Welcome to Oppenheimer's 34th Annual Healthcare Conference. I'm Mike Wiederhorn, the healthcare services analyst. It's my pleasure to introduce Addus HomeCare. With us from the company, we have Dirk Allison, Chairman and CEO, and Brad Bickham, President and COO. One more note before we jump into the fireside, there is a Q&A box in the top right corner for those who want to ask a question. So let's just, you know, start off with, well, first of all, welcome. Good morning. Thanks for joining us, guys.
Thanks, Mike.
We'll start with a broad question. You know, can you just provide us an update on the business, and how do you feel coming out of Q4 and entering the new year, from a high level?
You know, we're-- we've been very excited, with so much of our business, over 70% of our business in personal care, we've really seen, since about January of 2022, a real growth in our ability to hire caregivers. And that's been a real key, along with some of the internal things that Brad and his team have done, to try to make sure we get more hours to folks and people, you know, from hire to patient quicker. But being able to hire caregivers has turned around what we saw for a period of time during the pandemic, which was very little volume growth, but a lot of revenue growth from increases from states because of the federal money.
We're now back to a more normal cadence, which 50%-60% of our same-store growth is volume, which is really where we like to be. The rest is, you know, the price increases we get from the states to cover cost of living and whatnot. So right now, personal care is really doing well. Our smaller businesses, especially home health, which is our very smallest at 6%, that's been a little challenging, as the whole industry has faced not only lower increases, but also the challenge of trying to work with Medicare Advantage players and, being sure we can serve the ones that are able to pay us enough money that we can continue to do the good service that we try to do. So, all in all, we're pretty excited about where we are.
We think we're in a good shape going forward.
Okay, so let's get into the, you know, the biggest overhang, obviously, on the stock and the industry is the Medicaid Access Rule. You know, can you give... You know, can you talk about what you're hearing at this point in time? Kind of update from that perspective and the timing of you think the when it's gonna be, you know, come out to the public.
Sure. So, you know, last year, I think around April, this proposed rule came out with a 60-day period for comments. And, everybody's aware, I know, that over 2,000 comments, probably 97% were negative. It wouldn't work. The positives were more some of the, the unions that were involved in the negotiations. So, as we proceeded through the years, we've had, this last year, we've had a lot of meetings, both ourself, other providers, in the industry, lobbyists, obviously. And, and as we've talked to CMS and others, congressmen, what we have emphasized is the fact that the industry itself supports a lot of the quality metrics, that are in this rule.
The challenge is the 80/20 component of direct wages, largely because it's, this isn't a Medicare program where the federal government sets the rate and knows how a rule will affect each provider. This is a state-by-state program where a state may have multiple waiver programs with multiple reimbursement rates. Some states reimburse high enough that 80/20 would be fine, others are not quite there. And so, we, as an industry, do not really support the 80/20 itself. We'd like the states to be able to consider, do they want a percentage, do they not? You know, a state like Illinois has a percentage. It works well 'cause we all work together in that particular state to make it a program that can continue to expand and attract caregivers.
So, for us, as we sit here today, you know, OMB got the final rule in January. We could tell you we've heard everything from no percentage to lower percentage, from 4-year implementation to 6-year implementations. What we've chosen as a team to say we're expecting, and because we're somewhat conservative, is we just think it's gonna be 80/20, 4 years, no change, and then over that 4-year period, we'll work. We have thoughts on, you know, you need to be... How you're gonna operate in an 80/20 environment. If you're a number one or two provider in a state, you're gonna be, have a voice with the state. You can work with them on what the reimbursement rates need to be. It doesn't have to all happen in one year. You're gonna have 4 years to try to drive that process.
So, for us, we think it'll lead to the larger companies picking up market share, kind of like what happened when it went through, the Illinois change years ago. So, while we would hope it would come out with lower to no percentage and allow states, we're comfortable wherever it comes out, that we're gonna be able to operate and to be one of the providers that benefits going forward.
