Good day, and welcome to the Addus HomeCare's Q3 2022 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Dru Anderson. Please go ahead.
Thank you. Good morning, and welcome to the Addus HomeCare Corporation Q3 2022 earnings conference call. Today's call is being recorded. To the extent any non-GAAP financial measure is discussed in today's call, you will also find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP by going to the company's website and reviewing yesterday's news release.
This conference call may also contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, among others, regarding Addus' expected quarterly and annual financial performance for 2022 or beyond. For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, discussions of forecasts, estimates, targets, plans, beliefs, expectations and the like are intended to identify forward-looking statements.
You are hereby cautioned that these statements may be affected by important factors, among others, set forth in Addus' filings with the Securities and Exchange Commission and in its Q3 2022 news release. Consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements.
The company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. At this time, I would like to turn the call over to the company's Chairman and Chief Executive Officer, Mr. Dirk Allison. Please go ahead, sir.
Thank you, Dru. Good morning and welcome to our 2022 Q3 earnings call. With me today are Brian Poff, our Chief Financial Officer, and Brad Bickham, our President and Chief Operating Officer. As we do on each of these earnings calls, I will begin with a few overall comments and then Brian will discuss the Q3 results in more detail.
Following our comments, the three of us would be happy to respond to any questions. To begin, I want to highlight a few items from our Q3 performance. First, even with the continuing labor challenges we are seeing in parts of our industry, our team grew revenue 11% to $240.5 million for the Q3 of 2022, as compared to $216.7 million for the Q3 of 2021.
This resulted in adjusted earnings per share of $0.94. As we saw in our Q2 of this year, we had strong cash flow from operations in our Q3, totaling $18.3 million. This reduced our net leverage position to less than 1x adjusted EBITDA. We are proud of our conservative balance sheet and believe our disciplined approach has put us in a strong position to take advantage of future acquisition opportunities that may occur in spite of the current economic environment.
I'm very pleased with not only our Q3 performance, but also with our results year to date, especially in light of the COVID spike we experienced during the first two months of the year and to a lesser extent at the beginning of the Q3. Our team has continued to perform and provide excellent patient care despite these recurring challenges.
As we discussed last quarter, the labor environment remains a challenge. However, as we started to see in the Q2, we did experience improved hiring in our personal care segment, with hires per business day for the Q3 of 2022 increasing approximately 3% as compared to our hires per business day in the Q2 of this year.
Hires per business day in the Q3 of 2022 were up approximately 14% over our hires per business day in the Q3 of 2021. We are seeing this improved hiring trend in October with hires per business day running ahead of our Q3 of 2022 performance. As previously mentioned, we are investing in technology that will help us to further improve our sourcing, hiring and onboarding process to increase our personal care hiring numbers to meet the robust demand of our services.
While hiring in our clinical segment is more challenging than in our personal care segment, we are seeing improvement over the last few months with an increased ability to hire new clinicians as well as a modest reduction in our clinical turnover numbers. Overall, we feel the trend in both hiring and turnover is moving in a positive direction in all segments of our business which should help us serve more consumers and patients.
During our Q3, the funding we received from the American Rescue Plan Act, or ARPA, has allowed us to begin to increase caregiver wages, pay sign-on and retention bonuses, or provide one-time bonuses to current caregivers depending on the state program. This has been helpful with our recruitment efforts over the past quarter and should help our hiring and retention efforts as we have a significant portion of these dollars still to be utilized.
As for Illinois, our largest state of operations, on 1 July , minimum wage increased by approximately $0.40 per hour for our Chicago area personal care workforce. This negatively impacted our gross margin in the state during the Q3. However, we will receive a $0.70 per hour statewide rate increase effective 1 January , 2023.
Once we receive the statewide rate increase, we will likewise adjust wages for our remaining Illinois employees, which we believe will help with caregiver recruitment while positively impacting our gross margin profile in Illinois. Now let me discuss our same-store revenue growth for the Q3 of 2022.
For our personal care segment, exclusive of the New York Consumer Directed Program, or CDPAP, and ARPA funds, our same-store revenue growth was 7% when compared to the Q3 of 2021, up from a same-store growth of 2.5% for our Q2 of this year's, as we expected. We experienced increasing personal care admissions in August and September, with this positive momentum continuing into October. I also wanna give a brief update on recent developments regarding our participation in the New York CDPAP program.
