Chemed Corporation (CHE) Q3 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Chemed Corporation's Third Quarter 2019 Earnings Conference Call. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Sherri Warner, Investor Relations. Please go ahead, ma'am.

Good morning. Our conference call this morning will review the financial results for the third quarter of 2019 ended September 30, 2019. Before we begin, let me remind you that the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 apply to this conference call. During the course of this call, the company will make various remarks concerning management's expectations, predictions, plans and prospects that constitute forward-looking statements. Actual results may differ materially from those projected by these forward-looking statements as a result of a variety of factors, including those identified in the company's news release of October 29 and in various other filings with the SEC. You are cautioned that any forward-looking statements reflect management's current view only and that the company undertakes no obligation to revise or update such statements in the future. In addition, management may also discuss non-GAAP operating performance results during today's call, including earnings before interest, taxes, depreciation and amortization or EBITDA and adjusted EBITDA. A reconciliation of these non-GAAP results is provided in the company's press release dated October 29, which is available on the company's website at chemed.com. I would now like to introduce our speakers for today: Kevin McNamara, President and Chief Executive Officer of Chemed Corporation; Dave Williams, Executive Vice President and Chief Financial Officer of Chemed; and Nick Westfall, Chief Executive Officer of Chemed's VITAS Healthcare Corporation subsidiary. I'll now turn the call over to Kevin McNamara.

Thank you, Sherri. Good morning. Welcome to Chemed Corporation's Third Quarter 2019 Conference Call. I'll begin with highlights for the quarter, and David and Nick will follow up with additional operating detail. I'll then open up the call for questions. Consistent with the first half of the year, our third quarter 2019 operating results were very solid and at the higher end of various operational metrics for both VITAS and Roto-Rooter. In the quarter, Chemed generated revenue of $481 million, an increase of 8.2%. Our consolidated net income in the quarter, excluding certain discrete items, was $3.46 per diluted share, an increase of 12.7%. VITAS' admissions have continued to strengthen throughout the year. In the third quarter of 2019, we admitted 17,131 patients in the quarter, which is 4.4% above the prior year and compares favorably to the second quarter 2019 admissions growth of 3.8%. Our Average Daily Census expanded 6.3% in the quarter, and our adjusted EBITDA, excluding Medicare Cap, increased 6.7%. Roto-Rooter continues to show strong growth in our core plumbing and drain cleaning service segments. As discussed on prior earnings calls, our water restoration business has remained strong, but the average growth rate has leveled off as we reached full penetration in the water restoration capabilities in all of our locations. We continued to pursue several Roto-Rooter operational initiatives that in the short term have modestly increased our field operating costs. These expenses are primarily in the areas of increased field labor headcount as well as increased hiring and training costs. However, the most significant impact on our current operating margins is the direct result of our Roto-Rooter acquisitions that initially generate operating margins that are substantially below our Roto-Rooter operating metrics. As most of you are aware, in October 2018, we completed the acquisition of 5 Northern California franchise territories that service a population of approximately 4 million people and generate annual revenue of roughly $22 million. In July 2019, we acquired the franchise territories serving Alameda County and portions of Southwestern San Joaquin County in California. These acquired territories had annual revenue of $11 million and serve a population of approximately 1.7 million people. In September 2019, we completed the acquisition of the franchise territories held by our largest independent franchisee. The franchise territories include the Metro Los Angeles area, which includes Inland Empire, San Fernando Valley, San Gabriel County and Orange County. In addition, we acquired territories in San Diego, California; Dallas and El Paso, Texas; Phoenix, Tucson and Florence, Arizona; Salt Lake City, Ogden, Park City and Provo, Utah; as well as Portland and Salem, Oregon. Collectively, these Roto-Rooter locations serve a population of approximately 32 million people with initial aggregate revenue base of approximately $70 million. These acquisitions are immediately accretive to earnings, however, initially gross margins, EBITDA margins, pricing and mix of service offerings in these acquisitions are significantly below the average of our existing Roto-Rooter portfolio. Depending on the size, scope and existing operation practices of these acquisitions, it typically takes months to over a year of reengineering and infrastructure realignment to get newly acquired territories to perform at the level of our average Roto-Rooter operational benchmarks. I'm exceptionally optimistic that once our restructuring and reengineering of these acquisitions is completed, these territories will have overall operational performance that is equal to or above our current Roto-Rooter portfolio average. With that, I would like to turn this teleconference over to David.

