Welcome to Oppenheimer's 35th Annual Healthcare conference. I'm Mike Wiederhorn, the Healthcare Services Analyst. It's my pleasure to introduce Addus HomeCare. Today we have Chairman and CEO Dirk Allison, President and COO Brad Bickham, and EVP and CFO Brian Poff. You guys, thanks for attending. Looking forward to our fireside here. We'll just start right in. We'll get right into it. Maybe you could just start talking about how you feel coming out of Q4 and the first three months of the year.
Yeah, I mean, coming out of Q4, you know, the good news there is, you know, we had a little bit of noise on the redetermination process that we've kind of battled all of 2024. We saw that peak as far as in our Illinois markets in Q4, the first part of Q4, looking at October, had a spike in discharges, a little slowdown in new admissions just because of some of the noise around the redetermination process. The good news is that has really wrapped up in all our states. Coming into Q1, we're starting fresh there. Feel good about where we're trending on the personal care side. We have some nice tailwinds with the Illinois rate increase January 1st that'll help on the growth side. We're also seeing good momentum on our hospice segment.
You know, we've made some changes there on the sales side and really starting to see the pay dividends there with the admission volume and, more importantly, on the ADC growth. Hiring front looks good on the personal care side. So we're, you know, really seeing nice hiring numbers, you know, going into Q1. Came out Q4 was solid, a little bit of seasonality there, but feel pretty good about where we stand.
Perfect. Same store growth. I think you said you expect to be at the high end of 3%-5% on the PCS, you know, same store side. Can you discuss some of the puts and takes and how should we think about the volume contribution?
Yeah, yeah, I mean, I can start. You know, we feel like, you know, the 3%-5% is kind of our long-term goal. You know, we've been fortunate to be above that on the personal care side. Look to be at or maybe slightly above the 3%-5% this year with the Illinois rate increase, the benefit there. What we're really looking at, you know, is starting to see a return to the on the hours growth. We've been a little more on the flattish side to just, you know, than the one, 1.5% , looking back into that two, 2.5% hours growth on the personal care side.
Perfect. You know what, we'll jump into the question that all the investors have been focused on, regulatory. Seems like we'll get that out of the way early. You know, it seems like there's been a disconnect in the market's perception, maybe of your exposure to Medicaid cuts. Can you just talk about what you're hearing on the latest cuts being discussed in Washington and how those cuts can impact you and how, you know, investors should be thinking about it? Because obviously the stock does not reflect the fundamentals at this point.
Yeah, you know, I think what we tried to do on the last call was give a complete listing of things that had been discussed. I think since we discussed that on our call, you know, we've heard that from the President and from members of his staff that the caps are off the table. We've heard that the lowering of the match for FMAP is off the table, which if you really say that's the case and you look at what's left, there's a number of dollars that were on the list we talked about that have either positive or no effect to us, such as, you know, they're taking, they're saying at least today that there's a $120 billion positive give back if the 80/20 rule goes away permanently or past that 10-year timeframe. That doesn't affect us at all. In fact, it's very positive.
Takes the overhang of 80/20 if there's any remaining. Talks about the SNF nursing staffing ratio. That's $20 billion. Rule's not in effect, but through accounting, they're able to take that benefit towards whatever savings they have. Even the work requirements, you know, a lot of talk around work requirements, I think it's about $130 billion or so. If you look at our population, our population is generally, our average age is around late 70s. We have very few people under 65, a lot of them which we have are disabled if they're under 65. The work requirements from a standpoint of hurting our patient base is non-existent in our mind.
What really the work requirements could do, if you think it through, if there are younger individuals, maybe, you know, some of the expansion of Medicaid, we're in single family homes, maybe there's a single parent has children at home. If they can go to work for a part-time job and qualify as work-related, that meets the need for them to stay on Medicaid. We're a perfect employer for those folks. We can give them multiple hours throughout the week. We can work with their schedule around their ability to provide caregiving or have someone provide caregiving for them. We don't think work requirements are an issue at all. As we step back from the whole environment, we talk to our federal lobbyists and whatnot, it appears from what they're hearing on the Hill, there's limited appetite to make a number of these changes on the Medicaid side.
