Enhabit, Inc.

Good morning, everyone, and welcome to Inhabit Home Health and Hospice second quarter 2022 earnings conference call. At this time, I would like to inform all participants that their lines will be in a listen-only mode. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, please press star 1 on your telephone keypad. You will be limited to one question and one follow-up question. 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 Jennifer Hills, Inhabit Home Health and Hospice Chief Investor Relations Officer. Please go ahead.

Thank you, Sarah, and good morning, everyone. Thank you for joining Inhabit Home Health and Hospice second quarter 2022 earnings call. With me on the call today are Barb Jacobs-Meyer, President and Chief Executive Officer, Chrissy Carlyle, Chief Financial Officer, and Chad Knight, General Counsel. Before we begin, if you do not already have a copy, the second quarter earnings release supplemental information and related Form 8-K filed with the SEC are available on our website at inhabit.com. On page two of the supplemental information, you will find the Safe Harbor Statements. which are also set forth in greater detail on the last page of the earnings release. During the call, we will make forward-looking statements which are subject to risk 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 company's SEC filings, including the earnings release and related form 8K. The Form 10 Registration Statement filed on May 25, 2022, as amended on June 8, 2022, and June 14, 2022. We encourage you to read them. You are 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 at the end of the earnings release and as part of the Form 8-K filed yesterday with the SEC. all which are available on our website. I would like to remind everyone that we will adhere to the one question and one follow-up question rule to allow everyone to submit a question. If you have additional questions, feel free to put yourself back in the queue. With that, I'll turn the call over to Barb.

