Thanks everyone for joining us. My name is Joanna Gajuk. I'm a Healthcare Equity Analyst at Bank of America Equity Research. I cover some of the small and medium cap healthcare providers for the team, and it's now my pleasure to host this session with Addus HomeCare. They're one of the largest personal care providers, but they also have presence in some other verticals in home care. And today with us we have Dirk Allison, CEO, Brad Bickham, who's the President COO, and Brian Poff, the CFO. So we agreed we're gonna go right into Q&A, so thank you, thank you for doing that. So first I wanna talk about the most, I guess, topical rule ever for this industry, it seems like, because it's non-stop.
Medicaid Access Rule, right? It was finalized, and the, the key provision there, the 80/20 rule, essentially finalized at that percentages. But there were a lot of, you know, clarifications to definitions in the, in the rule. So maybe give us, your kind of, you know, a high level view of that regulation and in particular, that, that 80/20 rule, and what does it mean, for the company?
Okay, thank you. We appreciate that. Well, certainly we all saw that the 80/20 came out recently, the Medicaid Access Rule, and certainly after a year of being out there for comments, most of which were positive comments, honestly, about a lot of the rule, but not about the 80/20. A lot of concern that 80/20 doesn't work for every state that we operate in or that the industry operates in, and that there ought to be more ability for states to, if they wanted to have a percentage, to make it their own. CMS didn't listen. CMS came out and basically said, "80/20." But what they did do, they did listen to the industry as we talked about certain aspects around what is in the 80%.
Not just direct labor, but also things up to supervisory visits. They have a special carve-out for clinical wages, payroll taxes, unemployment taxes. There's a number of things that were included in the 80% that actually lowers the 80% a bit. And so from an industry standpoint, the biggest disappointment for a company like Addus is what it's, what we believe will do to the industry if, in fact, it gets into effect. Now, one of the aspects I didn't mention before I talk about that, is that it went from four years to six years.
And so realistically, those of us in the industry that look at it and say, "CMS is actually putting in a rule, and they give us six years to implement it," causes us to believe that there possibly will be a lot of changes between today and when this is implemented in six years. There's two presidential elections that will happen between those times. There's already been a bill in Congress, in the House, to take the 80% out of the CMS ability to make the change. While we do not believe that'll get through with the Biden administration and that he would veto it even if it got through the House and the Senate, it does show you that people are starting to think about it. So for us, our biggest disappointment is not that it really hurts Addus.
We don't believe long term it will have a negative effect on us because of our strategy. We're very large in most of the states in which we operate. It allows us to spread cost over a higher revenue base than a lot of the people in the industry. This is basically an industry of mom and pops. Probably the top 5, 6 providers represent 4% or 5% of the market across the nation. So really, the people that provide a lot of care are small mom and pops that are gonna be dramatically affected by this rule, if in fact, it gets in. Their margins, EBITDA margins, probably run around 6% at best, and this is cutting that dramatically.
So for us, while we think we'll be able to do fine, it does concern us for the industry in that it'll drive a lot of folks out of business. On the other hand, Addus will be a survivor, so we could pick up a lot of market share. And this is similar to what we've seen in Illinois. Illinois already has a 77% number. Illinois is our biggest market for personal care. And what we saw over time is, as that rule came into effect, the mom and pops either sold their business or just allowed their business to go away. And so today, probably anywhere from 60%-70% of the market is held by two providers, one of which obviously is Addus.
So we believe that if you looked at even if you said some percentage of our margin would go away, the fact that each percentage of market share gain is a nice number for us as far as additional revenue dollars and, and quite frankly, additional gross profit margin dollars. We feel very comfortable that over a six-year time, a number of things will happen. One, we'll get bigger in the states. Two, we think a lot of states will address this through raising rates and over a period of time, allowing us to get to an 80% figure, if that does in fact become law, in a very controlled manner. Similar to what we did with minimum wage, which we just came through in a number of states over the last five to six years.
