Q2 2025 Aveanna Healthcare Holdings Inc Earnings Call
Good morning and welcome to aveanna. Healthcare holding second quarter 2025 earnings conference. Call today's call is being recorded and we have allocated 1 hour for prepare remarks and Q&A,
At this time, I'd like to turn the call over to Debbie Stewart aviana's. Chief accounting officer. Thank you. You may begin.
Good morning and welcome to aviana's. Second quarter 2025 earnings call. I am Debbie Stewart, the company's Chief accounting officer with me. Today is Jeff shayer our chief executive officer and Matt Buckhalter our Chief Financial Officer
During this call, we will make forward-looking statements risk factors. That may impact those statements and could cause actual future results to differ materially from currently. Projected results are described in this, morning's press release and the reports we file with the SEC,
The company does not undertake any duty to update such forward-looking statements.
Additionally, during today's call, we will discuss certain non-gaap measures which we believe can be useful in evaluating our performance.
The presentation of this additional information, should not be considered in isolation or is a substitute for results. Prepared in accordance with gaap.
A reconciliation of these measures can be found in this morning's press release, which is posted on our website, avana.com, and in our most recent quarterly report on Form 10-Q when filed.
with that, I will turn the call over to aviana's Chief Executive Officer, Jeff shayer Jeff
Thank you, Debbie. Good morning, and thank you for joining us today.
We appreciate each of you investing your time this morning to better, understand our Q2 results and how we are moving aveanna forward in 2025.
My initial comments will briefly highlight our second quarter results.
Capacity.
I will then provide updates on the Thrive skill Pediatrics integration.
The current regulatory environment and year 3 of our strategic plan.
Lastly, I will comment on our enhanced outlook for 2025 before turning the call over to Matt to provide further details into the quarter.
Moving to highlights for the second quarter.
Revenue for the second quarter was approximately 500 and 590 million representing a 16.8% increase over the prior year period.
Second quarter, adjusted ibida was 888.3 Million representing a 903.6% increase over the prior year period? Primarily due to the improved rate environment and continued cost savings initiatives?
We continue to execute our transformation uh, our strategic transformation strategy.
Focusing on obtaining adequate rates from our payer and government partners for the services we provide which is clearly evidenced in our second quarter results.
Our second quarter performance benefited from some timing related Revenue items including an uptick in value-based payments which had a favorable revenue and ibida impact of approximately 9 million in the quarter.
Matt will provide further details on the positive impact and his prepared remarks.
As we have previously, discussed the labor environment represented, the primary challenge that we needed to address to see aveanna. Resumed, the growth trajectory that we believed our company could achieve
It is important to note that our industry does not have a demand problem, the demand for Home and Community Based care continues to be strong with both state and federal governments and Managed Care organizations asking for solutions that create more capacity while reducing the total cost of care.
Our Q2 results highlight that we continue to align our objectives with those of our preferred payers and government partners
by focusing, our clinical capacity on a preferred payers, we achieved year-over-year growth in revenue and adjusted evida
We also experienced improvement in our caregiver hiring and retention Trends. By aligning, our efforts, with those payers willing to engage, with us, on, enhanced reimbursement, rates and value-based agreements.
While we continue to operate in a challenging environment, our preferred payer strategy supports our ability to achieve normalized growth rates in all three of our business segments.
Since our first quarter earnings call, I am pleased with the continued progress. We have made on several of our rate Improvement initiatives with both government and payer Partners as well as continued signs of improvement in the caregiver labor markets, specifically
As it relates to our private duty Services business. Our government Affairs strategy for 2025 is twofold. First, we plan to execute on our legislative agenda to improve reimbursement rates in at least 10 states. And second, we continue to advocate for Medicaid rate, Integrity on behalf of children with complex medical conditions,
we have a strong advocacy presence of both federal and state legislators as well as solid support from our Governors. Across our national footprint.
Legislators have recognized how meaningful private duty nursing is to the overall cost savings and improved outcomes of our nation's most vulnerable children.
As it relates to rate updates, we have achieved 10 rate enhancements year to date and our private duty Services segment and are well on our way to achieving our legislative goals for 2025.
I am proud of our government Affairs and advocacy teams for their commitment to protecting children with complex medical conditions.
Now, moving on to our preferred payer initiatives.
Our goal for 2025 is to increase the number of private duty Services. Preferred pay agreements from 22 to 30.
We added 1 additional preferred payer agreement in Q2 and are currently positioned at 25 agreements in total.
Aviana's. Preferred, payer strategy is gaining momentum and allowing us to invest in caregiver wages and recruitment efforts to accelerate hiring and Staffing of nurses for our patients.
Additionally, our Q2 preferred payer agreements account for approximately 55% of our total, private duty Services, MCO volumes.
Now moving to our preferred pair progress in home health.
Our goal for 2025 was to maintain our episodic payer mix above 70%.
While returning to a more normalized growth rate.
In Q2, our episodic mix was 74.5% and our total episodic volume growth was positive, 6.9% compared with the prior year period.
The continued investments in clinical outcomes sales resources and a focused approach to growth is now paying dividends with Q2 total emissions of 9,800 or a positive 4.3% growth over the prior year period.
We currently have 47 preferred pay agreements in home health, our focus on aligning lining. Our home health caregiver capacity with those payers willing to reimburse us on an episodic basis has led to positive momentum in our clinical and financial outcomes.