Thanks, Kevin. VITAS' net revenue was $322 million in the third quarter of 2019, which is an increase of 6.6% when you compare it to our prior year period. This revenue increase is comprised primarily of a geographically weighted average Medicare reimbursement rate increase of approximately 0.5%, a 6.3% increase in days of care and a reduction in the Medicare Cap billing limitation that increased revenue 0.2%. This growth was partially offset by slight acuity mix shift, fluctuations in net room and board pass-throughs and contractual adjustments, the combination of which negatively impacted this revenue growth by approximately 0.4% when compared to the prior year period. Our average revenue per patient per day in the quarter was $188.02, which is 0.4% above the prior year period. Reimbursement for routine home care and high acuity care averaged $164.39 and $755.38, respectively. During the quarter, high acuity days of care were 4% of total days of care, relatively flat or about 7 basis points less than the prior year quarter. In the third quarter of 2019, VITAS accrued $1.3 million in Medicare Cap billing limitations. This compares favorably to the prior year Medicare Cap billing limitation accrual of $2 million. At September 30, 2019, VITAS had 30 Medicare provider numbers, three of which have an estimated government fiscal year 2019 Medicare Cap billing limitation liability of approximately $9.6 million. The third quarter 2019 gross margin, excluding Medicare Cap, was 23.4%, which is a 9 basis point improvement when compared to the third quarter of 2018. Our selling, general and administrative expense was $22 million in the third quarter of 2019, which is an increase of 7.7% compared to the prior year quarter and effectively the overall increase in SG&A on a year-to-date basis is roughly equal to our revenue growth. Our adjusted EBITDA, excluding Medicare Cap, totaled $54.3 million in the quarter, which is an increase of 6.7%. Our adjusted EBITDA margin, excluding Medicare Cap, was 16.8% in the quarter, which is a 5 basis point margin improvement when compared to the prior year period. Now let's turn to the Roto-Rooter segment. Roto-Rooter generated quarterly revenue of $159 million in the third quarter of 2019, an increase of 11.6% over the prior year. Revenue from our water restoration service segment totaled $25.7 million, an increase of 3% compared to the third quarter of 2018. A portion of Roto-Rooter's third quarter revenue growth is from the acquisitions Kevin discussed earlier. In most cases, it's relatively easy to carve out the revenue and profitability impact from individually acquired territories. However, given the size of these territories and the number, some acquired territories were fractured and merged into existing branches, merged into other acquired territories, combined with existing independent contractor territories or converted into a new independent contractor. Roto-Rooter recognizes revenue of approximately 20% to 25% of street sales when the territory is run by an independent contractor versus a company owned and operated territory. This process of redefining geographic territory sizes as well as merging portions of acquired territories into existing territories makes measuring revenue growth, excluding acquisitions, difficult and in some cases impossible. Within this limitation, we estimate the positive third quarter 2019 revenue impact from these acquisitions to be in the range of $6 million to $8 million. This would result in estimated third quarter 2019 unit-for-unit Roto-Rooter revenue growth to be in the range of 6% to 7.4%, still very healthy revenue growth on our core business. Roto-Rooter gross margin in the quarter was 49.2%, a slight increase when compared to the third quarter of 2018. Adjusted EBITDA in the third quarter of 2019 totaled $39.8 million, which is an increase of 17%. The adjusted EBITDA margin in the quarter was 25%, which is a 116 basis point margin expansion over the prior year. In addition, as most of you are aware, we reissued our guidance after we reported the second quarter of 2019, and we continue to maintain that margin through the end of this year -- the guidance through the end of this year. I'll now turn this call over to Nick Westfall, Chief Executive Officer for VITAS.