So all that being said, to move it around, when we first saw the proposed rule a year ago, it was very concerning to us. We spent a year looking at ways to become more efficient, more effective. We looked at ways to deal with this rule. We changed our strategy, really focus on or re-emphasize our strategy to be very large in the states in which we operate, to give us not only the revenue base to spread costs, but also the voice with the state leaders that make the decision on rates. So we're okay with the rule. We'll continue to operate as we are, and we believe our strategy will be very effective.
... and you mentioned your experience in Illinois that resulted in higher revenues, so the market share came to you essentially, and you also alluded to, you know, more consolidation. So should we expect more deals, you know, done by you pretty soon, or is it gonna be kind of over the next couple of years? Are you expecting, like, acceleration because of this rule?
I think the consolidation in the personal care industry that was going to happen in the next year to 18 months will happen just organically. It won't be because of the Medicaid Access Rule. Because if I'm a small provider and I'm looking at the rule being six years away, I've got a lot of time before I have to decide if I'm going to get out of the business. A lot of things can change in that time. So we really feel it'll be a couple of years. If the rule is still in place in that point in time and the administration is driving that direction, then we think we'll start to see some of the small mom and pops decide to try to get out of the business at that point. But for this year, we believe business as normal.
Okay. And when it comes to the fundamentals here, I guess, the EBITDA margins, you know, you alluded, you expect them to come in above 11% for the full year, right? And Q1 was actually even better, right? It was 11.6%, and Q1 tends to be actually the worst quarter when it comes to margins for that business, right? So should we think about you know, the margins improving from here, you know, for the rest of the year? And also specifically, you know, any puts and takes when...
I know you don't give guidance, that's why, you know, trying to get a sense from you, you know, where you think this year is headed and maybe, you know, Q2 when it comes to just, you know, how to think about sequentially Q1 to Q2, any puts and takes around margins.
Yeah, Joanna, I think we still expect the full year to be over 11%, so a good start in Q1. I think just thinking ahead sequentially to Q2, I think the thing we mentioned is, you know, our merit increases across the organization typically go into effect on March first. So you've got only one month of that cost in Q1, you'll have a full quarter in Q2. Kind of offsetting that, we usually get some relief on the payroll tax, people hitting kind of certain caps going Q1 to Q2, that will kind of offset that. So I think the way we characterized it is to expect, you know, Q2, Q3 to be pretty consistent with Q1. Maybe there might be a little bit of an uptick, but really, Q4 is really typically our best quarter of the year.
Primary reason for that is we get our hospice rate increase October first every year with no corresponding cost. We usually give that, those rate increases in the first quarter.
When thinking about fundamentals for personal care, I guess maybe we can talk about that segment first, given the size. You know, the top line continues to outperform. You know, you've been doing pretty well there. And I guess it's largely the rates, right? The average revenue per hour, you know, has been increasing with high single digits for the last three years, right? So, is there a risk that, you know, at some point it's gonna slow down? How should we think about, you know, the outlook for pricing in personal care?
Yeah, I think for 2024, with the most recent Illinois rate increase we got on January first, which was a nice increase, there's a lot of pass-through component to that, down to the caregivers. But I think we've said we expect to be, you know, at or above kind of the top end of our normal kind of long-term 3%-5% range, in personal care for 2024. But I think getting out of 2024, into, you know, 2025 and beyond, we would expect to see that moderate some, as most of our larger states have kinda hit, you know, their targets as far as minimum wage, that would be funded through reimbursement. I would expect that mix to go back to probably more two-thirds volume, one-third rate.
So if you think about 3%-5% as kind of our target range, you're probably thinking about 1%-2% rate, you know, 2%-3% on the volume side, long term. But for 2024, we would expect it to still be, you know, at or above the top end of that 3%-5%.
