Hello, everybody. Welcome to our presentation with Aveanna Healthcare. My name is Ben Hendrix. I'm the Healthcare Services and Managed Care Analyst here at RBC Capital Markets. Very pleased to have Aveanna Healthcare join us again this year. We are hosting Jeff Shaner, Chief Executive Officer, and Matt Buckhalter, Chief Financial Officer of Aveanna. Thank you, guys, for joining us today.
Thanks, Ben.
Yeah, maybe we can kind of start with just get your view of the world in a dynamic healthcare environment with policy changes and what have you, just kind of how you're thinking about things, and we can get into questions.
Awesome. Thanks, Ben. Matt, I'm glad to be here. I guess our view on the world, we continue to think about all things in the home. Even as 2025 has started and all the noise throughout the federal budget process that seems to be working itself out here in the first half of the year, our focus continues to be all things in the home, all healthcare focus in the home. We still think that as all the macro environments play out and then the micro state environments play out in 2025, which they will over the course of the next four or five months, we think we continue to stay focused on the lowest cost care setting, the patient-preferred setting, where everyone wants to receive healthcare is still in the home.
I think as the trade winds of the year play out, both macro and micro, people will still want to be cared for in the home. That's where Aveanna has built its business model around. Again, we think as sitting here in May, our confidence level is higher as it relates to all things Medicaid, as it relates to the federal government. I think as we think about May turning into August and kind of late summer, the level of certainty we think will play itself out between the House and the Senate and ultimately getting to a resolution that protects the Medicaid integrity, but also achieves some level of savings for the federal government. We think we're well positioned in that.
We think Aveanna was created to be on the right side of healthcare to make sure that we care for patients in the lowest cost care setting. We think that as this plays out, we end up being in a pretty good position.
Maybe you could just expand on that last point. Considering your patient mix, the type of patients you cover, it seems like you would be fairly insulated from any kind of cuts that are on the table or even any of the ones that have been on the table prior. Just you can kind of talk about that for a second.
Yeah, I think what we've seen in the last three months is really a better bipartisan conversation around Medicaid. I think both whether you're Republican or you're a Democrat, both parties, I think, understand that there is true integrity that needs to be retained to the Medicaid programs throughout the United States of America. I think that's a good thing for us. That's our politicians and legislators doing what they're supposed to do, which is finding compromise. At the end of the day, I think everybody wants to see some level of savings in Medicaid. So do we, right? So does Aveanna. I think our patient base is mainly insulated from any kind of direct cuts to work requirements or potential even ACA rollback from the 90% FMAP match to potentially the state's match of FMAP. We're well insulated for that.
I think where we have seen this cause some level of uncertainty is just in our state legislative process, which most states are every year. It has created choppiness and anxiety and uncertainty at the state level. As we are talking to governors and Medicaid directors and state policymakers, their uncertainty around what their funding could be is really the headwind that we have played with or are playing through at Aveanna. That is not a direct hit to our business, but it is the lost opportunity of that time that we get in the legislative process every year where legislators are not able to make certain decisions because they do not know their funding yet. We talked about 2025 being a muted, we use the word muted year for us. As you know, we have started the year with five state rate increases. We had a strong start to the year.
We do see that rate increase is being muted throughout the summer until there is certainty in the legislative process, which we do think will ultimately happen by late summer, early fall.
Yeah, and can you talk a little bit more maybe about your government affairs strategy adjusting? I think you said you had maybe several more updates, maybe not as big as some of the others, but some updates coming down the pike. Just wanted to get some idea of your government affairs strategy and kind of how you focus.
I think this year is a little bit different because of what we just talked about. Each year we go into the year focusing on a certain amount of states where we think we need to move the PDN or PDS rate primarily because of the need for additional wages to nurses and caregivers and clinicians. This year we kind of split our efforts and said 50% of our effort needs to be protecting the core Medicaid. We call it protecting Medicaid rate integrity. That is nationally for us. It is across all 34 states. That is the key focus going into the year was protecting the integrity of our business. The second half of it was at the same time, we still need to win government affairs rate wins in 2025 so we can pass that through to caregivers.
