Good morning, everyone, and welcome to Enhabit Home Health & Hospice's Third Quarter 2023 Earnings Conference Call. At this time, I’d like to inform all participants that their lines will be in a listen-only mode. After the speakers’ remarks, there will be a question-and-answer period. [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 Jordan Loyd, Enhabit Home Health & Hospice Director of Investor Relations.

Thank you, operator, and good morning, everyone. Thank you for joining Enhabit Home Health & Hospice's third quarter 2023 earnings conference 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'll 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 SEC's filings under the Form 10-K and subsequent quarterly reports on Form 10-Q, each of which will be available on the Company's website once filed. We encourage you to read them. You're 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 these 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 the earnings release. I would like to remind everyone that we will adhere to one question and one follow-up to allow everyone to ask a question. If you have additional questions, please feel free to rejoin the queue. With that, I'll turn the call over to Barb.

Thank you, Jordan. Good morning, and thanks for joining us. Let me open by thanking our 11,000 employees. This is an incredibly dynamic operating environment, and I'm so proud of our staff remaining focused on providing a better way to care for our patients, their families and each other. We are excited to be listed as number 42 in the U.S. News' Best Health Care Companies to Work For. U.S. News ranked the top 379 publicly traded companies spanning 20 industries, analyzing publicly available employee sentiment and other data that demonstrates how a company supports the everyday experience of its workers. Recognitions like this are important and reflect our commitment to our team and their commitment to our patients. I want to remind everyone that the purpose of today's call is to discuss our financial and operational results and outlook. As previously announced, we commenced a strategic review process. Our Board is conducting a thorough process with the assistance of our advisers, and discussions with interested parties are ongoing. We will not be commenting beyond that, and so we ask that you keep your questions focused on our business and our results. We have a lot of important updates to discuss with you today, including the final home health rule, continued improvements in labor recruitment, retention and cost and progress with payor innovation. Let's begin our updates with the final home health rule. CMS finalized a permanent adjustment cut that will result in a negative 2.6% impact, offset by a positive market basket update of 3.3%. After productivity adjustments and fixed dollar loss ratio adjustments, the result is a positive 0.8% versus the proposed negative 2.2%. The continued march of these cuts where the home health community does not know what to expect from Medicare year after year is not…

Thanks, Barb. Consolidated net revenue was $258.3 million for the third quarter, down $7.4 million or 2.8% year-over-year. Adjusted EBITDA was $23.2 million, down $8.5 million or 26.8% year-over-year. We estimate the continued shift to more non-episodic payors in home health, decreased revenue and adjusted EBITDA, approximately $8 million year-over-year. In our Home Health segment, total admissions increased 1.6% year-over-year, as continued strong growth in non-episodic admissions offset a reduction in episodic admissions. Our non-episodic visits grew to approximately 31% of our total home health visits in the quarter. This represents an approximate 800 basis point increase year-over-year and is consistent with the percent we reported in Q2 of 2023. While we are making significant progress demonstrating our value proposition to payors as we negotiate new agreements with improved rates and are successfully shifting Medicare Advantage volume into our payor innovation agreements, the revenue and adjusted EBITDA impact from this volume shift has not been enough to overcome the financial impact from the erosion of Medicare fee-for-service volumes. We estimate the impact of this payor mix shift was approximately $8 million, net of the impact from improved pricing and payor innovation contracts on revenue and adjusted EBITDA during the third quarter. In our Hospice segment, admissions decreased 3.4% year-over-year, while average daily census decreased 2.8% year-over-year. Sequentially, admissions increased 1.6% over the second quarter. Our monthly average daily census trended up each month of the third quarter and this positive trend continued in October. This is the first positive trending we've experienced since November of last year. And as a reminder, the hospice final rule for fiscal year 2024 went into effect on October 1, 2023, and is expected to increase our reimbursement rates by 2.9%. Over the past two quarters, you've heard us talk about the diversification of our…

[Operator Instructions] Our first question will come from the line of Brian Tanquilut with Jefferies.

Crissy, thanks for all the color that you shared with us. So maybe just to kind of like dig a little deeper into some of these comments. As I think about cost per visit, what do you think operationally you guys will need to do between now and into next year to drive EBITDA growth, especially as we think about the CPV line?

