I work at Bank of America Equity Research, and now it's my pleasure to host this session with Chemed. So we have a whole team here: Kevin, President CEO, Nick Westfall, who's the CEO of VITAS, and Mike Witzeman, who's the CFO. So we're going to go right into Q&A. We only have 30 minutes, and the question list is pretty long, so hopefully we can hit the key questions here. But I guess since this is a healthcare conference, so we're going to start on VITAS, I want to also have some time to talk about the other business for a little while because there are a lot of questions there too. But in terms of the VITAS, obviously the census numbers keep outperforming the expectations, right? The growth of 10%, right? Very impressive.
You gave initial guidance earlier this year that you haven't updated yet, but I was just curious how to think about a 7%, call it, guidance versus how you executed in Q1. Is there any implication that you're actually running ahead of your guidance? I guess as you talk about that, kind of the main drivers for that outperformance.
Yeah. So obviously very pleased with the first quarter. It did outperform our internal expectations that led to that 7% full-year guidance. Keeping in mind that guidance is the average of the full calendar year compared to the last full calendar year, so it doesn't have any quarterly sequential growth embedded inside of it. But I was really happy with the outperformance. As you alluded to, we plan on revising guidance at the end of the second quarter and don't see any short-term speed bumps related to continuing to build census on a sequential basis. And it's the combination of the things we've been discussing over the last 18-24 months in terms of continuing to have solid retention, no hiccups regarding hiring trends, and all that supporting demand from a referral standpoint.
When you combine that with our community access initiatives, we're continuing to see patients come to us earlier in their disease trajectory, and so it's leading to some slight length of stay and days of care expansion overall. I think the other aspect that was not embedded in our guidance when we started the year was our recent acquisition with Covenant that had just closed that we discussed at the end of the first quarter. And obviously that will have a step-up component to it as we've brought on not only some of the active patients that they had on service, but we'll continue to grow and build those markets throughout the rest of the year. So feel real good about it. But all in all, we have outperformed that 7%.
We anticipate continuing to do so, and we'll blend that and add that into the impact from Covenant, and it should lead for a fantastic top-line 2024.
No, exactly. And in terms of just you talk about the community access strategy, right, going after, I guess, the different patient population. So can you talk about where you are on that in terms of the nursing home, I guess, % of your census in those locations and also senior housing? Because obviously we've seen the senior housing operators also outperforming on occupancy. The occupancy actually has done better than the seasonal trends would imply in Q4 and then Q1 too. So can you talk about that? Is that also a tailwind, as in you go after these patients, so to speak, more aggressively, and also that industry is improving occupancy? So that creates also a tailwind to you. So can you talk about that a little bit?
It's absolutely a tailwind. And so when you take all of senior housing, whether it's ALF, nursing home associated with it, we spent a lot of time in the throes of the pandemic really leaning into those partnerships, and we're starting to see those things bear fruit as it relates to sustainability, whether it's at a site-by-site, facility-by-facility basis, but even with some broader national partnerships that we have very intentionally aligned and continue to perform on. And when you get into some of our larger markets, in particular Florida, obviously there's a heavy concentration and density.
And so we're continuing to champion, and as they see occupancy improve, we'll continue to be there and be a partner for any eligible hospice patients to respond and care for them and keep them in that setting of care, which is, at the end of the day, what we are really good at and what we pride ourselves in, and providing all four levels of care continue to allow that to happen. And so we really think it's a real potential for a win-win that's occurring not only now for patients and families, but also with those facility-based partners, but for the foreseeable future.
Having turned our back on the hospital referral network, which was key to VITAS, really how we help establish our reputation for high quality of service, it's just the others are growing faster. And we've adjusted out of necessity during the pandemic. We adjusted our resources somewhat. But again, we want to give the impression to every hospital referral source that we're still there, and it's still the base of our business.
Yeah. Hospitals are important for balancing Medicare cap as well. We need to make sure, too, it's running a fine line between the longer length of stay pre-admit locations and hospitals. It's a fine line, but hospitals will always be an important part of what we do.
We want average length of stay, certainly in California and Florida, to creep up, not to make significant advantages.
