Good morning, everyone, and welcome to Enhabit Home Health & Hospice's Third Quarter 2022 Earnings Conference Call. [Operator Instructions] Today's conference call is being recorded. If you have any objections, you may disconnect at this time. I will now turn the call over to Jennifer Hills, Enhabit Home Health & Hospice Chief Investor Relations Officer.

Thank you, Abby, and good morning, everyone. Thank you for joining Enhabit Home Health & Hospice Third Quarter 2022 Earnings Call. With me on the call today are Barb Jacobsmeyer, President and Chief Executive Officer; and Crissy Carlisle, Chief Financial Officer. Before we begin, if you do not already have a copy, the third quarter earnings release, supplemental information and related Form 8-K filed with the SEC are available on our website at investors.ehab.com. On Page 2 of the supplemental information, you will find the safe harbor statements, which are also set forth on the last page of the earnings release. During the call, we will make forward-looking statements, which are subject to risks and uncertainties, many of which are beyond our control. Certain risks and uncertainties that could cause actual results to differ materially from our projections, estimates and expectations are discussed in the company's SEC filings, including the Form 10 registration statement dated June 14, 2022, and subsequent quarterly reports on Form 10-Q, each of which can be found on the company's website. We encourage you to read them. You are cautioned not to place undue reliance on the estimates, projections, guidance and other forward-looking information presented, which are based on current estimates of future events and speak only as of today. We do not undertake a duty to update those forward-looking statements. Our supplemental information and discussion on this call will include certain non-GAAP financial measures. For such measures, reconciliation to the most directly comparable GAAP measure is available at the end of the supplemental information and earnings release. I would like to remind everyone that we will adhere to the one question and one follow-up question rule to allow everyone to ask a question. If you have additional questions, please feel free to put yourself back in the queue. With that, I'll turn the call over to Barb.

Thank you, Jennifer. Good morning, everyone. Thanks for joining us. I am proud of the progress we have made in the critical areas necessary to set us up for success in 2023. Quarter 3 was our first quarter as an independent company. This is a journey, and we appreciate the commitment of our leaders and our staff as we define and build Enhabit for the future. We remain confident in Enhabit's growth potential as more care is moving to where patients prefer it, in their homes. Let's start with the home health final rule, which was published Monday afternoon. We are extremely disappointed that the final rule included a permanent 7.85% cut to Medicare Home Health Services, which is even higher than the proposed behavioral adjustment of 7.69%. In addition, the temporary adjustments still loom. CMS has not changed their methodology at all, which is very problematic for the industry. 2023 now has a slight reprieve with the provisions in this final rule, resulting in an estimated net increase in home health payments of 0.7%. The industry does not view this as a win, and we will work with our industry partners to determine next steps. Our immediate attention turns to the preserving access to Home Health Act of 2022, introduced by Senators Debbie Stabenow and Susan Collins and representatives Terri Sewell and Vern Buchanan, which would prevent these massive cuts from taking effect in the Medicare home health program until 2026, allowing time for CMS to work with the home health sector to fix their flawed methodology and Medicare rate changes. In the meantime, our Enhabit focus will remain on the things we can operationally do to improve access to patients that prefer their care in the home. As our labor constraints began to ease in the quarter, we…

Thanks, Barb. Consolidated net revenue was $265.7 million for the quarter, down $8.2 million or 3% year-over-year. We estimate the full resumption of sequestration and the continued shift to more non-episodic payers in home health decreased revenue by approximately $10 million year-over-year. It's also important to remember that the impact of these 2 items falls directly to the bottom line. Adjusted EBITDA decreased $11.3 million or 26.3% year-over-year and also includes the impact from lower volumes in hospice, the impact of inflation, incremental, administrative and general expenses as a stand-alone company and the disruption from Hurricane Ian. In our home health segment, total admissions increased 2.7% year-over-year, primarily due to continued strong growth in non-episodic admissions. In the third quarter of 2022, our non-episodic admissions grew to approximately 23% of our total home health visits during the quarter. In the third quarter of 2021, non-episodic patients comprised approximately 18% of our total visits. We estimate the impact of this payer mix shift was approximately $5 million on revenue and adjusted EBITDA during the third quarter of 2022. On a year-to-date basis, we estimate the impact of this payer mix shift has been approximately $16 million. We are pleased with our continued Medicare Advantage volume growth. And as Barb discussed, we are taking steps to demonstrate our value proposition to these payers as we negotiate our contract rates. Our cost per visit in home health increased 5.7% year-over-year, primarily due to merit and market rate increases for clinical staff, increased costs associated with fleet and mileage reimbursement and increased costs associated with the workers' compensation. In our hospice segment, the strategic changes we made to sales and operations are providing positive momentum. As our labor constraints from early in 2022 began to ease, we were able to accept more patients from…

[Operator Instructions] Your first question comes from the line of Joanna Gajuk from Bank of America.

