Good afternoon. We are officially over the hump for the 45th (I always have to look at this) 45th annual Raymond James Conference. We're officially more than halfway through. I'm happy to have a return engagement with the dream team from Addus. Just a couple of introductory comments. Addus is the only publicly traded personal care company. It gets lumped into the same post-acute bucket as, say, home care and hospice, but I think it's definitely a different business than that. And the company has really done a remarkable job in a business that really doesn't have tremendous organic growth. So some of this growth has been engineered by some astute management. The company's also been a great steward of capital sitting on a pristine balance sheet. And so that's my teaser.
So, we're going to start with my favorite part about the story: Dirk was sitting on the board of this company. They maybe weren't performing like they should have, so he got so frustrated he came out of retirement to fix it. So, why don't we talk about that little bit of history and kind of your perspective today on the company versus kind of what you were thinking when you decided to go back to work?
Sure. Thanks, John. I appreciate it very much. I've been here eight years now, which is hard to believe, so I'm almost to the point I've forgotten the story of how we all started, but I'll do my best. In 2016, the board decided that we were going to make a change and bring in a new CEO, and the board approached me. I'd been on the board for five years and had spent a lot of that time getting to know personal care. I had not come from the personal care industry. I'd come from hospice and a number of other sides of healthcare services, but personal care had been new. And what I found, it was a service that I felt was very much needed and very much appreciated by the folks that did need it and the families of those that needed it.
I felt like the company itself, while we were relatively small at the time, about 300 million in revenue, I felt like we were doing some things that were causing us some issues as far as profitability and our ability to grow. So I spent the first year here recruiting new folks to come on board. Brian came on board as CFO. We've been together three additional companies. Been three now. We brought a number of other folks on from other companies we'd worked together. We moved the company from Chicago to Dallas and really started down the road of trying to build a company infrastructure that could grow to what we hoped would be a potential one billion in revenue company. So that was in 2016. 2017, we were really ready with infrastructure to start growing through acquisitions. We also redid our board.
So in 2017, we made our first clinical acquisition, which was home health and hospice. So fast forwarding to today, we spent the last 8 years focused mainly on personal care, which we believe is the base business. It's the non-clinical care component of home care. It's the first people generally in the home of an elderly patient, the group that stays the longest. And we found once we got in there, we spent about 67 hours a month in the home with this patient, this consumer. We felt that there were other things that might be needed, and that's when we went into clinical services. So we've added now hospice, which is about 20% of our business, and then we have another 6% or so that's in home health.
But the main focus for our building of our strategy is to focus on personal care, that non-clinical component, and then add clinical services on top of those locations so that our payer base, as they look to go into things such as value-based care and extend the service of their particular members upstream, that we were able to handle that business.
Great. Yeah, this question goes back a ways, but I remember when we were first doing our work on the company, we were kind of surprised that the personal care that you focus on is very much a Medicaid focus that the private label, private duty market wasn't something of interest to you. So maybe just kind of talk about why if that thinking has changed at all or if it's still, you think, for the foreseeable future, the company's going to be more government pay focused?
Well, when you talk about personal care, probably around government pay and Medicaid outsource pay, which is really kind of the same thing, is about 95% of our business. The reason we started in Chicago back in 1979, we started as a house cleaning service. The state asked us to come in and start doing this thing called personal care, which was new at the time. Our company kind of morphed into that working with the Illinois Medicaid program. So from that, our strong base was to work with state agencies. We understood that business. Our population, most of our population, probably almost 80%, is dual eligible. So you've got not only the Medicaid, the low-income folks, but you also have them qualified for Medicare. So as it evolved, we just kind of grew up where our expertise was in Medicaid.
So today we have 2% or so of our business in what would be called truly private pay, direct pay by the family or the consumer. The reason we hadn't really gone deeper than that, we think that's a good business, but the problem with that is it's more of a franchise business. To grow from scratch organically would be very difficult, especially because there is a different mindset. The nursing or the care component, the aid component of a Medicaid patient versus a private pay may be a little bit different depending on their needs. We've really, because we couldn't really grow the private pay through acquisitions because we stay away from franchise models, we've really focused on the Medicaid business. Quite frankly, I've been in healthcare a long time. When I started at Addus, nobody really appreciated Medicaid. It was kind of an afterthought.