So let's, you know, dig a little bit more into this. So, you know, operationally, what if the 80/20 rule came out tomorrow and said, "Okay, you know, it's gonna go into effect in, let's just say, 18 months," which we know is not, you know, there's no rumors about that, we're hearing 4 years as well. Just kind of operationally, what do you think your first things would, you know, what would you do, and then strategically as well?
Well, we've started, and Brad can get you some details. We've started working on a scheduling system that can help us be more effective in scheduling and to take our current caregiver base and try to give them more hours, which would do a couple things. It would cut down on turnover cost at the same time. Right now, we have 200 or 300 people out in the market that are scheduling for us. You know, every, by the time there's a change, you've got to redo the schedule. If we can use more systematic approach to that, that will help us as we grow to minimize our back office growth cost from a back office, and so that's one of the things we're doing.
We've already put in some software to help us on the recruiting standpoint, to make that a tighter issue. So those are a couple operational things we've already started that should pay off down the road with cost savings and growth.
Yeah. So I mean, if you look at, you know, the things that we've done, and these are things we were gonna do regardless of the 80/20 rule, and have been working with. So we're always looking, one, to enhance our caregiver hiring and retention piece, and we've been doing that for years and years, and we'll continue to do that. That's just an area that we're a high-volume company as far as hiring people. We have turnover rates on that side that are higher than you'd like. We also know it's a tremendous untapped group of employees if you're able to communicate more accurately with them and have them self-serve. For instance, you know, we know that they want more hours, which is interesting.
We're working on collecting their availability through a self-service app. We're also looking to be able to blast out schedules to them through that app, be able to also... When Dirk was talking about scheduling enhancements in the software we have there, you know, there's no real reason, once you collect availability on the caregiver side, we know the authorization for the client, that a computer couldn't do a lot of that scheduling. And so that's one of the things that we're working with, is machine learning, to be able to automate a lot of that process. To Dirk's point, you know, we've got a lot of schedulers out there in the field, you know.
Could we get a machine to be able to schedule 70%-80% of that, and then have that team focus more on that, you know, the 15%-20% that need actual human intervention? So there's a lot of opportunities, and of course, we're looking at it that, you know, based on the, what we understand from the proposed rule, don't expect it to change. You've got about a 4-year runway on that. So there's certainly opportunities there. And then, you know, going back to what we would do on the state level, it certainly gives us opportunities to start working and lobbying with the states to... You know, if we're going to an 80/20 world, your reimbursement needs to go from X to Y, and see if we can make some changes there.
I think the program is of such value to the states that they're not going to... they're not wanting, they have to support the program, otherwise it's ultimately gonna cost them more money to put these individuals into an institutional setting. So I think there's certainly opportunities over the next four years to work with the states to modify the reimbursement side. But then also, Dirk mentioned that, you know, all these state programs are different. I mean, the compliance piece, the regulatory piece, is often different. How often, what does the supervisory elements look like? You know, what are the background checks, the various ones that you go through?
So there's opportunities there to also work with states to say, "Well, let's modify your program a little bit to make the 80/20 rule work." And then finally, you know, to the point, you know, one of the... You know, in addition to reimbursements being sufficiently high to make it work, you need volume. That's what makes Illinois work. and so I think there's opportunities also to look at, what is the opportunity in a given state to get that volume that you need in order to make the 80/20 work? So between that, the operational, changes that we're working through anyway, you know, I think we'll, you know, with a four-year runway, there's certainly opportunities to, you know, minimize the impact of the, of the rule if it comes out 80/20.
You know, I know that certain states already have minimum requirements. You know, can you give us, you know, some color on them, and how they compare to the national level?
The rates?
Yeah, no, just the minimum requirements. Illinois, 77% out. So Illinois is a great example, where they've had in place for quite a number of years, a 77% number. But they also have a very, you know, the definition of revenue, that doesn't include your bad debt component. When you look at what's included in the direct wage portion, it includes training costs, it includes supervisory visits, it includes travel, all of that. So that's a little different than what was provided in the proposed rule. So much more definition around revenue, also more definition around what is included in that 80%, or the 77% bucket, in the case of Illinois. But you also have, I think, which is key, one strong rate environment in Illinois.
