Amedisys Inc

Greetings. Welcome to Ametis' second quarter 2022 earnings call. At this time, all participants are in listen-only mode. The question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. At this time, I'll turn the conference over to Nick Moscato with Investor Relations. Nick, you may now begin.

Thank you, Operator, and welcome to the Emeticis Investor Conference call to discuss the results of the second quarter ended June 30, 2022. A copy of our press release, supplemental slides, and related Form 8K filings with the SEC are available on the Investor Relations page of our website. Speaking on today's call from Emeticis will be President and Chief Executive Officer Chris Gerrard and Executive Vice President and Chief Financial Officer Scott Ginn. Also joining us is Dave Kimmerly, Chief Legal and Government Affairs Officer. Before we get started with our calls, I would like to remind everyone that statements made on this conference call today may constitute forward-looking statements and are protected under the safe harbor of the Private Securities Litigation Reform Act. These forward-looking statements are based on information available to Emeticis today. The company assumes no obligation to update information provided on this call to reflect subsequent events other than as required under applicable securities laws. These forward-looking statements may involve a number of risks and uncertainties, which may cause the company's results or actual outcomes to differ materially from such statements. These risks and uncertainties include factors detailed in our SEC filings, including our Forms 10-K, 10-Q, and 8-K. In addition, as required by SEC Regulation G, a reconciliation of any non-GAAP measure mentioned during our call to the most comparable GAAP measures will be available in our Forms 10-K, 10-Q, and 8-K. Thank you. And now I'll turn the call over to President and CEO, Chris Gerard.

Thanks, Nick, and thanks to everyone for joining us. Today, Amedisys announced our second quarter 2022 results. Before we get into the performance update, I want to give a heartfelt thank you to all Amedisys employees. The work you do and the care you perform on a daily basis is an inspiration, and I am truly grateful for all that you do. The topic on everyone's mind has been the proposed home health rule for 2023. As most of you know, on June 17, CMS released the 2023 Home Health Proposed Rate Update, which detailed a reduction to overall home health payments by an aggregate amount of 4.2%. As you are all aware, the driver behind this reduction is CMS's proposed permanent cut of 6.9% to the 30-day base payment rate. that was derived from a 7.69% permanent behavioral assumption adjustment. CMS has also proposed a market basket increase of 3.3%, reduced by a productivity adjustment of 0.4%, for a total market basket update of 2.9%. We do anticipate the market basket increasing for the final rule as CMS uses more recent data to provide for this inflationary update. albeit the methodology and data the CMS is using is woefully inadequate to capture the true inflationary impact that providers across all of healthcare are experiencing in providing care throughout the country every day. CMS also stated, but not formally proposed, that it is due to collect approximately $2 billion in overpayments from 2020 and 21 combined. Not surprisingly, Amedisys, along with the entire home health industry, strongly disagrees with CMS's assertions of an overspend of this magnitude. In fact, we believe there has been no overpayment at all. The budget neutrality methodology employed by the agency is extremely flawed. As we have in the past, Amedisys has been prepared to engage with CMS directly and alongside our colleagues in the home health industry. The proposed cuts based on behavior adjustments is unsound, And we were working on a comment letter that will thoroughly outline our position around the assumptions, our experience throughout the first two years of PDGM, and the impact of the ongoing pandemic. It is also confusing to us in the industry, as well as members of Congress and congressional staff, why CMS is making such a drastic cut to reimbursement during times of extraordinary inflation. With that being said, we have been preparing for this scenario and have been in discussions with our congressional champions for months to formulate a thoughtful legislative approach that prohibits CMS from instituting these drastic proposed cuts. On Monday, Senator Debbie Stabenow, Democrat from Michigan, and Senator Susan Collins, Republican from Maine, introduced Preserving Access to Home Health Act in the U.S. Senate, and we expect a companion bill to be introduced in the House in the coming days. Thank you to Senator Stabenow and Senator Collins for your bipartisan commitment to championing a pause to the potential cuts to home health agencies and maintaining access for home health patients. This legislation upon enactment would pause the implementation of any temporary or permanent adjustments to the base payment rate under the budget neutrality mandate of PDGM until 2026. This would allow time for the industry and CMS to work on a much more reasonable and predictable methodology that adequately measures the impact and transition from old HHRG 60-day payment system with the new PDGM 30-day payment system, as well as fully accounting for the impact that COVID-19 has had on utilization, patient mix, and the level of care provided by home health agencies. Based on limited data and information released by CMS to date, the proposed cut to reimbursement in 2023 appears to be the result of flawed methodology and lack of full recognition of current labor inflation. Now that the bill has been introduced, we, along with the industry, will continue explaining to staff and members of Congress the impact of the proposed cuts on home health agencies, patient access, and the need to pass this legislation by the end of the year. With that, let's jump into the segment performance, and we'll start with home health. For the quarter, home health same-store total admissions were flat. Lower utilization of home health benefit, largely driven by less total discharges to post-acute settings, coupled with elevated utilization of telehealth, and in some markets, clinical staffing challenges impacted our ability to grow during the quarter. On the quality front, I'm excited to announce that for the October 2022 preview, Our home health quality of patient care star score is 4.49 stars, with 100% of our care centers reaching four stars or greater. Quality has been and always will be core to all we do at Amedisys. And this continued improvement is really something all of us here at Amedisys are proud of. For the quarter, we performed 13.2 visits per episode, up .2 visits sequentially, and down one visit year over year. Our implementation and utilization of MediLogix has helped us to continue to make progress, optimizing the care we deliver to our patients, while constantly focusing on improving our quality scores. On clinical mix, in Q2, we achieved 48% LPN utilization and 53% PTA utilization. We have made tremendous progress on our clinical mix and will continue to increase our utilization of both LPNs and PTAs throughout the year. However, as we optimize visits per episode, increasing these percentages becomes more challenging. Now, moving on to hospice. For the quarter, hospice same-store admits grew 6% and ADC was slightly positive at 0.2%. This represents our first quarter of ADC growth since Q3 of 2020. Additionally, we saw a 2.5% sequential increase in ADC. Continued progress on the ADC front will help to drive performance in the second half of the year. As we continue to focus on both admission and ADC growth, we're going back and being more targeted in where we're adding our BD reps. Our focus is shifting away from simply growing our headcount to driving productivity as our reps move throughout the tenure bands. Also adding to the improvement in ADC has been the normalization of discharges as a percent of ADC. As we discussed in our Q1 call, discharge rate peaked at 39% in January and has sequentially improved versus our internal modeling since that point. To quantify how impactful discharge has been to our performance, had discharge rates mirrored 2019 experience, year-to-date June ADC would have been 874 higher, resulting in an additional $29 million in revenue and $20 million in EBITDA for the hospice segment. Now I would like to discuss Contessa's performance during the quarter. We continue to be pleased with the progress Contessa, our higher acuity segment, is making as it's generating meaningful growth in Q2 and positioning itself for material ramp in both admissions and revenue for the second half of 2022. Total emissions in Q2 for hospital and SNF at home were 345. representing year-over-year growth of 35% for Contessa. Despite the favorable growth, this performance was behind budget due to delays in closing scheduled partnerships. This volume represents 35% of the budgeted emissions missed for the quarter. Contessa is still tracking towards closing these partnerships to eventually bring this additional volume on platform. Contessa's palliative at-home model continues to demonstrate strong progress and momentum, evidenced by hitting 131% of budgeted engaged member months in the second quarter. The volume softness Contessa experienced on hospital-at-home and SNF-at-home models was partially offset by business continuing momentum towards increasingly favorable reimbursement banks. In Q2, Contessa had 30% of episodes at full risk, in 70% as limited risk compared to 21% and 79%, respectively, at the end of last year. Contesta continues to focus on finalizing health plan contracts with managed care organizations to shift volume into the full risk bucket. Contesta continues to demonstrate strong abilities to manage medical spend through its clinical management of patients admitted onto its programs. For a third straight quarter, we saw favorable direct MLR performance relative to expectations, largely due to high quality outcomes which resulted in patient satisfaction of approximately 90%. For the quarter, segment EBITDA on a consolidated basis was favorable to budget by 5%. This was driven by appropriate cost control measures at the corporate level. While volume was behind for the quarter, Contessa made meaningful strides in two key areas to bridge the gap to meet target metrics for the year. First, Contessa accelerated business development efforts by launching its previously announced partnership with Penn State Hershey and, in mid-June, closing two additional partnerships with Marquis Systems, Baylor Scott & White Health and Memorial Hermann Health System. We expect these systems to be operational by year-end. Secondly, we continue making progress on integrating the nursing function into a medicine's home health operations, as opposed to relying upon third-party home care agencies. This places the responsibility of recruiting and managing the nursing staff necessary to accept all referred patients squarely in our control. As of the close of Q2, Contessa had filled 81% of required nursing staff. thus increasing the team's ability to meet targeted emission metrics. We anticipate having this integration completed by August 1st, the one-year anniversary of closing on the acquisition of Contessa. We are confident Contessa will continue making significant progress with more partnerships as we close out the second half of the year, both with health systems as well as health plans that are interested in direct relationships. In summary, I am proud of the results we produced during the second quarter of this year. Though the environment and markets we operate in have changed, we continue to gain share, deliver the highest quality care, and differentiate ourselves. With that, I'll turn it over to Scott, who will take us through a more detailed review of our financial performance for the quarter. Scott.