Thanks, Jennifer. Good morning, everyone. Thanks for joining us today for our first Inhabit earnings call. Let me begin by recognizing our field staff. They are the inhabit our patients and families experience each day. It is so rewarding to receive the letters, emails, and calls from our patients and families sharing their stories with me about the impact our staff has made on their lives. I'm very proud of our entire team's work over the past year and particularly over these past three to four months as we work towards our spinoff from Encompass Health. It has been a busy and rewarding time for all of us. We are proud to be Inhabit and we are excited for what the long-term future holds as we focus on a better way to care for our patients. We are confident in the growth potential for Inhabit as more and more seniors prefer to age in place in their homes. Now let's discuss the home health proposed rule. On June 17th, CMS published its proposed rule for 2023, which includes a 7.69% permanent negative behavioral assumption adjustment. The cut would be partially offset by a 3.3% market basket update reduced by a 0.4% productivity adjustment that would result in an approximate 4.2% negative payment impact for 2023. The proposed rule also includes language around a clawback of an additional $2 billion from the industry for assumed overpayments from 2020 and 2021. We are opposed to these cuts and strongly disagree with CMS's approach, interpretation, and resulting recommendations. Inhabit, along with its trade associations and industry partners, are pushing back hard on this rule. We are currently working with our legislative supporters on Capitol Hill to mitigate these cuts. On Monday of last week, Senator Debbie Stabenow Democrat from Michigan, and Senator Susan Collins, Republican from Maine, introduced the Preserving Access to Home Health Act. An identical companion bill was introduced in the House last Thursday by Congresswoman Terri Sewell, Democrat from Alabama, and Congressman Vern Buchanan, Republican from Florida. The bill would immediately prevent CMS from implementing the proposed permanent and temporary adjustments to home health prior to 2026. This would allow more time for the industry to work with CMS to refine its proposed approach to determine budget neutrality in home health. I would like to take this opportunity to thank them for not only introducing this legislation, but also for their years of ongoing support for the industry. For hospice, the final rule was released, and it acknowledged higher inflationary trends and provides a 3.8% update for hospice payments for fiscal year 2023, an increase over the proposed rule. Now let's get into quarter two for inhabit. We knew quarter two of 2022 faced a difficult comp as quarter two of 2021 was the strongest quarter of that year as the country rebounded from the COVID pandemic. Net revenue for the second quarter of 2022 was $268 million. with adjusted EBITDA of $40.3 million. This compared to net revenue of $286.1 million and adjusted EBITDA of $57.8 million for the same period in 2021. Several factors impacted our decline in admissions for both home health and hospice, including an increase in the use of paid days off, vacation time year over year, coupled with less availability of our PRN staff for coverage, challenges early in the quarter with rebranding as it impacted e-referral systems, and a general decline in admissions from acute hospitals. Regarding paid days off, on the clinical field service side, we experienced a 7.4% increase in the use of paid time off year over year. On the sales side, we experienced a 2.2% increase. We know from employee engagement feedback that work-life balance is a top priority, and our staff are excited to finally use PDO for travel and fun versus quarantines and sick time. Staff have commented how great our PDO plan is, but the plan should not be difficult to actually use for time off. In these times of labor shortages, taking care of our patients is a top priority for healthcare providers. but we have to find ways to give our staff the time off they have earned. We covered some of this time off with extra visit pay and PRN usage. PRN staff are those staff members that work for a per visit rate on a when needed, when available basis. They have no specific commitment of hours worked. Many PRN staff members are on staff with multiple companies. Although our number of PRN clinical staff has been stable, We had 30,000 less PRN visits year over year, mainly due to the availability of the PRN staff. This impacted conversion of referrals. PRN staff have an important role to cover paid time off, FMLA, sick time, and regular staffing vacancies. Our compensation team is currently evaluating structure and compensation in each market to determine potential competitive adjustments that may need to happen. Another impact to our admission volume was the temporary impact of our rebranding with electronic referral systems early in the quarter. These electronic systems have grown over the pandemic as an increased number of facility-based healthcare providers have relied on these systems to send referrals to numerous post-acute providers simultaneously. Instead of handing a referral to a care transition coordinator or a sales account manager or faxing them, The discharge planners use these electronic systems to find home health providers in the patient's zip code and work with the patients to select a few providers. Then the discharge planners send the request to the various providers. It is critical to respond in a timely manner if you can accept the referral. In April, we saw these referrals decline and discovered additional work was needed by us and the electronic referral companies to ensure we