Good afternoon, everyone. Thank you for joining us this week at the J.P. Morgan Healthcare Conference. My name is Andrew Liang, and I'm an associate here on the J.P. Morgan Healthcare Team. It is my pleasure to introduce Kevin McNamara, President and CEO of Chemed, Nick Westfall, CEO of VITAS, and Mike Witsman, CFO of Chemed. With that, Kevin, turning it over to you.
Thank you. Whenever I speak in with a group that's bigger than, maybe 4 on one, one-on-one, I always like to start with a little bit of history of Chemed, because the question is begged, you know, what was the grand strategy between, you know, behind putting a hospice company together with a plumbing company? So just spend a couple minutes talking about it. Chemed was a subsidiary of W. R. Grace and Company during the 1970s. At that point, it had a couple specialty chemical companies and some healthcare companies. And it spun off the healthcare companies as Omnicare, company now, I guess, part of CVS. And during the aftermath, in 1980, Chemed spun off from W. R.
Grace and Company, and so 1982, and so no, no longer any connection between Chemed and W. R. Grace. 1982 to 2004, Chemed just bought and sold a number of companies. It sold its interest in Omnicare, so it was totally, completely spun off. In approximately 1994 VITAS was shopped to us. We were interested and wanted to buy it. At that point, they were just doing a recapitalization, though, and all we could do was get an investment interest in it. It's a pretty good deal. It was a preferred stock that paid about 9.5% after-tax return. We're happy with it, but again it was the kind of company that, you know we were very interested in. We get closer to 2004.
By that point, we had sold off a number of companies including a home healthcare company, a sanitary, a company called National Sanitary Supply, and a couple other smaller ones. So we had Roto-Rooter, a company we that Chemed had purchased in 1980 for $17 million. We had cash and this interest in Vitas, and we were asked if we were interested in selling the our interest. We said, "You know, at what price?" And they told us, and we said, "We're really, at that price, rather be a buyer than a seller." So it's 2004. We actually borrowed more than our market cap to buy the two-thirds of Vitas that we didn't already own. And we completed the deal.
At that point you know, we said like many of the people in this room would have said, "Well, Wall Street loves a pure play." It was two pretty different businesses. We were very familiar with both of them. There was no grand strategy behind owning them, other than we've been associated with one, owning it, the whole Roto-Rooter since 1980, and an interest in VITAS from the early 1990s. So we just said: Look, we're going to think what we think, put out very transparent information, making it very easy for the investing public to do the sum of the parts.
And if the sum of the parts, you know, was going at a discount, if our stock price was a discount of the sum of the parts, we'd be maybe an aggressive seller of the Roto-Rooter business. If not, if it was selling at a premium, we'd hold firm and hold pat until such time as it made sense, created value to do something differently. And so the question becomes, I think first and foremost, how have the 2 companies done being together? You know, they've had. They're both you know, kinda grinded out businesses, single digit top-line growth companies. They, they've grown largely through small acquisitions, kind of pseudo bolt-on, total acquisitions. The risk profile of the two companies in our growth has been low.
You know, just through the magic of having good, solid results for a 19-year period, and also both companies having very good cash flow, basically cash flows equal... Free cash flows were basically equal to reported net income. But buying in over 2 million, over $2 billion dollars in stock, reducing the share count. Net effect is that on an EPS basis, over the 19-year period, Chemed's EPS is up 22.5% per annum on a competitive basis. So the company... In other words, the companies have done very well. So that, that's the history of how we came about the two very different companies. The next thing I'd like to spend just a couple of minutes on is the pandemic.
The pandemic was you know, I'm not going to go into the tale of two cities, but it was great for Roto-Rooter. For the three years of the pandemic, that is 2020 through 2022, Roto-Rooter's net income grew 20% per annum. It's not a very basic business. I mean, everything was perfect for Roto-Rooter. Competition was troubled. We had the service people. People were in their homes, so available for, for very, on a logistical basis, very, very easy access, and pandemic was great for Roto-Rooter... and companies like it, that had the workforce. And VITAS, a completely different situation. It was almost an existential crisis for many companies like VITAS in the healthcare field. I mean, we had 20% of our workforce, our clinical workforce, quit almost day one, afraid for their own health and safety.