Thanks, Chris. The second quarter of 2022, on a GAAP basis, We delivered net income of $0.91 per diluted share on $558 million in revenue, a revenue decrease of $6 million, or 1%, compared to the second quarter of 2021. For the quarter, our results were impacted by income or expense items adjusting our GAAP results that we have characterized as non-core, temporary, or one-time in nature. Slide 14 of our supplemental slides provides a detail regarding these items and the income statement line item each adjustment impacts. For the second quarter on adjusted basis, our results were as follows. Revenue increased $9 million, or 2%, to $566 million. EBITDA decreased $9 million, or 11%, to $74 million. Excluding the acquisitions for Contessa, the EBITDA decline was $2 million. The decline in our base business was largely driven by the partial return of sequestration and lower volumes. EBITDA as a percentage of revenue decreased 190 basis points to 13.1%. Excluding Contessa, EBITDA as a percentage of revenue declined 40 basis points to 14.6%. EPS decreased 22 cents or 13% to $1.47 per share. Contessa drove 18 cents of the decline. Sequentially, EBITDA increased $8 million on a revenue increase of $21 million. Growth in volumes and the closing of two acquisitions offset a partial return of sequestration, which was a negative impact of $4 million. While we're encouraged with a sequential improvement, our Q2 volumes are below our internal expectations. Now turn to our second quarter adjusted segment performance. Keep in mind, segment level EBITDA is pre-corporate allocation. In home health, revenue was $349 million, down $1 million from prior year, which includes $14 million from our Q2 acquisitions and a $4 million impact related to sequestration. Revenue per episode was up $62, or 2%, which is a result of a 3.2% increase in reimbursement, partially offset by the reinstatement of sequestration at 1%. Visiting clinician cost per visit is up 6% year over year and flat sequentially. Visits per episode declined 7%, which offset the cost per visit impact, resulting in a cost per episode decrease of 2%. The increase in cost per visit was driven by planned wage increases, which were effective August 1st, 2021, sign-on bonuses, wage inflation, new hire pay, visit mix, and an increase in salaried employees. G&A increased approximately $7 million, mainly driven by our Q2 acquisitions, which added $4 million. The remainder of the increase was driven by planned wage increases, additional BD resources, and higher travel and training costs. Segment EBITDA was $72 million, with an EBITDA margin of 21%. EBITDA declined $9 million on lower-than-anticipated volumes, the impact of episodic payers shifting to per-visit contracts, the partial return of sequestration, and raises. Sequentially, segment EBITDA was up $1 million on a $13 million increase in revenue, which is net of a $3 million impact on sequestration. Now turning to our hospice segment results. For the second quarter, revenue was $198 million, up $7 million over prior year. Net revenue per day was up 4%, driven by a 2% hospice rate increase, that wouldn't affect October 1st, 2021, and lower revenue adjustments, partially offset by the reinstatement of sequestration. Hospice costs per day increased $2.88, primarily due to raises, wage inflation, and sign-on bonuses. EBITDA was $42 million, up approximately $1 million. G&A increased $2 million due to planned wage increases, higher travel costs, and the rollout of Metallogix Muses. Sequentially, segment EBITDA increased $5 million on a $5 million increase in revenue. The sequential improvement in revenue in EBITDA was driven by a 2.5% increase in ADC. Both the revenue and EBITDA increases are net of the $2 million sequestration impact. Turning to our total general administrative expenses, on an adjusted basis, total G&A was $108.2 million, or 32.2% of total revenue, up 150 basis points. mainly due to Contessa and our recent home health acquisitions, which added $9 million and $4 million in additional G&A, respectively. Excluding Contessa and our home health acquisitions, our G&A is down $1 million over the prior year. Sequentially, G&A is up $3 million. However, excluding our home health acquisitions, G&A is down $1 million. For the quarter, we generated $57 million in cash flow from operations. Our net leverage ratio at the end of the quarter was 1.5 times. During the quarter, we spent 17 million on stock buybacks. We have 83 million remaining under our previously approved buyback authorization. Turning to M&A, as stated in our last earnings call, we have signed and closed both the evolution and assisted care acquisitions. Our pipeline remains full with both home health and hospice acquisitions, and we will look to deploy capital opportunistically throughout the remainder of the year. That said, until we have a better line of sight into 2023 home health reimbursement, I'd expect home health M&A to be slower to materialize. We're updating our 2022 guidance of revenue given the volume impacts in the first half of the year. While reiterating our EBITDA and EPS guidance ranges, which can be found on page 16 of our supplemental slide deck, our new revenue guide is $2.29 billion to $2.31 billion. Though volumes in both home health and hospitals have been slower to return than original modeling, we have significantly outperformed from a cost management perspective. Continued progress in both total admissions for home health and ADC for hospice, along with decelerating losses at Contessa in our continued cost management, make our previous stated guided ranges for EBITDA and EPS achievable. As we move from Q2 to Q3, we will see impacts for the normal seasonality items, such as an increase in health costs of $3 to $4 million, our annual raise cycle, which is effective August 1st, with an expected impact of $5 million, one additional holiday totaling $2 million. And for this year, we have the additional negative impacts of the return of full sequestration of $4 million and $2 million related to conveners. This ends our prepared remarks. Operator, please open the lines for questions.