We set our goal this year being more than 10. The last three years we have been significantly more than 10 Medicaid rate wins per year. This year we said we wanted to be more than 10. With a strong start to the year of five of those rate wins in Q1, it is highly likely we will achieve the 10. We expected this year to be a little bit more prudent and balanced. We have had years of 19 rate increases, I think 13 or 15. We did not think that was probably this year. Protecting the Medicaid benefit for us was just as important as the additional rate wins. With that said, our preferred payer strategy has picked up momentum and continues. We ended last year with 22 preferred PDS preferred payers and about 10 value-based agreements attached to that.
We had two nice preferred payer wins in Q1. We picked up two additional. Our goal for the year is 30 total preferred payers in our PDS segment. We're well on our way to achieving that goal. I think globally, some years, the government affairs side of our business is up more than the preferred payers. I think this will be a year where preferred payer wins probably outpaced the government affairs wins. That's probably part of the reason why we have both of those strategies. The thing we can tell you with clarity and certainty is our managed care partners want more clinical capacity. Our payer partners continue to want more and more from us. The idea is of continuing to shift our private duty services volume over towards our preferred payers.
We have a volume indicator was 54% of our volume at the end of Q1 was with a preferred payer. We think that will continue just to gain momentum. It has grown nicely in 2023 and 2024. We think it will continue to get the high 50s and approaching 60% by the end of 2025. We continue to give more to our preferred payer partners. They expect more from us. I think that relationship will continue to grow.
Yeah, I mean, I think that's a really important point because you're not constrained by any kind of budgetary stalemate that you run into or could potentially run into in a state. It really is you're taking the active lead in building these relationships out. Maybe you can kind of provide some more information on the economic differential on these preferred payers and what specifically it is you target.
Yeah, and I think that's the, and you read it right, that our managed care partners don't have to wait till a legislative cycle to make a decision. They can make a decision this week, today. They really benefit from the idea of $5,000 or $6,000 a day in a NICU, PICU, inpatient setting cost compared to $500 or $600 a day in total cost of care at home. They have families that are stuck in children's hospitals that just can't get out. They know these families by name, the payers do.
That priority to move now, not six months from now, not next year, but to move now, and then to lean in with a partner like Aveanna that has size, scale, sophistication, density of services and really can move the needle from a caregiver standpoint to them is really what makes the preferred payer strategy work, both on our pediatric side as well as our geriatric side because we have a preferred payer strategy, as you know, Ben, on the geriatric side. We see the acceleration of this strategy just playing out because of our size, scale, and sophistication, but also just the pure economics of saving $4,000 or $5,000 a day on that note. There is just a lot of money to be saved, and they are able to move fast on that.
Also, just the dollars that we continue to invest in our clinical innovations are just top tier compared to our peers or the market itself. That is an area of focus for Aveanna. It has not been for the past few years, but our payer partners are seeing the benefits of that playing through, and they are seeing those clinical outcomes, those reductions of hospitalizations, those reductions of infections, the closeness to our Medicaid distribution that we have. They are very tight onto those pieces. That is what really drives our value-based care upside conversations that we have with them as well. Just that sophistication that we are bringing to the market and to the industry is really paying dividends not only for our payers, but most importantly, for our patients too.
Well said.
Great. We've always certainly seen really strong volume growth on the PDN side. Maybe you can kind of comment to how much of that is related to the pass-through of these PDN contract income to wages. How much is it to your clinical investments that you just noted and kind of where are you seeing the most traction?
Let me start with, and I think that's a great question. I'll expand it to how we started the year, right? And Matt will talk about how our growth rate plays out over time. Clearly, we had a strong start. Q1 was a very strong start for us, both in organic growth rates, but also revenue growth and adjusted EBITDA growth. Part of that was tied to the conversation we were just having. Five rate wins right out of the gate, preferred payer wins. A lot of momentum coming out of 2024 into early 2025. I also think to Matt's point, it's partly it is we're now in year three of our strategic transformation. It's no longer new. It's now the maturation, if you will, of the strategy is really trying, is really not only maturing, but it's just getting more and more and more efficient.