Finally, as we have achieved our desired preferred payer model and private duty services and home health and hospice.
We have embarked on a similar strategy and our Medical Solutions business.
We are in the mid-stages of implementing our preferred payer strategy in Medical Solutions.
And believe it will be fully realized by the end of this year.
To date. We have 18 preferred payers and Medical Solutions. And we expect that number to grow. As we achieve our desired preferred, payer model
Our gross margins are stabilizing in the 42 to 44% range as we align our clinical capacity. With those payers that value our services and pay us in a timely fashion.
I am pleased with our Q2 growth of approximately 91,000 unique. Patients served.
as we continue as we work to achieve our Target operating model,
While we expect our volume growth to be relatively muted, this year we are experiencing improvement in our clinical outcomes, customer satisfaction, and financial outcomes.
Our Medical Solutions business is well on its way to achieving its Target operating model and I look forward to updating you on. Its continued progress throughout the year.
We are encouraged by our rate increases. Preferred pay agreements and subsequent recruiting results.
Our business has demonstrated solid signs of recovery. As we achieve our rate goals previously, discussed.
Community-based care will continue to grow. And aveanna is a comprehensive platform with a diverse payer base. Providing a cost-effective high-quality alternative to higher cost. Care settings.
And most importantly Tate. We provide this care in the most desirable setting, the comfort of the patients home.
As it relates to our recent acquisition of Thrive Skilled Pediatrics, I am pleased to report that we are on target with our integration efforts.
Our combined leadership teams are collaborating on effective and efficient operations, and strategies to optimize care, delivery for our patients and Families.
As a reminder, the Thrive acquisition expanded our PDS offerings in 5 current states, while adding 2 new States in Kansas and New Mexico.
We expect the Thrive acquisition to be accretive to our 2025, re results. And a really nice addition to our aveanna family,
Now, turning to the current regulatory environment with Medicaid and Medicare.
We have been quite busy since our last earnings call with our advocacy efforts, primarily based in Washington DC.
We focused our efforts on 2 fronts, first supporting overall, Medicaid policy and second defending, the Medicare home health benefit for American, seniors, American seniors.
Medicaid front, we believe our patient population, fared relatively. Well and the 1, big beautiful, Bill legislation
Pediatric and adult patients with complex medical conditions were not directly targeted in the bill. And the initial view is that PDN was mostly insulated in the almost 1 trillion dollar cut to Medicaid.
With that said, we are experiencing General, headwinds with State, Medicaid, directors, and governors as they plan, for Less overall, Medicaid funding, and the possibility of shouldering more of their Medicaid cost in the future.
4%.
We are totally aligned with the National Alliance for Care at home and our home health peers and our opposition to the proposed rule.
this proposed rule would be a direct cut to Medicare and seniors receiving, and expecting to receive Health Care at home,
Although not overly material to aviana's 2026 results. This proposed rule is very challenging for the home health industry.
Insurance. Adequate access to care for seniors is Paramount and especially in America's rural communities where there is a dire need for more, not less access to care.
We strongly object to the proposed rule.
Our commenting during cms's open comment, period and will continue to advocate in all 38 aveanna States for CMS, and Congress to Halt, any cuts to the home health benefit.
Before I turn the call over to Matt. Let me comment our strategic plan and enhance outlook for 2025.
We will continue to focus, our efforts on 5 primary strategic initiatives.
First enhancing Partnerships with government partners and preferred payers to create additional capacity and growth.
second identifying, cost, efficiencies and synergies that allow us to leverage our growth
Third modernizing our Medical Solutions business, to achieve our Target operating model.
Fourth managing our capital structure and collecting our cash. While producing positive free cash flow and finally engaging our leaders and employees and delivering our aveanna mission.
Based on the strength of our second quarter and year-to-date results, we now anticipate 2025 revenue to be greater than $2.3 billion, and adjusted EBITDA to be greater than $270 million.
We believe this enhanced 2025 Outlook provides a prudent view considering the challenges we still face with the evolving regulatory environment.
In closing.
I am incredibly proud of our aveanna team and their dedication to executing our strategic transformation while holding our mission at the core of everything we do.
We offer a cost-effective patient preferred and clinically sophisticated solution for our patients and Families.
For further more, we are the right solution for our payers, referral sources and government partners.
With that, let me turn the call over to Matt to provide further details on the quarter and our 2025 Outlook Matt.
Thank you, Jeff and good morning.
I'll first talk about our second quarter Financial results and liquidity before providing additional details on our improved outlook for 2025.
Starting with the Top Line, we saw revenues rise 16.8% over the prior year period to 589.6 million.
We achieved year-over-year Revenue growth and all 3 of our operating divisions.
Led by a private duty services.
Home health and hospice and medical solution segments.
Which grew by 19.2%.
10.0 percent.
And 2.2% compared to the prior year quarter.
Consolidated gross margin was 210.8 million or 35.8%.
To Consolidated adjusted ibida, was 88.3 million or 93.6% increase as compared to the prior year.
This growth reflects an improved rate environment increased volumes as well as enhanced operational efficiencies.
Additionally, second quarter results. Were positively impacted by time related rate enhancement.
Improved revenue reserves and annual value-based payments, and our PDS segment, which contributed approximately $9 million to revenue and EBITDA in the quarter.
Now, taking a deeper look into each of our segments.
Starting with private duty services.
Revenue for the quarter was approximately 486 million a 19.2% increase.