Thanks, Dave. I'd like to start by thanking all of our VITAS team members for delivering another excellent quarter. In the third quarter, our Average Daily Census was 19,086 patients, an increase of 6.3% over the prior year. Total admissions in the quarter were 17,131. This is a 4.4% increase in admissions when compared to the third quarter of 2018 and compares favorably to our second quarter 2019 admissions growth rate of 3.8%. During the quarter, admissions increased in all 4 of our preadmit locations. Hospitals, which typically represent roughly 50% of our admissions, increased 5.2%. Home-based admissions increased 1.8%, assisted living facilities increased admits by 1.8%, and nursing home admissions expanded 8.1%. VITAS' average length of stay in the quarter was 92.6 days. This compares to 91.1 days in the second quarter of 2019 and 90 days in the third quarter of 2018. Our median length of stay was 17 days in the current quarter and compares to the 18-day median in the prior year quarter. On a year-to-date basis, median length of stay is 16 days and is equal to the prior year. Median length of stay is a key indicator of our penetration into the high acuity sector of the market. With that, I would like to turn this call back over to Kevin.

Thank you, Nick. I'll now open this teleconference to questions.

[Operator Instructions]. And our first question will come from the line of Joanna Gajuk from Bank of America.

So first, couple of questions on the quarter. So clearly hospice admissions were up very nicely and accelerated to your point from the growth in Q2. So could you just frame us -- frame to us a little bit what would you attribute to? Are there any variation between regions or any drivers you would point to there?

Yes. Joanna, I'd say -- this is Nick. Collectively, across the board, we saw a nice lift up across the country in all regions and well, it is good sequential growth. We still believe there is room for improvement, and that's consistent inside of our guidance. So a different way to say, to use a Roto-Rooter analogy, the phones are ringing, patients are being referred to us, we're differentiating ourselves in the marketplace by being a good partner to those referral sources and the patients and families. So we have an expectation of a continued trend hopefully around this level.

Right. And I guess, on that front, it sounds like there was no really any disruption in your Florida market around some weather patterns this quarter, right?

Well, I mean, with that being said, there was a disruption with Dorian and all the preparation that our team was ready for. By definition, those markets, really, and the referral flow shuts down for about what was about a 3- to 4-day window with it. However, we don't go into running the calculus around exactly what we would anticipate that impact to be because, one, obviously, it didn't make landfall, but it was disruptive for 3 to 4 days definitely across various segments of Florida.

And for that period of time, it tends to cost us Average Daily Census, but we get those patients usually eventually in Florida. But the other thing that I would say is, it's hard to talk about weather events, which -- both our service businesses are affected by weather events. I mean, for instance, in a quarter, we're not going to talk about the wildfires in California, which now we have substantial California operations. I mean, there's branches that are closed, servicemen that are -- can't get from one -- can't get into the office from where they live, that type of thing. But we tend to not highlight those just because they are never ending and how they compare from one year to the next. So we try and look through that. But that's really a question -- but it really is a question on Florida, there's probably going to another disruption in the hurricane season next year in Florida.

And our goal, Joanna, with our team and our prep is to really be prepared for all of those and ensure we're up, operational and ready to take patients as soon as the healthcare systems are back up and operational themselves. And at the same time, we're caring for all the patients we currently have on service to tuck them in and make it through the storm and focus on their experience and still continuing to deliver care during those events.