Well, I think, again, it gets down to productivity and optimization, Brian. We really focus on the density and scale of our markets. And we've demonstrated our ability to offset that 3% wage increase even in 2023. And again, we expect to continue to do that in 2024, again, as our volumes continue to grow.

And Brian, I'll add to that. I think the other thing to keep in mind is that we did use more contract labor this year, mainly because we had success with hiring. So as we've kind of talked about before, we tended to use contract labor more when we knew that there was an end in sight in employees coming out of orientation. So being able to now get rid of that by the end of the year will also create an opportunity for us on that cost per visit in 2024.

That's really helpful. And then maybe I just think about the top line, right? And your comments on fee-for-service volumes and the new payor innovation contracts. How do you think, number one, how should we think about the remaining opportunity to drive new contracts into the system? And then within the existing contracts, obviously, there's a ramp there. How should we be thinking about the runway left on that ramp and what the right sort of mature level would be for some of these wins that you've had over the last year?

Yes. I mean I would say, other than the national agreement, many of these are at a regional level. So it's really hard to give numbers consolidated when we look at so many of the regional contracts that cover multiple states. What I would say is that the branch directors and the business development folks in each individual market have now the tools in place to be able to prioritize that. We also have gotten continued feedback from our sales team in the field on what other payor agreements would be helpful to be on to be seen as a more full-service provider. So in addition to our success, we still have another 40 contracts in our pipeline that are being worked today. So again, it's about really the execution at that local level on driving the volume, not only into the new payor innovation, but to utilize that longer list of payors that we can take to also continue to earn that fee-for-service business.

Your next question comes from the line of Joanna Gajuk with Bank of America.

So I guess a follow-up to the comments around the Medicare rate update, right? So you said 1.2% and the wages growing 3%. So you're saying essentially, you assume the volume growth will help you offset or -- that 3% cost inflation, right? And in the end, the combined entity, you expect EBITDA to grow. Is that a way -- how to think about it?

Well, certainly, I think as we look to giving guidance in 2024, we'll certainly have more details around them. But I would say it's volume growth, it's continued focus on productivity and optimization. It's getting rid of all the contract labor and then it's also the visits per episode that we rolled out in Medalogix Pulse to all of the locations by the end of the third quarter. So there will be kind of a combination of the offsets that we'll have a lot more color on as we prepare for '24 guidance.

Obviously, understood, yes, there's going to be a more detailed guidance, but to figure it, I just asked that. And then my other question, and I guess a follow-up to some comments around pricing and then in segments. In the slides, you talk about revenue reserves, I guess, benefiting the pricing in segments. So what was this, I guess, benefit, I guess, in the quarter in millions of dollars? And how should we think about this impacting Q4, if at all?

Yes. So Joanna, remember that in the spring of this year, we disclosed a material weakness in regards to our accounts receivable reserves and revenue reserves and took a $12 million adjustment in the fourth quarter of 2022 based off of that analysis. We noted at the time that as we continue down the path of remediating that material weakness and redesigning our controls around that process, that if and when we got to a point that we believe the $12 million was overly conservative that we would inform the community and take that back into revenue. And that's what we did in the third quarter, we've redesigned the controls at this point, and they're still in the process of being tested. But again, based off of this redesign, we determined that we were able to take that $1.5 million on a consolidated basis of that reserve. And so that was the net impact to the Company in the third quarter of this year. It's too early to say what would happen in the fourth quarter. It's something that we're continuing to look at, again, as we test the operating effectiveness of the redesigned control. But again, the Q3 impact was a $1.5 million good guy.

And I mean, but it sounds like you do not assume a similar benefit in Q4, correct?

I think it would be premature to assume such.

Your next question will come from the line of Whit Mayo with Leerink Partners.

Just looking at the 10 new MA contracts that you guys signed in the third quarter, does this cover where you have 1% of your current admissions, 50% of your admissions? I'm just trying to visualize the coverage aspect of these new contracts to figure out how impactful this really could be.

I don't know that I know it by admissions. That's why we're looking at -- as we look at our visits, what percentage of our visits from our prior ones can we move in. As I think we've talked about in the past, the initial goal is not necessarily to focus on those for additional growth, but to be able to move from some of those really poor paying non-episodic agreements into these new agreements. So at this stage, that's been the focus, and that's why the plan is continue to update everyone on where we are with that percent of non-episodic that are in these new payor innovation contracts.