had a successful creation of each inhabit location page and that there was a link with the previous encompass selection that would direct them to inhabit. All e-referral systems have now been updated and in June we saw these referrals normalized. The temporary e-referral issue was part of our decrease in admissions from acute hospitals. Additional impacts came from the significant decline year-over-year in COVID patient volumes at acute hospitals and the decrease of electives at acute facilities. Our total electives were relatively flat year-over-year with the ongoing shift of our elective admissions coming from surgery centers. This shift has impacted our payer mix as there is a higher Medicare Advantage mix of these patients in the surgery centers. The continued shift in our total patient-payer mix is impacting our adjusted EBITDA and our margins. We experienced a 21.5% increase in non-episodic admissions this quarter. Medicare Advantage enrollees continue to outgrow traditional Medicare, and we must meet our referral sources' needs for these patients so that we can grow both episodic and non-episodic volumes in home health. To address this opportunity, we promoted a proven leader in our organization to lead our new payer innovation team. She has been very successful selling our value proposition over the years to ACOs and DCEs. In the past, our contracting team focused on contract term negotiations. Adding her talent to oversee this with a payer innovation focus has us already at the table with several national payers. The discussions are now on how we can work collaboratively towards each of our goals. We need to be paid fairly for the high quality we provide, especially our ability to reduce or mitigate hospitalizations. Payers need better and more timely access to home health services for their members and assistance in managing gaps in care. We are early in these discussions but pleased with initial reactions. Turning to hospice, Revenue declined as a result of lower ADC driven by lower admissions in the first two quarters. We added a great talent to our team in June of this year with an EVP of hospice. She comes to us with over 30 years of hospice experience in both sales and operations. In her first two months, she has identified opportunities for improving our clinical care model and diversifying our sales process. We saw an increase in admissions and a steady climb in referrals in June that have continued into July. With referrals increasing in both home health and hospice, our admissions will improve as we experience continued progress in our net new nursing hires. We had 96 net new nursing hires in quarter two versus 27 last year and versus 30 in quarter one of this year. Our vacancy rate has remained stable around 25% over the past year. We currently have 667 nursing openings compared to 688 last year. It's important to remember that the denominator of total positions is not static. As we grow and as we promote some of our clinical staff into leadership roles, we create additional openings. That's why we focus on the number of staffing-constrained locations. Our net new hires have resulted in a decline in the total number of staffing-constrained locations. We exited the first quarter of 2022 with 69 home health locations and 20 hospice locations constrained due to staffing. We exited the second quarter with 53 home health and 17 hospice locations constrained. We have continued to make progress and currently we have 41 home health and 13 hospice locations constrained due to staffing. We will maintain a hyper focus on our clinical staff recruitment. However, with this hiring progress and net new nurses, we are now in a position to focus on sales. We currently have 71 less sales headcount in home health and 18 less in hospice year over year. There's no perfect science to this, but we need to make sure our local branches are staffed and have available capacity so a sales team member can say yes and feel success in their role. We are focusing these hires in the markets where we have built clinical capacity. We remain very confident in the long-term growth potential for home health and hospice. Organic growth is a clear focus for our talent acquisition, sales, and operation teams. Growth in de novos and acquisitions are also key to our long-term growth strategy. We have opened three de novos year-to-date and continue to work towards our goal of 10. Our acquisition development pipeline has experienced strong growth over the past few months. Clarity around inhabit and the spin has increased our inbound calls and the acceptance of our outbound calls. We are confident we will meet our goal of $50 to $100 million in acquisitions in 2022. I'm proud of the management team we have assembled. We have a great blend of strong tenured and habit leaders and new experienced leaders. Every challenge we identify is followed with actionable plans that will drive our long-term success. The cadence of results of these actions is important as we look towards the back half of 2022. Some of the critical drivers such as payer innovation and talent acquisition and retention take time. Based on these and other drivers, we are revising guidance. Our updated guidance includes revenues of $1,075,000,000 to $1,110,000,000 and adjusted EBITDA of $155,000,000 to $170,000,000. The low end of the guidance assumes no substantial improvement from our quarter two performance in the back half of the year. The high end assumes our payer mix improves slightly, productivity improves, we see improved growth in completed episodes for home health, and our hospice ADC returns to quarter four 2021 levels or higher. Chrissy will go into more details on the various levers. With that, I will turn it over to her.