Right. That's what I was getting at, that despite any potential disruptions and what not, this admission number was pretty good. So I just want to -- I am going to hear it from you whether -- how you think about these seasonal variations, but just to stay on VITAS, just to close it off because margins were still pretty good in that segment. So can you talk about wages and labor and kind of anything you see in there, anything is changing or is status quo? I mean, obviously, you are doing pretty good job managing it. So can you just maybe flesh a little about that team?

Yes. So all the different approaches we have not only for wages, labor, managing headcount, balancing efficiency, that approach just continues to work for us, the strategies continue to work for us, and we're constantly trying to improve attraction and retention of quality resources, which drives things more than just wage fluctuations as well. So we're doing a good job competing on the labor front. It's a market-by-market challenge. But altogether, we feel good about where -- our game plan and executing on that game plan and what that means for us for the foreseeable future.

So what would you say is your kind of all in wage inflation is in that segment?

It's roughly 2%. It's market-by-market dependent, and we're all constantly balancing that out around need along with balancing out around being cognizant of pricing increases, so that we can continue to maintain a consistent and predictable margin like you were referring to that you've seen throughout the course of the year and continued it in the third quarter.

Right. And then, I guess, in terms of the margin, so Roto-Rooter margins, adjusted EBITDA was pretty good 25%. I guess, it's a pretty good margin there. So how should we think about that? I mean, I understand your point about when you acquire, especially the larger assets here that come in at lower margins that has some impact there, but obviously 25% doesn't really feel like you -- doesn't really seem like you felt any meaningful impact there. So can you maybe help us kind of size up the magnitude of things in terms of how these margins could defer. I mean you mentioned substantially below, but is it sort of 10% or is it higher, kind of give us maybe a little bit of color there? And also how should we think about the margin progression in terms of is it kind of like a smooth line or if there is a step-up in year 1 as you kind of improve pricing and then kind of grows from there? So any color, I guess, of how we should think about the margins for Roto-Rooter segment going forward?

Well, let me start by giving -- this doesn't answer your question directly, but it leads to it. As we reported, we already have several operations in -- that we have in California. One that Northern California, we've had for many years, couple more around San Francisco that we purchased. Our -- the way we look at it is our sales per population, that is per person. The California ones do very well, they are above our national average of $4 per person, per population. When you do that, it means you are hitting -- kind of hitting on all cylinders, you are providing restoration services, plumbing, excavation, you do Internet marketing. Well, the most recent acquisition, one half of it is in California, that is it's in Los Angeles County, Orange County, San Diego, those sales are $2 per pop, per person. Our goal obviously is to gradually increase that to the company average or above, as we said, let's say, $4 or $4.50. How do we get there? We get there by scientifically pricing the service by doing Internet marketing, by providing full excavation services. And again, we have confidence that we will do that, and I think in the Presentation Day we said that, that takes us -- the expectation is a good solid year to do that. What will we see during that year? We'll see on the acquired business, the margins go fairly substantially on that part of the margin. And it's -- all we're saying is why we were in that process, but you see, what we're really doing is we're doing a lot of different things. We're doing pricing, marketing, additional services, we're moving the call center for that size of the business. We're doing all that in the course of the year. And all Dave is saying really is that there will be a little bit of a headwind on the margin for Roto-Rooter because it's bigger than -- the recent -- the acquisitions in the last 6 months are a little bigger than a bread basket for us. So they will have an effect. But it will be a fairly clear road to getting sales per population to our expected level, and Roto-Rooter has done an excellent job in going from the sales line to the EBITDA line with some real projectability. So David anything to add to that?