I'm glad Kevin and Mike brought that up too because the other limiting factor right through the course of the pandemic was almost out of necessity as we were picking and choosing just the onslaught of demand and not having enough clinical team members to be able to respond to all of those. While demand is still very strong, as we've alluded to over the last seven quarters, not only net bedside clinical capacity we've been able to add sequentially for effectively the last two years right now, but our complementary community educators or our sales staff, we've been able to ramp up just as quickly. So we're unimpeded in terms of our ability to service the hospital systems, the hospitals themselves, and the integrated healthcare systems, which we all know.
That trend's just going to continue as they have primary care ownership and a whole host of outpatient capacities that we want to be in lockstep with them from a partnership standpoint.
As you mentioned, the admissions from acute hospitals, I was also thinking about the high acuity patients, right? So it used to be a headwind prior to COVID in terms of just the acuity shift occurring in your portfolio. So where do you think you are now on the high acuity patient population?
We think we're very comfortable with our practice in that regard. Reimbursement is looking better and better. The government is certainly of mind that there isn't enough of it available to the patients. And so we have a unique opportunity, certainly in Florida, where we have a lot of resources for that to take advantage of the appetite for that level of service, Nick. But.
Yeah. I mean, I think the only other aspect we report out on total day, high acuity as a percent of total days of care, our high acuity segments are both growing sequentially from an ADC standpoint. They're just not growing as fast as the overall bucket. So that's why optically it may appear as though we're doing less high acuity, but we are actually doing more on a pure day basis. On the inpatient side, feel really good, and we have a very good team that manages the overall bed count capacity as well as all those relationships. That's functioning very well. And on the continuous care side, it's really the staffing component that continues to occur. It's very much needed, and as Kevin alluded to, and it's embedded actually in the proposed wage rule for this year, continuous care actually has a higher uptick.
I believe you called it out in your research as well, a higher uptick from a reimbursement standpoint compared to any other setting of care. And that is because fewer providers continue to do continuous care across the country, and so the government's rewarding those that do, even though it's a requirement in the Conditions of Participation.
So on that front, do you expect another rebasing where they actually might shift more of the dollars like they did in fiscal 2020?
Maybe. We'd love it. Maybe it's a slight piece of it. I mean, at the end of the day, we just want to have consistency and predictability in the rate aspect. And that component by itself doesn't impact the physicians that are the ones making the judgment on period of crisis. And so we're just reacting from a business standpoint. But our ability to provide all four levels is what allows us to keep patients on service and really accelerate total cost of care reduction and quality improvement, which is what Medicare wants at the end of the day.
And you mentioned also the Covenant deal as being additive to your guidance. So I know you gave some numbers around the patient transfer 680. So when thinking about this, $50 million, I guess, annual revenue, is that in the ballpark? And then also because I guess that would be meaningful actually for VITAS, maybe not for the Chemed combined, but I guess for VITAS. So then in terms of the margins, so it sounds like they're going to start low, but you made it sound like it's actually maybe not that low because initially I was like, "Oh, this is a nonprofit asset, so maybe not such a great margin." But can you talk about kind of the accretion and the trajectory of your strategy?
So if you start at the 680 that we talked about that transferred over, we have $200 a patient day roughly revenue. So you can come to your $50 million pretty quickly. We think that's a pretty good number at least to start with. From a margin standpoint, two of the three programs, we don't have any back office requirements because we already have an entire back office set up there. So we think that the first-year integration costs might cost a few points on margin in those programs, but they will quickly get back to a margin that is equal to what VITAS runs on a normal basis across all of Florida.
And I think the 680 we referenced was, I think, six days after closing was when our earnings call was. It turned out to be slightly better than that. But the one thing we wanted to reinforce, no different than we did, that's just live eligible patients transferring over. We think there's ample opportunity to not only grow earlier access, particularly in the new markets, but even in the overlapping markets. And there's a combination where we will also invest additional clinical resources to help enable our growth-oriented model associated with it.
And so it's immediately accretive on day one is the most important piece and really opportunistic around not only the contribution in 2024, but what it's going to mean on a go-forward basis and what it represents potentially for the industry and inbound opportunities since it was a longstanding, like-minded, mission-focused hospice like we consider ourselves to be, that basically put the preconceived notions of tax status aside and said, "Let's figure out what's best for our employees. Let's figure out what's best for our patients and families." And the response has been fantastic. The community response has been nothing but really positive. And it is a singular story of what hopes to be many more to come in terms of what it can mean for VITAS and what it can mean for the industry as we evolve across the country.