You know, there's a real focus on taking care of the elderly and disabled. And even if, you know, there's even some talk that if certain things did go in, you could exclude the elderly and the disabled from that. I think overall, why we take comfort at this, whatever change comes through, what we're hearing now won't affect the budgets in the states. We should be comfortable with, but even if states, let's say the tax, they clean up the ability to charge tax and get that match back by the government, you know, that affects acute care facilities much more than us. I mean, we don't, tax is not charged on our service like it is in hospitals. But even if that lowered the amount of money they get from the Fed some, we're the solution to helping them take their Medicaid dollars and make it go further.
We are the low-cost provider. We've shown in the last 3+ years, if you think about all the value-based contracts we have actually done with Medicaid providers, people that are at Medicaid risk, how we've worked with them with our high-cost patients that are on Medicaid. We've been able to lower emergency room visits. We've been able to lower readmits to the hospital. Those are real dollars that we're saving the Medicaid program in that state. We feel very comfortable that we're in the right spot should some of these changes be effected. What we're hearing is some of what's been thrown out as far as potential savings is probably a non-starter as it sits here today.
Are you hearing anything from the state specifically, from Illinois, New Mexico, your areas that you're big in? Are you hearing anything from the governors? Anything kind of, you know, kind of what's the thoughts? Obviously, like you said, your programs are, they see a huge return on it. It makes a lot of sense to go after that, cut those areas. It seems to be illogical, but just kind of curious what's kind of the rumbling from the state level.
Oh, you know, we just got the improved rate increase in Illinois in the first quarter. There was some discussion on in their budget they're looking at now, should they give another rate increase. We don't know if that will happen, but I think it's positive that they're talking about supporting home and community-based care services. New Mexico's thinking about a potential rate increase even with what's going on. Texas is in the middle of their every two-year session. They've got rate increases for home and community-based services out there. Both the Senate and the House have a preliminary bill that will have to be reconciled and then actually voted on and hopefully get through the governor. In our top three states, all we've really heard is continued support for our services.
I think part of it, Mike, is what you talked about is, you know, we really are in that spot of being a low-cost provider. We take care of a population that is clearly important to the states, that elderly population, that disabled population. The fact that we can do that and be one of the low-cost providers is what we do, I think really is a plus, not only to us, but we've been selling, remember, we've been talking about this with states for years. This approach of us being the low-cost provider to help you with your Medicaid dollars is not new. This isn't something that just because somebody's talking about Medicaid cuts, we've come in and started saying. We've been working with them over years proving our worth to the states. We think we're in a good position.
Perfect. Thanks. Let's move on from, you know, the regulatory environment. Let's, you know, Gentiva, talk about the integration of that deal and then, you know, opportunities where your thoughts on the Texas market.
Yeah, I mean, the integration has gone very well for us. This is our largest acquisition to date. It was actually one of our more aggressive integration schedules. Normally we have 30-60 days to implement payroll systems, benefits. This was a day one change. You know, pretty daunting task to, you know, pay, you know, 12,000-14,000 people day one. Good news is that went very smoothly. Hats off to both our internal teams and also the leadership team for the Gentiva operations that came on board. You know, so far very pleased with it. We've met numerous times with leadership. We've been making site visits and everything's been very positive. I think they're one, they've been through this before, which was, I think, very helpful for us. I mean, this asset has changed hands probably six or seven times.
Some of the, most of those leaders have been around for all those changes. I think they were also glad to go with an operation or a company that is personal care focused. Now they see the investments that we make on that side of the business and I think are very appreciative of that. Been very pleased with how that acquisition has gone. I think it really presents well for us when you look at M&A opportunities to do tuck-in acquisitions in the state of Texas. You know, we're certainly starting to look at those. You know, even though we're the largest provider now in the state of Texas, still we only have about a 5% market share. There is an ample opportunity to do some tuck-in acquisitions on the personal care side. Also looking to enhance our skilled platform.
