Good afternoon, and, welcome again to the 2024 Jefferies Global Healthcare Conference. I'm Brian Tanquilut, the healthcare services analyst here at Jefferies. Joining us this afternoon is Addus HomeCare Corp., one of the largest operators of personal care services providers of personal care, and home care services in the U.S. With us this afternoon are the company's CEO, Dirk Allison, and the company's CFO, Brian Poff. So Dirk, maybe let's start with kinda like a state of the union. You know, lots of things going on in the personal care space. If you can share with us your, your views on what's going on with Addus.
Thanks, Brian. You know, from a personal care standpoint, we're really at a pretty good spot right now as far as an industry. Obviously, the last 12 months, we've dealt with a proposed Medicaid access rule, and so there was a little bit of concern there of how that was gonna come out. But realistically, with the finalizing of the rule, things have really settled down. From a volume standpoint, the last probably 6 quarters, we've started to see unit volume grow again. Hiring has been very strong. Quite honestly, the difficulty with inflation and the economy has probably helped us with recruitment because a lot of our caregivers are second wage earners or needed more hours, and we've been able to put them to work.
So I would say right now from the personal care standpoint, you know, with the exception of you do have this rule out there but at the end of six years, we're in pretty good shape. As far as our clinical services, about 25% of our business, hiring's gotten much easier than it was, say, this time last year. So we're pretty excited about what we've put together and think the company's in a pretty good spot.
So maybe, Dirk, thank you for that. I'll move to kinda like some of the questions that we've lined up here, but I'll start with your—the most recent news out of Addus, the sale of your New York assets. So maybe if you can walk us through the strategic rationale and how you thought about, you know, why exit New York, and how does that impact, Brian, you know, your financials as we think about, you know, what happens when the deal closes?
Yeah, I'll talk about it, and then you fill in. Well, we started about a year ago looking at New York. New York's always been somewhat of a challenging market. About three years ago, the state decided they were gonna make some changes with the CDPAP program and eliminate some providers. We were not chosen to stay, so we started refusing to accept new business, waiting for that to occur. After about a two-year period, they decided they couldn't do it, so everything went back to normal. At that point in time, we were starting to see minimum wage pressures, wage parity pressures, new benefits coming in, and the state having difficulty reimbursing that. They would tell us they had reimbursed it, but when you talked to the payers, it was a different story.
So we noticed that for a business, while it was a lot of revenue, 'cause New York authorizes about four times as many hours per month as any other state in which we operate. So where normally we get about 50 hours a month, we're seeing 200 hours a month in New York. So it was a program that's very expensive to run, and while they continued to... Their answer was to continue to reduce pricing, which caused providers to look, and for us, while it's $100 million in revenue, it's really zero on the bottom line. We're making nothing, and yet Brian and I were talking. We have a weekly executive meeting.
We get together and go around the room and talk about things that we're all being challenged with and what we're working on, and I found that two out of our people were talking almost 100% about what they're trying to do in New York. And so it came to the realization, we came to the realization that since it wasn't a stable environment from a rule standpoint, there's pressures from a cost standpoint, that we felt we could take our capital and move it to other states that were more appropriate for our programs. And so when we were approached to look at selling it, we decided to make that move.
While we hate to leave New York, from a standpoint of financial implication and the time we've had to put into it, it's a good move for us.
Yeah, just to add a little bit of color on the financial component. So, you know, New York for us is a market a little over $90 million in revenue, you know, but was running, you know, gross margins in the mid-teens, EBITDA margins in the low to mid-single digits. So, you know, on a run rate basis, it's running about $3 million in EBITDA, but after taxes, amortization, depreciation, really gets to a literally a zero EPS impact. So very little financial impact to us.
Dirk, maybe just out of curiosity, I mean, you found a buyer for the asset, obviously, right? So what are they seeing in the New York program that makes them think that they can run this business?
Say again.
The acquirer.
Yeah.
What, what do you think they're seeing in the New York program that they can do, that differently from what you're doing?