As you know, the state initiated a request for offer process in 2019. Ultimately, we were not selected as a winner in that process, along with many other providers in the market. We subsequently appealed this decision, as we believe the criteria used to select the winning providers lacked transparency. Recently, the state has rescinded the RFO and has allowed all providers of a certain size to continue indefinitely in the state Medicaid CDPAP program, which eliminates overhang of potential transfer of our existing state Medicaid CDPAP clients to other providers.
In order to qualify, providers simply need to respond with an attestation, which we will submit before the 29 November 2022 deadline. Separately, the state made reimbursement changes under the Medicaid CDPAP program that made an appropriate level of profitability challenging. As a result of both of these actions, we continue to serve our existing CDPAP clients under the state Medicaid program, but ceased taking any new referrals.
While we now have clarity on the future of our existing clients, we are evaluating the current reimbursement environment under the state Medicaid CDPAP program to determine whether we will resume accepting inbound referrals for that program.
In the meantime, we and other providers are also lobbying extensively and are hopeful the state will make the necessary adjustments to return providers participating in the state Medicaid CDPAP program to a manageable margin and allow the resumption of services for those in need. As a reminder, we continue to operate as normal with our managed long-term care plan partners in the New York market.
Turning to our clinical care operations. While our home health segment same-store revenue was flat when compared to the prior year, we did see a 15.1% increase in same-store admissions over the Q3 of 2021. This quarter, we saw a shift in our mix of patients towards non-episodic care.
Our operations team is working to improve this mix to a more historical level. We are also in discussions with our Medicare Advantage payers concerning adjustments to our contract rates. In addition, Brad and his operations team are working on our staffing mix as we expand our presence in home health. We are excited about our home health operation as it complements our personal care services, particularly where we participate in value-based contracting models.
While our hospice same-store revenue was flat when compared to the Q3 in 2021, we did see an increase of 1.2% in our average daily census as compared to the Q3 of 2021, and a sequential increase of 1.5% as compared to our Q2 of this year. While we had similar admissions to what we saw in the Q2 of this year, starting in late August, we did experience a higher than normal discharge rate.
During October, we started to see higher admissions volumes, while our discharges started to return to a more normal level, which we believe should grow our ADC. Our median length of stay improved to 20 days in the Q3, as compared to 23 days for the Q2 of 2022, bringing our median length of stay back in line with pre-pandemic levels. Although part of this increase was due to the elevated discharge rate in the quarter.
Our hospice ADC increased to 3,280 for the Q3 of 2022, as compared to an ADC of 2,629 for the Q3 of 2021, inclusive of the ADC attributable to our JourneyCare acquisition, which closed on 1 February of this year.
On 1 October of this year, we closed our acquisition of Apple Home Healthcare, a Chicago-based skilled home health provider. Apple Home Healthcare serves approximately 450 patients in the 11-county metro area in and around Chicago. This acquisition furthers our strategy of building out both home health and hospice services in markets where we have a strong personal care presence.
With three clinical care acquisitions in 2022 in our largest personal care market of Chicago, we have strengthened our ability to serve patients while allowing us to work more closely with MCOs, including Medicare Advantage plans. I want to welcome all the Apple Home Healthcare team to the Addus family. As for our ongoing development efforts, we are pleased with the level of activity in our pipeline as we look for acquisitions that meet our strategic criteria.
Our deal flow over the last two quarters has consisted of a number of smaller acquisition opportunities across all three levels of care. We are now starting to see a number of larger assets being brought to market, and we expect to see more of these scale opportunities in the coming months. We were excited by the CMS announcement yesterday of a slight 0.7% increase for 2023.
While this increase is smaller than we would like to see, we are appreciative of the change by CMS moving away from the proposed decrease of 4.2%. We expect to be able to take advantage of more home health care acquisition opportunities that should occur now that the final rule has been published as we remain well-capitalized.
As for our value-based care efforts, we are seeing positive results from our various value-based care contracts. As a reminder, we currently have four value-based care contracts in three of our states. These contracts are focused on helping our patients avoid both unnecessary emergency room visits and hospital admissions, as well as readmissions at various time frames following a hospital discharge. We have recently received positive feedback from our value-based care partners as our personal care and home health teams have improved patient results.