We've got hospice down kind of in the center part of the state. We'd love to expand that to match our personal care footprint and add home health as well.
Let's talk about M&A. I mean, I guess you used to have that 10% total revenue growth as a soft target. You know, what should we think about your appetite for future deals? You know, what segment do you view as the most attractive right now from a strategic and financial perspective?
Yeah, I mean, I think, you know, the 10% overall revenue, you know, goal for us, I think we still feel is very attainable. On the M&A side, we're still in a very well-capitalized position. Sit here today, you know, net of cash on hand at just under one times from a leverage perspective. Have a lot of capacity still. I think we see that as, you know, important to our strategy to continue to, you know, enhance our personal care operations and markets that we operate in today. If there are opportunities to enter at scale, similar to how we did with Gentiva in Texas, we would definitely, you know, be looking at those opportunities and then adding clinical services.
I would say, you know, focus today for us, I would say is probably more primarily centered around additional PCS operations and then complementary home health in markets where we have strong personal care. We like hospice as a business. I think our performance there is coming back in line with what we've seen historically. Very pleased with that today, but those tend to be a little more on the expensive side. I think especially with, you know, where we're trading today, I think we'll be focused on probably, you know, smaller acquisitions at reasonable multiples. We're usually pretty, you know, disciplined when it comes to price. We have a pretty robust, you know, diligence process. We'll make sure what we're buying are also quality assets.
I would say we're slanted more toward personal care and complementary home health and markets where we have strong personal care today.
Are there any specific markets you're interested in or entering, want to enter or anything like that?
I think, you know, we still have a lot of opportunity in markets that we're in today to continue to build out kind of our coverage. I think if there were opportunities in states that we're not in today, specifically ones that are either managed Medicaid or moving toward managed Medicaid, those are typically preferential to us. We can do things if we have clinical and non-clinical services in those markets to do some value-based or demonstration type projects with those folks and be helpful to them. There were opportunities there. We would be interested in some of those markets potentially.
I guess I gather from your previous answer, right now it does not seem like you have any appetite for large scale M&A. Is that, you know, kind of?
I think if it was strategic and it made the right sense at the right price, we're always, you know, willing to look and have an appetite to do something that makes sense for us and for our shareholders. Always open to those opportunities as they come along. As we all know, those on the larger scale like Gentiva are, you know, quite a bit fewer of those out there than potentials for smaller tuck-in operations. Yes.
Okay. Let me move over to labor. You know, what are you seeing in terms of PCS hires per business day on that side of the business? And are you seeing any potential, you know, impacts from the immigration policy as well?
Yeah, I mean, actually our hiring on the PCS front has been solid. We, you know, saw a little bit of a dip from Q3 to Q4, but that's normal seasonality. If you look at Q4 over a prior year, we actually had experienced a nice gain on the hires per business day. Hiring coming into the year, you know, January, February, we've been very pleased with that on the personal care front. If you look at kind of, you know, what impact immigration might have, really not any type of material impact. I mean, if we look at our workforce on the personal care side, the number of employees that may be over that are working for us currently that have work visas, it's about 600 employees. So a very small number of our workforce. So do not see any big issues there.
I think if anything, maybe there's some, you know, potential indirect implications for us that there's just a smaller work pool that we're competing for. As far as any direct impact, it's de minimis.
What about labor on the skilled side? What are you seeing, you know, in hiring trends from that point?