They've been, the state's been very supportive of the program. But you also have volume there, too. When you look at when that 77% rule came into place, what you saw, frankly, is more consolidation in the state of Illinois. So we have a fairly significant market share, along with one other provider, in that state. So, you know, when you look at all those various components, the definitions, the volume aspect, and great rate, and good rate support, it works in that state. But, you know, that's Illinois. You know, if you're gonna, you know, compare that to, you know, in Alabama or in Georgia, I mean, it's kind of another, you know. You gotta look at, do you have the volume? Is the rate support there?
What is the regulatory environment look like as well, and what is the definition section gonna look like?
That makes sense. You know, from a legal perspective, obviously there's been a lot of noise that potentially, you know, you could have the states or the industry, you know, could go off to some lawsuits there. Kind of what's the noise, you know, the word around that? Kind of what are you hearing, and are things kind of cued up, from that perspective, from a state level?
Well, you know, the industry had a number of legal opinions. I think two or three legal opinions came out, all of saying basically that CMS had not been given authority from the legislative bodies, Congress, and, you know, Senate, and the House to actually dictate to states what in effect is a minimum wage on healthcare workers. And so I believe that you will have a number of states. I mean, when you think about the comments, even the states that you would think would be very supportive of the Biden administration, California, Colorado, and some of the Democratic-led states basically said in a different manner, this program doesn't work at 80/20.
You flip to the red states, you know, the Republican-led states, they tend to be the states that will probably, based on a rule, that if it's, if it's something that was gonna cost the state a lot of money, time, and effort, you probably would see certain states file suit. Now, the question is, with a four-year implementation, how quickly will those suits be filed? But we are hearing, and we, we've worked with some states that know that, that they believe that it's not valid for CMS to do this. There probably will be some legal challenges after, the rule is passed, depending on, you know, obviously, what comes out with the rule.
And, you know, if there's a change in administration, how would that, you know, play a role in this?
Well, we think, you know, obviously, if the Republicans took over the presidency, we feel like this would go away. You know, they, Biden, the Biden administration been very supportive of home- and community-based care, and we were very excited about that, so that's why this way they're attempting to gain access is questionable to us. I think there's a lot of unintended consequences as far as small mom and pops in certain states, that this would be a problem. I think the Republicans probably would not follow through with this. That, again, that's just our opinion, but that's not been the. You don't see any of the Republican-led states with minimum requirements out there today.
Do you think when CMS comes out with the reg, do you think the acquisition market's gonna open up? What's that gonna do to the M&A front on this side of the business?
Well, you know, we always like to talk about when there's a big change coming, the mom and pops are gonna have to get out of the business. And what we've determined over the years, or I have, as I've been in this in healthcare, is mom and pops are pretty, they're pretty strong, and they move around pretty good as far as being able to deal with rule changes. And when you got a four-year implementation, I don't think anybody's gonna just say at that point, "We're gonna go for sale," unless they're already at that age where they say, "Look, we're at such an age that we want to retire anyway.
Let's put our business up for sale now." I think if the rule gets closer down the road, a rule is finalized and you're three years into it, a year away from some things going like this. I do think at that point in time you would see some of the consolidation opportunities that we saw in Illinois, when they went to, you know, the higher percentage.
Right, so you don't think there'll be an acceleration. Obviously, going into an election, you have to let that play out, and ultimately, it's a four-year timeline. States can come back, change reimbursement, change rates, and all that, so there's a lot of lead time here for, you know, for anyone to start to really kinda throw in the towel.
Yes, but that doesn't mean we won't see opportunities, but I don't think those opportunities will necessarily be driven by the rule and the potential rule change. I think it'll be driven by people. You know, a lot of folks have been in this industry a long time. There are folks today that are looking to sell their business and retire. So I think we'll continue to see those opportunities. Maybe we'll see some of the bigger companies that have larger personal care assets that are not their main focus any longer. They may be looking to, at some point, divest, depending on how the rule comes out. So I think we'll see opportunities, but not necessarily driven by the potential rule.