Thank you. We'll now be conducting a question and answer session. If you'd like to ask a question today, please press star 1 from your telephone keypad and the confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants that are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. So that we may address questions for as many participants as possible, we ask you please limit yourself to one question.

One moment please while we poll for questions. Once again, the star one to ask a question at this time. We'll pause to assemble the queue.

Thank you. And our first question comes from the line of Brian Tankvillette with Jefferies. Please receive your questions.

Hey, good morning, guys. Chris, I guess my question for you is, in the past, in different conferences, you've talked about how

We're moving on to the line of Matt LaRue with William Blair. We've lost our previous caller. Please go ahead, sir.

Okay, thanks. Hey, how are we doing? Good morning. I just wanted to ask about given the relative trends in Medicare for business. Maybe, Scott, could you just kind of remind us or level set us with where margins today sit for on the MA side, private episodic, and is it relative to Medicare fee-for-service, and then maybe where some of the big call-outs are other than the rate, maybe that's on the MA side, driving those differences in margins.

Yeah. Thanks, Matt. You know, I would say we're still in that kind of 25 to 30%, which, you know, some decent movement on the, you know, we'd like to see the rate get better, but it's moving that way. I think some of the other relationships and some of the other, even on some of the conveniors, we're getting some better rates. So we expect to see that over time improve as we shift. But certainly that's, you know, it's still some ground for us to cover. in order to decrease that differential because it's still significantly different than where our margins are. As we talked, our episodic visit margins have been expanding really pleased with what's going on there with a rate increase plus a decrease in really our cost per episode. So nice things there, but you're still in that 20 to 30 versus the mid-40s, potentially higher before you consider kind of some other you know, costs related to it, but there's a gap to cover.

Yeah, hey, Matt, it's Chris. I would add that we do have some new contracts that have come online recently that are going to draw better margins. Also, we've been talking about, you know, some new payment models we've been working on. I was hoping to have something announced by today, but, you know, we literally with one of our two, one of our biggest plans, top five plans that we do business with, we're We're pencils down on a new payment arrangement, a case rate arrangement, just waiting for, you know, ink to get on a paper before we can talk about it. So we expect to have something announced really soon on that that's going to allow us to actually expand some of that margin. And the last thing I'm going to say on this point is that, you know, we have a pretty broad range of payment arrangements on our per visit Medicare Advantage, and we're actively – going through and portfolio managing those contracts. And we're going to be exiting contracts that really just don't make economic sense for the organization. So we expect to see that result in some margin expansion on that per visit business. And we will kind of call out some of these older contracts that are just not covering our cost of doing business.