Medicare was the big payer. And really what we've seen in the last eight years is a greater appreciation by individuals, investors. Quite frankly, I think the states, they've really come around and understand and appreciate the value of personal care.
Kind of, you taught me that this was a business that really kind of there's infinite demand. You just got to find the labor. So we won't belabor the whole COVID journey that you've been on, but just maybe kind of level set the audience here on percent of your workforce turnover, how much it cost you to onboard somebody, what percent are family members, and then just what have you learned over the past five years as you've had to wrestle through COVID. Are there any lasting sort of business model improvements that were necessitated by the emergency you went through?
John mentioned family members. About 30% of our workforce on the non-clinical side, the personal care side, are family members. And again, that's state by state. Some states allow that. Others do not. But some of our big states do. And so a son or daughter, niece or nephew, even a spouse in some states can be hired by a company like Addus to take care of their family member. And the interesting thing about that is there's not a lot of turnover in family caregivers. They stay as long as the patient needs the care. But at the same time, once that patient goes away, you definitely have turnover. Most of them do not become caregivers to non-related individuals. But the industry itself has always been plagued with large turnover. When we started prior to COVID, the industry was about 85% turnover, which sounds it is. It's huge.
But our caregivers are part-time minimum wage workers. The problem we have, the number one reason for turnover, is that they can't get enough hours. Our average is probably just slightly under 20 hours a week, so about half time. The reason we cannot pay give them a whole lot more hours, we have to be careful, is because if you get over 40 hours, effective with the change in the law 10 or 12 years ago, you used to pay straight time for home care workers no matter how long they worked. But now at 40 hours, you have to pay overtime. State Medicaid programs do not give you any kind of extra pay for overtime hours. So you have to really monitor. Those hours become non-profitable. We've had to cut back as an industry how many hours we can give our folks.
So that has led to a lot of turnover. Now, what we have seen since the pandemic, we went in with about 85% turnover, but we were hiring a lot of folks. During the pandemic, it became very difficult to hire anybody. And the reason it became that way was because a lot of the criminal background check companies shut down. You couldn't get the criminal background checks that were needed. Some of the states that have to go out and authorize hours before you can start service, their departments were closed down. You couldn't get hours. So for a period of time, it was very difficult to hire. And we have a metric, hires per business day, that usually is around we would like it to be between 80 and 85 per day, which kind of keeps us in our area where we can grow 3%-5%.
That dropped into the low 70s because we just couldn't get people to come out of their home. You also, at that time, had the government giving expanded unemployment benefits. You also had childcare credits that were paid monthly. And again, a lot of the caregivers that we deal with had children at home, grandchildren at home. And so this extra fund to keep them at home kept them out of the workforce. Starting in about January 2022, when a lot of these benefits went away, we started to see the creep up of our ability to hire. We also saw our turnover rate drop to where today, instead of 65% for us, it's more like 50%. We started to see improvements on that side. And when you see those improvements, it kind of correlates if you look at our hourly growth.
We started seeing volume growth again back about 18 months ago. So that's been exciting. In our industry, just so you know, generally, companies in personal care do better in hiring caregivers when the economy is struggling. When inflation is high and families are looking for that second income, our caregivers are that second income being provided to that family. So we've really gotten to the point, I think our last two or three quarters, we've been in the low to mid 80s, and it's really helped us as far as our growth.
So I'm sure a topic you're tired of talking about, but CMS moved your cheese last year, and we're waiting on a final rule. So just what's the contingency planning around the 20% cap if that becomes the rule that you've done? And can you give us a flavor for kind of the iterative conversations? Do you have any kind of read at all about if they're accepting the industry's comments that this would be a counterproductive rule for a lot of reasons? So just kind of where are we? What's the latest there?