Thanks, Barb. Before we get too far into the numbers, I want to do a little level setting as to how the financial information presented in our earnings release and supplemental slides differs from our historic presentation as a segment of Encompass Health. The financial information in these documents is presented on a carve-out basis of accounting. That means our adjusted EBITDA includes an allocation of overhead from Encompass Health. We've provided a schedule on page 30 of our supplemental slides posted on our website and filed yesterday as part of the form 8K that reconciles the historic adjusted EBITDA as a segment of Encompass to inhabit suggested EBITDA as a standalone company. For the second quarter of 2022, the net overhead allocation was 3.5 million compared to 3.7 million for the second quarter of 2021. Effective July 1st, post separation, we will use actual cost of being a standalone company. Consistent with our previous guidance considerations, we estimate standalone costs will be in the range of $15 million to $17 million in the back half of 2022. Now, let me provide some additional comments on the quarter. First, as Barb mentioned, the second quarter of 2021 was the strongest quarter of last year as the world attempted to reopen. In contrast, the second quarter of this year was impacted by the continued shift to more non-episodic payers in home health, the partial resumption of sequestration, a slow recovery in hospice, and inflation. The partial resumption of sequestration decreased our revenue 3.4 million in the second quarter of 2022, 3 million in home health, and 400,000 in hospice. In addition, our mileage reimbursement program is an important part of our ability to attract and retain a mobile workforce. In late March of this year, we updated our mileage reimbursement formula and committed to our employees that we would examine gas prices on a monthly basis due to the rapid increases at the pump. In the second quarter, our fleet and mileage reimbursement costs increased 2.3 million year over year in our home health segment total admissions decreased 2.4 percent year over year primarily due to a reduction in episodic admissions offset by continued strong growth in non-episodic admissions in the second quarter of 2022 our non-episodic admissions increased 21.5 percent year over year and grew to almost 23% of our total home health visits during the quarter. In the second quarter of 2021, non-episodic patients comprised approximately 19% of our total visits. We estimate the impact of this payer mix shift was 3 to 4 million on revenue and adjusted EBITDA during the second quarter of 2022. We are pleased with our continued Medicare Advantage volume growth, and as Barb discussed, we are taking steps to demonstrate our value proposition to these payers as we negotiate our contracts. Our cost per visit increased 10% year over year in home health, primarily due to lower clinical productivity, increased cost associated with fleet and mileage reimbursement, increased PDO usage, increased use of contract staff, and market rate increases for nurses. In our hospice segment, admissions decreased 14% year over year, primarily due to capacity constraints and staffing challenges leading to a decline in referrals. In addition, our discharge rate outpaced admissions throughout most of the quarter. These factors contributed to a 10.9% decline in our average daily census. Hospice costs per day increased 6.2% year over year, primarily due to lower clinical productivity, increased costs associated with fleet and mileage reimbursement, and costs associated with our use of MetaLogic Muse for patient care planning. Let's transition now to the balance sheet. Just prior to our spinoff, we entered into a credit facility that includes a five-year $350 million revolving credit facility and five-year $400 million term loan A. We drew approximately $170 million on the revolver on June 30th. The full 570 million of proceeds from these facilities was distributed to Encompass Health. At quarter end, our net leverage was 2.9 times and we had approximately 230 million of available liquidity. I'll conclude with a few comments regarding our revised full year 2022 guidance. This guidance reflects the current challenging operating environment and the fact that volumes have been slower to return than expected. As a reminder, the full year range includes an approximate $12 million impact from the resumption of sequestration and $8 to $10 million of additional overhead cost in the back half of the year as we continue to stand up the company on its own. On page 21 of the supplemental slides, we've listed some of the guidance considerations for the full year. On the home health side, the risks are around volume and payer mix. In hospice, the risk is around volumes. And of course, controlling costs will be very important. Salaries and benefits represent 90% of our cost per visit in home health and 60% of our cost per day in hospice. We must manage those costs while also ensuring we can recruit and retain staff to service the volume demand in our markets. In addition, and as already discussed, rising gas prices are increasing our costs based on the millions of miles our clinicians drive each year. Based on current gas prices, we estimate our mileage reimbursement costs, not including our fleet related costs, will increase approximately $7.5 million year over year. In regards to free cash flow, we currently expect to generate between $75 million and $106 million in 2022. During the first six months of 2022, we generated $78 million of adjusted free cash flow, we had no cash interest or cash income tax payments. In the back half of 2022, we expect to make cash interest payments at between $10 million and $14 million and cash income tax payments at between $20 million to $25 million. We plan to use our free cash flow to fund growth in our business. We also have $10 million of required amortization on our term loan in the back half of 2022. With that, I'll ask the operator to open the lines for Q&A.