In that business, you clearly done pretty good job when it comes to hiring, and I guess, you know, you, you were making some changes, you know, to recruiting, onboarding process, and I guess seems like things are working pretty well. So can you flesh it out a little bit, you know, how things are tracking so far this year when it comes to hiring and retention? If you can throw some numbers around where you are on some of these, you know, metrics, and how does it compare, you know, versus, say, COVID? Like, as in, is there more room, you know, to, to continue improve some of these, you know, this year into next year?
Yeah, I think if you look at our hiring, first quarter was solid for us. It was sequentially a nice improvement over Q4, but Q4 has some seasonality in it, kinda comparable to prior year. You know, and I'd say the only reason why it was kinda comparable to prior years, January was a little soft because of some weather events that kept people out of the office, kept people from coming to the office to kind of finish their paperwork and get through the process. We actually saw really good hiring numbers in February and March, and that trend continued into April as well.
Some of the reasons for that is, you know, we did implement, I guess it was probably midyear last year, where we finished the full rollout of our new candidate tracking system. Certainly improved the candidate throughput there. It made it easier for candidates to apply. It was mobile optimized. People could complete the whole application process with their phone, more text-enabled instead of kinda email-based. So certainly saw some improvements there, and now we're kind of on to our kind of next iteration of that, and that's really starting to add some chatbot features to engage more actively with potential candidates to kind of pull them through. And so we're starting to pilot that in a few locations, and so far that's been positive.
We've actually seen some improved throughput from candidate to actually employed and actually working that first case, where we're starting to cut out some of the days that it takes to get somebody through the process and get them to that first billable case.
... And any numbers you can throw at us when it comes to, like, you know, where you are on the retention and turnover and how this compares, say, versus the industry or, you know, how things were, I guess, you know, before COVID?
Yeah, I think, you know, we're kind of back industry-wide more to kind of the pre-COVID numbers. I mean, during COVID, I mean, you actually saw kind of industry-wide, I mean, the numbers were pretty shocking. It was like 90% turnover rates. We weren't quite that bad. Now I think it's more kind of in that 50%-55%. We tend to do a little bit better than the industry. You know, I still think there's room to improve that number, and some of the initiatives that we have there is really geared to kind of address some of the reasons why we lose caregivers.
We do, you know, a lot of surveys with caregivers, and, the interesting thing is, kind of the number one reason we found that people will leave, is they don't get enough hours, which is ironic since one of our biggest challenges is we need, we have open shifts that are available. So some of the things that we're doing is really trying to address that disconnect. We recently rolled out a caregiver application that we've been developing. It provides for, greater communication with the caregiver, a lot of opportunities for them to self-service, to basically tell us, "Okay, how many hours would you like to work?" And then, more importantly, "What is your availability?" Because those are, you know, bits of information that is difficult to, you know, get from the caregiver.
And then, frankly, as soon as you get it from the caregiver, it could be stale in a week. So we really need to enable them and encourage them to be able to kinda self-service that. And if you think about if we can get their schedule and availability, we've got the client's schedule availability, and we can start matching that up better. And so we're starting to see, you know, some, some real buy-in from our caregivers in utilizing that application. And so I think that can help us maximize our existing workforce, and reduce that turnover rate.
And I guess when it comes to personal care, the last maybe couple of quarters, maybe 12 months, you know, you definitely guys talking more about value-based care in that business. So can you give us a background there and any more details in terms of the types of contracts? Because sometimes I get questioned, people get confused, how can you have, like, a value-based care? Because they think capitation. But my understanding is, you know, when you say value-based care, it's more kind of quality-driven or maybe some bonus payments. So can you give us a sense of, you know, what, what this value-based care and personal care, you know, looks like now for, for this, for this company?
Yeah, you know, we've got several value-based arrangements out there. Primarily, we got a handful in New Mexico. We've got one in Illinois, we've got one in Arizona, and there are maybe some little bit of differences between them, but I think fundamentally, we get paid for our services at the rate that we normally would get paid for. There can be a gainshare component to it, so there is an upside component, depending on how we do with certain metrics. Some of those may be related just to rehospitalization, some may be a combination of hospitalizations, ED usage, and then also looking at value metric, our quality metrics as well. But you know, we've invested in our value-based program. We recently rolled out a new software, case management software. It really...