So in terms of actually your comments around 2022 guidance or the reduction of the guidance, so you said that you expect that -- or I guess the non-episodic payer mix continues to be a headwind. So are you saying that you expect that headwind to be higher in Q4? I guess you said that -- I get it like $5 million in third quarter and I guess $16 million year-to-date. Q4, you're saying it's going to be a higher headwind. And then I guess you also said for '23 on the same topic, that you expect this mix to continue to be expected to kind of be stable or accelerate in terms of the headwind year-over-year in 2023.

Yes. Joanna, this is Crissy. Thanks for that question. It's certainly something that we're paying a lot of attention to. As I mentioned in my prepared remarks, 2021, we were at 18% of that payer mix as part of our total visits. Right now, for all of 2022, we expect that payer mix to be at 23%. We believe that we will exit the year slightly higher than that. Fourth quarter is probably going to be something closer to 24%. And then in 2023, again, it's a little too early. We're not going to go too far into 2023 discussions. But again, you can draw your own conclusions just based off the historical facts.

And if I may, a follow-up on the commentary around this new or revised, I guess, MA contracts, the 9 that you highlighted. It sounds like the rates improved, but sounds like not all of them moved all the way to fee-for-service, so just to clarify that. And the second, I guess, how meaningful are those contracts as a percent of your non-episodic business or your MA however you are willing to kind of size up these improved contracts?

Sure. So of the 9, we were able to negotiate 6 of them at an episodic rate. The discount was about between no discount to 10% discount for episodic contracts. On our 3 per visit, the good news there is that our discount averages around 25% versus that current 35% to 40%, so making progress on the discount piece of that. We will have a spread over 14 states with these 9 new regional and multistate plans. I would say the largest volume potential is in 6 of our states. It's hard to talk about volume at this point because at this stage, what we're doing is getting the list out to all of our sales team members so that they can be communicating this to our referral sources so that they know these are new regional contracts that we can now accept referrals on. So certainly hope to have more information on that in the new year but a little too early to say how it will impact the volume.

Yes, I was actually thinking just to quantify like how big these are in your current business, how meaningful those changes on these rates would be for a contract. But I guess the second question here would be like, are you expecting new volumes? But I was actually initially asking about how meaningful are these contracts as a percentage of your business.

I mean it's -- well, they're all new contracts. So it's all new volume. So they don't have an impact on the current rates with current contracts. So these would all be new with new volumes. This is part of more contracts and better contracts.

Okay. Okay. No, that's great clarification. Because yes, I was under the impression that this was existing business that you kind of improved your contracts, and it sounds you have completely new contracts.

Yes, they are.

Your next question comes from the line of Jason Cassorla from Citi.

Just with the 55 net new nursing hires in the quarter, while incrementally positive, the pace of hires slowed from the 96 in the second quarter. So I guess it would just be helpful if you could discuss the pacing of those net new hires month-over-month throughout the course of the third quarter. And then sorry if I missed this, but can you give us an update on the total number of staff in constrained locations? And then just a quick one there. And then maybe just help out, what inning do you think you're currently at in terms of reaching a staffing level that you wouldn't kind of result in capacity restrictions as you define them? So any help there on the hiring front would be great.

Sure. On your first question, certainly, the 55 net new hires was less than we had experienced. We did have a really sluggish quarter on a candidate pool inflow, and that was actually pretty sluggish throughout the third quarter. We didn't really start seeing an increase in our applicants until October. In fact, we were looking at that yesterday. Our nursing applicants for the month of October ended 11% higher compared to the monthly averages in quarter 3. So we're glad to see the actual applicant candidate flow improve. On the restrained locations, home health stayed pretty stable from second quarter to third quarter. Now some of that's because they're not the same branches. They move in and out. Some of them have actually grown to having a constraint so that they need to actually post for additional physicians because they've grown to a level of where they weren't constrained before and now they are. So second quarter for home -- second quarter to third quarter for home health remained stable. On hospice, we actually are down to 11 constrained locations versus 17 in quarter 2. That really speaks to what Crissy was talking about on those positive hires that we saw for hospice. So we are seeing the staffing-constrained locations for hospice improve.

Got it. Okay. And then just as a follow-up on the final 23 Medicare rates with some retreat from the proposed rule. I'm curious if you think the rate development there would impact the home health M&A pipeline, but you've discussed a greater near-term focus on the hospice assets. But any thoughts on the pipeline for home health, just given the rate update would be great.

Sure. I'll comment and then I'll see if Crissy has anything to add. I think it will be interesting to see because certainly, there were many that kind of took a step back with the proposed rule out there. It will be interesting to see if more come online now because obviously, there's not -- there's clarity for it next year but not for future at this point. They're already feeling not only the constraints of labor but also the impact of that MA shift even for the smaller mom-and-pop agencies. So I do think it will be interesting to see if we see an increase in the pipeline for home health. And I'll let Crissy add to that.