Thank you. Ladies and gentlemen, if you would like to ask a question, please press star 1 on your telephone keypad. If you would like to remove yourself from the queue, you may press star 1 again. One moment, please, for your first question. Your first question comes from the line of Joanna Gajuk with Bank of America. Please go ahead.

Yes, good morning. Thanks for taking the question here. So I guess just thinking about, I guess, margins, obviously the guidance came down largely on the higher labor costs. But if I'm trying to kind of parse through these numbers, you know, and what is implied for second half, so if I look at the standalone cost, you previously talked about $4 million in Q1. So if I have some similar numbers for Q2, that's, you know, standalone company margins. I guess performer would be 14.6 in first half, but this guidance now implies maybe 13.7 in second half. So, is my math, I guess, in the ballpark, and is this kind of the good starting point for the margins going forward?

So, Joanne, this is Chrissy, and I hope I understand your question correctly, and if not, please correct me. The original guidance assumption for what I'm just going to refer to as standalone company costs for full year 2022 was $22 to $24 million. In the first half of 2022, and I'm going to use rounded numbers, the overhead allocation from Encompass Health was about $7 million. So the back half of the year is going to be more than that as we continue to stand up the company and move to these actual costs. So it is back-end loaded. When you assume that we have $7 million going into the back half, the additional overhead that's being taken on is that $8 to $10 million that we talked about. Does that help?

Yeah, but I'm just trying to think about, because, yeah, the first half versus the second half and, you know, the standalone costs coming in. And then, you know, when you look at the guidance for the year, you know, just trying to see what this implies for the second half kind of, you know, standalone company fully loaded cost structure margin.

Yeah, absolutely. So the back half of the year is, if you think about standalone costs, the range would be $15,000 to $17,000. That's more than the seven included in the first half of the year. So when we talk about the eight to 10 million of additional, that's where that's coming from. The ultimate run rate still remains in that 26 to $28 million run rate. It's likely, Joanna, that we won't hit that run rate until sometime in 2023, likely the back half of 2023. But ultimately, that remains the standalone operating cost for inhabit.

Thank you. And if I may, you mentioned the Medicare proposal on the home health side calling for, you know, negative rate update next year. You know, it seems like the market baskets, you know, for the regs we have seen clearly moving up at least 100 basis points, maybe 110 basis points. So that's good. But if this, you know, behavior adjustment was to stay and there was, say, you know, a slight decline in rates or maybe at best flattish if it's spread out over two years. What can you do to kind of manage through that next year when you have flattish rates versus your labor cost inflation obviously much higher than that?

Yeah, obviously the big focus for us will be as we continue to see our net new hires improving will be to be able to focus on using those for our productivity and our optimization, because we do have room to continue to improve in both of those areas. As well as when you think about being more fully staffed, you can also plan your visits around improving the mileage that our staff are driving. So while the mileage costs have gone up, we can actually offset that by improving and making them more productive with their mileage as well. So there'll be some big focuses on those components.

And if I may just ask a question in terms of your guidance and how you on the slides talk about still including 50 to 100 million spending on deals. So is that also the assumption for this year? Yes, that's right. Okay. So would it be more on the hospital side than home health? It sounds like we're hearing from other companies that are pretty acquisitive for that, you know, the kind of pause in the home health given the proposal, the Medicare proposal.

We are seeing more of the hospice in the pipeline than we are home health at this point.

Okay, great. Thank you.

Your next question comes from the line of Scott Fidel with Stevens. Please go ahead.

Good morning.

Hi, thanks. Good morning. First question, just appreciate some of the color you gave us around the revised outlook. I thought it may be helpful, too, if you could, to the extent you can, maybe broke down the revised outlook for the EBITDA guidance between the two segments, home health, hospice, and then the corporate side, sort of how that lower EBITDA guidance sort of splits out across the three segments.

Yes, Scott, unfortunately, we don't give guidance on a segment basis, so everything that we talk about is on a consolidated level. When you think about the drivers, it's volume on both home health and hospice. The payer mix shift obviously only impacts home health. The cost initiatives, productivity and optimization, productivity is on both sides. Optimization is more on the home health side of the house. A few other things that, you know, PRN usage and some of those factors that Barb discussed, they're on both sides. The one factor that is cost-related to hospice that's not part of home health is when we think about one of the changes that the new executive vice president of hospice is piloting is a new staffing model based off of a caseload, which is more hospice-specific than it is home health-specific. Historically, we've ran that operation more like a home health productivity measure. So when you move to this caseload model, there's also some premium pay associated with things such as after-hour visits and on-call that could increase the cost associated with some of our hospice visits.

And so that's also being considered in the revised guidance.