And was driven by approximately 11.1 million hours of care, a volume increase of 6.9% over the prior year.
Q2 Revenue per hour of 43.97 was up 12.3% as compared to the prior year quarter.
Primarily driven by our preferred payer volume growth.
and the rate enhancements, previously discussed,
Optimistic about our ability to attract caregivers and address Market demands for our services when we obtain acceptable, reimbursement rates.
Turning to our cost of Labor, and gross margin metrics.
We achieved 157.9 million of gross margin.
Or 32.5%.
Cost of Revenue rate of $9.68 in Q2 was up, 95 cents or 3.6% from the prior year, period.
Despite continued wage pressures and the labor market.
Our Q2 spread per hour was 14.29.
This figure was influenced by the previously discussed, 9 million timely related items as well as the reversal of a $6 million legal settlement that was previously acred and resolved during the quarter.
We expect this metric to normalize over time as we make ongoing adjustments to caregiver wages to support, higher volumes, and improve clinical outcomes.
Moving on to our home health and hospice segment.
Revenue for the quarter was approximately 60.1 million, a 10% increase over the prior year.
Revenue was driven by 9,800 total emissions with approximately 74.5% being episodic.
And 12,400 total episodes of care.
Up 6.9% from the prior year quarter.
Medicare revenue per episode was $3231 up four 5% from the prior year quarter.
We continue to focus on right sizing our approach to growth in the near term.
By focusing on preferred Payors reimburse us on an episodic basis.
This episodic focus has accelerated our margin expansion and improved clinical outcomes.
With episodic admissions well over 70%, we achieved our goal of right sizing our margin profile and enhancing our clinical offerings.
We are pleased with our Q2 gross margin of 55%.
One 2% over the prior year period and.
And representing our continued focus on cost initiatives to achieve our targeted margin profile.
Our home health and hospice platform is dedicated to creating value through effective operational management and the delivery of exceptional patient care.
Now.
Our medical solutions segment results for Q2.
During the quarter, we produced revenue of $43 4 million.
A two 2% increase over the prior year.
Revenue was driven by approximately 91000 unique patients served up two 2% sequentially and revenue revenue per U P. S of approximately $477 up five 4% over the prior year period.
Gross margins were approximately $19 $8 million or 45, 6% for the quarter up three 2% over the prior year period.
As Jeff mentioned, we continue to implement initiatives to be more effective and efficient in our operations to achieve our targeted operating model.
We are accelerating our preferred payer strategy and medical solutions by.
By aligning our capacity with those payers that value our resources and appropriately reimburse us for the services we provide.
We expect gross margins to normalize in the 42% to 44% range and UBS to continue its growth as we implement our targeted operating model.
We will update you on our progress as we execute on this initiative.
In summary, we continue to fight through a difficult environment, while keeping our patients care at the center of everything we do.
It is clear to us that shifting caregiver capacity to those preferred payors, we value our partnership with.
As the path forward at Aviano.
With the positive momentum we experienced in Q2.
We remain optimistic that such trends will extend throughout 2025.
We will continue to pass through wage improvements and other benefits to our caregivers and then ongoing effort to better improved volumes.
Now.
Moving to our balance sheet and liquidity.
At the end of the second quarter, we had liquidity of approximately $354 million.
Representing cash on hand of approximately $101 million.
$106 million of availability under our securitization facility.
And approximately $147 million of availability on our revolver, which was undrawn as of the end of the quarter.
We had $23 million and outstanding letters of credit at the end of Q2.
During the quarter, we extended our securitization facility to 2028.
Increased its availability by $50 million.
And achieved more favorable pricing.
These enhancements further strengthened our overall liquidity position, providing flexibility to operate the business and invest in continued growth and future M&A.
Yeah.
On the debt service front, we had approximately 1.4 dollars 7 billion available rate debt at the end of Q2.
Of this amount.
$520 million is hedged with fixed rate swaps.
$880 million is subject to interest rate caps.
Which limits further exposure to increases in sofa above 3%.
Accordingly substantially all of our variable rate debt is hedged.
Our interest rate swaps extend through June 2026, and.
And our interest rate caps extend through February 2027.
As a reminder, we have no material term loan maturities until July 2028.
Looking at year to date cash flow cash.
Cash generated by operating activities was $42 $9 million in.
And free cash flow was positive $36 $9 million.
We are encouraged by the strong cash collections and expect to generate additional free cash flow throughout the remainder of the year.
Okay.
Before I hand, the call over to the operator for Q&A, Let me take a moment to address our improved outlook for 2025.
As Jeff mentioned, we now expect full year revenue to be greater than $2 3 billion.
And adjusted EBITDA to be greater than $270 million.
This enhanced guidance is inclusive of our thrive acquisition.
As we reflect on the Q2 results.
Like to take a moment to express my sincere gratitude to all of our ASEAN of teammates.
These strong results would not have been possible without your hard work and dedication.
Looking ahead I'm excited for the execution of our 2025 strategic plan.
And look forward to providing you with further updates at the end of Q3.
With that let me turn the call over to the operator.
Yeah.
Thank you we will now be conducting a question and answer session.
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We ask that you please limit yourself to one question and one follow up question. One moment. Please while we poll for questions.
Okay.
Our first questions come from the line of Benjamin Rossi with J P. Morgan. Please proceed with your questions.
Good morning, Thanks for taking my question.