So our challenge, and I know all you guys are going to have very detailed models when we come up with our 2020 guidance, and it was very fortuitous for us that we actually completed the largest acquisition we've ever done in September of this year because that gives us now 90 days to actually truly kick the tires and look at the process and the sequencing we have to do to what I would call rebuild these territories. And it's going to be a challenge even for us to predict the moving improvement of margin of Roto-Rooter as we go through all of 2020. So we really need the next 90 days of Roto-Rooter to perform and as we develop our 2020 business plan, and then, we'll be able to give you a little more guidance on the margin improvement we anticipate Roto-Rooter will enjoy throughout 2020. But that's just a long way of saying is, we've never done an acquisition this large, although we've never had a failed acquisition in Roto-Rooter's history. So we know we're getting -- we're going to get there. It's a question of when and how fast, but frankly, Joanna, we're more concerned about getting that done right and getting it done sustainably and we are getting it done quickly. So we're going to try to dampen expectations on the contribution of these acquisitions in 2020 and hopefully everyone will be pleasantly surprised by the speed that we can integrate these in.

Well, let me give you one clear example of what we're talking about. Let's say in -- and I won't mention the same, but one particular market in California, it's probably priced 60% too low, 50% to 60% too low. We're not going to increase the price in one fell swoop. It probably should be, but from a market standpoint, we're not going to do it in one fell swoop, but we'll do it in -- we'll do it regularly and consistently, and it will take us some time to get there, but that's an identified clear area that is going to take some work and we're, as Dave said, as example, the type of thing, that we're eminently confident that Roto-Rooter is going to pull off.

All right. That's helpful. And then so the last question here on this business. So the water restoration revenues were up, call it, 5% year-to-date. So is that a sort of organic growth we should think about for this business outside of, obviously, you're expanding to acquire -- any acquired territories?

The short answer on unit-for-unit, yes. We would really expect our water restoration to grow at the same rate as our core business. Now we have the acquisitions to layer on, and the acquisitions that we have done really, starting with last year, they had very minimal water restoration work. And there are some challenges in the California market related to require deductibles for California homeowners. But with that said, we would expect the acquisitions over time to actually [indiscernible] increase the growth rate of water restoration, but again, once we have full penetration on capabilities in the acquired markets for water restoration, it will still trip back down to our core growth rate, which we think is sustainably 4% to 6%.

And our next question will come from the line of Frank Morgan from RBC Capital Markets.

I guess, I'll ask on capital allocation. I noticed no share repurchases in the quarter. Given the fact that you've completed these acquisitions, kind of what is your thinking now over the next year as you integrate the Roto-Rooter transactions in terms of just overall capital allocation, whether it's buybacks or additional acquisitions?

We'll do that, Frank. And I'll turn it over to Dave. But I'll say, generally speaking, as you mentioned, in this particular quarter, we've been obviously making the biggest acquisition we've ever made and whatnot, but it still hasn't put us in a cash hold. I mean, generally speaking, we look to use our free cash flow for, as we've said, acquisitions, share repurchase, dividend. This just happened to be a quarter where we were very active on the acquisitions side. We fully intend to continue our share repurchase program if our earnings level and the price level remains accretive. We'll continue to increase our dividend, but no real change in there. But you just see -- as you noticed in the actual quarter, we flipped a little bit and were a little more active in the acquisitions side than we were on the stock repurchase side. David, anything to add to that?

Yes. To a certain degree, we're actually just demonstrating what we've been talking about for several years. We're always looking at capital allocation, and we have a hierarchy. Typically, the first and best use of capital is to buy capital equipment, fixed assets, because that is a phenomenal return. Again, we can demonstrate water restoration initially had a return of about 6 months before we got our capital back. But obviously, there's only so much capital we can put out there in fixed assets. But then the second thing we always look at, but traditionally we've been passing on is acquisitions, primarily because after you risk adjust the price of that acquisition, the return isn't adequate. But this time, with the Roto-Rooter acquisitions, we consider it the best use of capital and so just on the most recent one, HSW, was $120 million. Then the third thing we look at is share repurchasing. And we're -- as a general statement, we like to redeploy all the capital we produced or anticipating producing in any given year, but we are prepared to accelerate that if the time is right. So we'll spend more in capital deployment than we generated in any given year. But it's really all of the above. We want to do acquisitions, but only when the return risk-adjusted, we consider, passes our hurdle rate. And then we go to share repurchasing and other cash needs, but we're also prepared to pile cash on our balance sheet and not do acquisitions and not do share repurchasing if we think that's in the best -- the best use of our capital, not doing anything. So we'll continually look at this hierarchy, but by no means are we shying away from our share repurchase program.