We have been on the upper end of our growth rates in our Medicaid side of our business. Eventually, I think we'll see that.
Mature long term.
Yeah, and just kind of normalizing is probably the direction we've intended. That being in that 6%+ volume growth for us is pretty strong on the PDS side of the business. I do think we'll see that normalize over time. Now, with that said, 2025 is going to end up being a great year for us. I think as we think about the story of the last three years, it'll probably be equal to or as good or better than any we've had. I tie it back to everyone in Aveanna now understands the strategy of how to help our payer partners and our government partners. It's really mobilizing the entire force of Aveanna to help grow this business.
I would just like to add on to that. The answer is yes to all of that. The reason that we're driving high volume, 6.1% year over year in Q1 for PDS on a volume standpoint is because of the government affairs and the payer relation strategy that we have. The 16.5% revenue growth in that division year over year is driven all from that. It's taking those dollars, reinvesting them to our caregivers, attracting more caregivers into the market, and providing more care. There's a lot of pent-up demand, Ben. I mean, there was a tumultuous time out there where caregivers weren't available or weren't available in our market to address the demands that we have. We're addressing that pent-up demand right now. Eventually, this will normalize back out to that 3%-5% range.
We think we'll be on the high end of that on the volume side of it through the remainder of the year. In the long-term growth, that 3%-5% should be what we think about that division.
Gotcha. On the rate side, I know we saw some unusual dynamics this past quarter because we saw an influx in reimbursements where they kind of widened out our spread rate a little bit. Maybe you can kind of talk about those dynamics and how we think that normalizes through the back of the year.
Yeah, we did have a really nice Q1 and really pleased with what the team did. There was a little bit of influx in there, about $11 million that we addressed out there prior, Ben. Half of it related to old AR that was fully reserved that our RCM teams, operations teams, and our payer relation teams went out and worked with our partners to make sure that we were appropriately reimbursed for our services. That kind of hit through and dropped straight to the bottom line. We also had about roughly $5 million of retro rate increases in there that were back to 7.1 that got pulled forward in the quarter that we did not have time to pass through to our caregivers yet either.
We're doing so right now with those rates that Jeff alluded to, not only the two preferred payers from Q1, but also the five rate wins and the additional contracts that we're continuing to sign. We're pushing those through to our market and to our caregivers right now. You will see a little bit of elevation in that in Q2, but it should be normalized and fully passed through in Q3 and Q4. We will get back into our normal $10-$11 range on our spread per hour.
Matthew, Matt said it well. We do think that'll take some time to ultimately play back down to that normal range that we operate in. As we think about 2026 and beyond, we still target to be in that $10-$11 spread range.
We think that is the right messaging to our payer partners that you gave us rate with the intention to hire more nurses and apply more nurses. We're passing that rate through in the form of additional wage. It does take time for that to play out.
As that plays out, we should expect a little bit of a kind of an easing of the labor backdrop a little bit, which is kind of what you guys are passing through. But then as we think about the macro and kind of how some of the macro, whether it be policy issues or other, I guess, consumer confidence concerns or whatever, how is that impacting the labor market?
You know, we haven't seen, not that we're in a recession, but recession-like normally that would drive more variable caregivers back into the workforce for kind of variable income, we'll call it. We've not seen that yet, Ben. We've not seen like a step up in just overall labor coming back into the market. I don't know what to read into that other than maybe just not enough time's played up or thank God we're not in a true recession, which I think is a good thing. I think what we see, the accelerated growth rates are directly tied to the strategy we just talked about. Where we're winning, where we're hiring more nurses on a material basis, more clinicians, it's because the rate and the wage makes sense. I use California because we talked about California a lot over the last couple of years.