Just first glance at 2025 guidance so.
EBITDA up.
So I'm just trying to 50% year over year could you just go through what has been contemplated in that $53 million increase in guidance in terms of aggregate improvements in either tie ins and pricing across your segments.
And then for cadence, we had $26 million in one time items during <unk> that you described.
Or any other year over year dynamics to consider or expected M&A within the Skype for the back half of the year.
Hey, Dan Good morning, and thanks, Thanks for the question.
I guess I'll start with.
At this point I think it was we said at the end of Q1, we had really good.
Rate outlook, so uncertainty in 2025, and I think this guidance now shows that playing through our mid year.
State Legislative efforts, we talked about 10 tense pds rate wins year to date. So we've got really good visibility into 2025 and really from the Medicaid side of the business. Good good good outlook into 26 from rate as well.
Clearly the volume of our Pds business has picked up we've talked about that being in the 3% to 5% range over the last two years and I think the last three quarters that number has been in the six six and a half now almost touching 7%.
And remember our payers want us to staff more hours. Some more volume is good for our payers good for the state Medicaid systems, because we're keeping patients in the right cost setting and at home.
But good rate certainty, we now know the hospice rule. So we set a hospital so really the one the one the one still hanging right conversation for us as the home health proposed rule for 2026, obviously, we've aligned with our peer group working incredibly hard on on getting that overturned between now and the final rule, so that theres not a decrease in rate.
In home health for 'twenty, six, but with that said I think at this point in the year. We clearly have very solid rate certainty all three of our business segments are just performing at a really high level right now do want to point out medical solutions, Matt and I am really proud. We're all proud of a medical solutions team, that's going through their modernization efforts and yet.
We are executing on growth and a great outcomes and good profitability. So really nice shot. It's all three of our businesses and I think thats contemplated in the idea of greater than 270, Matt you want to.
Yes, Jeff just to add to or Jeff. We're really proud of the teams I mean, everybody is executing at a very high level, we're delivering exceptional patient care out there.
At the same time, we recognize there's still a lot of work to do and so we're going to focus on getting back to work and doing what we do best and that's providing the best care possible to all of our patients.
I think you said it but did you mentioned it but drive is included in this this uptick in our guidance both in revenue and EBITDA and we're really pleased with the thrive.
Position integration and the team has been amazing our teams are working well incredibly well together as I said in my prepared remarks.
And we really think drive will be a great part of our story as we move into 'twenty six I mentioned, we're really excited about Kansas and Nebraska was two new Medicaid states for us. So just just excited on how the business is operating I think Matt said it well, we're humbled by the opportunity to get back to work every day and just do the right thing for our patients our payers and our government partners.
Understood.
I guess turning on the rates. So last quarter, you mentioned, an expectation of the spread rate and Pds normalizing in the several lending range during <unk>.
We made a $15 million combined favorable one times and maybe some of that M&A and they're seeing the rates stay elevated during <unk>.
Is there any way to think about where your core spread rate currently sits excluding those items just trying to understand the lift youre getting purely from your previous payer contracting efforts there.
Yeah, Ben let's talk about the spread rates for a second because I think it's great question I really want to clarify that last $6 million that we talked about from the reversal. So Q2, we.
Had some elevated one time benefits in there onetime in nature, it's probably more timing related items than anything else them one time.
But that was a $9 million benefit that was to increase value based payments, we discuss some rate enhancements in there as well as well as continued phenomenal cash collections from previously aged accounts that the team has done a great job on additionally.
Additionally, there was that $6 million legal settlement in there that did not benefit EBITDA. If you go look at our adjustments that actually comes out of EBITDA as well and so though it impacted or influenced spread rates or are we or our wage rate was compressed because of it it did not impact our EBITDA at all for.
That $88 billion, so you've got to pull that out of your one time benefit in there as well looking ahead, we're obviously going to continue to pass through additional wages and benefits to achieve that full wage pass through that's continuing in Q3, but we expect a full wage pass through to be accomplished by the end of this year.
Probably not fully baked in Q4, but exiting the year in December we expect to be on that run rate basis, we're doing that because we weren't align our caregivers with what our preferred payors wants to do and thats, helping to fill more shifts and to support our patients and I think it's well said that underlying all of this is wage pass through has been happening every week.
Every month of this year, including 2024, so it's not like we're waiting for specific dates to pass through wages, we have been continuing to be methodical, but I think after three years of our strategy playing through what we're seeing is it's not across the board wage increases in every market, it's very targeted areas specific.
Fees specific shifts on specific days and nights and weekends and holidays. So our teams are just being very methodical in how they think about it but I think the most important thing is our payers continue to lean into us Ben and ask for more more nursing coverage more more home coverage at home and and really more hours being filled for their patients which is a great outcome.
Thanks, Pam we appreciate you.
Thank you. Our next question is coming from the line of Brian <unk> with Jefferies. Please proceed with your questions.
Hey, good morning, guys and congrats on another solid quarter.
Maybe Jeff just to follow up on that comment you made there. So are you seeing kind of like definitely a notable increase in the number of <unk>.
Caregivers as these.
Wage rate increases are coming through and I know you pass it through but is that already translating to increased capacity and what the labor market looks like right now for your caregivers.
Yes, Great question, Brian Thank you yeah.
Lean back to Q1 that the momentum coming out of 24 was probably greater than we expected it or knew at the time that that those rate wins through 'twenty four the enhanced wages that we had put through and really what we've done in the first half of the year.