Yeah, I mean, actually hiring has been good there. I mean, it certainly has been more challenging over the past several years versus the personal care side. But, you know, we've seen steady improvement over the last year, year and a half on the skilled side. There's still some pockets where it's a little more challenging. You know, your kind of wage inflation, you know, we were running kind of that 4%-5%. Now it's really more in that 2%-3% in some markets, maybe it's pushing in the 3%-4%, but it's getting steadily better. That being said, I mean, I think skilled hiring is just in general going to be, you know, probably more challenging just overall long term, just because, you know, the elderly population is growing and there's not enough people going into nursing and some of the other skilled professions.
You know, it has improved from where we were coming out of COVID.
I think you mentioned, you know, some, you know, color on Illinois. If you can dig a little bit more on Illinois, I know you did discuss some impact around the processing related to the redeterminations. Are you still comfortable that the volume trend should improve in that market and any other color specific to Illinois?
Yeah, I mean, we saw the volume really was impacted early in Q4. We saw a spike in discharges in October. That number steadily dropped through November, December, and going into January, we saw that it kind of flattened out and is more on a kind of a pre-redetermination cadence there. We're starting to see the admission volume come back. You know, I think it's taken a little while for those folks who were processing the redeterminations are the same people that would be processing news. You know, so there was, I think, a little challenge on our kind of referral side, if you will, just their workload and challenges there. Optimistic that that's moving in the right direction in Illinois. Certainly we've seen that play out in other states. A good example is New Mexico where we got hit with redeterminations kind of earlier in the year.
It's more kind of in the spring of last year. We're starting to see actual positive census growth in New Mexico now as those agencies, I think, have gotten their footing in being able to process new participants in the program.
Moving over to the skilled side, what are you seeing in terms of hospice trends? A couple of competitors have mentioned cap issues. Are you seeing any changes in your cap exposure and just overall kind of your appetite and your thoughts around the business right now?
Yeah, I mean, I think we've had a little bit of cap exposure in Q4 in like one market, but it was really pretty temporary, honestly. It just had kind of a bad admission month there. We've, I think, addressed that. We've actually had a location that has had some really solid admission volume this year going in January and February. You know, cap is, to me, I mean, the function there is making sure that you have a balanced admissions kind of a referral mix in each of your markets and just maintain that. I think with our new sales leadership that we brought in, much more data-driven. I think, you know, one of the, they've got specific plans in each market because, you know, we had the one market that had a little challenge with a cap.
We've, you know, certainly made outreach to make sure we have a more balanced referral mix. We have other markets that we have a really short length of stay and there's opportunities to make sure that we're serving all the market and not just focusing on the short length of stay patients. It kind of cuts both ways. I think as the new sales leadership we have has done a very good job of driving admission volume, but more importantly also increasing ADC. Very optimistic on the hospice side.
Okay. Moving over to home health. Can you discuss some of the trends on the home health side? Are you still in the, you know, are you still in the process of turning over low margin contracts or are you more comfortable with your current mix?
Yeah, I think, you know, we actually, if you look at our episodic, and that includes Medicare Advantage that's on an episodic basis from a volume mix, we're sitting at about a 55-45 episodic to non-episodic mix. You know, some markets a little heavier episodic than that and some a little bit less than that. Overall, pretty good mix and really had not changed much over the past 12 to 18 months. We have been pretty stagnant there at that mix. I think where we've got opportunities on the home health side is, you know, it's our smallest segment. We have not spent as much time on that as we have on personal care and on the hospice side. You know, we have started focusing really on home health, trying to, you know, let's get our operations very consistent from market to market.
You know, we brought in a consultant to help us on centralizing certain functions related to kind of the admission process. You know, that has been fully implemented in Q3 and Q4. I think we're in a pretty good place on the home health side as kind of a jumping off point going into 2025. Again, I think, you know, from a volume standpoint, I think, you know, we're still always looking at the payer mix and, you know, there are some payers that, you know, unfortunately we're not able to deal effectively with and we'll spend our time and energy taking care of patients with payers that are better partners. There's still a little bit of that dynamic.
