've obviously focused a lot on the trends around labor, but curious if there are any other I guess.
Speaker Change: Areas in Opex, where you saw good leverage our operating efficiency and if you could talk about the durability of some of those areas of leverage if you saw any thanks.
Speaker Change: Yes, any time, you are running at high volumes and particularly with the.
Speaker Change: The density that comes with the higher occupancy rate youre, creating opex leverage.
Speaker Change: Throughout the P&L, but definitely the more pronounced the most pronounced area of that and it's because it's our single largest expense category was in the SW line I think we've pretty well already addressed our thoughts regarding the sustainability of that we expect the as.
Speaker Change: As the primary measure of productivity, we expect the Epo number to move north over the balance of the year just based on the seasonality and based also on the capacity expansions that are coming on through the course of the year.
Speaker Change: Perfect. That's helpful. And then maybe go back to something you talked about in the prepared remarks, just some of the consistent performance you've had in your discharge rates and quality metrics and I guess I'll just ask what are the biggest drivers in your view in terms of the ability to sustain that level are performed.
Speaker Change: On quality, just considering how rapidly you've grown the business over the last couple of years.
Speaker Change: As Doug noted earlier, bringing new staff in and making sure as we add capacity that we are.
Speaker Change: <unk> staff that we have the staff onboard it.
Speaker Change: That isn't that our existing hospitals as we bring on new staff.
Speaker Change: We are.
Speaker Change: Training them and getting them oriented so I.
Speaker Change: I feel like our quality and if you just look at our trends we continue to.
Speaker Change: Increase.
Speaker Change: Our quality if you look at our discharged community.
Speaker Change: A reduced number of discharges being sent to skilled nursing facilities.
Speaker Change: We always focus on patient satisfaction with our net promoter scores.
Speaker Change: No we would not be adding.
Speaker Change: Both if we couldn't.
Assure ourselves that we could show and produce the quality outcomes.
Speaker Change: That we do as an organization. So I think it's very sustainable we're very proud of where we're headed particularly on those discharge status.
Speaker Change: <unk>.
Speaker Change: And we continue to focus on our with our clinical teams on on how can we get incremental outcomes.
Speaker Change: Every day.
Speaker Change: To underscore what Mark said, there because I think it's important to note we have experienced very rapid growth. Both in terms of on a same store basis and through the capacity expansions over a multiyear period of time and yet we now have the highest net promoter scores and the highest employee employee.
Speaker Change: The engagement scores that we've ever had and that's something that we're really proud of.
Speaker Change: That's great to hear thank you.
Speaker Change: And we'll take our next question today from Andrew Mok with Barclays. Please go ahead. Your line is open.
Andrew Mok: Hi, good morning, Andrew.
Andrew Mok: Good morning.
Speaker Change: The revenue discharge per discharge number was pretty strong in the quarter of three 9% and finished above the underlying pricing expectations. So I know that number contemplates a number of items, including core pricing acuity and bad debt bad debt came in on the lower end of expectations, but it still looks like it's strong can you flesh out kind of like the underlying drivers of that number.
Andrew Mok: How we should expect that the trend for the balance of the year.
Andrew Mok: No you're exactly right. It was and there are a number of things that go into it the largest ones I'd point out were that bad debt was at the low end of the range as you just cited.
Andrew Mok: Second is that we had that shift in the payer mix, which I alluded to earlier and it was not only that fee for service grew faster than Medicare advantage is when you look more broadly at the change in the overall mix.
Andrew Mok: That.
Andrew Mok: Whereas Medicare advantage and Medicare fee for service as a percentage of the payer mix in total for the quarter moved up 150 basis points and those are our two highest reimbursement categories.
Andrew Mok: Had.
Andrew Mok: Managed care and Medicaid Medicaid by far being our lowest moved down 140 basis points. So that's a real favorable shift there.
Andrew Mok: Also had some.
Andrew Mok: Favorable trends within our quality metrics to help improve our reimbursement as well.
Andrew Mok: In terms of our assumptions on a go forward basis again, we don't believe that one quarter makes a trend. So we're not assuming that this slip in the growth rates between Medicare advantage and fee for service will sustain itself for the balance of the year.
Andrew Mok: Great and then maybe just a follow up on share repurchase.
Speaker Change: Lowered the share count number in the guidance, but just how are you thinking about the level of share repurchase contemplated in the guide. It did you give that number and how do you expect that to evolve over the next 12 to 18 months. Thanks.
Andrew Mok: We did not put out a specific number I will note that with the.
Andrew Mok: The share repurchases that we made in the first quarter actually slightly exceeded those that we made to all of 2024.
Andrew Mok: We've talked previously about the fact that we find ourselves in the enviable position of being able to fund all or at least the vast majority of our capacity expansions with internally generated funds and we've also been seeing based predominantly on the growth in our EBITDA. The net leverage ratio come down so that is.
Andrew Mok: Creating capacity for us to allocate more capital to share repurchases and we think that's an appropriate utilization and a good complement to the growth Capex. We have so I think you should anticipate continued activity under the share repurchase program.
Andrew Mok: Great. Thank you.
Speaker Change: And we will take our next question from John Ransom with Raymond James. Please go ahead. Your line is open.
Andrew Mok: Good morning, John.
Speaker Change: So year acute care I won't call them pairs.
Speaker Change: Our industry has been kind of reporting some issues and changes in behavior with Medicare advantage.
Speaker Change: Are you guys I mean, they've been under a lot of stress as you know, but are you guys seeing anything new or different.
Speaker Change: In your managed care negotiations not just rate, but other behavior changes as they try to manage their posture.
Speaker Change: I think from a contracting perspective, we continue to have success and we're already at a very high level of moving away from per diem contracts to episodic contracts and tying those new contracts, even if they initially started to discount directly to the postal service reimbursement I will.
Speaker Change: Say that the overall level of price increase that we saw within our Medicare advantage book of business in the in the first quarter was a bit higher than we anticipated it came in at about 5%.
Speaker Change: Again, not ready to call that a new normal.
Speaker Change: So I don't know whether its reflective John of the overall environment out there with Medicare advantage, but we do feel like we're having good success with regard to our Medicare advantage contracts.
Speaker Change: I would say that just the whole preauthorization process continues to be challenging.
Speaker Change: And I would say it.
Speaker Change: Probably a little early to say, whether or not we're seeing significant differences or new trends enter around the preauthorization process and most of our markets and some things that we noted before continued to persist which is the ratio of admittance to referrals for Medicare advantage is.
Speaker Change: Daschle below what it is for fee for service and we see no reason why that should exist and then also the number of days between a referral and ultimately decision coming through Medicare advantage plans is much slower than it is for fee for service, which does not in new work to the benefit of the patient or the acute care hospital housing.
Speaker Change: Inflation.
Speaker Change: 5% is pretty stout, thanks, guys I appreciate it.
Speaker Change: Thank you. Thank you.
Speaker Change: And there are no further questions on the line at this time I'll turn the program back to Mark Miller for any additional remarks.
Speaker Change: Thank you operator, if anyone has additional questions. Please call me at 2059705860. Thank you again for joining today's call.
Speaker Change: Okay.
Speaker Change: This does conclude today's program. Thank you for your participation and you may now disconnect.
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