We had 11 million hours for the first time as an organization in Q2 in our Pts segment every one of those hours as a caregiver that's in the home. So yes, I think we are seeing.
Both from a Medicaid standpoint, with the investments we've seen our Medicaid states as well as the preferred payer model picking up momentum.
Hiring more nurses more caregivers.
I wouldn't say, it's it happened at one specific date or one specific month its been a just a continued uplift, but I do want to remind us there is not one preferred payer who has enough nurses from avianca. So.
Our TARP preferred Payors every time I talk to them, which is often they want more they just want more coverage. They want more of our patients more of their patients to be seen by our caregivers, which means we just got to keep hiring more and more so.
It's it's a continued evolution of the strategy, but I think as we've settled in kind of year three here. It finally has settled institutionally into both the Medicaid state systems in our preferred payers that that the uplift in rate has equated to uplift and wage and uplift in number of caregivers providing care.
That's awesome and then maybe my follow ups as you've talked about payers.
We're all aware that some of these Medicaid MCR are facing struggles right now I mean are you hearing anything for them in terms of.
There they are interest in driving more patients to you guys or a rate negotiations anything you could share with us as we think about the managed Medicaid.
Yes.
I would say it's been positive I mean, we are very sensitive to their success is also our success and so we're we're very very tuned like you are too to the health and well being of both the Medicaid and the Medicare <unk>.
We consider them partners and because of it because they are our partners. So so their success also means our success and I think the answer that we would give you is even in these turbulent times that they are working through they continue to lean deeper and deeper in us and their plan presidents continue to expect more of us they expect more not only more hours, but better quality.
And we talked about our value based payments, which was part of the lift that was in Q2, just like Q2 of 'twenty.
<unk> as well, but thats the annual based payments from our previous year coming through being adjudicated now paid and so none of our payers balked at paying us their value based bonuses from 24, even in quarters, where they had a turbulent quarter, which just tells me that they they need us they need more from us they expect more from us I will say.
They have raised the bar for us so the better we do the more they expect which I think is a good thing that they they just expect us to become more sophisticated.
Selling more hours, but better at managing costs better at managing quality and I think that's one of the reasons that they really like Avi on it is that is that we're comfortable being held accountable for great outcomes and cost effective care. So.
It's a win win.
Related to the Mcs.
Thanks, Brian.
Thank you our next questions come from the line of Andrew Mok with Barclays. Please proceed with your questions.
Hi, good morning.
We think about the right jump off point for EBITDA for next year is $270 million last I think 20 million items are that you've called out year to date is that gets you to $250 million is that the right number to think about as we contemplate kind of growth for next year.
Okay. Good morning, Andrew.
I think I'd say that there's still more to play out this year I think as you as you think about Q3 and Q4 and as these as these volumes settle in and all three of our businesses and our second half of the year I think I think you'll see that it's probably we've underpins a little bit higher number than $2 50.
We'll say to Matt's points earlier.
Is the the timing related events in Q1, and Q2 are all revenue and EBITDA, they're they're not one time adjustments to lawsuits that were taken credit for or it's it's it's revenue. It's cash collections. It's improved right. So even though we might move them in the quarters in which they belong it.
Is good quality business and so.
I think I think Matt and I would and Debbie we would all be careful to not try to underpin an $88 million quarter moving forward. We would we would absolutely hedge against that that that that that we don't believe avianca is a 15% EBITDA company at this point and we certainly would not try to have anyone underpin that I do think we've been striving for a long time to be north of 10%.
EBITDA company and I think at this point clearly we can underpin. The fact that were north of 10% met the two thoughts yeah. I would also just like to add Jeff we're halfway through the year right now and Theres a lot of wood to chop out there with our teams our teams know that theres a lot of patients that still need our care patient stuck in a hospital, there's nurses that need to be hired and so we're going to.
Two to focus on doing that and driving volume and driving results. We think thats the way to do so is providing the best care possible and everything will work its way out in the yen.
Got it and maybe related to that point, you mentioned passing through the caregiver wages do you expect to get back to the 10 to $10 50 spread this year, just curious kind of like timing and progression of what that looks like from here.
Back to the exiting the year it'll take time for us to get back to that number itself Andrew and.
We talked about in Q3, it will continue to come down in Q4. It will continue to go down we expect to be exiting I'm, saying exiting December and the idea of being in our go forward range, but it will still be a little bit elevated to that of that throughout the remainder of the year Theres still thoughtfulness on this wage pass through how do we feel that next shift how do we see.
Phil that night, how do we feel that weekend, how do we feel that holiday and so we just want to make sure we're getting the best coverage for our patients.
Thanks, Andrew.
Thank you. Our next question does come from the line of Ben Hendrix with RBC capital markets. Please proceed with your questions.
Great. Thank you very much just wanted to talk a little bit more about Medicaid policy comments appreciate that CBS dodged most of the headwinds from the Ob BBA, but as the states.
And their budgets start to address these Medicaid cuts and their impact on other providers you know how do you characterize atvs positioning.
Amid some broader headwinds budgetary headwinds and kind of how are you thinking about that.
Impacts do your efforts to achieve those 10 rate updates or there's a rate updates and in at least 10 states. This year.
Hey, Dan Good morning, and thanks for your question, Yeah, I think we've already seen this year.