Got you. I think you commented about the strength in the admissions was fairly broad-based from a geographic standpoint. And I was just curious, I think you made some reference to how you're differentiating yourself in those local markets. I'm just curious, more color around that -- what is that differentiation? And how does that impact that referral process?

So a little bit more color -- commentary on that, Frank, is, and it's something we have been continuing to execute on and have put in place over the last few years. So it's not brand-new, but what we really look to do is evaluate the referring entities based upon what -- the value proposition of what they're looking to get out of it. Right? So if it's a hospital system compared to a specialty physician, some of their needs, wants and appetite for involvement, right, with that patient flow are different. So what we're really just trying to do and take and be really prescriptive on is translate the conversation from why hospice to why VITAS, still protecting patient choice and everything else. And we're doing a good job at that in the various markets, and our partners and the larger partners are really -- that seems to really resonate with them. So we hope that, that game plan still continues to work where we're differentiating ourselves as a provider because the awareness around the value proposition of the hospice benefit is expanding throughout the country, and we're just looking to take advantage of that in serving every appropriate patient we can across every market we operate.

[Operator Instructions]. And our follow-up will be from Joanna Gajuk from Bank of America.

Yes. So just a couple of questions. So in terms of some of the, I guess, efforts around hospice on the, I guess, legislative or regulator front, so there is this Primary Care First Payment Model, right, CMS wished to delay the start of it, but any thoughts on that program? I know it's a demonstration in certain market. So is there anything in there for VITAS to participate? Do you plan -- like, how do you view those kind of efforts by CMS? And how Chemed is planning to get involved in those?

So Joanna, let me start with the last question right around how we view them. And then we don't typically comment specifically on each of those different demonstration projects. There are a lot of them out there, a lot of them proposed, but how we view them in general is, all demonstration projects that are really identifying, like I had referenced before, the value proposition of hospice and how to get more people into hospice and earlier when they are appropriate, obviously, we're in support of and are active participants in helping to be available to provide any insight to the legislative and policymakers to do that. Related specifically to the Primary Care First Model, and there is different variations with it and with the delay, we're constantly evaluating in each of those markets what the real potential is and also what the construct of that model looks like. So without commenting individually on each of the models, no, it is something that we look at, we evaluate, we consciously decide whether we're going to participate or not, and we're consciously going out to those markets to evaluate if there is a partnership that's required with it, do those make sense? But I think the other comment you can make historically with some of these demonstration projects is, while there is a lot of activity inside of them, for a company of our size, there has never been enough involvement in those to move the needle substantially and strategically from a results perspective and the total number of patients served. And if that were to be the case, we'd update our guidance and speak specifically towards it. But it's a lot of activity, but just as many models, that's the reason there is a demonstration, there is an evaluation as to whether or not they're successful or not and therefore want to be implemented long term.

Right. And I guess the other proposal that's out there somewhat different there, in terms of the carving of the hospice benefit into MA. So what's your position there? And I guess, when we'll be hearing on this from CMS? Because I guess, this is also proposed for not next year, but the year after that, it's also a demo and it's limited markets. So kind of any views there? And also the timing of when we might hear what CMS actually decides to go with?

This is Dave. I'll comment, and then Nick, I'm sure, will have some thoughts as well. So we're actively dialoguing with CMMI, who's basically coming up with these innovative models, and we're at it on 2 ways. VITAS is doing it directly with CMMI as well as we are actively and deeply involved with the National Hospice and Palliative Care Organization, and we're also on the special committee formed to also interact with CMMI and help them develop a very thoughtful model that's going to be designed to ferret out all of the concerns, all the positives and, frankly, all of the negatives that could result in by including the hospice benefit within Medicare Advantage. And it's kind of the most simple things on the face of it, but actually is fairly complex. So we're actually encouraged that CMMI has slowed this down a bit and is carefully considering all input as they develop the model.

