Enhabit, Inc. Q1 FY2024 earnings call

• Team focus on operational strategies was key to first quarter performance, with consolidated adjusted EBITDA of $25.3 million in line with last year's first quarter. • Home Health segment focused on stabilization of Medicare admissions, progress with payer innovation strategy, and increased utilization of clinical resources. Non-Medicare admissions grew, and 38% of non-Medicare visits are in payer innovation contracts at improved rates. • Hospice segment focused on growing census, recruiting business development team members, and exploring virtual care. • Employees' engagement driven by meaningful work, and thanks to nurses during Nurse Week. • Effective management of clinician visits to rightsize care plans, considering patient acuity and complexity, and exploring virtual care implementation. • Transitioned off the Encompass Health transition services agreement by the end of the first quarter.

In the Home Health segment, non-Medicare admissions grew 25.2% year-over-year, driving total admissions growth of 5.3% with 5% growth on a same-store basis. Home Health adjusted EBITDA decreased $1.1 million or 2.5% year-over-year. In the Hospice segment, revenue decreased $0.1 million or 0.2% year-over-year, average daily expenses decreased 3.7% year-over-year, and adjusted EBITDA increased $0.6 million or 7.1% year-over-year. The Home Health segment's non-Medicare visits have 38% in payer innovation contracts at improved rates, and the shift to more non-Medicare admissions reduced revenue and adjusted EBITDA by approximately $2 million net in the first quarter of 2024.

• Maintains 2024 guidance for net service revenue of $1,076 million to $1,102 million and adjusted EBITDA of $98 million to $110 million. • Continues to expect to generate $36 million to $62 million of free cash flow in 2024. • Believes consolidated results for the first quarter are strong and remains confident in the outlook for 2024.

• Macro headwinds including uncertain regulatory developments such as Medicare reimbursement policies, evolving anti-trust landscape, difficult health care and operating environment, and persistently high interest rates. • Impact of these factors on the company's strategic alternatives process, as no formal proposals were received for a transaction after evaluating strategic alternatives.

Q: Maybe on the cost per visit increase, obviously, a 2% to 3% increases what you've guided for, and you seem to be running at that. I'm assuming your underlying salary wages and benefits are running at least 3% to 5%. I think business per episode were slightly down 1/10 of a day. It would look like looking at the peers that maybe you've got some more room there. But can you just comment on the dynamics? What's offsetting those labor cost trends if indeed, I'm right about roughly where they're running. And how much more opportunity you might have on the driving down visits per episode over time?

A: Yes. So A.J. I'll take some of the cost per visit questions, and then maybe Barb can address the visit per episode piece. On the cost per visit, I think the one thing I didn't hear you mention is the elimination of contract labor, and that was a significant benefit to that cost per visit number and part of the guidance considerations for the year. But yes, you're right, the merit and market increases are around 3% or so. And then the teams are just doing a great job again, having eliminated all contracts later, those long 13-week contracts by the end of 2023 and then managing the productivity and optimizing our staff.

Q: Maybe a follow-up then on your resegmentation of your Home Health segment to have this non-Medicare segment, that's going to obviously include MA episodic, which has fairly high margin or higher margins, and they may provision which is lower margins. So 2 business -- 2 items that are quite different on the gross margin profile, how do we think about the gross margin of that segment going forward? And how is it likely to trend?

A: Yes. So I think you're -- when we think about Medicare and non-Medicare reporting, one, we believe it's more peer-like so that should make us more comparable to what you're historically seeing from there. You also have enough information within our disclosures to -- while we prevent to get that non-Medicare number includes episodic, you still have the information you need to get really close to -- here's why non-Medicare revenue, here's my total visits. And you can still run it on a per visit basis to see what's happening from a rate perspective. And you can see the success that we've made with that rate from this time last year to now. So I think it's all there. It's probably a little bit easier to model the way that we're preventing it, given that you're not trying to model 3 different sets, as you've got these 2 just traditional Medicare and non-Medicare.

Q: Great. Maybe just a follow-up on A.J. I mean, can you help unpack a bit on the payer innovation side specifically on the pricing of those visits, because non-Medicare revenue per visit was up, I guess, 4% year-over-year. Payer innovation visits grew by $190,000 nonpayer innovation visits were down almost $100,000. I guess, can you just help us get a sense of the moving pieces around the non-Medicare revenue per visit? It would kind of imply that payer innovation visits in the quarter weren't as significantly higher reimbursed versus the legacy. Just -- any help on the color around the payer innovation and the revenue per visit inside the non-Medicare would be great to start.

A: Yes. Jason, one of the things that we have to be very careful of is these national agreements prohibit us from discussing the details around those agreements. And so given that we have the one large national agreement that is an advanced episodic model, if we get too far into the details, that's not going to be good for other party. So we have to be very careful of that. And that's part of the reason, again, that we did make the decision to go with Medicare and non-Medicare. I can tell you that the historic statements we've made around episodic pricing, and the discounts as a whole, we're still in that kind of 0% to 25% to 30% discount, and that is far better than the 35% to 40% discounts that we have historically seen before we had our payer innovation team.

Q: Great. And if I may, also a follow-up, I guess, or maybe new, but around your innovation plans or the contracts. So when you negotiate these rates, I guess, to maybe that's separate from your new contracts, but I guess when you negotiate for existing contracts because it sounds like there's also, some of that is happening, where you try to improve the rates for some of these per visit contracts. So first of all, like, is that the case are you trying to do that, too? And if you do, what kind of, I guess, rate increases are you getting if at all? And then when you do that, are you also trying to get a relief on the utilization management as in increasing the number of business that authorized by these MA plans. And then I guess somebody was trying to ask a question like how much essentially the pricing is improving on these low-paying contracts?

A: Sure. So I would say that, yes, we continue to negotiate and work on new contracts. But as we mentioned, there is also a focus on renegotiation. So the new contracts that we brought into the payer innovation since 2022, none of those are up for renegotiation yet. So our renegotiation is really focused around one large national plan and more of a smaller regional plans, many of those of which came through acquisitions over time. When we go in for the renegotiation. So we approach it just as we do with new plans, and that is trying to prioritize getting an episodic agreement, if we can. And then if not, to work better on the per visit rate. I will tell you though that one of the things that we're doing is sticking to our -- we need to have no more than that 25% to 30% or we now are in a place where we will walk away. It is many times easier for our business development team members to say we are not in contract than it is to not accept. So that's where we're at now. Now that we've built up the good contract, we can be a little bit more firm with the legacy ones.