Enhabit, Inc. Q2 FY2024 earnings call

Management Statement and Operational Highlights

• Strategies and Results: Quarter 2 2024 demonstrates success of strategies, with Home Health achieving 6.4% total admission growth driven by payer innovation and clinical resource utilization. Hospice census growing sequentially.
• Payer Innovation: Home Health's payer innovation strategy shifted admissions to better-paying contracts, with non-Medicare visits in payer innovation contracts rising to 43% in Q2 2024 from 6% in Q1 2023. Terminated UnitedHealthcare contract, focusing clinical resources on fee-for-service Medicare and favorable contracts.
• Clinical and Operational: Utilized Medalogix Pulse tool to lower visits per episode, increasing clinical capacity. Hospice implemented case management model and centralized admissions department, improving referral-to-admission conversion rate from 73% to 76%.
• Employee Engagement: Enhanced leadership tracks for employees, with 85 full-time nurses promoted in the past 12 months.

Segment Performance

• Home Health: Revenue declined $3.6 million or 1.7% primarily due to lower Medicare re-certification. Non-Medicare admissions grew 25.2%, driving total admissions growth of 6.4% year-over-year. 43% of non-Medicare visits are now in payer innovation contracts at improved rates. Home health adjusted EBITDA increased $1.4 million or 3.3% year-over-year, with cost per visit decreasing 2.2% year-over-year.
• Hospice: Revenue increased $1.9 million or 3.9% year-over-year due to increased Medicare reimbursement rates and patient days. Average daily census grew sequentially since January 2024. Adjusted EBITDA increased $0.8 million or 9.6% year-over-year, but cost per day increased 1.3% year-over-year.

Guidance

• Narrowed full-year 2024 net service revenue guidance to $1.060 billion to $1.063 billion.
• Adjusted EBITDA guidance narrowed to $100 million to $106 million.
• Expected free cash flow in 2024: $39 million to $58 million.
• Long-term volume growth targets: Home Health mid to high single digits, Hospice mid to high single digits over the next three years, including de novos (expecting 10 de novos per year).

Risks

• Proposed 2025 home health payment rule by CMS with potential negative impact (-4.06% permanent adjustment, estimated 1.05% impact for Enhabit).
• Uncertainty in Medicare fee-for-service volume affecting guidance.
• Claims experience fluctuations, especially with workers' compensation and group medical claims.
• Regulatory and legislative risks, including potential impacts from CMS rulemaking and litigation (e.g., NAT litigation).

Question and Answer

Q: How are you strategizing to turn Medicare fee-for-service admissions around?

A: Using best practices from branches with growth, deep diving into referral sources' payer mix, and focusing on healthy payer mixes to direct business development efforts.

Q: Is there room to drive cost per visit down further?

A: Eliminated contract labor, continuing productivity optimization, and monitoring visits per episode to maintain cost reduction.

Q: What's the impact of the United contract termination on top-line?

A: Confident in replacing census, with current non-Medicare conversion rate at 48%, expecting to replace volumes over the notice period.

Q: What was the same-store census growth for Hospice in the quarter?

A: Same-store average daily census (ADC) growth was 1.2% positive.

Q: How is the DME issue progressing?

A: New contract impacting cost per day, with volume growth expected to provide leverage against fixed cost structure.

Q: How do de novos factor into three-year growth targets?

A: De novos are included, with mid to high single digits organic growth including de novos, mostly in hospice.