In addition to our four current contracts, we are working on two new opportunities which should start early in 2023. We are also in negotiations with a number of additional MCOs and ACOs for potential contracts around value-based care. As we have previously mentioned, our value-based efforts are relatively immaterial today, but we expect them to grow to a more meaningful amount over the next few years.
I am so proud of our team for the care they are providing to our elderly and disabled consumers and patients. The home remains one of the safest and most cost-effective places to receive care and is also the place where most elderly individuals and their families prefer to be. We believe the heightened awareness of the value of home-based care is favorable for our industry and will be a growth opportunity for our company.
We understand and appreciate that our operations and growth are dependent on our dedicated caregivers who work so incredibly hard providing outstanding care and support to our consumers, patients, and their families. I want to thank each of our team members and tell you how proud I am of the job you have done in the past and continue to do each day. It is important that we always focus on our mission, putting our consumers and patients first. With that, let me turn the call over to Brian.
Thank you, Dirk, and good morning, everyone. Addus had another solid financial and operating performance for the Q3. Our top-line growth reflects positive same-store growth trends in all three segments compared with the Q3 last year, particularly in personal care, which at 7% was above our normal expected range of 3% to 5%.
While we are still facing a challenging labor market in our clinical services, our hiring and turnover trends in personal care continued to improve in the Q3. Our home health business had a strong volume quarter, boosted by the addition of two acquisitions we completed in 2021, Armada Skilled Home Health and Summit Home Health. We are also pleased to see more stable trends for our hospice business, with continued improvement in median length of stay.
As Dirk noted, total net service revenues for the Q3 were $240.5 million. The revenue breakdown is as follows. Personal care revenues were $179.2 million or 74.5% of revenue. Hospice care revenues were $51.4 million or 21.4% of revenue. When compared to the Q3 last year, hospice care revenues include the addition of the hospice division of Armada, which closed on 1 August 2021, and the acquired hospice operations of JourneyCare, which clo sed on 1 February 2022.
Home health revenues were $10 million or 4.1% of revenue. As noted, these results include operations of two acquisitions, the home health division of Armada and Summit Home Health, which closed 1 January 2021. We have continued to actively pursue acquisition opportunities that complement our organic growth, and acquisitions remain an important part of our growth strategy. With the recent addition of Apple Home Healthcare on 1 October and the JourneyCare acquisition in February, we have added approximately $65 million of annualized revenue to date in 2022.
We continue to evaluate and pursue other acquisition opportunities and have a robust pipeline of potential transactions that meet our criteria. With the announcement of the final home health rule, we anticipate the overhang this has caused on the home health M&A landscape to dissipate and allow acceleration of this portion of our pipeline. We look forward to becoming more active on the acquisition front and remain well capitalized to take advantage of these opportunities as they arise.
Other financial results for the Q3 of 2022 include the following. Our gross margin percentage was 31.3% compared with 30.9% for the Q3 of 2021, as overall, we continue to benefit from a higher percentage of clinical services. However, this was partially offset by the negative impact of the 1 July 2022 minimum wage increase in Chicago, one of our largest markets. We are scheduled to receive a statewide reimbursement increase in Illinois effective 1 January 2023, which will offset the minimum wage increase.
As expected, we also experienced a negative impact in the Q3 of the final phase-in of Medicare sequestration effective 1 July . However, we expect our gross margin in the Q4 of 2022 to benefit from the 1 October 2022 hospice rate adjustment, which should contribute approximately 50 basis points based on current volumes.
G&A expense was 22.5% of revenue, slightly higher than 21.4% of revenue a year ago, primarily due to a larger percentage of clinical services with a higher G&A profile, as well as higher acquisition and stock compensation expenses. Adjusted G&A expense was 20.6% for the Q3 of 2022, an increase over the prior year of 19.5%, but a decrease sequentially from 21.3% in the Q2. The company's adjusted EBITDA increased to $25.7 million compared to $24.9 million a year ago.