Okay, thanks. That's helpful. And then Chris, You cited, I think, telehealth as a headwind to utilization of curiousness. That's the first time I remember you citing it. Does this give us a sense for how that's, you know, appearing as competition? I think at times maybe we thought it potentially could be complementary or even extending some of your capabilities. Could you maybe flesh that out a little bit and give a sense for how you're thinking about telehealth? within the broader context of home health long-term?

Yeah, so during the PHE, it's actually working to our advantage in terms of facilitating patients getting on the service and having face-to-faces being done by telehealth. So that's not what we're referencing. We're really referencing kind of the fact that, you know, our demographic, our age population that we serve, they're not going in to see their physician face-to-face. Oftentimes, this is being done video and telehealth-wise. And, you know, there's just we feel like there's missed opportunities to identify the need for home health and or hospice care. You know, they're not having head-to-toe assessments. They're not listening to lungs. They're not looking at range of motion. And just it's not as thorough of an assessment when it's happening in telehealth. And, you know, in this day and age also, if they're symptomatic at all, they're definitely doing it by telehealth. And so we feel like that's driving down utilization a little bit of home health. We've noticed with physicians that we have strong relationships with that have not had change in their actual patient mix are seeing different behaviors in terms of their utilization. And it's not a loss of market share. It's actually just less utilization of home health that we're seeing right now. And that's something that we think we need to solve for, and we will. But that's kind of one of the, I think, unintended downsides of the proliferation of telehealth today. Okay, interesting.

I'll defer to others. Thanks.

Yep, thanks, Matt.

Thank you. Our next question is from the line of Justin Bowers with Deutsche Bank. Pardon me, that's a question coming from the line of Brian Tanquil with Jefferies. Please proceed with your question.

Hey, thanks for getting me back with you. Chris, sorry about that. What I was asking earlier, in the past few conferences that you've attended, you've talked about how Medicare Advantage is It's kind of like part of the strategy, and it's a new growth area. If anything, maybe there's a little bit of pivot there. So I wanted to hear your thoughts and maybe articulate that here, kind of like the strategy there, the thinking on Medicare Advantage, and also any update on the contracts that you've alluded to, moving some of the reimbursements to a case rate basis. Thank you.

Yeah, thanks, Brian. You know, number one, you look at the Medicare fee-for-service population. It's declining. Topped out around $39 million. Now it's starting to decline. And Medicare Advantage penetration at 53% and accelerating. You know, this is where we knew the puck was going. This is a lot of the rationale behind us acquiring Contessa. And now on the home health side, it's really kind of driving a little bit of a pivot in strategy for us is that How do we lean into, you know, Medicare Advantage in a way that it is not a vendor-payer relationship, it's more of a partner relationship so that we can have, you know, kind of the economics as well as the dynamics that make us want to take more of that business and drive, you know, drive more volume and utilize our capacity more towards that business. At the same time, drive up quality and drive value proposition for the plans. You know, what we have kind of started to really settle in on is a case rate model where it really removes the need for a convener to control and do utilization management of the visits that we do day in and day out. It allows us to use the tools that we've been using in PDGM to optimize our episodes to use those tools for these Medicare Advantage patients. We feel like that will actually unlock additional capacity with our existing clinical staff. And if we have a fixed rate on the per admission basis, then that'll actually create a little bit of margin opportunity for us at the same time. And that will create kind of the motivation for us to take that new capacity and actually take more of the members from the Medicare Advantage plan we have a case rate arrangement with. So, you know, in the discussions and where we've gotten to today, it really is something that will lay out and create value for the plan, economics for the plan very similar to what the conveners are generating today, but also unlock additional capacity for us to take more of their members, and it'll also remove some barriers from us that are unnecessary and just hindrances today in terms of the utilization management, which we can do ourselves, and allow us to actually see better margin expansion on that and lean into that growth.

Thank you. Our next question comes from the line of Justin Bowers with Deutsche Bank. Please proceed with your questions.

Hey, good morning, everyone. Just trying to get a better – hey, guys. Can you help us understand some of the utilization dynamics you're seeing across both of the segments? And then, you know, would the change in the revenue outlook, is it, you know, is it concentrated in one area or another? Or is it, you know, is it split between both segments?

Yeah, so, you know, it started with hospice. If you think about, you know, we saw elevated discharge rates in the first quarter that put us behind on census. And I called out that if we had 2019 discharge rates, we'd be setting on about 875 or 874 more patients. today, which would completely change the outlook for, you know, the top line outlook for hospice and the profile of hospice. So as we started the year in the hole and start to climb out of that from an ADC perspective, you know, that builds in terms of pressure on the top line for the back half of the year. We moved into growth in hospice in the second quarter, slight growth, and we expect to continue to accelerate that growth through Q3 and Q4. But, you know, we just can't make up the ground that we lost in the first quarter. So, you know, that was driving down the top line on the hospice side. On the home health side, similar dynamics as well. We're seeing softness of utilization on Medicare fee-for-service for home health, but we're also seeing record demand from Medicare Advantage, which actually drives lower top-line opportunity, but, you know, growth opportunity, but it's going to be Patrick O' impacting the top line. So we had to adjust for that. And, you know, the second half of the year as well. Patrick O' You know, we have data that shows that, you know, even in that Medicare fee for service population, Patrick O' utilization of home health has declined from 8.8% of members using home health in the course of a year in 2019 to 8.1% in 2021 and still looks like it's declining further. So, you know, there is this shift that's happening. It's going to Medicare Advantage where we're seeing record demand for our services, but it's also coming at a hit to the top line. So all that being said, it's equal parts. It's just pretty much equal parts adjustment down in hospice and home health, you know, really related to, you know, how we work through the first half of the year. You know, we feel good about what we have out there in the updated guide. And the last is we didn't adjust down any on the Contessa, on the Contessa top line.

