Hi, everyone. Thank you so much for joining us today. I'm Justin Rogers. I'm a vice president in our healthcare services investment bank. Really pleased to have Enhabit with us here this morning. Joined with me is Crissy Carlisle, CFO of Enhabit, as well as Barb Jacobsmeyer, CEO of Enhabit. Thank you both for being here today.
Thank you.
Absolutely.
With that, we'll hop right in. So, as part of your Q2 Earnings Call, you announced you'd submitted a notice of termination to UnitedHealthcare on August first. Could you please walk us through how you got to that decision, as well as the plan to replace United volumes?
Sure. I guess first, it's important to remember that the reason that we created our payer innovation strategy about two years ago was because at that time we only had United as a large payer and then a few regional smaller contracts that had come along with acquisitions over the years. Those combined contracts had us at about a 40% discount to Medicare. So obviously that's not sustainable. So we started the payer pnnovation strategy to be able to have more and better contracts. And so the reason that we were able to get to the decision of giving the notice to United is because now we have 68 good payer innovation contracts. Two of those are national. One of those went into effect May of last year, and the other went into effect January of this year.
It's those, really those national contracts with the large member access that allowed us then to make the decision. We've been at the table trying to negotiate with United since last year. Our contract was up for renewal in February this year. It auto-renews without notice, and so, unfortunately, after that amount of time and being unsuccessful, we made the decision, because frankly, now we do have the ability and the access to fill that capacity with better paying contracts.
Good. So you all have experienced a lot of success in regards to non-Medicare volumes and improved reimbursement rates from non-Medicare payers. Can you talk to us about your non-Medicare strategy, which I believe you refer to as your payer innovation strategy? How do you continue to grow non-Medicare volumes and increase your non-Medicare rate per visit?
Sure. Well, a couple of things. One, it's important first for us to be able to get the contracts, right? So we've used our high-quality outcomes, particularly our low rehospitalization and readmission rates, to be able to negotiate with payer contracts to get better rates. As I mentioned, we have 68 new payer innovation contracts over the last two years, and those are successfully negotiated at a 0-25% discount, versus that historic 40% discount. So the first work has to be getting the contract, and then once the contract is negotiated and signed and executed, then it's really about the work in the local markets of our business development, communicating to our referral sources that we can now take those payers.
And then really, at the branch level, the branch directors knowing how and what to accept as referrals come in. They're the ones that really do the big lifting to make sure that we are growing the volume in the new payer innovation contracts.
Interesting. So switching to Medicare Fee-for-Service reimbursement, in your post-call reports for the second quarter, analysts seem to take a very different approach to estimating the impact of the proposed home health rule for 2025. What are your expectations in regards to the ruling, and what is Enhabit's exposure to Medicare reimbursement pressure in 2025 and over the next few years?
I think when we look back ever since PDGM went into effect, and when you think about the behavioral cuts that have happened over the last several years, you know, what we have seen is that the proposed rule comes out with a behavioral adjustment that is usually proposing a negative rate update for the following year. The final rule has tended to be better than the proposed rule, and so I think, you know, if history repeats itself, then if you look at today, the proposed rule for 2025 actually comes out with about a - 1.7% pricing for home health for the industry next year. Based on our patient mix and our wage index impact for us, we're estimating about a - 1% for next year.
If history repeats itself, we do anticipate then that the final rule will be better, meaning a better market basket adjustment and maybe cutting that permanent adjustment in half, so that you could get to maybe a flat to slightly positive rate update for next year.
Understood. So hospice. You've said your hospice segment has been on a journey. Your hospice average daily census has grown sequentially each month since January. What are your strategic priorities around hospice, and what should we expect for the remainder of 2024 and into next year?
We have said it's been on a journey, and the main reason we've called it a journey is because if you think about it, you know, if you look back at last year, this time we had a lot of capacity constraints clinically. So it really was about building the clinical capacity. We were very successful last year, changing to a case management model that allowed us to recruit and retain staff. That recruitment and retention allowed us to not only eliminate all contract labor by the end of last year, but also to be able to remove all capacity constraints. Once we were able to remove the clinical capacity constraints, we could really focus on building up business development.
So last year, towards the end of the year, we had hired three new VPs of business development from competitors that came with a lot of hospice sales experience. They have helped us this year really build out not only our business development team, but create regional admission, centralized admission offices, so that we can have you know fast responses to our referral sources. And I think those are the things that have fueled the sequential growth in ADC that we've seen each month this year in 2024 .
Got it. So G&A, is there investment ahead, or can you lower your G&A costs?
Let's be clear. We are constantly looking at all of our G&A costs, and when we talk about G&A, we're talking about not only the home office costs, but the general and administrative costs that are also part of our segment, so both home health and hospice. During 2023 , as we've previously disclosed, we took out a little over $3 million of home office G&A costs, and that has been what's enabled us to keep that leveled off in 2024 , and to offset merit and market increases associated with that, as well as increased incentive compensation based off performance in 2024 . We continue to look at ways that we can manage those costs. We have several promising initiatives ongoing.
We're looking at high volume, repetitive, time-consuming tasks and how we can automate those or use AI to become more efficient. So I think there's more to come, and we'll continue to update the investment community on those as they progress.
Thank you. So on labor, could you give us a picture of the overall labor environment and where you believe Enhabit is in regards to having clinical resources to grow the business? In addition, what are your thoughts on wage rate growth next year?
So we have really, we've really appreciated the work that the field has done focusing on either recruitment and retention. As I mentioned, we eliminated all contract labor for nursing by the end of last year, both for home health and for hospice. So we feel like we're in a great place as it relates to our recruitment and retention of our clinical team members. We feel we're kind of back to what I would say, almost normal, of about a 3% wage increase. Now, we do have some markets that, you know, we will need to do market adjustments. We've had some markets, we've done them this year. The Northeast, in particular, has been kind of a challenging market area for us this year.