They're about a, in my understanding, about $500 million in revenue. They've been in New York, that their entire base is in New York. They have relationships in the city. I think they have different inroads than we do, and their belief is... I think we all probably think there's not gonna be a single FI by April of next year. Honestly, that may never happen, and I think their thinking is we have a very strong position, at least out on Long Island with our CDPAP program, and I think it's something they wanted to have, and so I think that's really why they're in a much different position than we are. It's much more immaterial for us, but for them, it's their business.
That makes sense. So while we stick to the state discussion on specific states, Brian, I was just looking at the Illinois budget that just the new budget there. How should we be thinking about any impact in your business for this year, 2025?
... Yeah, so the next year's budget, so their fiscal year is July 1, but kinda consistent what we've seen the last couple of years or the last couple of rate increases, we're gonna get another rate increase on January 1, 2025. So based on kinda current volumes and the rate that's been published, you know, that should equate to probably around $23 million-ish in new revenue for us, kinda with a normal kinda fall through in margin. So with the Illinois requirement of 77%, you can kinda think about it in that context as far as what our margin contribution will be. So nice support from the state. Again, this wasn't something that necessarily is tied to minimum wage in the state, like we've seen over the last several years. This is actually specifically directed at, you know, our workforce.
So our caregiver wage will actually move up to $18 an hour, effective January 1 next year.
That's, like, almost 6%. Is that right?
About 5.5, lower 5.5%.
Yeah
rate increase. Yes.
That's awesome. Okay, good, good news. Maybe, Dirk, shifting back to the rule that you mentioned, the 80/20 rule, do you feel like the final rule came in better than what you were expecting or what you fear the rule could be? And how meaningful do you think additional costs are included in the math will be material to reducing your exposure to the impact of the rule change?
Yeah, I think the final rule ended up being a little more positive than we were expecting. We didn't expect the 80/20 to move, realistically, because we felt there were some reasons that was put in, and those reasons have not gone away. So it coming in at the 80/20 did not surprise us. I think we were pleased to see movement in the definition of what's in that 80%. We also saw some of the quality and reporting measures stay in, which is very important, and we think is good for the industry. We do believe if you read it, it tended to believe that the states would have some additional flexibility into how they define things, which we think is very good.
In fact, our overall deal was we weren't against the rule. We just think the 80/20 either goes away or should have been negotiated state by state by those in the state, along with the providers. And so that was the only difficulty we had. So at the end of the day, the fact that the rule was moved from a 4-year implementation to a 6-year tells us there's opportunity for additional changes over that 6-year period. There's a couple elections that'll occur. So from Addus' standpoint, we believe we're gonna be successful with or without the 80/20. We think it's important, if the 80/20 goes in, that you're very strong in size and strength and statewide coverage in various states.
Our focus over the next few years will be building density in those important states, which we feel like either are very close to applying to the 80% rule or have a clear path to get there over the six-year period.
So maybe to level set that, just to that point, Dirk, Illinois, what, what does it look like in Illinois today? And if this is implemented, what, what change should we be expecting? 'Cause obviously, that's your biggest-
You know, Illinois is at 77%.
Yeah.
And I think the difference with Illinois, what they would do is probably raise the reimbursement rate to cover up to 80%. It would mean companies would lose a few percentage points in margin, but they would offset it with the dollars because of the volume. They're not going to do that today 'cause I think they, like all states, are waiting to see, will it actually occur? We actually think Illinois is a perfect example, and we would like to have seen CMS come out, and while they quoted them in the proposed rule, we'd like to have seen them use the same definitions, work with the providers the same way that the state did, 'cause it's been a really good-- I think it's been good for the industry in Illinois, with one exception.
I think what you did see in Illinois as this occurred was that you lost a lot of small mom-and-pops. So they either sold out or they just went out of business with companies picking up market share, where today, you know, a very large percentage of the business in Illinois is two providers. So that is the only downside. For our size company, it's fine, but we'd like the industry to be strong, and that's why we were a little concerned with the 80/20.