Okay, got it. And the fee-for-service dynamic is partially what you related to what you were referring to in Matt's question around telehealth?

Exactly.

Okay. Okay. And then for the full year outlook, you guys had a beat and there was some confusion around around the accrual there, but is the way, in terms of the back half outlook, you had to be in the first half, you're having somewhat increased pressure, lower demand on the top line, but better cost control. So those kind of make up the gap and enable you to keep the full year guide. So that's part one, and then part two, With the ZPIC audit, is there any remaining potential outstanding, I guess, liability, or is this kind of like maybe the last rule, or has this issue been resolved at this point?

Yeah, I'll take that. So, starting with that contingency accrual. So, yeah, that goes back, and we've got a full disclosure, and our 10Q has been around for a while. So, it's based on a 2015 acquisition that got a Z pick in 2017. We initially booked an accrual versus an assessment. I think it's in a gross number somewhere around $26 million. We get an indemnity of somewhere around 11 against that. So that's all been recorded for a while. We fought this all the way through the ALJ. We got ALJ findings on there's two different provider numbers impacted. We got those a couple weeks ago. so we ended up having to adjust the accrual based on, one, we did not break the extrapolation, which is what we were fighting for, and two, we did not win as many claims as we thought, which reassesses the amount. We have not gotten the final letters around this, so that's our estimate of where that is. It could be a minimal movement there, so that's kind of what's in that large number. Also, there's an interest component to that. If you notice in our adjustment, there's about $4 million we were forced to go back and accrue interest back to that 2017 date, so that's why it's such a sizable amount. So I think we pretty much have made a pretty good determination of it. We have to make some decisions. There's still one more layer we can go ahead and push against to see if we could win some more of these, but we've got to make those decisions. I think we're pretty close. As far as the first half, the second half, we did 140 in totality here, certainly pulling down Volumes going into the second half does put pressure. We've done a great job on cost. I think what I'm most excited about is if you look at both sides of the business from a margin perspective, they're performing very well at the gross margin line. Home health is only down 50 bps despite an 80 bps impact of losing sequestration. and still some pressure on the softer episodic volume. So really good performance there. So that's really helping us lean into the rest of the year. Similar in the hospice, it's actually up 20 bps on a 70 bps impact from sequestration loss. So those dynamics are helping feed into the actual what we think we can drop from EBITDA. So we think we get there. If you think to the midpoint, we need another 140. I do think there's a step down. as we move from Q2 to Q3 relative to normal. Normally, we see about a $5 million decline from Q2 to Q3 when you take out some of the COVID years that were abnormal, and that's driven by we get raises in Q3. We have higher health costs in Q3, and there's an extra holiday. So you've got those normal trends. And then this year, we're introducing about another $4 million related to the sequestration going back in play. Another 2 million because conveners were done really better than that 14 we've called out to date, but there's still an incremental 2 going from Q2 to Q3. There's another million related to kind of additional raises above what our normal trend has been. So combine that with about that normal five plus that seven I just called out, it's about a $12 million directional number into Q3, and we expect to build that as our hospice census continues to grow. And then now the good news around the hospice rate finalization, about 110, that's better than we thought. That's gonna be a 78 million good guy in Q4, and we've got some other cost initiatives that really help stamp that up in Q4 as well. That's a strong exit rate. The Q3 has been traditionally a more difficult quarter for us.

Understood. Appreciate all the detail on the cadence and the questions. I'll hop back in queue.

Thanks, Justin. The next question comes from the line of John Ransom with Raymond James. Please proceed with your question.

Hey, good morning. Hey, so let's just talk about Contessa. you know, you put out some projections when you bought the asset, paid $250 for it. How do you feel currently about those projections and, you know, where you marked the valuation? Thanks.

Yeah, we still feel, you know, good about the acquisition and the acquisition price. We do have some learnings that we've talked about in previous quarters that still persist, but we're actually seeing them improve. You know, part of it is Really kind of within our control and that's our ability to staff these these admissions as they come in, you know it as a reminder in Q1 we were only able to staff about half of the admissions we had about a 50% conversion rate. In the other 50% was what we call ancillary misses and that was due to you know kind of our stable of acute care RNs that dropped through Q2 to about 30% so 70% conversion rate. And we exited the quarter even better. So we had our best month in June in terms of our ability to staff the volume that's coming in. So that's with our existing JVs, the volume and demand is still there and it's still strong. And it's in line with what we were expecting, what we modeled out. Now, what also we're learning is getting deals online is taking a little bit longer. And I think part of that is the complexity of the deals that we're talking about today versus what, you know, Contessa had in the pipeline at the time we acquired them. And if you think about, you know, Contessa doing just a hospital at home joint venture with a small system or a regional system in utilizing contract home health and hospice business, you know, to be able to staff the care in the home, you know, the deals were pretty simplistic. The types of deals we're talking about now Because of our, you know, experience operating as operators of home health and hospice are getting more comprehensive to include actually putting the hospital-owned home health and hospice businesses in the JV as well as ours. So it's taken a little bit longer to get deals done, as well as we had some regulatory delays, particularly on our New York deal that, you know, we lost a quarter on in the first year. So if you normalize for all that, we're in line with what we had laid out for this year as well as our growth trajectory. Now, to put rocket fuel on all of it is if you think about the risk-based palliative programs that we're really close to being able to announce and having a statewide kind of fully attributed full risk model out there, it's going to drive significant upside on the top line. And we still think we'll have enough of that show up in 2022 to keep us in line with kind of what our top line projection or our guide was for this year. So the long and short of it is we think we're still going to hit that number. It's going to be a little bit different mix between the palliative versus the JVs, but also we have additional JVs coming online this quarter and scheduled to come on in the fourth quarter as well that we think that we're going to have a really nice exit trajectory.