Adjusted EBITDA margin in the Q3 was 10.7% compared with 11.5% for the Q3 of 2021. Adjusted net income per diluted share was $0.94 compared with $0.91 for the Q3 of 2021. The adjusted per share results for the Q3 of 2022 exclude the following, acquisition and de novo expenses of $0.08, restructure and other non-recurring costs of $0.01, and stock-based compensation expense of $0.14. The adjusted per share results for the Q3 of 2021 exclude the following, acquisition and de novo expenses of $0.08 and stock-based compensation expense of $0.11.
Our tax rate for the Q3 of 2022 was 23.7%, slightly lower than expectation, and primarily due to higher work opportunity tax credits as we see our personal care hiring numbers continue to improve. For calendar 2022, we expect our effective tax rate to remain in the 25% to 26% range. DSOs were 46.2 days at the end of the Q3 of 2022, relatively flat compared with 45.9 days at the end of the Q2 of 2022.
We have experienced strong cash collections and expect to see this trend continue, especially in our key markets where the states currently have budget surpluses and a focused approach to payments. Our DSO for the Illinois Department on Aging for the Q3 were 35.4 days compared with 43 days at the end of the Q2 this year and are at an all-time low in Addus history. While continuing to be a strong supporter of our services in the state, we also appreciate the consistent payment trends we have experienced in Illinois over the past few years.
Our Q3 net cash provided by operations was $18.3 million, including a net $4.4 million in ARPA funding and was in line with our normal expectation. Exclusive of ARPA funding, our cash provided by operations total $63.8 million year to date, ahead of our normal conversion rate, primarily as a result of our strong cash collections.
As a result, we have been able to pay down a net $93 million in our revolver over the past two quarters with a reduction of $33 million during the Q3 of 2022. As of 30 September 2022, the company had cash of $105.6 million, with capacity and availability under our revolver of $375.5 million and $200.5 million, respectively.
In this economic environment, we are well positioned with a capital structure that continues to support our growth initiatives and acquisition strategy as our net leverage ratio is just under 1x. As a result, we anticipate the ability to be active in the M&A market to further our geographic concentration and enhance our service offerings and look forward to the opportunities that lie ahead. This concludes our prepared comments this morning, and thank you for being with us. I'll now ask the operator to please open the line for your questions.
We will now begin the question-and-answer session. To ask a question, you may press star then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question today comes from Joanna Gajuk with Bank of America. Please go ahead.
Good morning. Thanks so much for taking the question. I guess first on the strong pricing in personal care. Can you help us break it into pieces? How much was the ARPA funding in Q3, and how much it benefited the pricing, if at all? Also in terms of other examples of rate increases that you have experienced in terms of trying to quantify the magnitude of these increases.
I guess, and then, you know, trying to just understand going forward, how to think about pricing into next year. Obviously, we know about the July, or sorry, 1 January increase in Illinois, but any other states you would be pointing out to us to understand the outlook for pricing into next year?
Hey, Joanna Gajuk, this is Brian Poff. I think I can provide a little color on that. Just to quantify, the ARPA funding doesn't factor into our revenue per hour or our pricing a ll of that, as we kind of discussed previously, most of that flows through the balance sheet. As Dirk Allison kind of discussed in his comments, typically that comes through and is basically a pass-through to caregivers for retention bonuses, sign-on bonuses, enhanced wages. It doesn't actually impact our revenue per hour.
On the rate front, I think we've actually, you know, been very well supported by, you know, most of our states. I think particularly, you know, Illinois is probably the best example, our largest market w e got our rate increase at the end of last year. We'll get another rate increase coming up 1 January 2023 this year.
I think, you know, in the current period, you know, recently, New Mexico, which is our second largest market, we received a rate increase that affected Q3 and was helpful to offset some new sick wage enhancements that they put in place in the state t hat's kind of an offset. Again, historically, as we've discussed, we've done, you know, very well in getting reimbursement offsets for kinda increases in costs, either be it minimum wage, sick time or the like. I think that's kind of the overall, you know, landscape that we've seen over the last year and expect to going into, to 2023.
Okay, that's helpful i n terms of other states, looking at the increases, any states we should be watching?
Yeah. I think in 2023, the primary again is gonna be Illinois is gonna be the largest material impact t hat'll be effective 1 January. I think some of the smaller states have been, you know, helpful i think New Mexico has also been very supportive, as well w e get, you know, rate increases from our two largest markets o bviously it's meaningful and does help us on our revenue per hour.