We have spent the last 10 months, as have industry participants in various states, telling CMS and giving our comments of why this won't work. I think if you go back to what CMS was trying to accomplish, CMS goal was to increase access for personal care to individuals in the market. And their thought was the best way to do this is by increased pay so that we compete better with others that may have opportunities for higher wages, say in the fast food industry or hospitality. That's a great way to think of it. But right at the end, after the industry had worked with CMS for about a year, they made this decision to add an 80/20 rule that said 80% of your revenue has to go to direct care wages.
I think there was a failure on CMS to really think through that and say, what does that mean for access? Because most companies operate with a margin slightly higher than that. And certainly, the big companies would be fine. We may have a little pressure on our margin, but our growth would offset that. But the small mom-and-pops, of which about 80%-90% of this industry is small companies, would struggle. So in our discussions with CMS, I think they understand that. I think we've opened their eyes a bit. I think some of the feedback we've got is this is an important industry. CMS supports it. I think the fact that a number of the Democratic-led states have come out, California, Colorado, and others, and said, "It won't work.
You can't put one rate for the entire country because in Medicare, you change the rule one time. It affects every state equally because there's just one Medicare program. But you go into Medicaid, and especially in personal care, we can have one, two, or three waiver programs per state, each with different cost and responsibility requirements, whether it be training, supervisory visits. So setting this one rule does not really work. So our belief is where it is now, it's been given to OMB in January. Their deadline is in April. We think it will come out. We've heard all across the board. We've heard there'll be no percentage. We've heard the percentage will change. We've heard it won't change at all. We've heard instead of being four years, it'll be six years.
I think pragmatically, as a company, we are expecting it to be finalized exactly as it was proposed because politically, that makes the most sense for CMS at this point in time, knowing that in the next four years, it's going to be challenged legally. There may be changes of administration that don't support the rule. So for us as a company, we had to sit back after the first three or four months and looked at it and said, regardless of whether there is or isn't a percentage, regardless of whether there's a Republican or Democratic leadership, how do we remain a leader in the industry? And we really come to the conclusion that you have to be big. And that's not just big nationally.
You have to be big in a state because if you look in the states where we're very large, we have a great deal of access to the state government and can work with them on the reasons why we need increases in rates, which is what it will take for certain state programs to remain competitive if this goes through. So we're working on that. And then we've also started two or three projects saying, regardless of whether it goes through or not, we need to be the most efficient operating company we can be.
And so things such as, and these are just quick little things, but scheduling, some of the ways and cost with turnover and recruitment, we're doing some things with new automation that we think over the next two-three years will help drive out cost of our system so that regardless of where we end up long term, we believe this will be a very viable industry and that Addus will be one of the leaders at that time.
Are there certain geographies that just wouldn't make sense anymore if this goes into place that you would exit?
Those markets that are more rural, let's be honest, if you got the more western states that are more rural in population, trying to spread regional costs on a smaller amount of business would be very difficult. The easiest place to operate are the big states with large urban marketplaces. So there might be a few states you would either avoid or consider what you would do going forward. Our focus is to take our states where we are today. We'd like to drive to being the number one or number two market share leader in each of our states. We think if we can get to that in most states, we'll be in very good shape should this happen.
Great. Yeah, we've been pleased and surprised how resilient your stock has been in the face of this because the modeling is challenging, to say the least. So just pivoting to your other two businesses, which are obviously small businesses, and we talked about a little bit on the call, but hospice has been in a slump really since some of the COVID changes around referrals and nursing homes have put hospice in a slump. What's your crystal ball on that business over the intermediate term, coming off a long period of stagnation?
During the pandemic.
I'm sorry, just to be clear, this is not an Addus. This is an industry dynamic.