OK. Just a follow-up on the Medicare Advantage question. Is it reasonable to expect that you'll have these case rate deals done by the end of the year with at least two or three payers? I know the timing is slipping beyond what you'd originally hope, but what's a realistic expectation between now and the end of the year? What percent of your

current visit based revenue what what percent of revenue do you think you can cover by the end of the year with some of these contracts yeah i would be uh john i honestly i'd be shocked and surprised if we don't have it announced by the time we announced q3 um so the end of the year i feel very very good about um i think that we'll have one we're talking about in the coming weeks um and two two of these contracts we're talking about three different unique contracts we're working on today And I'm confident in all three of them by the end of the year. But even if we get two of them, two of them, you know, comprise about 60% of our per visit business that we do today. And that's about 10% of our total home health revenue that we're looking at today would be under these unique new payment arrangements.

And so I guess, you know, just... Thinking about logic, we would just think about the big MA. There are three big MA players, so I would think you'd try to go shoot those elements first versus some regional Blue Cross plan or something. And do you think the dominoes will fall? If you can knock down the big three, do you think some of the dominoes will fall with some of the other plans?

Yeah, I do, because I think we're going to execute to where the plans are going to be very happy, and we're going to see that we're going to want to take more of that business. So You know, our execution is going to, in my opinion, you know, determine whether or not other plans are going to fall in line. Gotcha. All right. Thank you. Yep.

Thank you. As a reminder, to allow as many as possible, we ask you to please slim yourself to one question. The next question comes from the line of Matthew Borsch of BMO Capital. Please proceed with your questions.

Hi, Matt. Thanks for taking my question. You have Ben Rossi here filling in for Matt. Just quickly following up on the MA sizing that you just mentioned, you talked about the 60% of your total business. Could you convert that into maybe your MA volumes as well?

So can you repeat the question? I want to make sure I get it right.

You're talking about 60% of the business. impacted by these new contract negotiations, including 10% of revenue in home health. Could you just maybe translate that to the possible IMA volumes across that segment?

Yeah, so I think I'm going to get to the answer you're looking for if I don't just ask further. But basically right now in our home health business, 20% of our revenue is in a per-visit arrangement. We have contracts on the table that we're trying to get executed with plans that comprise 60% of that 20% that will be paid in a more of a per case rate basis versus a per visit basis where we'll see opportunity for market expansion and margin expansion as well as organic growth because as we unlock additional clinical capacity, We're turning away a lot of business in that space today. We do about 200, in that 20% of our home health business, we do about 200,000 visits per month or 600,000 per quarter. And we expect that we're going to be able to see that size of our business grow pretty significantly as we come out. I hope I got to what you were asking.

Thank you. Our next question is from the line of Sarah James with Barclays. Pleased to see you with your question.

Thank you. I wanted to go back to the comments on telemedicine impacting demand. So should we think about that as more impacting visits per episode so people are mixing telehealth with in-person or Are there certain types of patients that can fully shift over to telemedicine? And if it's the latter, how much of your current business is in that type of situation that could alternatively be served by telemedicine?

So, you know, what we're talking about here is just under – utilization of the home health benefit. Patients that are not getting referred to home health today that would have been referred to home health pre-the pandemic in the utilization of telehealth. The reason we feel that is that, you know, before 2020, the pandemic, you know, the population that we serve was in a routine of seeing their practitioner face-to-face two to three times a year. And every time that they had some sort of ailment, they would go in and see their doctor. And the doctor had really, you know, had to have the opportunity to be face to face with them, do head to toe assessments, to also do other types of, you know, kind of testing and, you know, kind of diagnostics to determine, you know, if possibly home health or hospice could be or should be, you know, a delivery that they're getting in the home. What we see happening now is the patients are not getting face to face with their doctor, and we feel like there's missed opportunities for home health to be ordered by the physician. You know, in the most, you know, the most basic ones I can, you know, kind of lay out is that, you know, there is value in listening to somebody's lungs when they come in for an exam. And if that's not happening because you're just doing a through video conference, there is opportunities for things to be missed and actually, you know, conditions to actually worsen over time. Somebody actually getting up and moving around and seeing their gait and their range of motion and things like that from a therapy perspective, You know, doctors use that to be able to determine whether or not they feel like that patient should be receiving home health care. So, you know, we just think that this is a new diamond dynamic that's kind of, you know, been spun up during the pandemic. That's going to not go away. And, you know, we just got to find ways to, you know, identify physicians that may be utilizing and ordering for home health less today than they were pre-pandemic and make sure that, you know, we capture those opportunities.

Thank you. The next question comes from the line of AJ Rice with Credit Suisse. Please proceed with your question.

Hi, everybody. A couple quick questions here. First of all, around the contract labor utilization rate, I think you're at 3.5% this quarter. That's down from being over 4%. Where do you think that can be, and are you seeing any easing on the rates itself that you're having to pay for contract labor? And any thoughts on how that trends in the rest of the year as well?

