Enhabit, Inc.

Good morning, everyone, and welcome to Inhabit Home Health and Hospice's first quarter 2023 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 period. 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. Today's conference call is being recorded. If you have any objections, you may disconnect at this time. I'll now turn the call over to Mark Brewer, Inhabit Home Health and Hospice Chief Investor Relations Officer.

Thank you, Julianne, and good morning, everyone. Thank you for joining Inhabit Home Health and Hospice for our first quarter 2023 earnings conference call. With me on the call today are Barb Jacobsmeyer, our President and Chief Executive Officer, and Chrissy Carlisle, our Chief Financial Officer. Before we begin, if you do not already have a copy, the first quarter earnings release, supplemental information, and related form 8K, or filed with the SEC, are available on our website at investors.ehab.com. On page two of the supplemental information, you will find the safe harbor statements, which are also set forth on the last page of the earnings release. During the call, we will make forward-looking statements, which are subject to risks 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 Form 10-K and subsequent quarterly reports on Form 10-Q, each of which is available on the company's website once filed. We encourage you to read them. Your caution 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 and the earnings release. I'd like to remind everyone that we will adhere to the one question and one follow-up question rule to allow everyone to ask a question. If you have an additional question, please feel free to rejoin the queue. With that, I'll turn the call over to Mark.

Thank you, Mark. Good morning, everyone. Thanks for joining us. I'd like to take a quick moment during this Nurses Week to acknowledge all our nursing professionals who provide a better way to care each and every day for our patients, families, referral sources, and payers. It is our nurses alongside our other clinicians, caregivers, and support staff who deserve the credit for our consistently strong quality outcomes. We firmly believe care will continue to move to the home, and the long-range growth potential is significant, particularly for the providers that can deliver the high-quality care required to help patients remain wherever they call home in a cost-effective manner. Let's talk now about our Quarter 1 results as we continue to make progress in two of our critical success factors for 2023. payer innovation, and the recruitment and retention of clinical staff. We are pleased with the progress we've made in both areas. The start of the year has been a busy and productive time for our payer innovation team. The most significant update is our executed agreement with a national payer that became effective May 1. Our branches are excited and ready to accept these patients they historically had to decline. In addition to this national payer, We executed agreements with two conveners that have national reach, both of which went effective May 1. We look forward to working alongside these conveners to solve challenges and deliver accessibility for patients for home-based care. The primary role of a convener is to create high-quality networks of post-acute providers who can lower the overall total cost of care. They understand the need to pay competitively for timely access to high-quality care. Our data analytics and strategic finance teams have collaborated to produce information for the field to direct our local teams where to go to drive change in referral and admission patterns towards these new agreements. I have been traveling with members of our executive team visiting our local leaders. To date, we have visited branch operations and sales teams covering 159 branches. We believe it's important to take time to sit down and be transparent as we present not only how but why we must deselect certain payers and replace them with the new regional and national agreements. We spend time walking our operations and sales leaders through the impact of not making these tough decisions and how this affects our ability to reinvest in our people and our technologies. We sincerely acknowledge there is a patient on the other side of these tough decisions, but we remind them we did not create the need for this difficult decision the payers have. We thank our employees for remaining focused on the quality of care they provide and remind them to rely on us at the home office to negotiate these better contracts. We are confident the strong quality outcomes our clinicians drive, particularly our low readmission rates which are 360 basis points below the national average, will continue to reinforce our value to the payers and the conveners. To put the financial impact of driving this change in perspective for you, every 5% move of non-episodic admissions under our current average rate per visit to one of our new national or regional agreements improves adjusted EBITDA by approximately $2 million annually. This is outside any additional volume growth. In addition to our success with payer innovation, we have continued success with our recruitment and retention of clinical staff. A continued increase in our full-time nursing candidate pool drove 101 net new full-time nurses in the first quarter, 91 in home health and 10 in hospice. Our full-time vacancy rate improved 50 basis points sequentially decreasing from 24.3% to 23.8%. We are beginning to see the impact of our staff completing orientation and ramping up their patient caseloads. We ended the quarter with only four hospice locations at capacity constraints and 71 in home health. 17 of these home health capacity constraint locations occurred as a result of growth to new census levels. New positions have been posted in these locations to increase core staffing. With improved staffing and increasing volumes, the team's efforts around productivity and optimization resulted in a 2.3% year-over-year increase in home health cost per visit and a 4% sequential decline in cost per visit from Quarter 4, 2022. For hospice, the implementation of the case management model has created an increase in our cost per day year over year. The use of contract labor, while less than quarter four, and additional triage and dedicated on-call resources drove 1,000 basis points of the 13.2% increase year over year. Sequentially, cost per day increased 4%, primarily due to the impact of the case management model's fixed cost that were added in quarter four with lower patient days in quarter one. We continue to believe these are critical resources needed to drive our recruitment and retention and our ability to accept patients from a more diverse referral source. I'm also excited to share with you a little about our first inhabit employee engagement survey that was recently completed. 76% of our full-time and part-time staff completed the survey. And their response to the question, how likely is it you would recommend Inhabit Home Health and Hospice as a place to work, was above national healthcare benchmarks and places us in the top quartile of healthcare. The two top drivers of engagement were the meaningful work that we do and the organizational fit our employees feel, specifically when it comes to diversity and inclusion. We scored in the top 5% of healthcare on each of these drivers. With the continued progress in staffing, payer innovation, and our hospice case management model, we are making additional strides towards our growth strategy. In March, we acquired a home health agency in Evansville, Indiana, and we continue to have success with our de novo strategy. In quarter one, we opened two hospice de novos and have increased survey activity at other sites in quarter two, which is a prerequisite to obtaining our provider number. We believe we are on track to open 10 de novo locations this year. With that, I'll turn it over to Chrissy to discuss our quarter one results and guidance.