This is an industry dynamic. Yeah, we do about 20% of our business in hospice. And both of us were at a bigger hospice provider years ago. And what we saw about every year, you had about 2.5 million deaths in the U.S. that were individuals that could have been benefited by the hospice service line. And that was pretty consistent year-over-year. Everybody thought, well, that you're going to have a you're going to see an aging of the population above 65, and that will eventually grow. And I think we probably are starting to get there. But I think what we saw during two or so years of the pandemic was a lot of the elderly patients that would have used hospice got COVID, and unfortunately, a large number of those passed away.
And so some of the deaths and patients we would see prior to death got pulled forward. And so really, the last couple of years, we've seen admissions start to come back, but a little tough. Up until just, I'd say, the last two or thtree quarters or so, we've now started to see admissions improve. It feels like we're getting back more to a level set towards that 2.5 million or above number. We won't oversure Medicare. It's about two years delayed on at least some of this data. But this last quarter, if you take that as an example, we had very nice admissions growth. The problem is our year-over-year ADC was down just under 1%, but it was because in the fourth quarter, for some reason, we had about 25% more discharges in the quarter than we'd seen in our average quarter in a long time.
That seems to have stabilized in the first quarter. Our belief is we're at that point in time where hospice, if we continue to see the admissions in that 3%-5% range, we believe ADC will get back to that normal growth, which should put them with rate increases and whatnot in the mid- to higher single-digit growth rate.
I should know this, but did the ending of the PHE also change some of the incentives from your referral partners?
It did. Nursing home SNFs had the ability to skill some people. There was a three-day rule that went away. And so what we saw, our referrals from SNFs basically went down a great deal. We were starting to see hospice patients out of long-term facilities much later in their lifespan than we were seeing before. Now that the PHE has gone away, we are now seeing that back to normal. I would say today, really, our referrals out of the long-term facilities, whether that be SNFs or whether it be assisted livings, it seems to be really back to normal. And our median length of stay has got back where it needs to be.
Great. So home health, smallest part of your business. You've had this mix shift away from traditional Medicare into Medicare Advantage, which is a bad guy. So I think you talked about it being a 500-point shift last year. So it's complicated because the plans now are big owners of home health. So how have the payer conversations changed now that you're kind of a frenemy and they've got an incentive to fill out their own networks versus using third-party?
Yeah. I think the bigger players that own home health now, obviously, it's to their advantage to try to keep their home health inside their network. They have the ability to work on that as far as where cost and revenue goes. What we have seen, we've had a lot of success with the more regional plans. In our business, really, our largest concentration of hospice is New Mexico and Ohio. We do some up in the northwest. We're more exposed, not so much to the big two or three payers, Medicare Advantage payers, but more to those middle-level payers that appreciate the fact that we have statewide coverage. There is one larger payer in one of our states that we had to stop admissions because we couldn't get a rate that made sense.
We have recently been able to get a better rate, not one that we would like long-term, but better than before. We've started those admissions back. I think the real key is where do you get on the breakdown between fee-for-service and Medicare Advantage? We're now at about 68% fee-for-service. I think one of our large competitors announced they were about 62%. I think we're getting closer at that level where if we can kind of finalize, this is the mix going forward that it'll be, I think then you'll be able to know that home health is a good business to be in, and you'll know the base of profitability you can expect on any acquisition. That's been our biggest issue.
Quite frankly, we've been glad as we've worked through this. It's only 6% of our revenue because it's not been as big an issue for us, but we have seen the effects of it.
Are the MA rates still just kind of a fee-for-service? I mean, a fee for a visit or any episodic? Are you getting any episodic rates from the payers?
We're getting some episodic rates. That's our goal. The biggest payer I talked about, we got more higher visit rates. We didn't get the episodic rate, but we'd like to eventually be able to get more to the episodic rate. But as long as Medicare Advantage has the incentive to save money, they're going to be tough negotiators. And in those markets where the large payers own their own, it's going to be very difficult for companies to compete. We're not in those markets, fortunately, with our operation, but again, we're very small.
Well, it's funny that MA contracts are generally Medicare rates, but those are ceilings. Medicare rates are lower because sometimes Medicare rates aren't very good. So I believe it's Arizona. You have the three legs of the stool, the three businesses. New Mexico?