No, that makes sense. Maybe, Brian, shifting gears a little bit, as we take a step back and look at the three different segments in your business, how do you think about the fundamental outlook for each moving forward, you know, when we're thinking about growth rates, across different business segments?
Yeah, I think personal care first. I think, you know, Dirk kind of referenced it earlier, we're continuing to see, you know, nice volume growth, just in overall hours. So, you know, with our strong hiring numbers, I think that's obviously been key for us. Our turnover rate has dropped down to just above 50% now in personal care, where we were, you know, probably 65%-70% a couple of years ago. So as hiring continues to be consistent and strong, turnover is reducing. We're hanging on to those folks, you know, that's been helpful. I think our focus on trying to kind of, you know, maximize that fill rate or that difference between authorized hours and how many we fill, you know, we have some opportunity there.
That kinda took a step back, kinda coming through COVID and out of the pandemic, and we're actually making some strides, I think, in trying to get that back to our pre-COVID number, which is probably more in that low- to mid-80% range. So, you know, good, good momentum, we think, on the volume side. Obviously, we talked a little bit about Illinois and some of the rate environment there. So, I think our comments so far for 2024 in personal care is we're expecting to be, you know, at the high end or above that kind of 3-5, you know, typical target that we talk about in personal care. So with another January 1, 2025 Illinois rate increase, I think that's gonna be helpful, also continuing that momentum into 2025.
I think on the hospice side, it's been, you know, key for us. Admissions have been very, very strong. We haven't seen that translate, you know, directly into ADC. We've had a little bit of noise coming out of the end of last year, with some kind of, you know, an unusual amount of excess deaths. We haven't seen that continue into Q1, and we've talked about that on our earnings call. So we've seen nice trajectory in building ADC, so hopefully kind of keep that trend going. That'll be the key for us there, is just keeping, you know, length of stay in check and seeing those strong admissions turn into ADC growth. And then on the home health side, I think we've been, you know, as we've talked about, pretty selective in the cases that we'll take.
So we haven't seen, you know, a big, you know, organic percentage growth number there, but that's intentional on our part. So we've made some strides in our contracting there. We're hopeful we can actually start to take a little more of those, you know, cases that before were not as profitable. So hopefully, that can translate into a little more, you know, growth moving forward in the home health side.
... That makes sense. Maybe Dirk, you, you talked about labor for a second there and addressed turnover, but when it comes to recruiting, what are you seeing in terms of, you know, obviously, the macro environment's been tough on the consumer, and, and the thesis is that that helps you guys out, right? And you kinda allude it to that. So what, what does that look like for you in terms of leads and just the number of folks that are applying for jobs with, with Addus?
You know, over the last probably 20 months, what has been one of the bigger drivers as far as us seeing people come in looking for jobs, it's been inflation. Most of our caregivers are either single—a lot of times they're single family, single family member care, families. They may be second incomes that have left the market because they didn't need it before. The economy was pretty good. Once inflation took over, they needed some help, so they came back in as far as a, as a second wage earner. So for us, and historically, if you look back over the last 30, 40 years of Addus, we do, we do fairly well in recruiting when the economy's tougher because of the makeup of our caregivers. So realistically, the last 6, 8 quarters have been very strong.
We now back at, I think we talk each quarter about our hires per day. We had a really nice fourth quarter. We came into January. We saw the first two weeks of January were tough because we had some weather issues in Southern Illinois, one of our bigger markets. But since then, it's really gone back up to where I think we ended up around the mid-80s in the first quarter, and that has continued through April and May. May, obviously, you have the holiday at the end of the period, and if it falls during a, you know, people take off Friday and Monday, both. You tend to lose those two business days, but it's still good. So we're pretty excited.
It appears that the economy is such that we're still seeing a lot of folks come in looking for jobs. And our key is to make sure we do that quickly, because with these caregivers, if they apply for a job and you take a lot of time to hire them, they're gonna find somebody else that will hire them. So our key has been to really focus on speed to hire and then speed to first case, and that's proved to be pretty effective over the last 12-15 months.