California today is the only state that we have left out of the 34 states we're in. California is the last state where the Medicaid reimbursement rate no longer works with the wage environment. And it hasn't the last, I'll call it, two and a half years. We're not expecting a, we're not in the governor's budget this year. We're not for the third year in a row. We're not expecting the PDN rate increase. But the dynamics in California no longer work. We're not able to effectively staff cases in the Medi-Cal program because the reimbursement rate is so unbelievably low. So I use that example to Matt's point. Four years ago, we had 20 California states. We had two-thirds of the states we were in did not work. The rate wage dynamics don't work.
Each year we've knocked that number down and literally we're down to one state at this point. We won't give up. In California, we will continue to advocate. We will continue to partner. We will continue to communicate on behalf of the families because it's really the families that are suffering. We're literally down to that one state after three years of work where we have fixed or materially fixed all the rest of our states and payers.
In the interim, as we're kind of still working on California from the legislative perspective, how are things progressing with payers in that state? Kind of how is the, I know it's a little bit of a different dynamic, right? Like with Kaiser and those, maybe you could.
I'd say it's still, I mean, I'll call it three, four, some one, four.
Predominantly Medi-Cal.
It is still the majority of the families receive their benefit through Medi-Cal, which is the issue. We do have small markets in California where it is an MCO strategy or they call it whole child model strategy. It is a county by county model. It works great because the reimbursement is significantly above the Medi-Cal rate because those payers understand to get nursing in the home, I have to pay more so you can pay more in wage. I do think it is, and we have shared that with the department in California that, hey, in these pockets with these payers in your state, this is how much more you have to pay than the Medi-Cal rate is $44.12 an hour is what the reimbursement rate is. This is how much more you have to pay in these markets to get nurses hired.
I think part of that data will help ultimately solve your no choice but to raise the rates. There is no other option. Labor is not going down in that state. It's not decreasing in value. We will solve it. I think to your point in that state, about a fourth of our business in that state, a little bit less than that, is with other payers. Those payers pay significantly higher. Therefore, we are able to admit them. We're able to staff the cases. The families are able to get what they deserve. Over time, the value of that Medi-Cal issue to Aveanna has diminished as the rest of our business has grown, which I think is a good thing for our strategy. Not that we still work on behalf of those families. We still want to help them everywhere we can.
Our business has grown in every other state more materially. That has diminished the downside of us for California Medi-Cal.
That makes sense. Then moving on, smaller piece of the business, but the home health side, I want to talk to you about that. Hiring and also the preferred payer strategy there. Clearly, home health is top of mind for a lot of folks given the potential for a clawback in the Medicare rate. Just how are y'all navigating that and what are you seeing in the preferred payer side?
Yeah, we're a home health and hospice business, but we think of it home health first. We're home health folk. We're one of the few companies left that are still home health focused. As you said, our goal was to be above 70% episodic in that business. Last quarter, we were 77% episodic. We've been in that mid to high 70s now for about a year. We equate that with a very disciplined approach to that business. We think episodic is the right way. Great clinical outcomes, good margins, and we think it works in that business model. I think you'll see us being disciplined in nature. We were flat year over year last quarter, total episodes. We expect to be slightly positive in Q2, which I think is the right trend for us. Our goal ultimately is to be between 1%-2% positive year over year volume growth.
We are a net winner today from TPS scores, which is the value-based side of Medicare reimbursement. We are a net winner in that. We are receiving rate increases in home health because of our clinical outcome scores. We'd like to be total revenue growth between about 3% and 5% in the near term. Ultimately, we think that that business can get to 5%-7% total revenue growth. You will see us continue to be incredibly disciplined around the episodic rate. I mean, we would be fine with a low 70% with a little bit more growth, but I don't think you'll see us drop below 70%. We think it's that important to drive great clinical outcomes and good financial outcomes in that business.
It drives our clinical scores so much as well. We want to provide episodic care and just take care of the patient opposed to, hey, you have four visits, you have six visits, and that's all you're allocated to do, going and working and doing what's in the best interest of the patient. We think it's the right outcome.