Only other comments, no different than the Primary Care First is, we're encouraged about twofolds. One, the recognition of the value proposition of hospice and what it means for the future of the country's health care. And the second piece is, we're encouraged on their degree and openness to collaborate, ask questions and do it at a methodical pace so that there is not any grossly negative unintended consequences because, I would say, even from a bipartisan perspective, nobody wants that. And when we're talking about a seriously ill and elderly population, we can't afford to do that as a country. So I don't know if that answers your question or not, Joanna, but I think that's what we're trying to do.

Right. No, I appreciate it. That's definitely a proposal that I just want to hear, know your thoughts, where you stand on things. And it's also good to hear that CMMI is responsive and working with you and the association on developing the right structure for that demonstration. So I appreciate the color. And the last, I guess, topic just to wrap it up. In terms of the guidance that you issued -- at the time you issued in August before -- or after the final hospice operation came out. So I know that you're not providing the guidance for next year yet. But can you frame for us sort of if you -- if we were to annualize the rebasing impact for the company, can you size it up for us? Also can you phrase for us the different offsets? So I understand there is the gross impact from just higher rates from inpatient and continuous care? Obviously, there is offsets because of the pass-throughs, so maybe that's, call it, a couple of million, maybe $4 million annually. And also obviously Medicare Cap limitations. So kind of how should we think about kind of broad-strokes numbers for 2020 of the impact from -- of the rebasing?

I'll start, then jump in. This is a Kevin. We're not going to do too much that it's difficult. And to be honest with you, aside from the fact that there might be some -- perhaps some issues there, we will -- we -- until we get a month or 2 under our belt, I mean, there is so many moving parts it would be speculation on our part. I mean, obviously, the rebasing is very positive to VITAS. And we'd try to give some indication, at least a gross amount of the positive aspects. There is always unintended issues that change the gross and the net. We don't know -- I mean we don't have a month's results in on it, just to see the first month and see how it starts to shape down. But -- so we're not being quiet. We don't even know other than we've given some -- previously, we've given some indication of the -- some of the gross positives, but Dave, anything you want to add to that, but you're not -- we're not in any position to talk about than that.

No, but what we can talk about is what we used to develop the fourth quarter guidance in 2019, and we expect something slightly north of a 6% aggregate price increase for Medicare business. But remember not all of our business is Medicare/Medicaid, but slightly north of 6% for the Medicare, but as well as we already had, remember, 1.5% increase dialed into our 2019 guidance. So -- but slightly north of 6% is obviously a very significant increase. However, as part of our updated guidance, we said this increase to the extent it happens in the 3 markets that we already have a cap liability, by definition, our cap has to go up. And this in the short term could actually slightly put in 1 or 2 programs barely in the cap as well. So we would actually, conservatively, we estimate, with a slightly more than 6% increase in Medicare reimbursement, we anticipate our cap going from roughly $9 million to $18 million for the run rate which, of course, will dial down as we turn around and rightsize the mix of our admissions in various programs. So I think the safe -- the headline number that we use for the fourth quarter would be about a little over 6% increase for Medicare reimbursement and about a $4.5 million run rate for Medicare Cap billing limitations per quarter.

And then any offsets from the pass-through?

We're not going to go into that kind of granular detail until we give full year guidance in 2020.

Thank you. And I'm not showing any further questions at this time. I would like to turn the call back over to Kevin McNamara for any closing remarks.

All right. Thank you very much for the questions. We thought we had a very solid quarter, and I want to thank everyone for their attention, and we'll be back in February with our fourth quarter results and our guidance for the next year. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.