Got it, and then maybe, Brian, you know, as I think about M&A, historically, like, you, you've been very consistent in terms of getting deals done and, and adding to the growth rate through acquisitions, right? And, it seems like you're heading to the final rule. You kind of tempered down a little bit, but how are you thinking about M&A now? And where is your mind in terms of interest level, getting out of legacy or, or core personal care and more into home health or hospice?
Yeah, I think the focus for us is still on the M&A side, and we would definitely love to continue to be acquisitive. Obviously, we have, you know, a lot of dry powder. But I think, you know, personal care still is probably the number one priority for us, trying to continue to build, you know, density and statewide coverage in some of the markets that we're in. There could be a few select, you know, other states that would be interesting to us if we could enter into them in, you know, a sizable way. We wouldn't want to come in with a toehold per se. We'd want to make sure we had some decent coverage there. We've had, you know, some of the managed Medicaid plans that are on the national level.
Some of those guys have asked us to enter into certain markets and look for assets, and so we've definitely been out there, trying to find those and get some deals done. I think second for us is probably more complementary home health. Really, in markets where we have strong personal care, we can continue to do things on the value-based side, with those assets. So where we can find those opportunities, that's probably number two for us. Hospice still, you know, is on the table. We've got a pretty good footprint today. We definitely see some revenue synergies, particularly where we have home health into our own hospice.
So if there's, you know, opportunities for us to add in existing markets or new markets where we have personal care and home health, you know, we would do that if the valuations are right and they were the right deals, but it's just a matter of finding the ones that make sense for us.
Probably, maybe I'll follow up. You know, as we think about the geography answer, right? And where you're saying value-based is important in deciding to go into home nursing, if you can help educate the audience here, like, what are the—I mean, I know New Mexico is one of those states, and that's why you're there already, but what are the key states where that is the case today, where managed Medicaid is already paying for home nursing? Because there aren't that many of those, right? There are not a lot of them.
I mean, and where we're entering into those agreements on the value-based side is where we have personal care is what we lead with in those arrangements, but it doesn't necessarily have to be clinical home health. We just need clinical assets. Home health fits that bill very nicely for us. To have the ability, if we see changes in condition with those clients in their home, where can we bring in clinical assets that we own to intervene where necessary and keep them out of those kinda higher, more acute type settings? So, you know, the markets that are typically managed Medicaid, where some of those plans have a risk of population, you know, those are opportunities for us to take advantage of those type of arrangements.
That makes sense. Maybe, Dirk, I'll shift gears here a little bit. You know, we've talked about Addus and opportunities in value-based care and even Medicare Advantage over the years, right? And I think some of your peers in the personal care space have talked about care management as an area of focus. Where do you stand now in terms of your value-based care/care management strategies?
Yeah, well, first of all, we have our own case management team-
Case management, sorry, yeah.
That sits with our value-based care team. So we've actually segregated that away from normal operations. What reports up through operations, the separate team is focused strictly on signing contracts, making sure that we report change of conditions, and then work with our payer population to make sure that we're achieving the goals that we both set out. So, the first couple of years we've done that, we started with having to do it all manually. If you think in terms of personal care. The systems in personal care are just now starting to catch up to some of the things you've had in home health and hospice. And so we actually started reporting conditions, change of conditions in personal care manually, which is very difficult.
You got, you know, when you have 40,000 patients out there. Today, we have 6,000 of those patients under a value-based care approach. You're not gonna be able to scale that and make it any material nature unless you can you need, you need to have systems help you do that. We now have a system that will automatically, once we record change of condition, it filters up that to the right personnel electronically, as opposed to us having to take a spreadsheet and correlate it ourselves. So that's the thing. We're putting resources behind it. We have our own team. We have the IT system out there. And now, the real key is, you know, the first thing we've done is not take risk, but we've had gain share contracts.