Perfect. Let's shift gears now to top line, you know, on. You know, I think you're still forecasting, you know, strong same-store growth in 2024. Can you just remind us what you're looking for and how much will be price versus volumes? And then kind of looking longer term, do you think your bias is for growth to continue to exceed the 3%-5% target?
Well, right today, 3-5 is our, still our target, and we believe next year, 2024, we'll be at the upper end of that because we've got some strong rate support from certain states. Plus, as I mentioned, we're back today to a more normalized manner, where about 50%-60% of our same store growth is coming from volume. So today, we would say 3-5's still a good number. We'll be at the upper end. I think for us to raise that range a little bit will be depending on how we see states operate now that the pandemic is over.
In other words, during the pandemic, there was great support to cover minimum wage increases, to do cost-of-living increases, and while we believe states will continue to give us cost-of-living increases, we need to see that occur before we'd be able to say we're pretty comfortable that what we've seen the last year or two being over the 5%, will continue to be what we think we can hit.
What are you seeing in terms of hours per business day? Do you expect volume growth to come more from the patients or more hours? Kinda, you know, kind of the mix then from that perspective.
Yeah, I mean, I think it's gonna be a kind of a pretty equal weighting there. I mean, if one thing, if you look back through the pandemic, we certainly had some challenges on the labor front. We saw what we call our service rate or fill rate, which is the percentage of actual hours served versus the authorized hours, we saw that slip during that period of time. We actually have made some pretty good headway this past year to really start getting back up to where we were kind of pre-pandemic. And so when you look at our fill rate, you know, we're kind of there pre-pandemic, but with some of the things that we've talked about from an operational standpoint, we think there's certainly some room to grow there.
So just looking at hours per client, certainly some opportunities there to increase our service rate. I think, you know, from a just client flow or new, new client flow into personal care, that again, I think, is gonna kinda track what you see with, you know, just the over 65 population growth. So you're gonna see a, you know, 1%-2% kind of increase there, just on clients.
Yeah, staying on rates here. You have Illinois with the, you know, the 2024 wage and rate hikes in effect. What are you expecting from the state going forward from Illinois? And are there any other states that you expect the minimum wage increases or rate updates over the next 12 months?
... Yeah, well, let me talk about Illinois-
Yeah.
And then you can talk about some other states. You know, with Illinois, they-- we've been very appreciative. They've been a great state as far as doing two things. One, they've supported as they wanted to get their minimum wage up to $15, and they've done that. And now what they're doing is they're raising the rates above $15 each year in a cost of living adjustment. The state has come back out, as you saw this year, and they supported that cost of living adjustment, and they gave us rate increase to cover it. So we believe going forward, we won't see the large increases, the $1-an-hour minimum wage increases. We believe it'll be more of the cost of living from this point forward. We believe the state will be very supportive in that particular environment.
If the state decided to push minimum wage up higher, history says Illinois has been very supportive to the providers in the state to make sure that they keep us whole. So we don't anticipate as large of increases on both the minimum wage and the revenue, but we do anticipate we'll continue to see small cost of living increases and with state support each year to cover that.
Yeah, and if you look at some of the other states, I mean, we have some states, you know, Washington, Oregon, where we get, pretty much, frequently kinda annual rate increases, then we go through a collective bargaining process. So it kind of, you know, kind of keeps the margin, roughly intact in those states. So we'll continue to see those types of rate increases. We have gotten some rate increases from the VA program this year, which was nice to see. Now, we got a nice increase in Ohio, but, again, like, Ohio isn't tied to a minimum wage increase, but we will be adjusting wages there, just, you know, from a market standpoint. We really don't have any states, you know, material states that have minimum wage increases, on the table.
We went through a lot of that during kind of the pandemic, states adjusting their minimum wage.
So let's move over to the labor trends. You know, stick on, stay on personal care. Can you talk, just talk about what's going on and what you're seeing on the labor market on that front? And why, how has that been so resilient, and how do you think the applicant tracking system will help as well going forward?