That was one of, I think, the gating items to really be able to scale that program was just the technology piece. I think, you know, we've addressed that in the Q1. We've had some good results with that. We're now able to. We've moved from, you know, having a team of individuals that have been getting changes in condition that our caregivers send to us, to now it's going into the system. So the system is now doing risk scoring on clients so that we can be, you know, scale it, be able to target specific individuals who actually need to have some sort of intervention. So really positive about the, you know, that development and what that bodes for the future for us.
So you said, this new software that you just launched, case management, is there anything else that you need when it comes to just driving growth there? Or so from here, it's just essentially signing more contracts. So I guess, you know, are there certain markets that are more prone for this kind of, you know, setup versus others and where you are? I mean, are there more opportunities, or are we talking about just you would have to add additional states in order for to expand value-based care?
Yeah, no, yeah, actually, the payers that we're currently operating or working with are looking for us to expand the existing arrangements. You know, in addition, there is... We haven't had a lack of interest from other payers, but you do need a payer on the other side that's got risk, you know, for those items. So there's no lack of demand for that type of arrangement. It's really getting with a payer that's gonna be a good partner with you to be able to make sure that, you know, if we've got interventions that need to take place, we get, you know, an engaged case manager on the other side that can help us make those changes.
But, you know, I think the other thing with the software, what it also is allowing us to do is, you know, as we get more and more data, we get, you know, we can look at what interventions we take and what, how did that impact the care for that particular client. We're gonna be able to tweak the algorithm, and I think do a better job of being able to really risk score, and then also evaluate the interventions that we take, you know, which ones work, which ones don't.
Also, you know, thinking about this value-based care, and so, you mentioned, you know, three different states where you currently have this in place. Can you help us size them up, you know, how big, I guess, as a % of revenues, where your value-based care now, and where do you think this could be, you know, five years?
... Right now, it's immaterial. Excuse me. Right now, it is still immaterial, very small for us. But if you take the revenue we're generating, as Brad said, there's really two components to the revenue. There's not just the success fee, so to speak, and the gain share that we get for hitting certain metrics, but we also get paid the revenue that we normally would, be it personal care hours or even home health visits and whatnot. So if you add all that up, while it's still relatively minor, we'd like to see that grow substantially in the next five plus years. You know, does that mean it grows to three or four times the size it is today? You know, it's as a billion-dollar company, it's gonna be hard to become material for a while.
But it is something we're very excited about. In fact, one of the things Brad mentioned, we're doing one new contract. It's a small contract, and it's where we're actually, instead of gainshare, we're taking some risk. Now, it's very minimal. We're only taking risk for our part, for our hours. But the reason we did it is we wanted to have a, I won't say experiment, but we wanted to enter into a contract with the payer that we could partner together to determine if adding personal care hours can help reduce the overall medical loss ratio for their patient base. And so we're excited about that.
We've only been in it, you know, less than a few months, but it is something that we'll be able to see, a little different metric, that if it works and works well, that will help us then go to Medicare Advantage providers and be able to work with them in a different area, not only with the aspect of e-visit, emergency room visits, rehospitalization, but quality care metrics, and then also potentially take some risk adding to a patient base that we don't currently do.
Right. I mean, there's a lot, and I want to follow up. But, so on this last contract, so you're saying you kind of guarantee the number of hours, or they kind of pay you per member fee for personal care, and then it's kind of, you know, you take the risk of if that patient actually requires more hours than it's getting paid, or how should we think about, like, where's the risk?
We set the care plan.
Mm-hmm.
So we control the hours of personal care that that patient gets. We do not get reimbursed for those hours. The reimbursement for those hours will be on the gain share at the end.
Mm-hmm.