Just with some specificity, just to give you an example, I mean, obviously we think they did a good job and they were very well respected. Nick, just talk about their strategy on admitting nurses and our approach.
Yeah. So as we take different approaches, we'll have community educators out talking to a variety of different referral sources. But when a referral comes in, we'll have full-time dedicated admission nurses that will respond and help coordinate with physicians on eligibility. Covenant, as well as other providers in our space, don't always have that investment in those full-time dedicated admission nurses, and we'll rely on their case nurses to perform that response who also have a caseload of active patients. And so we purposely, while our admission nurses are part of the overall team, we purposely separate that out so that we can help ensure a timely, immediate response to those referral sources. And that's led to outsized admission performance, days of care growth, and everything else that comes along with it. Those are the types of resource investments we've already made in those markets.
That's where we will improve their service offering where they are. At the same time, there will be a bit of a transition exercise for us putting those in place.
So should we expect more acquisitions like that in short order? Are you getting inbounds? Because it sounds like, by the way, that deal.
For several quarters, we've mentioned that there's struggling going on, especially with the not-for-profits. We focus on Florida because we're closest to those markets. There are a lot of struggling not-for-profits in Florida. We've taken through our various employment practices, we've taken a lot of their top people. That causes, as we saw during the pandemic, if you don't have the staff, it's hard to grow your business. Because of that, we're just seeing a lot more interest as far as somebody's not-for-profit saying, "Look, we've done a variety of things. I'm not sure we have to do hospice." Or we still want to be an eleemosynary institution, but it doesn't necessarily have to be in this very competitive hospice space.
To say expect might be a little strong, but we certainly think that there's a pipeline growing. We have the resources on our balance sheet with cash and no debt to be able to really be a player in any of these. We would like, as Nick will tell you, we would like to be in states that have CON restrictions much more than an unrestricted state. But we certainly have the interest and ability when things come available to be able to jump on them.
Nick, you might just mention, I suppose it's not secret, it's obviously public as far as the CON applications we have pending in Florida.
Yes. We have two applications where counties were not in for CON. We'll find out about those here in the summertime along with the rest of the applicants. We'll just keep. That's part of our normal de novo strategy not only in Florida but anywhere else. Just also piggyback on Kevin's comments a little bit. I wouldn't always categorize anybody necessarily as struggling. I think you have everyone in a different process coming out of the pandemic related to it.
But the one item where we think we're very well positioned, even from a brand awareness standpoint, is as providers, whether you're just in hospice and palliative care or whether you're in a bunch of other complementary service lines that you've evolved over time, if you're looking at it and saying, "Look, we really want a partner that has scalable infrastructure," which is really the requirement to be successful long-term in this industry, we're a fantastic partner and a very attractive partner, starting with the balance sheet, but even for many of these organizations where economics may or may not be the primary focus. We have a great cultural alignment and mission-focused component that comes with it. And so that's what makes the pipeline currently very strong for us. And it is all relationship-driven. And we've spent a lot of time establishing those relationships.
Talking about VITAS, the other, I guess, part of the equation is margins. So your prior comments implied you thinking about margins, it should be stabilizing closer to like 19%, I guess, at some point. And I want to say Q1, it tends to be low margin quarter, so that's not a good indication. But can you talk about is there a limit? Is 19% something we should think about next year? And also when you think about it, how much of it is volumes? Because clearly you've been outperforming in census. And how much of it is maybe some of these things we talked about before in terms of reimbursement and how this rebasing that occurred in fiscal 2020, but we haven't really been able to see it come through because pandemic hit right after that. So can you help us understand the margin commentary that you made?
So the 19% margin that was discussed, I don't know, last year, maybe two years ago, I would call that aspirational. And we can get there, but it's not going to be 2024 or 2025. It's going to be a slow, methodical gain towards that. That's as top line grows, we'll cover more of our back office costs. And that's where we've made margin over all the years that we've owned VITAS is covering our SG&A costs. We still essentially spend the same amount on direct patient care that we did in 2004 as a % of revenue. So all of the leverage we paid.
But there's no leverage at the clinical.