Yeah. So, you know, the, we certainly saw, as Dirk mentioned in the opening comments, a nice kind of pickup on the revenue side, driven by an improvement on the labor front, on the PCS. And a lot of that was, of course, with a lot of the pandemic-related support out there for individuals, the advanced childcare credit, enhanced unemployment. When all of that kind of went out of the system, we saw people coming back to the labor force. So we saw our candidate volume increase, which then drove certainly our hiring and increase as well. You know, so we're still seeing, you know, kinda steady improvement there. If you look at our year-over-year numbers, we did better in Q4 this year versus Q4 of the previous year.
We're down a little bit sequentially, but that's kinda normal holiday noise there. So I think we're on a pretty nice, steady state on the personal care side. All that being said, you know, we implemented the new candidate tracking system, fully implemented probably mid-year last year. That certainly helped us maximize pulling in candidates, but then also being able to transition those candidates to hires. It was mobile optimized, so people could, you know, do an application on their cell phone, versus used to have the kind of more of an email versus computer-type interface. Now it's text messaging in an iPhone or a Samsung.
But we've also, you know, looking ahead, we are piloting some chatbot features that will enhance, I think, the communication when somebody applies, to get them more engaged and improve that conversion percentage. So I think there still continues to be opportunity to improve that front-end piece. And then kind of related to that, some of the things that we're doing on the scheduling side is trying to collect availability. We've got a caregiver application that we're rolling out that will allow caregivers to do a lot more self-service. You know, 'cause one of the things that really can help us is, do you want to work more hours, and what is your availability? And then we can find them the clients that they would like and the hours they want to serve.
And one, that's going to, you know, primarily increase retention on those caregivers. 'Cause one of the things that we have found over the years, really, the number one reason why a caregiver leaves is because they're not getting enough hours, which, you know, kind of is a head-scratcher because we always have plenty of hours. It's just trying to make that connection. And so the things we're doing on the technology front is to try to improve being able to figure out which caregivers want additional hours, how many hours do they want, and what is their availability, so we can do more on the schedule matching side. And again, I think that'll also... When a new caregiver comes on board, you know, they're looking for 30 hours. If you give them just 10, they may or not, may not show up.
They're still looking for 30. So, you know, the key there is, let's get them the hours that they want to work, but that really requires them to be able to do some self-service.
Let's shift gear. Stay on labor, but let's go to the skill side. You know, can you guys update me on what you see on the home health and hospice? You know, it's obviously been a bit, little bit more competitive on that, on that front, on the acuity, higher acuity side. You know, you've seen some improvements there. What are you doing to minimize the pressure on the labor costs and improve your ability to meet demand?
Yeah, you know, there we've seen certainly, you know, more pressure on just wage rates over the past couple of years. I think that's starting to moderate this year. Seems to be getting down to a little bit of a more normalized number. I think when the kind of travel nursing opportunities ended, you know, that certainly, I think, helped providers out. You know, the things we're doing, we're seeing, you know, there's pockets that are still challenging on the labor market. I mean, if you look at, you know, kind of, the inner city Chicago is a challenging labor market to find clinical staff. Oregon is another market that's challenging. So there's pockets where you're having to pay up.
There's pockets where it's tough to find the staff. That being said, I think overall, it has improved significantly over the past year and a half. But again, it's really trying to stay focused with, you know, the nursing staff, and making sure you're meeting their needs as far as, you know, is there ability to be a little more flexible in what schedules look like, and hours that they want to work. So I think we're certainly being a little more flexible on that side of things.
When we think about hospice, you know, can you talk broadly about where the hospice industry is at this point in time, and do you see a return to normal growth rates? And can you talk about trends specific to Addus as well, in terms of referral patterns and length of stay metrics?
Yeah, I mean, I can start with, you know, when you look at, I mean, I think globally on hospice, I mean, we went through COVID. You had a lot of excess deaths. And so I just think that certainly impacted the industry in the near term. You're starting to see, I think, that those effects start to wane, and you're starting to see kind of a more normalized, growth rates on hospice, just for, with respect to beneficiaries coming in. There were also some things that were in, inherent in the, PHE, that basically allowed, you know, for instance, skilled nursing facilities to skill more patients and skill them longer.