We had facilities from which we serve patients and get referrals were closed to outsiders. We saw our average daily census fall from about a little over 19,300 to 17,200. And again, at the time, we had insufficient clinical staff to really serve any kind of upswing in the company. Now, I'm gonna first talk about Roto-Rooter for a few minutes, then I'm gonna turn it over to Nick, who's the CEO of VITAS, and he's gonna talk about what he did to you know, over this period at the end of the pandemic, to build back to where we were from pre-pandemic levels. But with Roto-Rooter, great business, great service mark. You know, operating profit margin approaching and exceeding occasionally 20%.
So great operating margin for a service business. Very predictable. The issue... We've added some service lines over the last several years, including expanded excavation and something we call water restoration, which is just where water has gone into a finished area, getting the water out, drying it out, so mold does not form. And, you know, so it's been a very good business. I think we're getting towards the end of geographical expansion. I mentioned we purchased Roto-Rooter in 1980. At that point, it was just a franchisor. So we've been buying back the franchises in major metropolitan areas. So, you know, the issue we've had recently on Roto-Rooter is, okay, you're coming off a period, a three-year period, where you had unprecedented growth. Last year was tougher.
We saw it to be early last year our phone calls for service fell just dramatically, down 15%. Unprecedented. And we spent a lot of time talking about that the last several days, and we said, "Well, there's a lot of good things going on with Roto-Rooter." I mean, during a period of 18 months of you know, 7% to 8 inflation, we were able to pass, in the last two years, price increases of 5% to 7% along.
You might say, "Well, then, are you pricing yourself out of business?" I'd say, "Well, number one, you know, we don't quote prices over the phone." And we say, "We'll send a service person to your commercial establishment or residence, and they'll make an evaluation and give you a written estimate." And the close rate at the dispatch level for booking that job over the last two years has increased, actually. When the service man shows up at the customer's residence, the close rate on selling that job, those close rates have gone up. So it's more of the marketing issue. What we think is an explanation lies on the cyclical side, and that is, we went through a period where inflation dramatically exceeded the increases in wages.
To the extent we had a customer-facing business like Roto-Rooter, and we've seen this with a number of companies, to the extent that there's aspects of the business that can be delayed, that is, request for service, I mean, that's what we're seeing. And, you know, we don't hold ourselves out to be economists or predictors of the macroeconomic activity levels in the country. But, again, we believe it's we believe what we've been dealing with largely is a tough macroeconomic environment. Our operating results have been very good. There have been questions, I think, that are well-founded, that, you know, during the period of the pandemic years, maybe there was some front-loading of some activities.
That is, people fixed everything in their house, second and third jobs, when they were being called out on a plumbing fix. All those are very likely. But generally speaking, I'd say that Roto-Rooter, great pandemic experience, a little bit of a pandemic hangover, you know. And to the extent I've been asked in the one-on-ones, you know, where do we see the improvement? And we... I'd say that's largely when, you know, calls return to normalcy.
I think when they do, as I said, our workforce is very solid, our pricing is right where it has to be, and, you know, we'll go from a period of, you know, flat to up 5% range to, you know, back to the 8%-10% that we've achieved, you know, over an extended period of time. So I just wanted to have Nick talk for a few minutes about VITAS and the totally different issues that he's been facing. That is the evisceration of the business during the pandemic and the triumphant return of it.
That's good. Thanks, Kevin.... Afternoon, everybody. Just want to spend a few minutes as we close up our presentation, as Kevin alluded to, just talk about VITAS, as well as spend a few minutes to talk about the outlook for the industry overall. For those of you that have been following our story, you know where we sit right now and where we're heading forward at VITAS. We're extremely positive and optimistic about. For everyone who hasn't followed the story, there's really been two drivers as we talk about the pandemic. We want to spend a minute or two to discuss that has led to our success right now. Our ability to sustainably build our clinical bedside capacity and the corresponding growth in census that we've seen and anticipate continuing on a go-forward basis.
On the first one, for our ability to grow clinical capacity, early part of 2022, we realized with the pandemic subsiding, that we had a unique opportunity to really differentiate ourselves. And what we put in place at that point, that started in July of 2022, was a one-year recruiting and retention program that was very successful, where we actually added a net 784 bedside clinicians across five disciplines. But with that being said, in parallel, what we also wrapped around it were a whole host of other items that really elevated our culture at every single one of our sites.