Just the feedback I think we shared in the Q1 call.
We've had great conversations with our state governors in the Medicaid directors and obviously they were anxious all the the whole first half of the year and probably are still anxious today being beamed bean.
Curt that theyre, probably still anxious today on the UV the settling in of the Ob be a over the course of the next decade.
I will say.
The rate enhancements, we've got mid year are more muted right. So they're in the single digit low single digit percentages, where over the last three years, we will probably receiving double digit rate improvements in many states.
So and we're hearing from our state partners, just the need to be fiscally incredibly fiscally responsible which we expected at the end of the day I do believe the three and a half years of work post COVID-19 or during Covid.
Has settled in nicely within our state legislatures and it's the same work that we're trying to get done on the federal side with CMS and Congress related to home health that that you need home based care, both in Medicaid and Medicare you need the most cost effective patient preferred health care setting at home and I think in the Medicaid system.
Maybe not in every one of the 50 states a K a California, we still that message has resonated incredibly well. So I don't think at this point, we have to start over with our state governors in them that Hey, let us tell you the value of home care I think they get it they absolutely get it it's really now about partnering with them that as they are.
Medicaid budget inevitably have gotten tighter and are going to get tighter that we are a partner with them in a solution with them. So.
As we've said over the course of the last few quarters.
Three years ago, we had 30 30 states that we needed to get a major rate improvements as of the end of last year, we were down to one and as we sit here today its still the same one so.
We're not going to give up in California, we're going to continue to continue.
To advocate and partner with California to move the PDL Ray, but effectively that is the only state at this point that we don't have a rate that we can be successful and so.
Yes, Ben just add on there we're going to continue to advocate for our patients and our families.
In the meantime, we're going to continue to do what we do best we can provide the best quality care with great operational efficiency in the most cost efficient setting in that patient's home to Jeff's point, regardless of whatever policy ends up coming out of it that's going to be our focus we do believe that we're positioned to partner with these payers, who really want to take care cost.
Out of health care, and we believe that's in the patient's home.
I appreciate that commentary just shift over to the home health side real quick assuming we do see a claw back in the six plus percent range.
Get finalized.
What is the potential for that level of cut your trickle into some of your episodic.
Our rates that are embedded in those preferred home health preferred payer relationships.
Yeah. Thanks, Thanks, Matt first of all I don't think I can speak strongly enough about how disappointed we are in the proposed rule. It makes absolutely no sense in today's environment.
To use the statistics from the alliance from care at home.
2015, the cumulative impact of the rate increase to home health, including 2026 proposed rule is one 1% over 11 year period.
<unk> invested one 1% rate increases into home health.
Our peers have received over 30% rate increase and probably that includes COVID-19 that includes inflation hyper inflation labor is up as you know been over 40% of wage labor improved sorry increase in that 11 year period. So it just doesn't make sense. It makes absolutely zero sense, then being blunt.
And it's not the right thing to do it's not helping control cost we know the the lower that you utilize home health the more of that hospital and sniff care ends up being utilized so higher cost care setting. So yes, I just I just can't speak loud enough.
Proud of my peers, we have been working together with the alliance for care at home for the last 45 days I will tell you Ben.
The government has a welcome to homecare industry and we are United in our response that not only is it the wrong thing to do it's harmful to seniors it damages rural Rural Homecare Rural Health care home care is a great recipients of that so it's just bad policy throughout and we really want to work with CMS.
To overturn that policy between now and the final rule with that said, let me come back to Aviano for a second.
70, almost 80% of our revenues are driven through Medicaid Medicaid MCR. So avianca is going to be fine regardless of the outcome of the home health rule ASEAN is going to be strong. We've got a lot of momentum one of the things I'm most proud of with Matt and the team at <unk> is our cash flow results and our liquidity. It is compared to when we started three years.
Our positive operating cash flow free cash flow the improvement in liquidity the improvement of our balance sheet that the deleveraging that we have accomplished at aviano. It truly is phenomenal. So all beyond is going to be fine, but we can't sit down and allow home health to be effectively eliminated as of <unk>.
<unk>, that's not okay for American seniors, so youre going to hear us be incredibly passionate youre going to hear our peers be incredibly focused on overturning this and one of the great things about homecare is we're in every community of all 50 states and we represent seniors throughout the entire United States of America and.
And I truly believe the government through our Congress through our administration and CMS, we'll hear from home health in every single County in all 50 states and it will be crystal clear on the messaging. So anyway, you can tell I'm passionate under subject. Thanks Pat.
Thank you. Our next question is come from the line of Peter Chickering with Deutsche Bank. Please proceed with your questions.
Hey, good morning, guys nice job.
This quarter I guess stepping back here looking at rate increases looking at the preferred providers.
They've been doing how much demand sort of remains left there.
What inning are we in for getting patients out.
The hospitals are are we in the early innings in the latter innings of kind of how much more demand is there going to be.
These rates are coming up in two levels that you guys are able to stop better.
Yeah.
I'll, let Peter Thank you like to think of this year's all Star game, which was hosted right here in Atlanta that.
We're probably in inning four five and we're going to go into extra innings, and we might even need to get to get the best better from both the American League internationally, you got to back to bring this home, but all kidding aside.
I don't know appeal that we can ever fully.
Solve the demand and that's why we say on every script that we don't have to.
Demand problem, there's not one preferred payer that would say, yes, avianca has solved all of our home care issues are all of our PD issues. Because we just we can't we we at best would have.