And so that's our way of saying... It's like the Medicare Advantage. When they came out a few years ago, CMS came out and said Medicare Advantage can add personal care as a supplemental benefit. Well, you know, Medicare Advantage plans didn't get paid any more money to do that. They didn't really understand personal care like we understand personal care and what it can do for that patient and the cost. So for them, it was kind of a marketing opportunity. We want to be able to show them, "No, even if you don't get additional funds for this, we can help you control your cost by using personal care hours to help do that, to identify the change of control." And the whole reason why personal care makes sense is we're in there earlier and more often than any other home-based service.
So that's why this particular contract, when it came up, and we were talking together to partner on this, made a lot of sense for us. Now, again, because it's new to us, we're still gathering data, we minimized our risk. We know what our risk is, and it's very immaterial overall, but it's a learning experience, and that's really what we wanted out of this contract.
So would you say that that's like the next, I guess, area of growth, that eventually, you know, MA plans will realize the benefits, and instead of using this as a marketing tool to offer the personal care hours, this could actually be like a new market for you? Is that-
We believe so. We like to think that if we can work with Medicare Advantage, who take risk, obviously, if they will work with us and we can develop a program around personal care hours, that we can help them reduce their overall medical loss ratio. And so we can pay for our own services in effect and benefit the patient and benefit them. So that's really where we're trying to head with value-based care. You know, there's only so much you can do with gain share. You really need to be involved with the new market of expanding away from just Medicaid patients and getting more into the Medicare Advantage side. That's our next phase.
Right. And also, I want to follow up, you mentioned something about, you know, getting paid for the personal care services, but also home health. So are you saying that in these contracts, when you were talking about, you know, recording this change of condition that might require additional services, so is that, for you, an avenue to use Addus Home Health Agency in the market? Is that's what was happening in-
It is. I mean, it. So, you know, we can work with the case manager, and if we identify a client that, you know, really could use home health services to avoid that rehospitalization, we can work and get that referral and do that and provide that service in-house. And by the same token, to a certain extent, you know, we also, you know, have identified some clients that really hospice is a viable option and something they ought to consider, so we can introduce that service as well, and certainly, we provide that service.
All right, so I guess that's why it makes sense when you guys talk about, you know, your strategy when it comes to M&A. In terms of just adding home health assets where you have personal care for that, for that reason, right?
It is. I mean, there's definitely some synergies. And if you think about it, you know, somebody can be on personal care and home health at the same time because those are two distinct services, two distinct payers. You have an authorization for personal care hours. You get an approval for the home health services. You can do the same thing on the hospice side as well. A lot of times, individuals that are on hospice, they still need assistance with daily living, the ADLs, and that's the service that our personal care provider team can provide.
Since we started talking about these other verticals, you know, hospice and home health, so maybe we can talk about that, those business lines a little bit. 'Cause in the hospice, it seems like the census recovery has been much slower than what we would have expected. Would you say there's some structural changes or differences in that particular vertical, in that business, that kind of prevents you to coming back, you know, quicker to the census growth? Or how should we think about the recovery there?
Yeah, I mean, if you think about hospice, I mean, certainly there have been some near-term headwinds. You know, COVID, there were a lot of, you know, kind of excess deaths for that population segment that would, be eligible for hospice and would've been receiving hospice benefits. I think that that's largely subsided, and if you look at just admission volume, you're starting to see that really pick up. We've had nice sequential growth on admissions, so I don't think there's any structural, challenges with hospice. I think it's just been a little slower to come back just because of that kind of, the excess deaths.
You also had kind of during the public health emergency, there were certain rules that allowed, you know, skilled nursing facilities to skill patients, a lot of patients that they otherwise wouldn't have and would've referred to hospice because of the elimination of the three-day prior hospitalization rule. That went away, I think it was in May of last year. So there's, you know... And we've seen from a length of stay standpoint, our skilled businesses, that length of stay is starting to improve after the elimination of that waiver. So I don't think there's anything structurally different with hospice long term. I think it's just kind of fighting through some near-term headwinds that I think are starting to abate.