What governs the payer's decision, whether or not they want to decide to go ahead and commit to an episodic relationship or say, okay, no, we'll pay you a higher honor per visit basis?
Yeah, it's an evolution. I will say the more that the provider community has come around to episodic as the most efficient reimbursement strategy and the best clinical outcome strategy, the more the payers have reluctantly got there. If everyone says yes to per visit, the payers would never go to episodic. I think as more of the provider community has come around to the episodic reimbursement model as the most efficient model with the best outcomes, it is cost-effective that ultimately the payers have started coming around to it. At the end of the day, we love saying the word no. We are very good at saying no to our payer partners. Ultimately, we will not give away our clinical capacity for low rates and/or not doing what's right for the patient.
These patients are highly vulnerable at the end of life, and they need the right amount of care in the home. We're not going to do half of that care and then discharge them so they end up back in the hospital. We're going to do the entire care model that the episodic model sets up well for. Again, that's something that we've stayed incredibly disciplined on. It's driven great outcomes. Clinical outcomes has driven good financial outcomes. I don't think we'll move from that strategy.
Let's, in the last couple of minutes here, maybe we can talk a little bit about the capital allocation strategy, where you're looking to grow and then where you might see opportunities for more internal investment.
Yeah, no, great question. I mean, we're really excited about what our teams have been able to accomplish to just be a generating free cash flow company at Aveanna. Have been for years now. We'll continue to be on a standalone basis. Our cash outflows, Q1's got a little bit of outflow just due to timing of DSOs and how it works with some prepayments that occur. We'll expect to be a standalone basis, positive free cash flow company, operating cash flow company in 2025 once again. We'll take those dollars and appropriately move them into equity or growing of our EBITDA, growing of our revenue through small tuck-ins of M&A, but continue to be able to add to it.
Thrive is a great example of being able to do this through cash as well as stock and bringing that story and that great business into Aveanna story as well is going to be really rewarding. That is where you'll see us kind of on a go-forward basis allocate capital to.
I also think Matt and what we call RCM, which is our billing collections, have done a phenomenal job. Our cash collections have been incredible. Q1 was the highest cash collection quarter we'd ever had. The team is doing a great job of collecting the cash. The payer strategy helps that. Our payer relations team help us in our collections. Also just deleveraging the company. We were a healthy leveraged company a few years ago. Some would say very healthy leveraged company. We've materially deleveraged the company. We continue to deleverage the company.
We delivered one full turn in Q1 alone. Continuing to deleverage below seven, eventually below six. Ultimately, our target is to get the leverage below five turns. We can now see that in the next year, year and a half, really continuing the story through just great organic revenue growth, EBITDA growth. As Matt said, companies like Thrive, it just makes sense. They just fit right into our model, continue to deleverage us by using our cash generation and our equity as value.
Yeah, that's one thing I didn't touch on before, but maybe in the last minute here, you can kind of give us the 60-second soundbite on Thrive and what it brings to the organization.
Yeah, just as Matt said, we say it checks all the boxes. It's a clinical excellence-driven company. It does exactly what we do in PDN and therapy, pediatric therapy. It fits five of the seven states right into our geography today. It densifies and scales us in those five markets. We add New Mexico and Kansas. New Mexico is mainly a Medicaid state, but it's one of the better Medicaid states. We're excited to be in New Mexico. Kansas is an MCO state. Our national Medicaid payer partners are in Kansas and wanted us to grow there. It just fits all the right boxes. The fact that we could do it with majority equity and cash helps us deliver almost an additional half a turn. It's just a great outcome.
Our teams are already totally engaged in integration planning. We'll spend the majority of the summer integrating the business. We think the first three or four months, we'll do the majority of the integration of that business. Certainly by the end of 2025, we'll have the business fully integrated into Aveanna.
Excellent, guys. Thank you very much. I think that brings us to the end.
Thanks, Matt. Appreciate you.