50 ish percent market share with a single preferred payer I mean at best So there is a tremendous still upside in these relationships.
And so it's.
Not in the first or second inning to your point I mean, we are now in year three with many of our relationships certainly a year or two with the majority of our live relationships. So they are maturing in nature, but but theres not one planned president from one MTO plant, who would say, yes aviano has solved all of my my PD and issues. They have they said anything about it but we need more.
More from Avianca. So I, just think I think all joking aside that debt.
This this will play out for the next three to five years and then ultimately we probably never will be able to fully.
Solved all the issues of RMC of partners, we certainly can make a significant impact as we're making today.
Okay great.
Follow up here. This is from and asked a couple of different ways I'll go differently in the script you talked about discussions of state medical directors as it looked for changes next year.
Just with lower lower dollars I mean, what what areas.
These could they do to impact you guys would it go back to lower rates with date, where they put different screening mechanisms.
Same medical doctors do next year.
As a Medicaid dollar pool gets smaller that could negatively impact you guys.
Yeah.
Yes.
But first of all thoughtful question I don't think there is there is one silver bullet answer to that I think I think every state is different.
And you can ask the question why did 10 states. This year give us rate increases if they knew that.
The bill they knew there's going be headwind. They know this because Medicaid right. They did it because they still value. The services. Those 10 states didn't give rate increases to all health care REIT. They gave help negate any cases, specifically to at least PD and so.
I think the key is for us to be incredibly thoughtful partners with our states and it would be foolish for us to go to all use Georgia as an example, which I think we talked about Georgia last year. This time has just given us the largest investment in Homebase nursing in the history of GA. According to Governor Kemp.
Be foolish for us to go to the Governor Kemp assurance, Okay, we need another 30% rate increase because it just wouldn't land well it wouldn't show that we understand the environment, but.
With that said, we are going back to those same state directors and legislatures and we're showing you gave us this investment two years ago, Here's what we've done with it here's what we spent that money here's how we've hired more nurses here's how we've taken more children home so.
Part of our job is to go back and retail the story to the people who have already invested money us and show them, what we've done including Medicaid systems and governors. So yes.
<unk> I think being a thoughtful partner has been our game.
Our Gulf of last three years will continue to be our goal.
I keep come at California, we could solve so many.
Problems for California, with a thoughtful rate increase and so we are still at the table with California, we are still with our peers.
The State Association pounding on Governor Newsome store and pounding on the that the director of Medicaid store are really focusing on.
You are the one state that's not invested in this clearly $6000 a day to $600 a day change and setting. So again, we're not going to give up we're going to keep advocating for these families. We are thoughtful enough to know that there are general headwinds in Medicaid that we're going to have to navigate through over the next 12 18 24 months.
I think the company is well prepared to do so.
Thanks Peter.
Thank you. Our next question is come from the line of Raj Kumar with Stephens. Please proceed with your questions.
Hi, good morning, just.
I appreciate the color on the medical solutions business in the prepared payer strategy. There maybe you talked about 18.
Payer contracts in place, maybe just kind of framing that and what that means in terms of a percent revenue contribution or from a volume perspective, and then kind of thinking about.
The margins in that business you know, it's you know.
Towards the at least year to date is looking at it towards the high end of that 42% to 44%. So how should we kind of think about the back half progression of margins are relative to that framework.
Yeah, Great question Raj I mean, we're really excited about the implementation of the preferred payer strategy and honestly the targeted operating model that the team is putting in place a medical solutions.
We added one preferred payer and Q2 of this year to get us up to 18 preferred payers to date will continue.
To expand that through the back half of this year and continue to add to it as well.
To your point gross margins were a little hot at 45, 6%, we think that will settle back into that 42% to 44% range.
<unk> of this year and then kind of lived there and definitely we are really really proud of this team's expansion now ink growth while going through this modernization effort in this transformational effort to go sequentially to 2% growth as theyre going in reshaping. This division is unheard of and hats off to that team what they've been able to accomplish.
But you should see that gross margins start to come down a little bit, but reciprocally you will continue to see that growth continuing there and I think you said it well, which is 18 is just the beginning we expect 18 to grow north of 20 in one day would be north of 30, and potentially 40 preferred payors.
You met that sets up well with the TSA pre check in line like I just think of this like TSA project, we're trying to get Payors into a mode, where we know that theyre going to pay us appropriately we're going to allow us to provide a great clinical service with great customer satisfaction, and we're going to get paid for those services in a timely manner. That's what I prefer payer medical solutions looks like let's say the high.
Payer, but someone that we can count on to get paid for the services that we provide and so that's.
That said it well, we're really proud of this team. The fact that they hit 91000 UBS in the middle of the modernization is fantastic and our leader there is doing a fantastic job and we're so proud of her and her team. So really excited about what this business looks like in 'twenty six 'twenty seven because it it should not have the constraints that we've been talking about related to.
<unk> Medicaid.
Got it and then kind of thinking about our free cash flow and.
Even accounting for the one time items it seems like the year to date contributions from free cash for our higher versus last year, So maybe helping us frame a bogey for this year I know you called out higher taxpayer pay.
Payments this year, just given the the earnings growth, but maybe anything else to think about in the second half and where do you think about free cash flow and then.
Any prioritization towards debt pay down as well that'd be helpful.