Okay, great. Thank you i guess, just thinking about, I know you don't give guidance, but when you think about coming into next year, can you give us you know, your sense of the biggest you know, tailwinds and headwinds? I understand the Illinois rate increase, but also any other color you can give us in terms of you know, volumes or i guess, wage inflation that you would assume for next year. Thank you.
Yeah, I mean, Brad, do you want to take that?
Yeah. When you're looking at kind of wage inflation, you know, we've seen that, you know, a little bit of moderation of late as far as particularly on the clinical side, I think is helpful t hat's encouraging. You will still see some increases related to the CBA. Illinois is an example where when we get the $0.70 increase, 1 January will be increasing wages down in the southern at the areas outside of Chicago. You'll see a little bit of pressure there.
But when you think about on the personal care side, in particular on the wage front, so many of our employees are subject to CBA, so those rates are set... And they're in place w e don't see really inflation there. We may see some inflation rate pressures in some of our smaller markets. Again, I think, you know, a lot of those have been, you know, kind of addressed really in the, you know, Q3 and, really this year. I don't anticipate any significant increases, in 2023.
Any other, you know, year-over-year, you know, headwinds, tailwinds we should think about, you know, when it comes to next year?
No, I mean, I think the material ones we've talked about. I think with the hospice rate increase coming into play, obviously, and we have clarity on the home health rule now that'll impact for next year. Sequestration is fully baked in now. Those are kind of the more material moving pieces for us going into 2023.
All right. Thank you all. I'll hop back to the queue. Thanks.
The next question comes from Brian Tanquilut with Jefferies. Please go ahead.
Hi, good morning. You've got Taji on for Brian. Thank you for taking my question. Just circling back to your value-based programs and your efforts around that. Just wondering maybe if you can talk about how you're envisioning Medicare Advantage and how that'll play into your efforts moving down the road. Thank you.
Well, you know, our value-based care program is something we started a little over a year ago, really focusing on our ability to try to help with the cost of care for certain of the patients we have under personal care or home health in our New Mexico market. That's with three managed Medicaid programs that we deal with out there w hat we're learning is we do have the ability to affect positively the readmission rates from hospitalization, the initial hospitalization rates and emergency room visits.
The whole goal of those pilots out there, or one of the goals, besides really being able to give good care under these contracts, was the ability to take the information we learned over a period of a year or more and be able to move that into other areas of the country where we have particularly personal care and home health.
As we move around the country in some of our strong markets, that's where you're going to see our ability to interface with Medicare Advantage payers. We're excited about that process w e're doing some contracting in Illinois. We're looking at other markets where we can add that n ow long term, we believe Medicare Advantage is a really large opportunity for our industry as value-based care and particularly for Addus where we stand.
We're not quite there where you're seeing meaningful relationships. When our company has grown to the size it is, it takes a lot of moving on a revenue line to really be material for our company. We do believe over the next two or three years, as per our plans, that we should see that become a much more material part of our business.
Thank you.
The next question comes from Scott Fidel with Stephens. Please go ahead.
Hi, thanks and good morning. First question, Dirk, was just hoping maybe you could flesh out a little bit more the updated commentary on the deal pipeline, particularly when you talked about some of the bigger deals you're looking at now. You know, I know you guys have talked about home health and personal care being the focus area for deals.
Just interested in how those bigger deals may break out between those two segments and then multiples that you're willing to pay, you know, at this point for home health and personal care. Clearly got some visibility on the home health rates, but obviously still flat, you know, it's flat, right, not up, CMS also still talking about maybe, you know, continuing to put the behavioral adjustment in the rest of it into 2024 or beyond. Just interested in how you guys are factoring that into your valuation expectations for home health deals.
Yeah. I'll talk about kind of what we're looking at and the size of the deals and the segments. Brian, I'll let you talk about what we're willing to pay. You know, I think from our standpoint, some of the bigger deals we have started to see are in the home health market. Now, honestly, a couple we were working on got delayed as it was awaiting for the final rule.
You know, when you're looking at a 4% reduction, that's obviously a material factor that most sellers are gonna wanna make sure they understand before they consider whether they're gonna go through with the process i think now that the rule is out, and it's basically flat, as you said, I think that will encourage some folks to go ahead with the process.