Understood. And then follow-up question just around cost per visit. And in the slide deck you have, you know, you're guiding for 5% to 6% CPV for home health, you know, for the full year. Clearly that was, you know, substantially higher at around 10% in the second quarter. Just interested in terms of how you think that 10% number, you know, sort of moderates over the course of the back half, you know, from 3Q to 4Q. and what the key drivers, you know, of that moderation would be. It's, you know, obviously you laid out sort of a number of the headwinds that you experienced in 2Q. Should we think about sort of driving improvement across each of those factors, or is the improvement, you know, more weighted to a couple of those items in terms of the back-up improvement? Thanks.

Sure. So certainly the increase in CPV that we saw in Q2 was a consideration as we revised guidance. That's a little bit higher than what we expected and what we had planned for. In the back half of the year, we do anniversary, the market rate adjustments that we put into place last summer. So that's a helpful item. We are seeing the increased PDO usage. And of course, with that, when someone goes on PDO, you do have to put someone back in the field to service that volume. That can be done through premium rates to a PRN staff or to our own staff, extra visit pay, if you will. So those are some of the factors that we're considering when we think about that. The bigger drivers will be getting the volumes, and that will improve productivity because that is one of the more significant items impacting our fixed cost structure right now.

Okay, thank you.

Your next question comes from the line of John Ransom with Raymond James. Please go ahead. Good morning.

Hey, good morning. Good morning. And I'm sorry if I missed this, but could you just say again what the top one, two, three things were between your initial guidance and your updated guidance? And specifically, what changed in the last few weeks that caused you to alter your view? Thank you.

Sure, John. A lot of it is we have June and July actuals at this point, and volumes have been slower to recover than anticipated. We also had increased PDO usage. While that supports staff retention, there is premium pay associated with putting people in the field to try and take care of those outages. We're also going to be examining our PRN rates, as Barb mentioned in her script. to see if we're being competitive because we did see a decline in PRN usage and availability during the quarter. And then, of course, I think the one thing that people may not realize is that our gas prices are in arrears, right? So we base what we pay in July on June prices. I think some of the comments we received last night were rates are going down. Well, they are. They did go down some in July, and those will be adjusted somewhat for August. But the rates we paid in July were the highest we had seen based off of what happened in June. And then, of course, as I mentioned just a few minutes ago on the response to Scott, we do have a new staffing model that we're piloting in hospice. And if we so choose to implement that more fully, then there will be some premium pay for after hours and on that department.

Okay. And then my follow-up question is, I mean, obviously, getting on the other side of this Medicare Advantage makeshift risk, you know, and changing the rate structure is critical. Do you think year-end is a realistic timeframe to think about getting this negotiated, or is there no way to put a timeframe on it at the moment?

It's hard to put a timeframe. What I will say is when in our discussions with the larger payers, We've been talking about things like episodic or case rates because I think we're all very interested in going that direction. But what we've been asking for is consideration now to our visit rates because if it's going to take time for them to build out in their systems how they pay either episodically or case rates, we'll understand that. We'll be patient with that. But what we've said is you know, without a fix now to where we are on a per visit rate, we're left with continuing to deprioritize their patients. And so, you know, we've gone in with data around wage inflations, gas prices. And so, you know, I think that it's hard to say timing on getting us to that episodic or case rate. But I do feel that by the end of the year, we will have made some progress, at least on some of these larger per visit rates.

So, I mean, you've called out the United contract in particular as one that's putting some pressure on you. Is that open for renegotiation or is there an expiry where you're just kind of stuck with the legacy deal until the renewal date?

Well, it's always, I think, open for renegotiations as you look for one of the things that we're realizing as we've met with United and others is that access for their members is critical. And so I think things are always open for renegotiations if, and through that, we can commit better access for their patients. So I feel good that we could at least come up with something midterm.

Okay, thank you.

Once again, ladies and gentlemen, if you would like to ask a question, it is star 1 on your telephone keypad. Your next question comes from the line of Brian Tancelot with Jefferies. Please go ahead.

Good morning.

Hey, good morning. Good morning, and welcome to, I guess, being public as in habit. I guess, Bart, my question for you, you know, obviously a good percentage of your referral flows right now come from the Legacy Health South relationship. How are you thinking about the durability of that and, you know, just kind of like the, yeah, how should we be thinking about that?