Thanks, Barb. Consolidated net revenue was $265.1 million for the first quarter, down $9.2 million, or 3.4%, year over year. We estimate the continued shift to more non-episodic payers in home health and the resumption of sequestration decreased revenue approximately $10 million year-over-year. While both of these items fall directly to the bottom line, adjusted EBITDA, which decreased $21.7 million year-over-year, also included increased general and administrative expenses primarily due to increased employee group medical claims and incremental costs associated with being a standalone company. In our home health segment, Total admissions increased 1.2% year-over-year as continued strong growth in non-episodic admissions offset a reduction in episodic admissions. While episodic admissions decreased year-over-year, they increased 1.3% sequentially from the fourth quarter of 2022, driven by our new Medicare Advantage contracts that pay episodically. This represents the first episodic growth we have experienced since the first quarter of 2022. In the first quarter of 2023, our non-episodic visits grew to approximately 29% of our total home health visits. This represents an approximate 700 basis points increase year over year and an approximate 300 basis points sequential increase over the fourth quarter of 2022. We estimate the impact of this payer mix shift with approximately five million on revenue and adjusted EBITDA during the first quarter. As Barb discussed, we are making significant progress demonstrating our value proposition to payers as we negotiate new agreements with improved rates. Our cost per visit increased 2.3% year over year as improved clinical productivity and optimization offset the impact of merit market increases contract labor, and a rise in employee group medical claims. The year-over-year increase in employee group medical claims impacted cost per visit by approximately 120 basis points. In our hospice segment, we achieved a 7.1% sequential increase in admissions, while our average daily census decreased 1.8% sequentially. This decline in average daily census was the result of an increase in the number of admissions with shorter lengths of stay. We had 137 more deaths in the one to 30 days length of stay range than in the fourth quarter of 2022. This is due in part to our intentional diversification of referral sources and the expansion of the number of our admissions coming from facilities. As patients coming directly from a facility tend to be admitted to hospice care later in their journey. As Barb mentioned, the implementation of the case management model is the primary driver of the year-over-year increase in cost per day. Similar to the third and fourth quarters of 2022, our nurse recruitment success resulted in full-time nurses who were not at full productivity throughout the first quarter and increased use of contract labor to keep referral sources strong during that onboarding period. We now believe we have full-time nursing capacity that will allow us to reduce our use of contract labor and improve clinical productivity going forward. Our home office general and administrative expenses increased approximately $4 million year-over-year, primarily due to incremental costs incurred as a standalone company and increased employee group medical claims. For the first quarter of 2022, The net overhead allocation from Encompass HELP was $3.1 million, as shown on page 26 of the supplemental slides that accompanied our earnings release. For the first quarter of 2023, we recorded standalone company costs of $5.1 million. These costs include expenses associated with the transition services agreement we have with Encompass HELP, as well as costs we are incurring to ramp up our team and their resources. In regards to free cash flow, we generated over $28 million during the first quarter. Adjusted free cash flow during the quarter benefited from the timing of payroll and a $6 million income tax refund related to overpayments in 2022. We continue to expect to generate between $49 million and $88 million of adjusted free cash flow in 2023. Let's transition now to the balance sheet. Information on our debt and liquidity metrics is included on page 15 of the supplemental slides. We exited the quarter with net leverage of 4.2 times. Our credit agreement requires that our ratio not exceed 4.75 times. Our leverage ratio is more sensitive to changes in adjusted EBITDA than it is to reductions in debt. As we've noted previously, The ramp from quarter to quarter in 2023 is expected to be steep. The strongest quarters of 2022 were in the first half of the year and will be replaced in the trailing 12-month calculation of adjusted EBITDA by what we expect to be the lowest quarters of 2023. While net debt decreased approximately $25 million from December 31st to March 31st, our trailing 12-month adjusted EBITDA decreased approximately $22 million. This is putting pressure on our leverage. This pressure on our leverage also constrains our liquidity by effectively limiting the amount we can draw on our revolving credit facility. As of March 31st, we had 107.6 million of available liquidity, including 37.6 million of cash on hand, which we believe is sufficient to support our operations and financial obligations. As a reminder, Post our spinoff from Encompass Health, we've drawn on the revolver only once for $20 million during the fourth quarter of 2022 when we funded three acquisitions and made a $15 million deferred payroll tax payment related to CARES Act funds. Through today, we have repaid $10 million of that revolver borrowing and made $15 million in required payments on our term loan. Our current forecast indicates we will continue to be in compliance with our financial covenants. Given the leverage pressures mentioned earlier, we are continually and closely evaluating our expected compliance with the covenants under our credit agreement and will take all appropriate steps to proactively renegotiate such covenants if needed and when appropriate. Let's turn now to guidance. As we stated previously, We knew the headwinds in 2023 were going to be stronger in the first half of the year, and we noted the ramp from quarter to quarter this year would be steep. Given the increase in employee group medical claims, our quarter one results were just shy of our internal expectations. With our expansion of Medicare Advantage contracts and improved rates combined with reduced staffing capacity constraints, We expect to see improvements in our bottom line throughout 2023. We maintain our 2023 guidance that includes adjusted EBITDA of 125 million to 140 million. Given the slightly weaker than expected first quarter results, the higher end of the range assumes sequential trends and episodic admissions and home health accelerate, the quick and smooth transition of non-episodic admissions to our new national and regional payer contracts, and improved clinical productivity in hospice. With that, we will open the line for questions.