We think it's very important as we look at these deals, larger deals included, that we build out our markets, personal care, home health, particularly. While we will continue to look in the hospice market for small deals in markets where we currently have hospice operations, you should see most of our focus over the next 12 to 24 months to be around either a larger personal care, fill in personal care, or we'd like to see a larger home health deal that we can put on top of our personal care. You wanna talk about the multiples we're seeing and what we're paying?
Yeah, Scott, I think, you know, in our pipeline, I think we've talked about it previously. I think, you know, this year, particularly off of the last couple, I think multiples have definitely come more back into a reasonable line from our perspective i think with the home health rule coming out, I think our expectation is that that doesn't necessarily enhance multiples i think those stay pretty consistent and obviously down from what we've seen in the last couple of years, although we think there could be, you know, activity i think it alleviates kind of at least trying to model in a 4% cut.
You know, a flat rate with kind of that potential still out there still needs to be considered, and I think probably keeps those multiples still fairly tempered. You know, personal care, I think, you know, nothing has really changed in that market i think our view there is still, you know, those are sub-$10 million things or, you know, larger size or more strategic coverage for us. You know, I think in the past we've paid, you know, 7.5 to 8 times, but for smaller deals, it's been as low as, you know, 4 to 5 times. I think that's still consistent with our thinking today.
Scott, let me just mention and add on to what Brian said. If we're looking at a home health deal that's very strategic to our company in a personal care markets where we can add value-based care and other services, we're gonna be still be willing to do those deals even with the potential of reduction out there. Because as we saw this year, sometimes those reductions don't come through. While we always try to be somewhat conservative in our approach towards deals, if it's a strategic deal, you know, we're gonna be interested in trying to get that to the close.
Okay, great. Just my follow-up question, just wanted to toggle back over to Medicare Advantage and just talk about sort of the opportunity just on selling the personal care services in M&A. Obviously, it's been, you know, sort of big opportunity theoretically for several years, and we've seen more M&A plans theoretically, you know, offering these benefits. I know that the number of authorized hours has remained relatively paltry, which has really sort of mitigated or minimized that opportunity.
Maybe can you talk about what you're seeing for 2023? It did look like in the landscape data that, you know, a lot more plans, you know, again, offering the benefits, but it's harder to tease out, you know, what the authorized hours are looking like. How are you looking at the M&A opportunity for 2023? Thanks.
Yeah, Scott, this is Brad. You know, it's very similar to 2022. Truthfully, you are seeing more plans offer those hours. But again, they're more kind of respite type benefits, so hours are, you know, significantly lower than what our typical Medicaid PCS client would receive s o i don't see any material changes-
-in the landscape for 2023 i think the big opportunity, again, is when we start looking down the road and start, you know, pushing the value-based care model to the M&A plans, where it's more of a self-funded benefit i think they will be a little more aggressive on the number of hours that they could provide and also provide us with some potential upside benefit based on those value-based contracts down the road. Again, 2023, I don't see a material change in the current landscape of what those plans are offering.
Part of that, honestly, is on us. You know, we need to take the results that we're getting from these pilots, and we need to develop a program to move in with these Medicare Advantage plans and show them, as Brad said, how it can be a self-funding plan t hat's what we're working on for 2023.
Okay. Thank you.
The next question comes from Tao Qiu with [inaudble]. Please go ahead.
Hey, good morning. My first question is, could you remind us, you know, should you start admitting in the New York CDPAP program, what kind of impact would that have on the personal care volume side?
You know, we haven't fully kind of baked that in or measured. There is a tremendous opportunity from the standpoint that we get a lot of calls. But I think it's all contingent on are the rates sufficient for us to be able to make a gross margin that makes sense. That's what we're still evaluating. We've gotten some recent increases related to the $2 increase in minimum wage for the personal care in New York, which was very encouraging. It funds that.
What we're still lacking is a little more clarity on what the kind of historic kind of cost-based rates are. We're still waiting for some clarification from the state there o nce we have an opportunity to assess that, we'll be able to provide more information regarding the volume potential there.