Whether that is a host of employee recognition programs, whether that's continued education, it really was us focusing in on reinforcing why clinicians and why our team members come to VITAS and why they come to hospice, and that really is truly a calling. And so in parallel with the recruiting and retention program, combined with the cultural wraparounds, what we translated to and where we sit right now, and as we alluded when we issued our Q3 results, is not only were we able to sustainably grow clinical capacity over the last five quarters, ending in the third quarter, and anticipate discussing the continued trend when we release results in February. But once the one-year retention or recruiting program expired, we didn't see any elevated turnover.
That cultural wraparound became very sustainable, and in the Q3 of 2023, we were still able to add a net 157 team members without that recruiting and retention program in place. The second piece that's led us to sustainable census growth was our ability to really penetrate all the communities in which we're accessing. Demand never waned during the pandemic. What we didn't have, as Kevin alluded to, were a sufficient amount of clinicians to meet that demand. And so back in end of 2021, early 2022, we really spent intentional time for all of our sales force and educators when we were out in the markets, honing in on servicing all four segments of the market, both hospital and then we have three non-hospital segments.
What that meant and translated to us through our community access initiative was our ability to continue to bring on patients, but earlier in their disease trajectory, which had an incremental compounding effect for us, growing our census at that time. And when we bring the two things together as we sit here today, or as we sat at the end of the third quarter, we illustrated five quarters of sequential ability to grow our clinical capacity, which has continued, and we'll talk about it when we release full year results in 2024 guidance. And couple that with four quarters of strong census growth, that in September of last year, we crossed the 19,000 milestone, which was around our high watermark pre-pandemic.
When you put the two things together, that puts us in a position, as we sit here today, to feel really good about our ability to have predictable and sustainable top and bottom line growth to our shareholders for the outlook of VITAS for all of 2024. If I can spend one more minute, since it's a healthcare conference, to also talk about the industry in general. There's a few things that are important to note inside of the pandemic that, you know, starting in March of 2020, as I sat in the West Wing and they talked about the importance that they saw, that the COVID task force saw the hospice community, helping the country get through the pandemic. What it helped to illustrate was our ability as a country and as an industry to provide high-quality, safe care at home.
There were some things as well in March of 2023, from a research standpoint, that have really helped to positively influence the policy outlook for hospice over time. There was a study released in March of 2023 by the University of Chicago, the NORC Institute, and what it helped to illustrate was the total cost of care reduction that the hospice benefit provides to the Medicare Trust Fund. In 2019, it was $3.5 billion of total cost of care reduction when we, as an industry, were re-imbursed $20 billion.
The other important novel concept that helped to dispel some misperceptions and misunderstandings at a federal level was, the longer a patient's on the hospice benefit, the greater that total cost of care reduction, up to almost fourfold that number, if we started getting patients to understand and access the benefit even two weeks earlier than they do today. So I bring all that up to say, as an industry, in 2024, our total addressable market is about $35 billion. And through all independent forecasts, it has hospice as the second highest growth rate through 2030, at an 8% growth rate. And that would make the, the TAM in 2030 a $65 billion dollar industry.
And when you combine that, along with the fact that the industry helps solvency from a Medicare trust fund, but also improves quality to all the patients that access the benefit, we're really optimistic about where VITAS sits as a unique national platform in the outlook and the value that we can add both to our shareholders as well as to the country and the overall solvency of the Medicare trust fund on a go-forward basis. So really excited for where we sit, but it was a multi-year path that led us to this point, and we're really excited to talk about 2024 and beyond. That's all.
Great. Thank you very much. At this point, we will open it up to any questions from the audience. We've got a question over here on the right side. I think a microphone will be coming around.
Thank you. Nick, really appreciate your comments about, you know, the possibility of benefits of hospice care. However, you know, I see when I'm looking at the headwinds, you know, facing VITAS here going forward, how are you looking at the Medicare Advantage carve-in? You know, we know it's coming. It's eventually gonna get there for hospice care. And as everyone can tell, you know, dealing with Medicare Advantage, with the home health, it certainly doesn't lead to extended profitability for, you know, agencies and certainly the hospice. And as a national player with multiple MA programs all over the country, what are VITAS's plans? How are you gonna deal with that, and what are your plans going forward for that?