So you're absolutely right. I think our pipeline is geared a little more towards hospice right now. And as Barb mentioned, we are prioritizing opportunities that offer the greatest growth opportunity for our business. When we look at these opportunities, we're looking at Medicare beneficiaries in the market, opportunities for scale and density in that market. overlap with existing service lines. And now especially we've added staff availability when we're looking at markets, that's a critical success factors. Specific to home health, we do believe that the reimbursement uncertainty and that continued shift to the lower-paying Medicare Advantage contracts may push them to market. Those sellers are going to have to acknowledge the reimbursement uncertainty and its impact on multiples, especially the onesie, twosie smaller players. So we're certainly not taking home health opportunities off the table, but we are scrutinizing them more on currently.

[Operator Instructions] Your next question comes from the line of Brian Tanquilut from Jefferies.

I guess my question for you guys, first, Crissy or Barb. As I think about the long-term guidance ranges that you provided pre-spin-off completion and where we stand today? I mean how are you thinking about some of the growth rates that you have provided in the past? And maybe looking past some of this near-term volatility, I mean, how are you thinking about the business in general in terms of the opportunities to grow organically and get some margin expansion and recovery from here?

Yes, Brian, this is Crissy. I really appreciate that question and the focus on the long term and not the near term. The factors that combine to support the long term really haven't changed. It's the efficacy of home care. It's undeniable. The continuing to grow preference for home-based care, the cost efficiency of home-based care. The demographic tailwind, all of those factors remain in place and haven't changed. We have a long-term target out there of home health volume growth at 10-plus percent. Within our home health service line, we believe that our use of care transition coordinators, our geographic coverage, our willingness and ability to treat high acuity and polychronic patients. All of those factors makes us an attractive partner in preferred provider arrangements and with referral sources. In addition, as you've heard us say numerous times, our hospital readmission rates are over 300 basis points lower than the national average and they're lower than our peers. And that drives value to payers and makes us a provider of choice. And so we believe that there will be industry consolidation opportunities that we just talked about. That's going to be fueled by reimbursement uncertainty, all the factors that we've already talked about. And then we think that's going to play well into our multifaceted home health growth strategy. In regards to hospice, that target that you mentioned is 10% to 15% volume growth. We believe hospice is a significant area of opportunity for us. Hospice use among Medicare beneficiaries has grown substantially in recent years and still is underused by those that are eligible for it. And we believe that the changes we're making in our hospice business, such as the new staffing model that we've talked about, the diversification of referral sources, all of those factors, we believe, sets us up for success in that growing area. So for these reasons, we really haven't taken the long-term admissions growth targets off the table at this time. I think the key success factors to achieving those long-term targets include recognition of the value proposition by Medicare Advantage payers, things that lead to episodic rates. So near term, higher per-visit rates longer term, episodic rates. It's going to be dependent on our ability for -- to be acquisitive. And then, of course, our de novo strategy plays a part in that as well. So again, at this time, we continue to support those. We'll continue to monitor those and provide an update to the investment community as part of our Q4 and 2022 earnings call in February.

And Brian, I'm just going to add to what Crissy said. I mean, it's why we are putting such a focus on the recruitment and retention. Obviously, early on, it was on comp benefits. Now it's more on flexibility and opportunities for growth because as Crissy mentioned, I think the growth is all there. We have to staff so that we can have that growth.

Got it. Okay. And then I guess shifting gears a little bit here since you mentioned MA and congrats on getting some of these new contracts. But as I think about your existing MA business, I know it's heavy per visit right now, right? So just curious, what are those conversations like with some of the existing clients in order to try to drive that rate growth? Because obviously, that's where a lot of the growth is coming from, at least in the post-acute discharge, it seems like it's heavily weighted to M&A. So just curious what the strategies are there? And then what the conversations are like?

Sure. So well, I think the one thing to note that I've certainly learned with my time spending, especially with the NASH to the large plans, is that while they do verbalize interest in value plant, value-based agreements, episodic or case rates, they do also remain today, very focused on their unit cost -- and so, for example, with one of the national payers right now, we're having discussions on could we pilot in one of your regions where you're struggling with access issues, could we pilot whether it's a higher per visit or episodic or some other rate structure to, a, prove that you would have improved access for your members, but also then use that data to go back and kind of get away from this unit cost and look at how does it really impact overall cost. So we're offering different things, including a regional pilot just to be able to try to move things along quicker with particularly the national payers. I would say, though, that one of the things that we do use, though, is we use the plans that we have to try to continue to try to grow episodic. So for example, when we look at referral sources that sends us both UHC and Medicare, those referral sources sent us 3% more Medicare year-over-year in quarter 3. Now they did send us 210% more UHC, but it's the positive growth that we saw from those referral sources in Medicare, and that's what we need to continue to be focused on in our markets.

There are no further questions at this time. Ms. Jennifer Hills, I turn the call back over to you.

Thank you, Abby. A replay of this call will be available on our website. Thank you again for joining today's call.

This concludes today's call. You may disconnect.