Yeah. Tao, just one thing to piggyback on that. Just looking back, you know, where our program was, you know, before the RFO started, if you wanted to maybe use that as a way to potentially frame it a lthough again, you know, a lot of things have changed since then. You know, we've reduced revenue in that program by, I think, you know, $20 to 25 million on an annual basis, kind of over the last couple of years as we've not taken new clients. So we were running, you know, that much higher, you know, I guess three years ago before kind of all this process started i don't know if that's helpful or not.
Yeah, that's helpful. My follow-up question is, I heard earlier comments about you assessing kind of larger personal care investment and larger, you know, home health deals out there. You know, are you still targeting the $100 million revenue acquired per year target? And also secondarily, you know, if you think about the risk of that $2.1 billion overpayment on 2020 to 2021, it sounds like you're still willing to pursue this, but how would you build that risk, you know, if any, into your underwriting process? Thanks.
Yeah, I can start and let the guys kind of weigh in on the risk component i think, you know, $100 million in acquired revenue for us, I think we still think that's definitely achievable and attainable i think we were on pace for that this year until the proposed rule came out with some of the things in our pipeline.
I think we still feel with where we are and as well capitalized as we are, you know, acquiring $100+ million in acquired revenue each year is definitely there's an opportunity for that. I think that's still a good proxy for us i 'll let Dirk or Brad, you want to weigh in on just kind of how we're thinking about the potential risk of the additional adjustments down the road.
Yeah. I mean, it's certainly something that we have to look at on a particularly chunkier home health asset. So it's something that would go into our pricing model, and might, you know, impact of course, kind of the multiple of EBITDA that we're willing to pay.
Got you. Thank you.
The next question comes from Matt Larew with William Blair. Please go ahead.
Hi, this is Madeline Mollenhauer on for Matt Larew. Going off of the M&A questions, just because you've made paying down debt kind of a priority, and I know you said your leverage level was below one, how do you consider that when you're looking at deals? Is there a specific leverage level that you would be willing to go up to if you found the right deal?
Sort of building on that, has the way you look for assets changed as the macro environment has evolved? For example, is profitability more of a priority versus something like JourneyCare, which was a nonprofit conversion? Just want to see like if the macro environment has changed your approach to M&A at all.
This is Brian. I think just thinking about it from a leverage perspective, I think we've obviously had a focused effort on paying down debt just now with rising interest rates over the year and just in absence of not having deals that we've been completing. I definitely would prefer to use those proceeds in that revolver in the M&A arena i think if we have more opportunities coming up as we would anticipate.
Hopefully be able to put some more of that back to work, paying down in the interim i think from a leverage perspective, I think we've said historically, you know, we're very comfortable, you know, 2 to 2.5 times even to 3 x kind of on an ongoing basis w e'd be willing to stretch higher than that 3.5+ for the right strategic deal if we saw a way to pay that back down through cash flow.
You know, I think we've taken an approach over the past several years of, you know, maintaining conservative leverage, which is, you know, different than some i think definitely has paid benefits for us this year, being in that position and given us, I think, a good opportunity to be active in the market still.
Just thinking about it that way, I think, you know, that's how we anticipate it moving into 2023 a s far as the macro environment, you know, I think for us, when we target deals, again, we're looking at, you know, where is the right geography, concentration of services, how does it fit into, you know, the three segments that we have today, but primarily focused, as Dirk said earlier, on home health and personal care.
I think JourneyCare was a little bit different. I think, you know, the way we look at deals is really we understand from the gross margin line, you know, what reimbursement is, what the wage structure is, what some of those costs are f or us, it's really paying more attention there in the market that they're in and the environment in that particular market going forward w hat does that look like-
-from a reimbursement standpoint dependent on the segment, in the future? We kind of, you know, we have a lot of control on SG&A. I think JourneyCare was a little unique experience where we knew we could make some of those changes to get it to a normal level of what we consider to be profitability in our hospice segment. We had full clarity and control over that process. I don't think it really, the macro environment, has typically changed our strategy on where we're looking and how we're trying to source and look at deals.
Great. Thank you. Just speaking of the interest rate environment, can you talk a little bit about your interest rate exposure? Do you have any swaps or hedges or anything to offset interest rate, rising interest rates?