Yeah, no, I appreciate the question Darren. Obviously, the question around the future of the carve-in has continued to be one of the biggest questions for the overall industry. If it is a foregone conclusion that it happens, a lot of the current experience would really indicate the opposite of it. When you start thinking about some of the plans today that have come in and become owners of those hospice assets and either divested their interest in desiring to operate those or taken a minority interest, I think that will really determine if there is a speed, velocity, and closure towards the carve-in ultimately happening. The carve-out right now, I would argue, really operates pretty effectively when you think about our little small sliver of the hospice benefit, right?
Being a pioneer of an industry in the early eighties, being arguably one of the first capitated value-based reimbursement, models, and that's why it provides total cost of care reduction. With all that being said, if we're migrating to a future where there ultimately is a carve-in, I think the one saving grace for any, national provider is, it is a unique delivery model, right? There is something special, about all the hospice providers out in the country, the mission-focused ones that are able to provide high quality of care, and it's not something that'd be replicated inside of a boardroom. And so there aren't too many providers as well as platforms that can do it at the size and scale that these insurance companies ultimately need.
And at the end of the day, they also see the quality as well as total cost of care reduction, as indicated by direct dialogue that comes along with it. And so the hope becomes, as opposed to negotiating on a pricing and a rate standpoint, it's really we're talking about how do we help patients in a journey realize they need both pre-hospice, community-based palliative care, as well as hospice earlier in their disease trajectory, and the components of that become very attractive to the business model, over time. I think the only other comment, using the VBID carve-in demonstration, where year 2 results just came out recently over the last few weeks from, one of the studies, is it's still...
Granted, there's some pandemic potential disruptions embedded inside of it, but the year two experience really helped to further indicate that there has not been any material progress for those hospice providers who are caring for patients that are participating in the v-bid plan. That we haven't seen any substantial changes in outcomes, and the total number of patients that access the benefit while inside of a carve-in Medicare plan was still less than 1% of the total patients that got cared for in 2022, and 80% of the providers providing the care were out of network. And so I think it will take time, like many things do in healthcare.
While we may theorize and think about how great some of the upside is, related to it, we're ready and able to ebb and flow based on how it plays out. But our primary focus is just continuing to further penetrate every market in which we operate in, and that should give us the best leverage we have if we get back to, from a negotiation standpoint.
I'd like to just add that, you know, to the extent you look at it and say, "Well, you know, the what would be the driving factor for some change from the status quo?" First, I don't assume generally the status quo of anything is gonna last forever. But one of the things I look at is what we have under the current situation. The first we have is it's already capitated. I mean, the federal government, first and foremost, you know, Medicare Advantage, let's capitate our exposure here. Hospice has always done that, and we've always already achieved that goal. The second thing, and Nick alluded to it, goes to, you know, the issue of an element of any future country's healthcare is gonna be some type of rationing of care. I mean, the issue...
It's already happened in all the European countries. They. You just wait longer for a hip replacement. You just can't see a doctor. They limit those options. Rationing of care in the United States is politically untenable, which worrisome. When you start talking about, you know, ending the carve-out, you're talking about insurance companies basically convincing their patients to opt out of the curative setting, the so-called death panel risk, but which is something that not in their interest, you know? And, you know, to the extent that, you know, we say, "What is the government trying to achieve?" They're trying to achieve capitation and rationing. And in the current system, the status quo already achieves both those very important objectives.
Nick, if his problem is he's looking to see any other advantage that could be so additive that they would, you know, upset the status quo and maybe create some uncertainty. I don't see it, but, you know, it's, it's certainly a possibility.
Yeah. I, I think the only other comment that tells us we're sitting in the right space, and we'll figure out where the ownership and, and where everything else ultimately ends up going with it, is when you take even the sub-delegated providers that are part of those Medicare Advantage plans, they have a very strong appetite and appreciation for the role hospice, as well as a community-based palliative care benefit, can play in terms of helping to manage total risk and that entire population. And as long as we're moving directionally in that, you know, in that way, sitting in the space, being a mature provider, and having the clinicians and a culture that attracts more clinicians, we think provides a strategic advantage to continue to provide a real valuable service for the country.
Puts us in the best position to try to avoid some of the disruption that potentially could have happened, like is currently going on for rate negotiations with home health.