Yeah, I mean, we're pretty close to where we thought we would exit. I mean, so we're kind of, as you said, you got that right, that's 3.5% for the quarter. We said we'd be happy kind of getting that 3.2% type of range. You know, as we look across our portfolio, there's some areas of opportunity from a growth perspective that we're really trying to hammer on staffing to help In particular, so we may, you know, may move that as a little bit in order to take some more business in. So we'll see there. But if we stay in that kind of range at three to three and a half, we would certainly be happy and keeps us in our modeling for the full year. Rates are kind of hitting this based on some geographies. They've softened a bit, but really haven't gotten to where we'd like to see them. But, you know, I think it's, you're not seeing the pressure that you saw before on the rates.

okay and then maybe just on the issue of the pdgm i appreciate the prepared remarks around that pdgm and potential adjustment um i guess i would ask uh when do you think obviously we'll get the final rule in november we'll see if cms makes an adjustment at the beginning of november and see if cms makes an adjustment but congressional action i guess could happen anytime are you getting a sense of when this all might come to a head if it's going to happen and then Also on this issue, I know with the original PDGM rollout, you guys were able to mitigate a lot of that and offset it. Any early thoughts on if it did get implemented, whether you'd be able to mitigate some of it? Does a cut like that being implemented give you more flexibility to go to your workforce or other places and say, hey, we need some help here because of this cut?

Dave Kuntz, yeah hey AJ i'll take the second part and then i'll let Dave talk a little bit about the activity on the Hill, and you know kind of our optimism around. Dave Kuntz, Getting something done with Congress is going to help offset you know. Dave Kuntz, or alleviate ourselves from from the major cuts it's on the table today, but you know we already had on our roadmap some some transformation activities in our organization that we feel. are really long overdue, and there's a lot of opportunity around it. And it's around, you know, kind of more centralized functions that are being 100% decentralized in the organization today, and more automation around some functions that we're requiring people to do today. So we've identified, you know, a spend around decentralized functions in the tune of about $175 million a year that, you know, creates a lot of dependency on accuracy in the field, Also, you know, puts revenue, you know, protection at risk if you have inconsistencies there. And actually, you know, these are duties and functions that can be done in a more streamlined manner. And so, you know, we have been working through some of this and identifying some opportunities over the last year and a half or two years. And, you know, given the threat of the rate cut, we're kind of pulling that forward a little bit. There will be some that will impact actually the back half of this year. and a couple of functions that we've already identified and we're able to kind of get moving on. And we think long term, there's about probably a $15 to $30 million opportunity just around automation and centralization of functions that are being done manually today in a very decentralized fashion. So we'll give more color on that, but just know that we've been identifying this. We already have some things in play that we'll be able to talk about later this year. And it's going to be an offset to either wage inflation that we're dealing with today or potential rate cuts. It's something that we have to do.

Hey, AJ. It's Dave. Thanks for the question on legislation. We, along with the industry, are really excited about the developments on the Hill, especially the introduction of the bill in the Senate. And I think you'll see in the coming days, you will see a companion bill in the House. And I think we've already shared that publicly. So To answer your question, look, based on our conversations with members of Congress, the proposed rule is not what they contemplated when they voted for budget neutrality in the Bipartisan Budget Act of 2018. So, we're seeing a lot of support for a three-year pause in the application of the budget neutrality mechanism. So, really, to get exactly to your question, I think one of the most likely vehicles for legislation is the Medicare extenders package, which, as you know, would be at the end of the year and likely beyond the final rule. So sometime between, final rule usually comes out late October, November 1st. So the extenders package could be after that, but that's a very viable and likely vehicle for our legislation.

Our next question comes from the line of Ben Hendricks with RBC Capital Markets. Please proceed with your question.

Hi, this is Mike Mariano for Ben. Just to follow up on the case rate strategy, how do you think the rates will initially compare with fee-for-service rates? And do you see them converging over time? Yeah, they will.

I mean, it will start to close the gap. It'll still be less than Medicare fee-for-service on a PDGM or episodic basis. But what will happen is we'll see our actual revenue per visit kind of migrate from around $126 to $128. visit today to get into that 175 to 185 over time. And also as we're removing some of these administrative hurdles that we have to do on that type of business, we'll see our actual margin, you know, expand as well from, you know, low 20% to the high 30s to low 40s. So, you know, and then the last piece on top of that is as we unlock this additional capacity, we see an additional two to three percentage points of organic growth that will come with that expansion as well.

Our next question comes from the line of Andrew Mock with UBS. Please receive your question.

I just wanted to better understand how higher fuel costs are impacting your business. You add back a fuel supplement to your adjusted results, but I think you have a mileage headwind in your guide for the back half of the year. So what exactly is the fuel supplement and what's the earning sensitivity to every penny of mileage reimbursement?

Yeah, for me, you know, as we change the mileage reimbursement itself, a penny is about a million dollars. So, you know, we've certainly felt that in our base business through our fleet costs. We've probably talked to another 800,000 in the first half. The stipend piece is just, it's flexing up and now down. based on what we re-established where base fuel prices were and where we thought they'd be at the beginning of the year. So you're seeing that number kind of peak in June and then come back down now as gas prices are settling. So that number, that's not a permanent number. We expect that to go away as things get to some normalcy, hopefully sooner rather than later. But we do plan on increasing our normal reimbursement two cents in the back half of the year. So, you know, you get half a year of that, so it's kind of 800 to a million dollar type of impact in the back half.

Our next question is from the line of Tao Tsukiku with Stifel. Please proceed with your question.

Good morning. Thank you for squeezing in. So in your prepared remarks, you highlight that quality metrics continue to improve in home health, even though visits per Medicare episode continue to stay at the low level of 13.2. Do you think there's still more room to optimize visits or will stabilize once labor and COVID disruption settles some more? And this is the first part. And then how should we think about visit per case or visit per month in the new managed care payment model you talk about? How does this stack up against visit per episode under people's service? Thanks.