At the bedside.
At the program level. Direct, there's some slight leverage piece on program-oriented indirect. But like Mike alluded to, it's all back office. When we think about our call centers, when we think about our central support, that's been growing at less than half the rate of overall top line growth. That's where we get some incremental marginal expansion that Mike's predecessor would have alluded to. With that being said, the reality as well is reimbursement and the rates of reimbursement still lag real cost of doing business that I think everybody's aware of. And so that's always a constant headwind. But for every hospice provider, including VITAS, our job is to be fiscally responsible for every dollar we get reimbursed. And in no way, shape, or form are we skimping on any aspect of frontline support in terms of paying prevailing market wages.
We found opportunities to continue to innovate and be more efficient that elevates quality of the bedside and doesn't detract from our investments we make in all of our people, which is frankly what's made us successful and what's got us to this point today.
Right. And I guess the other element that came out, I guess, last week, I guess more on the oversight. So there was this letter sent by, I guess, 40 members of Congress asking some specific questions to CMS and clarifying some things as a follow-up to some proposal that came out. I guess they made it sound like in that letter that they feel like there's no action happening. So kind of how do you guys think about this? Is that a headwind to you or is it a wash? Does it increase your administrative costs if there's more oversight? Or there are some specific things that in this letter they called out, like CMS talked about previously of doing the reviews of stays longer than 90 days. So it sounds like it hasn't been happening. So would that happen?
How would you have to respond to those kind of inquiries?
So let me start at the end around the VITAS impact and talk about the macro a little bit with it. From an administrative cost standpoint, we have the departments, the organizational infrastructure, and everything as we have not only proven to successfully defend those types of pieces, but we actually spent a lot of time from a policy formation standpoint supporting not only those members of Congress as well as CMS themselves. Because the industry is at an important point where, whether it's MedPAC, whether it's CMS, everyone actually better understands the value of hospice, in my opinion, through the NORC study, earlier access. MedPAC has reverted on previous recommendations that are very positive for the outlook of the overall industry. What we can't do is conflate that with fraud and abuse and program integrity pieces, which is what that letter you were referring to alluded to.
So of the 2,500 new providers that almost all of them that have come into the hospice industry in the last 3 years, with almost all of them being in 4 states, in California representing 85% of that, Nevada, Arizona, Texas, longstanding providers such as ourselves and the trade associations have been absolute in our recommendation and support to help the government crack down on all of those things immediately. While it's not dramatic, they're not really providing patient care right now. It has the potential for it to conflate that activity with misconceived negativity inside of the industry and what's actually happening by longstanding providers that are providing care in the community. I would say that is the risk.
But right now, what we're really trying to do is be very clear in separating those things out and helping to support the government on the actions they can take to lock that down. And then similarly to that, when you get into the 14 states that still have Certificate of Need and restrictions, they function very effectively. And when you look at every hospice-based outcome, whether it's quality and everything else, it just further reinforces why that's so important for the frail and elderly population that we all serve. And you see it in every reported outcome. There was another public report, I think, two days ago that came out to help support that.
And then I would just say, by way of background, as you know, Joanna, some of the fraud and abuse efforts are to identify hospices that aren't doing as well. VITAS has a couple of headwinds going just right off the bat, starting in Florida where the whole state of Florida is one program. So four complaints on a statewide basis in a year for VITAS is not the same as a 35-census hospital in Jacksonville that has four complaints or three complaints. Some of those proposed standards, they would equate those reports. The second thing is, as I kind of alluded to, getting so many hospital admissions, so many patients that are very in extremis, those are the tougher patients.
It's those tough patients who are with you a short period of time where the clock is ticking, where an hour delay in getting a hospital bed, that's the type of thing that causes issues. If you have a program that runs like a milk run, those are less likely to occur. Whereas you jump into the throes of a very significant health challenge for some of these super elderly patients, we know what we're getting into, I guess, is what really Nick is saying. We know what we're getting into it. We do a great job. We have no controlled referral sources. We wouldn't get any referrals if we weren't viewed by the referral sources as being preeminent.