The one thing I'd add is, again, if as an employee, speaking as an employee or an investor or and/or investor, and Kevin, one thing that gives me some comfort with regard to the potential change in the status quo, it's one thing that day one we don't have that advantage. That is, for the Medicare population, that is 65+, hard to say that Florida isn't the most important state to, you know, under any program that they would be providing service. And in Florida, VITAS is synonymous with hospice. You know, very strong presence in every county in which we've been able to secure a Certificate of Need, and we'll continue to secure more.
But again, I guess my point is, there may be some situation where we're gonna have to zig or zag, but we hold a key position in the key state for providing service to this, you know, Medicare population.
Great. Thank you. Are there any other questions? We've got one in the back. I don't know if we can get the microphone back there. Nope. Got a-
Somewhere.
Back.
Thank you for the presentation today. In a carve-out world, to shift back to that side of what we live in today, can you provide some comments on the outlook for reimbursement rates relative to cost inflation and how you see that trending over time?
Yeah. So the first piece for everybody maybe new to the story just a baseline, is the hospice reimbursement rate is by statute, so absent an act of Congress, it can't be modified. What we've seen, and all providers have seen over the last few years in a hyperinflationary market, is the formula for it, which is pegged to the Hospital Market Basket Index, has a trailing lagging factor related to it. And so what it's meant is, while we have stability with pricing increases, it's lagged real inflation. And there is no true-up mechanism inside of that formula. So by definition, it's not going to change, but when we move away from a hyperinflationary market, true cost of operating the business, along with the reimbursement rate, should get back to being more normalized.
The other thing, Kevin's done a great job of highlighting throughout the course of today in all of our one-on-ones is, if we go back to when the pandemic didn't exist, back in 2019, there's also a substantial thing the federal government did, to their credit, inside of the wage reform in 2019, which was they raised the rate for both high acuity services, continuous care and general inpatient, because they recognized that high acuity wasn't being provided universally by all the hospice providers across the country. And they felt by raising it 38% at that time, that it could help to incentivize hospice providers to provide both of those levels of care that you're required to under the Conditions of Participation.
When it went into effect, then the pandemic came into play. Keep in mind, from VITAS's standpoint, we have been and will continue to be a full suite service provider that provides all levels of care, including continuous and general inpatient. So hopefully, while it's logistically more challenging, but as a needed, necessary period of crisis service for patients to keep them appropriately on the benefit, not have them inadvertently feel they need to revoke and go back to the emergency room, it's something that, you know, going forward for the entire industry also, I think, is a encouraging sign from a pricing and rate stability, outlook. You know, we would anticipate, you tell me how far out, you know, inflation will get back to more moderated levels.
There'll still be some delta where real price increases are gonna lag, probably the cost of operating the business, but for all of us as providers, that's something we just have to manage as a business to ensure we have sustainability and predictability in, you know, in the service of which we provide.
... Thank you. Are there any other questions? Maybe I'll ask one right now. Can you provide your thoughts on what President Carter's current hospice journey has meant for the industry and public awareness?
Appreciate you bringing it up. For those of you who may not be aware, you know, wanted to go out and thank President Carter, where, you know, back in February of 2023, he's been on service and on the benefit for 11 months, at this time. And the thing that is great about it is him and his family came out and were public about his desire to elect the benefit, and do so by definition, early in his disease trajectory, highlighting the intent, and the benefit of everything that hospice provides. And the one sort of serendipitous piece that's really neat with it is the hospice benefit got enacted when he was president.
So, you know as an industry, collectively, we want to continue to acknowledge and thank him for having the courage, and his family, to come out and have the courage to make the country aware of that choice. From a policy standpoint, inside the Beltway, it's done a lot to help to continue to dispel misconceived notions that hospice is brink-of-death care or someplace you go to have service for three days. That really is the challenge we continue to fight as an industry, but provides a lot of tailwinds to us, that even that NORC study helps to highlight, is as a country, the more we can dispel some of the negative notions around hospice and brink-of-death care that comes along with it, it's actually about expansion and elevating, anyone's ability to live and have the highest quality of life up until death.
President Carter has done a fantastic job to help highlight that to the country.