Thank you. If you would like to ask a question, please press star followed by the number one on your telephone keypad. As a reminder, in the interest of time, we ask that you please limit yourselves to one question and one follow-up question. Thank you. Our first question comes from Brian Tanklet from Jefferies. Please go ahead. Your line is open.

Hey, good morning. I guess, Chrissy, thank you for the comment on the cadence for the year and the improvement from Q1. But maybe if you can share with us kind of like where the confidence comes from and your visibility into sequential gains versus Q1. And I know there's seasonality in your business, but what can you tell investors to make them feel or get the same level of confidence that you have to get to the numbers for the year.

Yeah. So I think it kind of gets back to the closing remarks of my script. The new national contract that Barb mentioned earlier and that was part of our earnings release, as well as the two new convener contracts, they all became effective May 1st. And so we are 10 days into looking at the performance of those contracts and working with our teams to shift those contracts into replacing former contracts or historic contracts. So it's a little too early to know how quickly and smoothly we can make that transition. As Barb mentioned, for every 5% of current non-episodic visits under one of our historic contracts that we can move to one of these new national or regional contracts, That's $2 million of adjusted EBITDA annually. Now, again, it went into effect May 1st, so you have to timeline adjust that. But it's a big, it's a significant impact. And that's before we even focused on growing as a result of those contracts. So that's one of the bigger drivers of the rest of the year. In addition, episodic admissions. Recall that historically when we've had a national contract One of the other benefits or side benefits to a national contract is that our referral sources, we become more of a one-stop shop for them. And so when you go in and say that we can now take these patients, they also tend to provide more episodic patients to you again because you're meeting more of their direct need. So that's one of the things that we're focused on in regards to how can we accelerate and continue some of the episodic growth that we've seen thus far. And then the last factor is the clinical productivity in hospice. Again, as we noted, hospice has reached a point of staffing capacity that we're comfortable with and believe that we have the full-time nurses in place that we need. And so we can begin trending out, trending down the contract labor as we go through the rest of the year. And that's why you see that guidance consideration. We did take that guidance consideration up from 4% to 5% to 4% to 6% for hospice costs per day. But, again, we stay comfortable with that knowing that the first quarter included contract labor usage. But what we're seeing now is reduction in that and improved clinical productivity given the full-time nursing capacity we have.