But we feel even with those market increases in some markets, we're gonna be able to manage around that 3%, and then always focused on productivity and optimization, so that as you look at your wage increases, you can work to offset some of that through our productivity and optimization management.
Got it. So near-term outlook, at a high level, what are the headwinds and tailwinds investors should consider for 2025?
Yeah, so it's still a bit too early to talk specifics about 2025, but we can give them some high-level guidance assumptions as it relates to, you know, volume and pricing. So for home health, let's start with pricing. Medicare, we've already really talked about. Based on the proposed rule, our estimated impact would be a - 1%. That equates to about $8 million-$9 million of a headwind. Again, if it goes through as proposed, and that does include both Medicare Fee-For-Service and our Medicare Advantage contracts that pay us episodically. On a non-Medicare pricing side, it's really dependent on where the UnitedHealthcare volumes go. We like what we're seeing thus far. Again, we just gave notice August first, and we haven't closed August at this point.
But we like what we're seeing from a United admits per day perspective, as well as, you know, since it's not suffering from that, stabilizing and even growing. So again, it's really dependent on where those United volumes go. Remember that we've historically talked about the non-Payer Innovation contracts being at that 35%-40% discount, and our Payer Innovation contracts being at a 0%-25% discount. So you can do some quick math and say, you know, there's some financial upside, as we continue to shift the United volumes into most anything else that we have. On a volume side for home health, we have stated that we believe a mid to high single digit volume growth for admissions is expected kind of in the near to longer term.
So we're looking for that as well. On the cost side, 3% wage growth. Remember that our cost per visit, 90% of our cost per visit is salary and wages. So that's the main factor there. And then I think there's still room for our continued use of Medalogix Pulse, and what we can do with our visits per episode in managing productivity and optimization on our home health labor force. On the hospice side, we're not under the same reimbursement uncertainty for hospice, and so based off of the final rule at this point, that will go into effect October first, we expect an approximate 3% increase. Based off our current census and mix, that's about a $6 million tailwind for 2025. So that's good.
Volume, same kind of mid- to high-single-digit volume growth and then on the cost side, again, the 3% wage index, that's about 60% of our cost per day, is salaries and wages on the hospice side, and then it's important to remember that we made an investment in the case management staffing model for our hospice group, and that fixed cost structure as we continue to grow our census, we expect to be able to spread those out more, so our cost per day should be fairly stable, and we should be able to grow in regards to not having to add additional fixed cost in order to achieve that growing census.
Got it. So, longer-term outlook. What about the longer-term outlook of the company and industry? How should we think about that?
Yeah, so I'll start, and I'm sure Barb has thoughts on this too. It's important to remember that the efficacy of home care is undeniable, right? Patients want to be treated in their homes, and home is the lowest cost setting. And so that's where we're getting some of our, you know, mid to high single-digit growth factors from industry information. And we expect to be able to do that, and then, of course, we want to exceed that, based off of our own quality scores and things that are well above the national averages here. Again, we think longer term that the mid to high single-digit volumes in each of our segments, both home health and hospice, is a reasonable volume growth assumption.
It's a little bit more difficult to talk about price because we are a price taker with Medicare, but again, as Barb mentioned in our fee-for-service discussion earlier, some promising initiatives underway with our industry groups that will hopefully mitigate some of that, if not eliminate some of that uncertainty going forward.
And I think to kind of tack on what Crissy said, you know, I think one of the biggest reasons we've been successful with negotiating the 68 contracts that we have is that, you know, because of the shift of Medicare beneficiaries into more Medicare Advantage plans, as MA has grown, they have started to feel some access issues for their patients. So if you think about some of the challenges that Medicare Advantage plans are facing on their MLRs, really needing to control costs, it is where home health can come in and really be a solution. But that means a high-quality home health provider that can help prevent patients from going to the emergency room, prevent patients from being readmitted, which are the high costs for them.
And so for MA plans to have access to that kind of care, they are realizing they have to be willing to pay for it. And so again, I think it's why we've been successful in negotiating the agreements that we have, and I think that opportunity is gonna continue to grow as they work harder to control those high-cost dollar resources.
Any closing remarks?
I think a couple of things. One, I think it is important to know. I know that, you know, there was a lot of talk around the notice that we gave on 1st August to United. We certainly would not have given that notice if we didn't feel confident that we could replace that volume. Again, we would not have been in a place to be able to do that, had it not been for the success we had with the Payer Innovation contract. So I think one of two things are gonna happen in the next... You know, we had to give a 180 notice. I think either, you know, we will be successful.
They're still at the table talking with us today, so we're either gonna be successful coming to an agreement to continue to be in contract with them, or during that time, we will have moved away from that business. As Crissy mentioned, we are very pleased with what we saw here in the last month in August. In our first four weeks after giving notice, we have done a really good job. The field has done a good job moving away from United admissions, helping to lower the census of those patients, but not seeing that at the cost of admissions or census growth. We continue to see the growth despite that. So that's an important thing for us, and we watch that every day, but feel confident that we'll be able to replace that.
In addition to that, I would say, you know, the work continues to be with our Payer Innovation team. There are more contracts to continue to work to get contracted with. So the team continues, because their ultimate goal for our field is to be able to not have to think so hard about whether or not to accept an admission. You know, there are a lot of referrals out there, and we want our branch directors to be able to just feel confident that if we're in contract, it's because they're willing to pay us, you know, a reasonable rate, and so the answer should be a quick yes. And then the growth is there to have.
Awesome. Well, thank you so much. Really appreciate the insights today. Thank you.
Absolutely.
Thank you.