Yeah. So in terms of, I'll take the latter part first, is on the visits per episode, as we get into the new case rates, We expect to see, you know, visits per admission very much in line with what visits per admission looks like on the Medicare PDGM side. So right now, it's a little bit higher, and the length of stay seems to be a little bit longer. And, you know, that was one of our key learnings out of utilizing metallogics and PDGM is that, you know, there are visits that we have historically performed that bring no real incremental value to the patient, and that's That's the science behind Metalogix is getting your utilization right so that you're matching the visits to the actual care needs of the patient. And it's worked well there. And we plan on using the same tool in the exact same way as we work through our case rate patients. So we expect that you'll see a lot of similarities in the length of stay and the number of visits that a patient that's in a case rate gets versus a PDGM patient. In terms of visits per episode and where we are, You know, we said last quarter we think this year is going to settle out around 13.2 to 13.3 visits per episode. We are real pleased with kind of where we are right now. We're also very pleased with our quality outcomes. And now that we have actually 100% of our care centers, our legacy care centers at four stars or greater, we're at an all-time low on hospitalization rates, 30-day and 60-day. And we're having, you know, great improvements on our patient satisfaction scores as well. So, You know, we're real happy with where we are. We're not going to try to drive it further. I will say, though, that the Metallogix data suggests there's probably about a half to three-quarters of a visit more that could be reduced, but we're not aggressively trying to do that. Our clinicians are doing a great job of providing excellent quality for our patients, and the outcomes are exactly where we want them to be.

Thank you. Our next question is from the line of Scott Fidel with Stevens. Please receive your questions.

Hi, thanks. Good morning. Just had two quick numbers questions. The first just around the adjusted EBITDA ad backs, you know, those have been creeping up the last couple of quarters to around 19 million in the second quarter. Just interested in terms of how you see those, you know, sort of fleshing out as we get into the back half of the year. I know you did sort of call out a few different items related to that. And then the second just one would be just an updated estimate on the convener impact. I think Scott had mentioned that you guys may be doing a little bit better than that 14 million that you're expecting. Just interested in where you see that shaking out now for this year. Thanks.

Yes, it's one of the add-backs. It has picked up. We had some kind of unusual items there in Q3. If you look at those in Q4, I mean Q2, I'm sorry if you kind of, you know, I think around 15 of the kind of the EBITDA type numbers related either acquisitions or this contingency accrual closed on two deals, somewhere around, I think, $70, $80 million in the quarter. So those are always going to be heightened. And at that point, we had a real opportunity around some back office savings that we took advantage of quickly. So there's some severance numbers, not a medicine, but the acquiring companies that are funded through there. So that's why you're seeing those elevate. I expect all of those to tick back down as we move into the back half of the year. You know, unless we, the only qualification is we do a large acquisition and you have a lot of integration and acquisition costs, which are very hard to predict and why they've stuck in those lines. And then I think the other question was?

I'm not, the conveners, Scott, you had previously called out like 14 million.

14 million, yeah, so we had signaled a $14 million hit Just reminding people, when we look at that, there's two components of that. If you had someone that was moving from an episodic payment to a convener, even if it was a better per visit rate, which most of them have been, than what our traditional 125-ish type of range we've been talking about, if you're stepping down from an episodic reimbursement, there's a rate hit, and then there's a utilization hit that we we put in. Now, we've done better on some of the rate pieces, and some of the utilization hits have not been where we thought they'd be. So that's actually, I really haven't given a number on that, but I would say it's significantly below that $14 million we signaled. But there is an incremental $2 million as we go into Q2 to Q3, both rate and utilization driven.

Our next question comes from the line of Whit Mayo with SVB Securities. Please proceed with your question.

Hey, thanks for sneaking me in. I really just have one question. I still struggle a bit with the face-to-face or the reinstatement of the face-to-face. Can you just maybe share some of the field-level strategies that you're putting around this to prepare? I just have really bad acid flashbacks when I think about the implementation of this the first time. I know you guys aren't as worried as others, but it just might be helpful to hear you know, what you're doing in terms of reeducation in the field, and is there any way you could share what percent of your, you know, starts of care, if that's what we want to call it, are initiated with an actual physical face-to-face assessment today?

Yeah, so starting with the latter part, it's about maybe 10% of our starts of care today are initiated with a virtual face-to-face versus a physical face-to-face. So, I mean, I think that that's still significant. It's a risk for us. you know, we, we, you know, our strategy is leveraging our, you know, our 1300 sales reps that basically spend, you know, time in the physician's offices, uh, in the referral sources offices, you know, you know, multiple times a day, every day to, you know, kind of number one, remind them that, you know, this is only, you know, during the PHE is this allowed to be virtual and, um, that it's going to have to be done, you know, in a, in a, in a physical, you know, format and then, um, and then also educating our referrals and really starting to encourage physical face-to-faces today versus virtual so that we're moving into it a little bit to the extent that we can. So we're already seeing less of a dependency on that in a virtual format today just because we've been encouraging us getting back into the routine to go in and see your practitioner in order to be able to comply with the face-to-face requirement.

Thank you. Our final question is from the line of Joanna Kachuk with Bank of America. Please proceed with your question.

Hi. This is Nabeel Gutierrez filling in for Joanna. Thanks for taking the question. Just a quick one. So, hospice census improved sequentially. What are you assuming for the rest of the year?

We assume for it to continue to grow from where it is. So we should be in year-over-year and sequential growth as we balance out this year. We're seeing good stabilization in the discharge rates. Our median length of stay has been consistent around 24, 25 days for several months now. And we've been kind of shifting a little bit of focus away from hospital referrals to more physician and community which is helping to stabilize that and add to the growth. So we expect to see sequential growth as well as year-over-year growth for the balance of the year.

Thank you. At this time, we've come to the end of our question-and-answer session. I'll turn the call over to Mr. Chris Gerard for closing remarks.

Yeah, thank you, Rob. And thanks to everyone who joined us on our call today. And once again, thank you to all of Ametis' employees who have helped to deliver another strong quarter of performance. I hope everyone stays well, and I look forward to seeing you all on the road in the coming weeks. Thank you.

This concludes today's conference. May this connect your lines at this time. Thank you for your participation.