We have not. We have no swaps hedges currently in place. You know, our effective rate today is just a little over 5%, but still, you know, if it goes up a little bit more, I think we still have a little bit of exposure there.
Great. Thank you.
The next question comes from Ben Hendrix with RBC. Please go ahead.
Hey, thank you for taking the questions. Just a quick question on this CMS final rule, clearly better than expected, but it looks like definitely the underlying methodology regarding the behavioral assumptions and budget neutrality seem to kinda stay in place. Do you think that this better than expected final rule takes any of the steam out of any legislative stay efforts for the end of the year? I'll just start with that one.
Yeah. This is Brad. I don't think it takes any steam out of the legislative efforts because, you know, the fact that they left the, you know, the potential for future cuts, based on the methodology that they've put out in the final rule, you know, then it certainly was better than what we'd anticipated, but it still doesn't address the real big elephant in the room, which is how do you handle the behavioral adjustment.
I think that's something that I think there's still a lot of interest on Capitol Hill to address going forward w e'll work with, you know, our industry stakeholders and associations, in, you know, pushing that legislative fix as well.
Great. Just as a follow-up, as the M&A market opens up a little bit, now, are you still primarily focused on, you know, those core Illinois, New Mexico markets, or have you identified other markets, kind of, in the very near term, to layer on more PC, or I'm sorry, more, home health and hospice assets to current PC platforms?
Yeah, I mean, certainly Illinois is probably the most attractive market just because of the size in Illinois. We've done a pretty good job of adding clinical services up in the northern part of the state, you know, essentially the Chicago metro area. We've got some really big programs throughout the state of Illinois, so we'll be looking to expand or looking for the right opportunities on the clinical services, particularly home health down in the rest of the state of Illinois.
Other states you look at, you know, where we have good geographic presence, you know, in Ohio and Pennsylvania, you know, Michigan, those are all very attractive states w e can find something in Tennessee where we also have good geographic coverage on the personal care side is another state that we'd certainly be interested in. You've got some CONs that you have to navigate in a few.
Thank you.
As a reminder, if you have a question, please press star then one to be joined into the queue. The next question comes from Mitra Ramgopal with SIDOTI. Please go ahead.
Yes. Hi, good morning. Thanks for taking the questions. Just a couple for me. First, I was just curious if you are seeing any incremental benefits from the strategy of providing all three services in a particular state, in terms of driving better partnerships and increased volumes across your segments?
Yeah, certainly w hen we look at New Mexico, which is the most mature market where we have all three levels of service, we have seen a nice kind of benefit of having all three service lines with referrals from, you know, one service line to the other. With our value-based contracting that we have in there, we have seen the benefit of having clients referred to home health or hospice or even our house calls division. Certainly seeing the benefits of the strategy that we're focused on in adding clinical services in those personal care markets.
In anticipation, we're having, you know, kind of too early to really see in big numbers, but Illinois, we certainly have seen already some, you know, cross referrals from the different service lines there, and I think a lot of opportunity to expand that in that market.
Okay. No, that's great. Just curious, we're hearing talk about this could be a rough flu season, still some variant of COVID, maybe having an impact. Just wondering if you're seeing that, being an issue for you and with the caregivers.
Well, you know, it's always, you know, we've been.
Yeah.
Yeah. Yeah, so we've been through a lot of waves with COVID. You know, now there is talk that the flu season may be a little worse than historically because I think people are out more, maybe not wearing masks as much as they have in the past. We certainly continue to provide our employees with the necessary PPE to keep them safe.
We encourage vaccination, but don't require them unless it's mandated by the state or local government or federal government, in the case of the skilled lines. You know, that's something that you know, I think is just with us, you know, on the going forward, and we've not seen any kind of upticks right now. I mean, the numbers that we've seen are actually have gone down w e had a little bit of a surge in early July, I think, that Dirk mentioned in his comments at the opening of the call. You know, I think it's kinda hard to just plan that, you know, this is kind of business as usual now, for lack of a better term.
Yeah, no, totally agree. Thanks for taking the questions. That's it for me.
Thank you.
This concludes our question and answer session. I would like to turn the conference back over to Dirk Allison for any closing remarks.
Thank you, operator. I want to thank you all for your interest in Addus and for being part of our earnings call today. We hope you have a great week. Thank you.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.