What Kevin's alluding to is what that separation where I was trying to talk out to. So the letter you were referencing didn't talk about the Special Focus Program and the consistent 37 recommendations the trade associations have sent. It highlights the fraud and abuse piece as well as one component, which is surveys, where they haven't completed the required three-year survey. And we get surveyed all the time related to those types of things. So it does not impact us. But the fact CMS hasn't completed the required surveys of all the providers, as well as there was a delay in their mandate for elevating education and standardized high-quality hospice surveys that didn't take effect until the starting point of last year.
So there hasn't even been a three-year window where all providers have been consistently surveyed, which is a component actually of the SFP recommendation as well. It's interrelated but completely supports Congress's comments that the fraud and abuse piece and the actors that none of us want in the space need to be stamped out and completing the survey process and allowing a three-year window for consistent approaches where the surveyors know what hospice is when they show up. They don't think it's a home health company when they show up on day one. All that is going to be beneficial to just really improve quality and consumerism inside of the industry many years from now.
And I guess since we're running out of time, maybe just for a few minutes, we can switch to the other business. Because VITAS clearly has been outperforming. But on the flip side, the plumbing business, the Roto-Rooter has not done so well. And especially Q1 was the results that were disappointing. But really, when I looked back, it was really the last four quarters were kind of on the weak side, I would say. And then with Q1, you kind of flagged there. You identified it sounded like almost like an incremental, I guess, issue that's been brewing there. So my question is, is it fair to say that maybe those things around your commercial revenue pressure that you identified with Q1 was actually already brewing sometime prior to Q1? And it's just kind of like now.
I think the answer to your question is yes. Our best analysis of it is that our commercial business at Roto-Rooter is very important. It takes a lot more handholding. It takes more spade work, more work before the job is done, and more work after the job is done. During the pandemic, when we had more demand than we could really service many times, it's not surprising that out in the field that some of that handholding and necessary work behind the scenes wasn't getting done as often as you want. That has repercussions. I think so the answer to your question is, since the end of the pandemic, we've seen some weakness on the commercial side.
Generally speaking, something that if you go back for the previous 18 months, if you look at the ancillary services, the water restoration, excavation, it was building faster on the residential side. So to the extent that you look at the commercial side where during that period where it wasn't keeping pace, they were losing ground. And those are the efforts. It's not a one-month or a one-quarter issue to turn it around. But we're doing everything we can to make sure that that goes further up in the priority list out in the field on the commercial side. With regard, generally speaking, we've talked about macroeconomic trends that have affected the Roto-Rooter business. Now, we're recession-resistant, not recession-proof, we always say.
But to the extent that those where we see it on the commercial side, as things get tough, I mean, we've made reference to some of the big box stores that we ran into some issues with kind of walking away from some business because we just didn't want to overly discount the service. That's caused because they're struggling a bit. They're seeing consumer headwinds. Misery loves company. And one of the things that we see sometimes on the commercial side, on an excavation, they're more likely to say, "Okay, good. We might need it. We'll get a second bid." I mean, when everyone's flush, they're more likely and that's supposed to be a good term for Roto-Rooter. But you're more likely in good times for them to say, "That sounds fair. Why don't you go? Could you do it tomorrow?" Whereas the process has been affected.
The net effect is there's two things. The phone isn't ringing enough and not enough of those calls on the commercial side. And the commercial business is something that is you get a lot more jobs to repeat three or four times more frequently. So it has that carryover effect. But again, with regard to Roto-Rooter, we love the business. There's no question for a lot of reasons. We've spent a lot of time today in our meetings already today going into some detail about what we think are some of those issues, certainly on the marketing front. I mean, the one thing I always like to add because I think it had a significant impact on the price reaction to our stock, and that is it was a surprise to us. Our margin was significantly lower than we expected.
Two-thirds of the problem, maybe a third of it, was maybe 100 basis points. This was just because we're struggling with the top line and the fixed costs were eating into the margin. But two-thirds of it was we did some very aggressive marketing programs on the internet. And they didn't bear fruit. So it went right to the margin, didn't affect the bottom line. Before the start of the second quarter, we made those adjustments. And again, if I was an investor, I would be very concerned with a 300 basis point drop in margin for a service business like that. We don't expect that to recur in any sense at all.
I think this is all time we have. I have to stop there. Thanks, everyone, for joining. Thanks for being here.
Well, thanks for having us.
Thank you.
Sure.
Appreciate it.