'Cause in the past, you used to talk about, hospice is supposed to grow, you know, more like high single digits, right? So, when or, you know, what needs to happen to kind of get back to that census growth to get to that, you know, high single digits growth for that business?
Yeah, I think when we look at hospice, I mean, we're, we're looking, you know, at the end of the day, kind of 5%-7%, and that includes a rate component at least this year. So I think there's some opportunities. You know, Q1 was a little soft just because we started out at a lower number, but we saw nice census growth if you look at the numbers from January to February and February to March, and then, you know, I think we talked on a call that we saw those trends continuing into April as well.
Okay, that's, that's good to hear. And I guess, on hospice, you know, there's increased, I guess, attention from CMS and even Congress last week, they sent a letter to CMS. So it seems like there's more focus on, like, fraud and abuse in the hospice industry. So kind of what is your view of, you know, these changes that are already kind of been put into motion or maybe are being considered? Like, does that change your view of this, of this business, and, you know, do you expect any, any changes to how you operate or maybe the costs associated with complying with these new requirements?
Well, you know, it's we've, of course, our prior life, we were with hospice, you know, at a previous company, so a lot of experience there, and you certainly go through cycles. You know, is hospice under a fair amount of scrutiny right now? It is. You know, so we do have to respond to a lot of requests for information and such, but you kind of go through those cycles, and we're kind of in one of those now. Now, what I will say personally is, some of the ways that CMS is going about it, I wish they would handle differently because a lot of the people that gave rise to the stories that you read about the fraud and abuse aren't frankly going to be touched by some of the things that they're doing.
They're largely gonna, you know, fly under the radar and continue to do so. So I think there's certainly a way to address that piece, and I think the industry is in favor of that, and that's, you know, frankly, on the front end. There ought to be a little more scrutiny over admitting new providers, and that shouldn't be that hard to do, honestly.
Okay, so would you say you expect kind of, you know, CMS or maybe even Congress to come up with, like, a different set of tools to kind of capture the bad actors?
Well, I think that's some of the pressure you're seeing from Congress is, you know, "Hey, are you, the things that you're doing, are you actually going to be able to catch those people?" And so I think there's a little tension there, and hopefully, maybe there's some rethinking within CMS about how to kind of better target where their investigation should be. 'Cause, I mean, you look at the big providers, you know, they're trying to do the right thing. You know, and then don't get me started. I can talk for a long time on this topic. So it's... But, you know, I think the industry is in favor of, let's try to find the bad actors.
I think some of the things that are going about it is just not going to reach those individuals.
You know, we spend a lot of money on compliance, quality, and we believe that's needed, and so it shouldn't affect us. Doesn't mean we won't have issues that we have to deal with, but from our standpoint, we're very much behind the fact that the hospice industry needs a strong compliance program.
Yeah.
And maybe the last half a minute on home health. So I guess things are tracking, you know, I guess well, I would say, but kind of how do you think about that business? So clearly, that fits well with your strategy, you know, having the three business lines. So this is the smallest one, but you know, you recently added an asset despite the, you know, the Medicare reimbursement pressure in that business. So kind of, you know, your views around the home health, are you gonna be aggressively pursuing these deals, or are you waiting to see kind of how the reimbursement plays out for the next year? You know, what are your thoughts around growing that business?
Yeah, we're from a home health standpoint, I mean, we believe it works well with personal care, especially in the value-based care markets. But we like the three levels of care, too. In just all of our markets, we continue to work towards that. Our home health is only 6% of our revenue, so it's not a big item for us today, but we do believe it's important to continue to look at home health opportunities in areas where they can sit on top of our personal care network and help us towards those three legs of care. So we're not avoiding it because we believe that the industry is in the sights of CMS right now. We think that will change.
All right. I think... Wait, does it mean we have still more time, or this is counting the other way? All right, I think this is all time we have for today, so thank you so much.
Thank you.
Thank you.
Thanks, Joanna.