No, that's helpful. I appreciate it. And then maybe my follow-up question. And I know, Crissy, you're in the middle of the planning process or beginning the process. But how do you think of the right corporate overhead costs for next year? I didn't hear you talk about that. Presumably, you probably need to reload for some of the bonus accruals, maybe there's some opportunities to bring that down with some of the transition costs from a former parent company or something, I don't know. But just any thoughts there would be helpful.

Yes, Whit, you're absolutely right. It's a little too early for me to give specifics on that. I think the best guide that I would tell you right now is, again, we're really closely monitoring all of our corporate costs, and you've heard about some of the actions that we've taken in the latter part of this year in regards to items like virtual clinical orientation, even not the home office, but looking at some of the back-office staffing of our hospice locations and such and the moves that we've made in order to control those costs. I do think it's important to note that you can look at kind of the $5.8 million of stand-alone company costs that were in the third quarter. That may increase slightly in the fourth quarter and first quarter of next year, again, as we kind of continue to roll off of the final big piece, the PeopleSoft piece being the biggest piece of IT from Encompass, but it may be -- what I'm looking at right now is, are we running towards the lower end of that original $26 million to $28 million estimate of stand-alone cost, and even possibly running under it on a go-forward basis. So I think that's what I'm very interested in at this point.

[Operator Instructions] Your next question will come from the line of Jamie Perse with Goldman Sachs.

I wanted to get a little bit more color on just what you think is going on with the Medicare fee-for-service business, that being down 11%. I know you guys have been asked about this in the past and have said the markets are down 4-ish percent. So is there a reason that you think at this point you can diagnose why you're underperforming the market? And then relatedly, I mean, just what gives you confidence in the comments for '24 that you'll be more in line with market growth and fee-for-service?

Yes. So I think probably the biggest thing to look at is where our peers have been as it relates to a percent of their home health revenues being fee-for-service Medicare. And our peers have been pretty consistently in that 60% to 65% range over the last few years. As we noted, we're at 65% this quarter. And so we are nearing more of that normal range of our peers versus our historic 75-plus percent. So that's what gives us confidence that we're really more at a peer average now, so that what we should experience in the future will be more like what our peers are experiencing as folks move into MA from traditional fee-for-service Medicare.

Okay. And then I also wanted to follow up on the comments next year around Medicare Advantage pricing growth. I don't think you gave a number there, just said you thought it'd improve with the mix shift towards the payor innovation contracts. But I guess, one, what's included in those comments with respect to the United contract. Any color on where you are in that negotiation process and how we should think about the potential rate update for that contract next year? And then any more precision you can provide on MA pricing next year would be great.

Yes, Jamie. It's too early, and I don't know that we would provide precise pricing, especially on a specific contract because that's kind of forbidden via the agreements themselves. We like the trends that we're seeing, again, as we continue to shift more visits into the payor innovation contracts, but I'll certainly keep your request in mind as we head into 2024 guidance and determine what we are willing to say and what we can say within the confines of our agreements. Again, from a per visit pricing, our agreements are kind of coming in at that 25% to 30% discount compared to the historic 35% to 40% discount. So we like what we're seeing there and are confident in our ability, based on what we've seen thus far in 2023 and our ability to shift into the higher paying contracts.

Okay. And if I could squeeze one last one in, just following up on an earlier question. What's been your contract labor expense for '23? And would it be right to assume most of that goes away next year?

I have -- we can certainly get you the expense side. I have the utilization side of it. So when you look at -- and this is quarter three information right now, but -- so for example, in quarter three, 1.3% of our home health visits were performed by contract nurses that was compared to 2.2% last quarter. And then hospice visits, there was only 1% of hospice visits performed by contract nurses and that was more in that beginning part of the quarter, but we've eliminated all hospice contract labor by the end of the quarter. Last year, this time, 6% of our hospice visits were done by contract labor, just to give a comparison for hospice.

And Jamie, the only thing that I would add to that is when you look at our hospice cost per day, you see that the year-over-year increase was about 8.5%. In the prior two quarters, it was in the double-digit increase. Well, again, with the elimination of contract labor by the end of the third quarter for that segment, that was a reduction in our cost per day of about 200 -- of that increase, I should say, of about 260 basis points. So you see the magnitude it can have.

And I'll now turn the call over to Jordan for closing remarks.

Thank you, Regina. If anyone has any additional questions, please feel free to call me at (469) 860-6061. Thank you again for joining today's call.