One thing I will say is when we did the Gentiva acquisition, it certainly made us a bigger part of several of the national payers out there. Even though it is on the Medicaid side, it has gotten us some traction to have discussions with them on the Medicare Advantage side. It has opened some doors there.
Perfect. Any color, like, you know, upcoming home health regs? There's obviously discussion around the clawback. Any, you know, thoughts on that?
You know, we've heard some rumblings that the clawback might be something might come out of that later this year to settle that. Our thoughts are, we'll wait and see. Will it be like the productivity adjustment that you see in hospice, something that lasts for a period of time? For us today, you know, we're taking a wait and see attitude. We'd like to see a little more clarity on the clawback. We'd like to see a little more understanding of how the new administration thinks about the value of home care and the rates going forward.
What that means is while we will continue to look for those smaller strategic home health operations, particularly in states like Texas, you won't see us do anything material until we get some further understanding of what's going to happen long term or what seems to be happening long term with home health.
Okay. Perfect. What are your latest thoughts on the margin trajectory between PCS and skilled and then for the blended company overall?
Yeah, I mean, I think, you know, our focus always has been, particularly in personal care, is really, you know, gross margin consistency. So we've definitely seen that over the last several years, even with some pressure on rising wages in certain markets and minimum wage. We've seen corresponding reimbursement offsets for those. You know, I think we don't expect to see anything really different there. I think, you know, just broader, you know, company-wide, our focus is on continuing to see top-line growth and leveraging on G&A. You know, as long as the mix, I think, remains pretty consistent between personal care and our skilled segments, you know, we wouldn't anticipate seeing, you know, a lot of movement in our gross margin line.
We do have some seasonality kind of through the year that's pretty typical, but we would expect to see, you know, some continued bottom line expansion as we get that leverage on G&A with our growth.
Okay. And we're winding down here. You know, we talked about M&A. Anything else, you know, can add regarding your capital deployment strategy?
Yeah, I mean, I think M&A is going to be, you know, our focus. But again, that's going to be, you know, where there are opportunities. I think, you know, where we're trading today, our valuation is a little different with, you know, some of the things we talked about and some of the overhang. And obviously, we'll take that into consideration when we look at, you know, potential, you know, targets and size and scale there. But, you know, outside of that, you know, on the capital deployment side, you know.
We're always talking with our board, you know, certainly with where our stock is today. We're going to continue to have discussions. But are there other things we ought to look to from a capital standpoint? How do we put our dollars to work?
We will keep talking to them and see what we can come up with.
One last question we've been asking every company today, yesterday as well. You know, obviously AI continues to be a, you know, hotspot in the world economy and continues to be, you know, discussed heavily. You know, what do you see as the role of AI in your business model?
Yeah, I mean, I think we actually have piloted a little bit on the AI side on the scheduling. I think there's a real opportunity that, you know, could we have the, you know, basically machine learning handle 80% of the scheduling? Is that a possibility? I think down the road that might be. I don't think we're there yet. You know, some of the things that we're doing out in the field is not necessarily certainly AI-driven, but we have unleashed our caregiver application in Illinois. We've implemented that across the board. We're now putting that in New Mexico. What's kind of cool about that is it allows the caregiver to self-serve. One of the biggest challenges to being able to implement machine learning into a scheduling system is we know the client's availability.
We know how many hours they want and when they want service. What we struggle with is what's the caregiver availability? Because the number one reason why caregivers leave us is generally for lack of hours. They do not get enough hours. They want to work 30 or 35 hours and we got them scheduled for 20. I think bridging that gap, in order to do that, we have to have the caregiver update their availability constantly. That is what the application allows them to do. We are starting to really see much better adoption of that in Illinois than I frankly had anticipated.
I think once we get to that point where we've got caregivers updating their application, their availability on a regular basis, there's actually a real opportunity on the machine learning or the AI side to be able to really kind of enhance our scheduling and potentially save some costs there.
Perfect. We are out of time. I really appreciate you guys participating. Thanks again as always.
Thank you very much.