Enhabit, Inc. Q4 FY2023 earnings call

Management Statement and Operational Highlights

• Payer Innovation: Successful execution of new national contracts, with 11 new agreements negotiated in Q4, 8 at episodic rates. Payer innovation team has negotiated 59 new agreements since summer 2022, over 2/3 at episodic rates. Non-episodic visits in new payer innovation contracts increased from 5% in Q1 2023 to 25% in Q4 2023.
• Quality Metrics: Home health 30-day hospital readmission rate 20.5% better than national average; hospice visits in last phase of life 53.2% better than national average.
• 2024 Focus Areas: Expect continued decline in traditional Medicare volumes to slow; episodic admissions stabilizing; payer innovation team set to drive Medicare Advantage pricing improvement; Medalogix Pulse rolled out to all branches; hospice case management model aiding recruitment/retainment; de novo strategy added 8 locations in 2023, expects 10 more in 2024; people strategy focused on employee engagement and retention.

Segment Performance

• Home Health: Consolidated net revenue was $260.6 million for the fourth quarter, down $2.6 million or 1% year-over-year. Total admissions growth of 3.9% year-over-year was driven by 34.2% growth in non-episodic admissions. Non-episodic visits grew to approximately 33% of total home health visits. Cost per visit was flat year-over-year as reduction in nursing contract labor offset merit market increases.
• Hospice: Revenue increased $3.7 million or 7.8% year-over-year, primarily due to increase in revenue per day and Medicare reimbursement rate change. Admissions decreased 1.5% year-over-year, while average daily census decreased 4.3% year-over-year. Adjusted EBITDA increased $6.1 million year-over-year, primarily due to revenue per day increase and general administrative cost reduction.

Guidance

• Net Service Revenue: 2024 range $1.076 billion to $1.102 billion; adjusted EBITDA range $98 million to $110 million.
• Home Health: Expect Medicare pricing increase ~1.2%; volumes to grow via payer innovation and clinical resource utilization; cost per visit to increase 2%-3% due to wage inflation, partially offset by productivity improvements.
• Hospice: Focus on census growth; reimbursement rate to increase ~2.9% in first 3 quarters of 2024; cost per day to increase 2%-4% due to DME issues, but expect operating leverage from census growth.
• Free Cash Flow: Expected $36 million to $62 million in 2024, impacted by return to cash income tax payment.

Risks

• Wage Inflation: 3% average merit market increase creates ~$10 million net headwind.
• Durable Medical Equipment Costs: Service issues led to ~$2 million additional DME costs in 2024.
• Medicare Eligible Shift: Uncertainty in Medicare eligibles shifting to Advantage and payer mix impact on financials.

Q: Congrats on the quarter. How are you thinking about the remaining opportunity with the national episodic contract and pressures on Medicare Advantage plans?

A: Barb Jacobsmeyer mentioned the ability to ramp up with the new national agreement due to care transition coordinators, and payers' challenges work to their benefit due to high-quality outcomes.

Q: What are the assumptions in terms of payer mix shift and wage inflation?

A: Crissy Carlisle said guidance considers increased reimbursement, volume growth, and efficiency, partially offset by wage inflation and DME issues, with expectation of industry-like Medicare volume decline slowdown.

Q: Any color on earnings cadence and hospice cost per day without DME issue?

A: Crissy Carlisle said moderate adjusted EBITDA build, expecting to manage labor needs via staff and productivity, and Barb Jacobsmeyer discussed hospice cost per day impact of DME issue.

Q: Thoughts on volume balance with lower-paying contracts and hospice cost per day?

A: Barb Jacobsmeyer said ability to grow volume with longer payer list, and Crissy Carlisle explained hospice cost per day impact of DME agreement.

Q: Quantify incremental revenue/volumes from national agreement?

A: Barb Jacobsmeyer said historically 5% of admissions, with focus on improved rates.

Q: Capital deployment priorities and de novo ramp?

A: Crissy Carlisle said focus on deleveraging, free cash flow towards term loan amortization and de novo strategy, with de novos geared more towards hospice and some running ahead of plan.

Q: Regulations impact on 2025 proposals?

A: Barb Jacobsmeyer said expected adjustments in home health proposed rule, with uncertainty on temporary measures, and no major changes anticipated in hospice proposed rule.