So they've paid our personal care normal rate, and then we share the savings above that. We've gathered some great data showing that we can actually move the needle on low cost. Going forward, the real goal would be: Can you convince Medicare Advantage providers to take advantage of that? Because when supplemental benefits said, "Yes, you can add personal care," no one gave them any money, and so for them, it was a cost. We need to show them how it can really be part of the medical decision to keep these high-cost patients out of the hospital. 'Cause if you look at our population, most of which are dual eligible, these folks cost a lot of money to, to these payers and to the healthcare system.
A lot of it is appropriate care, I'm not saying that, but if we can help them minimize inappropriate care that isn't needed at the higher cost level, if we can keep that care in the home, it's a win for all of us, including the patient. That's really the focus we've moved into now. We are doing one small contract we just started this year, and where we're taking risk. It's minimized, so there's not a lot of downside potential for us, but it's a way for us to learn. Can we take any additional risk going forward? Do we have enough information to be able to put kind of parameters around it so we know it's good for both us and for the payer that we're taking risks with? Those are some of the things we're out there attempting to do right now.
Hey, Dirk. So since home care today or personal care falls under supplemental benefits, like you said, right? As we hear more and more from the payers that they're probably pulling back on sub benefits going forward, or at least for the next, maybe, couple of years, are you seeing any movement there yet or conversations in terms of, you know, MA plans trying to pull back on home care benefits?
There's a good and a bad story there. The good story is we didn't get much business from them to begin with. The bad story is we didn't get much business because it was a supplemental program, and so even the ones that offered that benefit offered maybe 30 hours a year, where our normal patient is 700-800 hours a year. So, we didn't have a lot at risk for people saying: We're not gonna continue supplemental. It really doesn't change our approach that says it never was a supplemental benefit. It should be a medical benefit because we can help you control cost. And so from that standpoint, nothing's really changed. As we get bigger and have more coverage and have clinical services, I think it's given us kind of the...
The payers acknowledge the fact that we do have the ability to talk to them about that, and so I think that's been very helpful as we've started some of these discussions with them.
Makes sense. Brian, as I think about the balance sheet, I mean, literally, post New York, your leverage is gonna be zero, right? So how are you thinking about capital-optimal capital structure and other ways. I mean, you're still generating a good bit of cash, so just curious how you're thinking about cash generation and redeploying that to maintain a cap structure target.
Yeah, cash has been strong for us the last couple of years. I think, you know, part of that probably not sustainable long term because we're getting some nice working cap benefits there. But, you know, our DSO is at a pretty good level today. Probably wouldn't expect that to continue to decline the way we've seen over the last year or so. But, a lot of our larger payers have been very consistent, so it's been very helpful for us. But yeah, to your point, you know, our leverage is getting, you know, fairly low. We've got a lot of dry powder. I think our objective would be to use that in M&A.
So our teams are definitely, you know, out there working hard to bring that to fruition and find the right deals that make sense for us, and we can get those across the finish line. You know, we still have a little bit of debt on our balance sheet today, so, you know, we'll still pay down and mitigate some interest expense in the interim, but still would like to continue to push on M&A.
Dirk, maybe to close, what should investors look forward to over the next several quarters or even next couple of years as you continue to execute your strategy across the three different business segments that you're in?
Yeah, I think for us, our focus, and I think our investors will see, we're gonna—we haven't given up on M&A. It's been a little tougher the last couple of years because as capital started getting more expensive and as people's expectation of pricing has had to come down. I think that's kind of gotten to a point that makes more sense now. So we are starting to see some interest in doing deals, and so I believe you'll see us hopefully enter into a new state or two, continue to strengthen our personal care network in the markets where we have ability to do that, and then we will selectively add clinical services on top of that because we think it makes a lot of sense.
So I hate to say the same that we've been doing, but really, the focus on trying to get a little larger in the States is kind of new for us.
That's awesome. Awesome. Well, Dirk, Brian, thank you so much, and to everyone in the room, and on the webcast, thank you.