Sure. Well, I guess just to get a little bit of color on the quarter, so our admissions were actually down about 643 from the Encompass Health IRFs in the second quarter year over year. What I will say, though, is that, you know, that the care model we've put in place to be able to take care of those types of patients that need such an intensity of nursing and therapy, we've done so well with that that we've made sure that our care transition coordinators are beyond our Encompass Health IRFs. admissions from all IRFs actually were relatively flat year over year. And so I think really being able to go out and kind of sell that care model to all has been helpful for us. The other thing that's helpful to know is that 68 of the IRFs were generally flat year over year, 35 declined, and 28 increased. So what we're focusing on as a team here are when we look at those that actually increased, what were some of those best practices that were in place so that we can focus that on the areas that declined.

Gotcha. That makes sense. And then maybe, Chrissy, as I think about the guidance you had given previously on admissions CAGR for home health at roughly 10%, just to clarify, does that include anticipated acquisitions?

It does. It's all in.

Got it. Okay.

Perfect. Thank you.

Thanks. Your next question comes from the line of Jason Casorla with Citi. Please go ahead. Good morning.

Good morning. Great. Thanks for taking my questions. Just going back to the MA conversation you've been having, you noted the 35% to 40% rate differential. How should we think about the pull through of that lower reimbursement on a relative basis kind of directly to EBITDA or You know, are there ways to offset maybe the costs per visit on the Medicare Advantage member versus perhaps the cost per visit on the fee-for-service? I'm just trying to understand if that rate differential falls right to the bottom line, or are there some offsets, you know, as we think about the goal forward and this mixed shift towards Medicare Advantage?

Yeah, unfortunately today that falls straight through the bottom line. Now, what I would say is, you know, we would focus with Medicare Advantage, just like we do on fee-for-service, on the optimization piece. And that's where, you know, you have someone working at the top of their license. So if that visit can be performed by an LN versus an RN or a PT assistant versus a PT, that is a way to lower that cost per that visit. So, you know, you continue that focus, but that we have both on fee-for-service as well as MA.

And then, Jason, the only thing that I would add to that is that when you're having these discussions with the MA payers, You're also talking about certain administrative expenses that we incur to service those contracts. So you put things on the table like if we don't have pre-auth and such that, again, require administrative time and people for us, that also helps us with the A&G cost.

Got it. Understood. And then just shifting to that $50, $200 million of acquisition. Sorry if I missed this, but did you delve into where the focus of those dollars are going, either on the home health or hospice side? And then I guess just given the backdrop, can you give us an idea of how multiples are developing for both home health and hospice, just given the backdrop and all the pressures you're kind of flagging here?

Sure, so I'll touch the first question. And what we're seeing is a little bit higher hospice potential development projects in the pipeline compared to home health. We actually are interested very much in both on the hospice front. We continue to want to increase the overlap of our hospice where we have home health. For home health, we look at opportunities that allow us to have those tuck-ins. So if there's markets that we could benefit from our productivity and optimization by adding home health locations to kind of build out a territory, then that's a continued focus for us. But at this point, we are seeing a little bit more of a hospice than home health in the pipeline.

And then, Jason, on your multiple question, multiple is very widely based on what you're buying. Some of those variables include, you know, the CON status, you know, what states it in, the referral concentration, the market penetration, the patient mix. All of those factors are considered when we approach a company with a potential offer. I would say that right now multiples are generally sub 10. They do run higher for hospice. You have, you know, fewer hospice assets across the country. And then, of course, when you run hospice, you can earn a little bit higher margin than you can in home health. I would say that hospice is probably at the higher single digits right now versus a home health, which is going to be closer to the mid-single digits.

Okay, thanks.

And those are for the onesies, twosies, the smallers. That's not if you had a portfolio of assets, which would obviously attract a higher multiple.

There are no further questions at this time. I will turn the call back to Jennifer.

Thank you, Sarah. If anyone has additional questions, please call me at 469-621-6496. Thank you again for joining today's call. This concludes today's conference.

You may now disconnect your lines.