Yes Raj Great question, we're really pleased with the team's progress on positioning <unk> as a free cash flow generating company.
$37 million of free cash flow year to date really reflects that dedication to that patient care, but also our team's dedication and collecting that cash on a timely manner as well its coming through a revenue cycle team has done a great job teamed up with our payer relations team and our entire operations and clinical team to make this happen as well.
We will continue to add additional free cash flow throughout the remainder of the year Q2 was a great quarter for US Q3 will continue that to it and into Q4. So.
We're going to keep that liquidity at this time.
To keep our liquidity position up just for any potential M&A in the future and the way we're going to be able to do it is through this free cash flow generation.
And Raj.
So on top of that he said it and I missed it again.
I mean three years ago, we were in a very tight cash position tight liquidity, we've worked incredibly hard as a combined team and I Echo Matts comments, just so proud of our team on making.
No it would be a positive free cash flow company, but really controlling costs collecting cash and providing great outcomes and I think to your point.
Stronger than where we thought we would be this time of year, but also nice a nice horizon for the rest of the year and I think I think on all fronts cash flow is going to be a really good story for avia end of this year and certainly much stronger than we had expected coming into this year. So nice job to the entire team who has made that happen.
Yeah.
Thank you. Our next question is come from the line of David Macdonald with Truest. Please proceed with your questions.
Good morning, guys. Congratulations just one question left.
Come back to labor for a quick minute.
And just can you guys give us some sense just some framing in terms of whether it's <unk>.
Number of hires percentage of demand you're able to service retention you mentioned during the prepared remarks, just can you give us a sense of kind of where you were let's say 12 months to 18 months ago, and where you are kind of now given all the success that you've had on the rate side.
Hey, David Good morning, Thank you.
Im going to focus on home health and hospice for a minute.
It's a similar story to two that are Pds, which is just as we as we focus on our preferred payer model and really focused on.
Lining our caregiver capacity with those partners that are willing to partner with us. So that we can provide great clinical outcomes and have an appropriate gross margin appropriate financial outcome.
I think that showed us that labor labor was there.
But you had to provide the right service at the right right patient at the right time, but again it would be very disciplined on who you allocated that labor too.
And I just think that's been our story, it's not been Gobi everything to everyone. It has been it's been being very targeted in each business model I know labor is not how we think of med solutions, but it's what we're doing about solutions right now right to aligning our capacity with those payers that that value is so it's.
It's less about inflation, it's less about the labor market, good bad or indifferent. If we continue to stay focused on the right partners in each of our businesses. We can produce sustained growth and I do think we were very specific on home health hospice ever.
Everything else has been working floating clinical outcomes, except for positive year over year growth. We were breakeven I think last quarter, just just north of zero percent. This quarter, we turned the corner and I don't think we will look back.
Seeable future in home health hospice generating almost 10% volume growth in home health hospice year over year is phenomenal it isn't like we hired 10% more nurses to do that it's is that we've aligned our business with the right payers and now we can grow because those payers pay us in tiny matter in an appropriate manner to go high.
Caregivers and so I just think that's the way we think of is less about labor inflation and availability, it's more about us managing to our playbook getting things hone just right driving great outcomes and great outcomes do drive growth.
And then guys just just one one quick follow up just with regards to thrive in kind of the M&A environment.
Look you know obviously improved financial flexibility can you just talk a little bit about.
Just how youre thinking about if you were to see another kind of unique opportunity like a thrive I mean, obviously in home health with some of the.
Challenge visibility in the near term I assume kind of nothing to think about there, but just when you think about pds and potentially incremental M&A just any high level thoughts there.
Yes, thank you for asking that question.
One we have the liquidity to now to now be meaningful and M&A and continue to lean deeper deeper in it.
Our teams are doing a great job with thrive, but our teams are head down on integrating thrive as we speak right. Now this week next week last week, but we'll wrap up thrive integration here in the next few months.
We would like to target something for the later half of this year first of next year I would have told you most likely home health oriented David but to your point, we're a little bit more muted at the moment to really see where home health lands. We are a big believer in home health over the period of a decade two decades. So I do think youll see us continue to lean into home health and hospice.
From a from an acquisitive standpoint, just not at the current moment until things settle out, but yes, I think you should expect us to we're not a debt pay down shop is not what we do right. We focus on growing M&A and growing revenue. So I think as Matt will talk about I think youll see us continue to lean in to both Pds and Triple H and then us.
We get into 'twenty six we will start to lean back into med solutions and look at tuck ins in med solutions, but Matt anything to add to that David I think the way to think about it as thoughtful we will be very thoughtful on any M&A in here, we've done a great job of generating free cash flow being mindful about our expenditures out there and bringing in really good.
Companies with really good clinical outcomes as well that's what we're going to continue to target and to continue to look for we have done a phenomenal job of deleveraging this organization.
Total team effort to do so so anything that we go out and look to acquire we're just going to keep all those things in mind make sure. It's a great clinical outcome. It's a deleveraging story for Avianca and that it will continue to generate free cash flow for us.
Thank you we have reached the end of our question and answer session I would now like to turn the floor back over to Jeff Shane or for closing comments.
Thank you so much and thank you for your attention and your focus on our company and your interest in Avianca and we look forward to connecting at the end of Q3. Thank you.
Thank you. This does conclude today's teleconference. We appreciate your participation you may disconnect. Your lines at this time enjoy the rest of your day.
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