New Mexico.
I'm sorry, New Mexico. One of those states out west. What advantages? Are there some contracting advantages, some synergy advantages, or are the businesses still kind of running separately and that's still on the come, the ability to run those three businesses under one umbrella?
Yeah. Well, there's a couple of synergies that we look at. One is we've seen a lot, our home health is one of our bigger admitters to our hospice program out in New Mexico. So our own patients in home health, a lot of them are moving just upstream into the Addus hospice arena. And that's been a nice move. We do believe there's opportunities for personal care to move into hospice. Home health providers for the last two or three, four years have been using a product called Medalogix to mine data and say it's now time to have that conversation for hospice with the patient. Personal care hasn't had that because we haven't really had an electronic medical record that really works well. So Homecare Homebase has been working with us for about the last three years.
We're getting close to starting to roll out a program in a pilot stand that will give us one medical record across all three levels of care. So we believe we'll be able to take the revenue synergy and kind of move between home health, hospice, personal care, and hospice, and that'll be meaningful. But what we've really found that works out in New Mexico is the providers that work in the Medicaid program out there take risk. So they also have hospital risks. They have obviously, visit risk, and then just the risk itself of the Medicaid program.
And so we've been able to take our non-clinical care, our personal care, and train our aides to be able to do additional services and then report to our payer on changes of condition, which at that point in time, depending on what is needed, we can send in. We have a nurse practitioner program out there. We have registered nurses we can send in. And so it's really allowed us to develop contracts on a value-based care where we get our base pay. So if you send a personal care person there, you get paid per hour. But we get bonus payments based on criteria we develop together, whether that's be things such as lower admissions, lower readmits at 30, 60, 90 days, or in some cases, it's things like care gap closures, such as making sure they get flu shots, making sure they go to their PCP.
So that's really the other side of the synergies where it not only gives you an opportunity to make more money per patient through bonus payments, but it also ingratiates you to the payer so that you have all three levels of care and you cover the entire state. And in New Mexico, for personal care, you can negotiate rates. They're not set by the state. So we've been able to get, in our minds, a little better rate because of our partnership with these payers.
And do you need we had another company yesterday saying they do capitation revenue, but really just in California, and they say you need the doctor groups. It's easier to work with the doctor groups who are on the hook. They take the $0.85 from the plans, and then they work with the doctor groups versus the plans. Do you find that you have to work with these capitated doctor groups, or can you work direct with the payers?
Well, in New Mexico, we have our own doctor visit group. And so we're able to work with our payers. We can use their doctors. We can use our own. Sometimes you use the PCP of the various member. And so we have not. We do work with some doctor groups in other parts of the country, but it's not been a big issue for us.
So lastly, we've got about five minutes. You guys are sitting a lot on dry powder. I'm sure the 20% gross margin rule is one of the gating issues. What are the other gating issues for you guys to be maybe more aggressive in deploying some of this balance sheet that you built up?
I think that the things for us are finding the right opportunities in the right geographies and in the right service lines, but valuations, if that makes sense, as well. So I think the last couple of years, we haven't been quite as active as we have previously. But I think it's really kind of come down to that. We found some more sizable companies, but they weren't in geographies that made sense for us. Others that we've looked at, it's really come to an agreement on valuation. I think that those kind of expectations between seller and buyer are rationalizing. It feels like going into this year, they're probably a little closer than they have been the last couple. There were a couple of deals we looked at that we just could not come to good terms on what we thought was a rational price.
I think some of the home health side, with some of the overhang on reimbursement, has kept some sellers on the sidelines. So there hasn't been as many opportunities as maybe we would have thought we would have seen the last year or two. But we're hopeful that going into this year, we can use some of that dry powder.
Yeah. I imagine the investment bankers are getting some answer to get some points on the board because it's been a draft bill. A post-acute investment banker wouldn't be a great place to be. All right. So we got a couple of minutes. Any questions from the studio audience? Anybody? All right. Well, thank you. We'll go to breakout.
Thank you very much. Thanks, John.