And so you saw length of stay negatively impacted on the hospice side, because you were getting patients from skilled nursing facilities much later in the course of their episode. Those have phased out. They phased out, I think, it was May of last year. So we started to see our length of stay build, primarily with the kind of the skilled nursing facilities. You know, so we're kind of in that upper twenties right now from a median length of stay. That's really what we kinda focus on, as far as trying to see kinda how that's going to drive census growth. We've seen good referral volume. If you look at the last three quarters, we've had nice sequential growth, on the referral side and the admission side.
You know, this last quarter, we had a lot of, you know, kind of a, I think it was, a kind of a one-off thing, we just had a lot of deaths, so we had a lot of discharges due to death that have, you know, impacted our census numbers, and that drove our median length of stay down. You know, I think we're back to kind of more of a normalized length of stay. The admission volume has certainly increased for us. So I'm optimistic that we'll see some, you know, nice growth on the hospice side. And I think that kind of correlates with, and translates with what you're seeing in the industry as well over the past, you know, one or two quarters.
You know, in lieu of time, you know, a few more minutes here. One, one question on home health, you know, can you give us an update on the trends that you're seeing there? You know, how are contract negotiations going? What inning are you in with exiting from the low, you know, the low-margin contracts?
Yeah, you know, home health is still, you know, it's the, it's our smallest segment. It is challenging from both, you know, from the, the contracting side, the rate side. You're also still seeing some challenges, or we've certainly seen that shift of mix from episodic to non-episodic or, you know, traditional Medicare to, the, Medicare Advantage. I think we, as, you know, as a company and also, I think, as an industry, we're starting to... We're probably starting to get more to an equilibrium point as far as that shift. I don't know how many more, particularly with some of the pressures on MA, how much more of a shift you're going to see from traditional fee-for-service to Medicare Advantage. You know, are we kind of,
You know, I don't think it's going to be as dramatic as it has been over the past several years. So I think we're getting some stabilization there. On the contracting side, you know, we've had some some wins, moving some Medicare Advantage into episodic contracts. You know, it's a little slower than you would like. You know, some of the, the larger payers are the more challenging to get to move, but we've also had some, you know, kind of what I call near-term wins, where you're moving that per visit rate up. So still work to be doing, to be done there, and it certainly is a focus area for us to, to want getting increased, you know, the quick wins.
Let's try to see if we can increase that per visit rate, but then also see if we can't start moving more of them to an episodic reimbursement environment.
Time for one last question here. You know, I want to talk broadly about your, your capital deployment strategy, and then, you know, when, when, as also as far as when you think about M&A, is there, is there any segment that you want to focus on, and what, kind of what are you seeing in terms of valuations or even potentially new states that you, you consider entering?
Well, most of our capital will be deployed towards the personal care side over the next 12 months. We will be looking for some home health opportunities if they sit on top of our personal care network. But our focus mainly is to try to drive size in the states in which we operate on personal care. We believe if you're that number one or number two player in the market, as we said earlier, you're going to have more voice as we go forward down this particular timeline of any potential change to the Medicaid Access Rule. You know, so for us, we haven't really seen a change in the valuation for personal care. Smaller ones, obviously, lower multiples.
If you have some of the bigger ones, if you get some of size, you're probably going to pay in that low double digit range. On the hospice side, which we won't spend as much time in, largely because we haven't seen the valuations come down as much there. In home health, we might have seen it come down just a little, but it seems that hospice has not yet made that turn. So our focus over the next 12-18 months will be personal care first, home health in markets where we have personal care, and, you know, really looking and making sure that the price we pay works for our shareholders going forward.
Well, I appreciate your time today. We're out of time here. Dirk, Brad, thank you very much, and have a great rest of the day. Thank you.
Thanks, Mike.
Thanks, Mike.
Appreciate it.