And one other element that it helps highlight is eligibility. I mean the patient's doctor, who checks the regulations and the law, sees that the patient is eligible for hospice if his disease state, if follows his expected course, would be more likely than not, let's say 51%, lead to death within a 6 month period. Obviously, an inexact science in several respects, but as proven by President Carter, his condition is reviewed periodically, and to the extent that the doctor of his hospice says that at that point, he still is within that range, that is, his disease state, even though he's been a survivor for longer than... He, you know, he's in the 49% that survived longer than one might expect, it doesn't affect his eligibility.
I think to send that message to everybody, including the government regulators, is an important one, and it's one that, as Nick says, we very much welcome.
Thank you very much for that answer. Are there any other questions from the audience? Maybe I'll ask another one then. So with the you know, current fragmentation in the hospice industry, do you think there will be accelerated consolidation in the future? And if so, what are the catalysts in 2024 and beyond?
Short answer is yes. You know for all the reasons we highlighted of why we're have an extremely positive outlook for VITAS, what we can say is, in the markets in which we operate and elsewhere, that's not the case for everyone. And to that end, because you have the fragmentation, what it will continue to naturally lead to and as well as an answer to the previous question around, you know, insurance company, Medicare Advantage, and carve-in, is there's value to scale across the country. And so from an opportunistic standpoint, we're encouraged by potential opportunities that, you know, may come forward here in 2024 and beyond, where at attractive valuations that we could consider, as well as others that are in strategic markets that we'd like to be in, that we are not in today.
As an overall industry, I think that should will be a positive sign as well. You almost have to bifurcate it out. There's been a policy item, where there's been an explosion of licenses inside of the industry over the last 24 months, but that doesn't mean that explosion of licenses is providing care at the bedside. So for long-standing, mission-focused hospice providers, I do think there will be continue to be tailwinds towards consolidation across all segments, both for-profit as well as nonprofit, as the industry collectively looks for how it wants to ensure you're competitively positioned on a go-forward basis, as well as have the infrastructure and scale to continue to attract and retain high-quality clinicians in an environment where you may have reimbursement headwinds for the foreseeable future.
I'd just like to add, I think that to the extent there's continued consolidation among referral sources, you expect it also to follow through to the hospices that get all the referrals from those consolidating entities. And I think you do have that, and you know, something we monitor very closely. But at this stage, more important than brand loyalty is quality. And to the extent that VITAS is viewed by the referring doctors as the higher quality alternative, a directive from the corporate office hasn't seemed to, you know, dramatically sway negatively for us, referrals. And the other thing I'd say, but as far as consolidation, is you remember there's a bifurcation in the industry, for-profit, not-for-profit. There's no question that not-for-profits in many geographic areas have not recovered from the pandemic.
Their first move in the case of struggle is to turn not to a financial buyer, not to a strategic for-profit provider, but it's to a not-for-profit agency of some sort, whether it's a consolidator or an effective consolidator who has affiliated with them over a broader geographic area, which I think is, you know, whistling past the graveyard. I mean, it doesn't solve some of the problems they're dealing with, but it tends to put them, push them out, you know, 9 to 18 months, you know, perhaps. But that's another element as far as consolidation. Someday, we want - today, we've talked about many times that VITAS is in major metropolitan areas with major healthcare systems at both as a feeder and a competitor.
And someday, it's probably more likely than not, we will be in smaller communities, offering a, you know, a less robust form of hospice, based, you know, the, in the, you know, required by the the much smaller census, average yearly census basis. But those, those, those days are not on the immediate horizon, so-
Being a provider with mature infrastructure that can help to service a lot of different referral sources, patient and community needs, is gonna continue to be an absolute must. In a lot of instances, consolidation can be seen as a negative thing sometimes. But honestly, it becomes very positive because, at the end of the day, the hospice benefit, no matter what the consolidation looks like or the ownership piece looks like, is really a localized service, that the brand and the company that's providing the care is local and specific to the community. Whether they're part of a larger national organization or part of a regional association, at the end of the day, for the patients and families and the referral sources, they care about those local relationships and the understanding of what can be provided in their communities.
That's, that speaks to sort of the sustainability of the entire industry on a go-forward basis.
Great. I think that, you know, brings us to time. I wanna thank the Chemed team for a wonderful presentation, and thank you all for joining us today.
Thank you.