That makes a lot of sense. And then maybe, Barb, I know in the past you guys have talked about how there's some, you know, maybe part of the headwinds on volume or admissions is kind of like the decoupling from encompass, right? So as I think about, you know, a lot of folks are focused on the admissions number. Maybe if you can walk us through how you're thinking about the trend or how we should be thinking about how that whole situation will evolve over the course of the year and where that bottoms out.

Sure. Well, I think we've raised instability in the volume that we're getting from the Encompass Serves, but it kind of goes to what Chrissy was just mentioning. One of the things that we had our sales team focus on at the end of last year and early this year was going out to all of our key referral sources, which included the Encompass Serves, saying, what are the other payers that would be helpful for you for us to focus on so that we can be a better provider for you, a more wholesome provider? And so, because there are some markets that have a pretty significant local or regional payer, that will make a big difference. And so, the focus on getting onto these regionals as well as the new national, I think, is going to help us, again, be able to go and say, okay, now let us earn more of that fee-for-service, whether it's an Encompass IRF or another IRF or other facility. That really gives us the ability to go in and be more of a good provider that can take a long list of patients.

All right, got it. Thank you, guys.

Thanks.

Our next question comes from AJ Rice from Credit Suisse. Please go ahead. Your line is open.

Hi, everybody. Maybe first to ask about the MA trends. I know your revenue per visit was up 8.8% in the current quarter. That does not seem like it had much impact from the recontracting you're talking about today. What do you think the trend looks like for the rest of the year there, given the recontracting? How quick do you sort of get to a normalized rate with this new national contract? And also it's not clear to me, were you not in contract with this payer before and therefore any volume you get from them is incremental or were you getting just less profitable volume from them previously?

So this is a new national contract. I will say that it is one of the top five payers and we actually, they have lives in all of our markets but one. So there were some out of network, very little that we were seeing in some of our markets, but this is a new national contract for us.

Okay, any thoughts on the 8.8% revenue per visit and how that might trend over the rest of the year?

AJ, again, this contract's been in place for all of 10 total calendar days, not even business days at this point. It's something that we are monitoring. We have put the appropriate tools in the hands of our branch leaders and regional presidents in the field so that they can find these referral sources, find these patients, and start transitioning historic referrals into these new contracts. So we're doing everything we can to make that adjustment as quickly and efficiently as possible, but it's just too early in the timeline to tell anything at this point.

There's some branches that will move faster. We certainly have some that historically we're turning this volume away on a consistent basis. That will be quicker for those because they already have referral sources that have needed us to take these patients. And then in other markets, we're working with the teams to find the facilities and the physicians that take care of these patients so that they can go after the business.

I understand. I guess I was just trying to see if there was anything else going on that's helping on the revenue per visit. The hospice cost jumped per day 13%, and I know you revised slightly your cost per day assumption for the rest of the year. It sounds like a lot of it is this move to the case management model, but I wonder, is there any way to parse out how much is that, and when does that start to roll off so we can get some comfort on reversion to more of a modest increased number, and how much is sort of just the natural trend in the business increasing at this point?

So AJ, I'll try to put some color around that. The nurse productivity, so just the onboarding, think of an impact of all of this where nurses are not operating at their full clinical capacity level. That was a little over 500 basis points in the quarter. You also had contract labor that was around 240 basis points impact of that during the quarter. And then group medical was another 130 basis points of that. Everything else is, those are kind of the biggest driving factors. The dedicated on-call and triage nurses, that is a permanent part of the cost structure because it is part of being able to have a case management model and to attract and retain nurses in our hospice sector, so that part will stay. And it will come to, it's a matter of now that we have, as we increase clinical productivity of these nurses and we increase our volumes, then that fixed cost structure will start to come down just like other areas that you've seen.

Okay. All right. Thanks a lot.

Our next question comes from Jamie Purse from Goldman Sachs. Please go ahead. Your line is open.

Hey, thank you. Good morning. Just focusing on the national contract, again, can you give any details just in terms of how the rate came in versus your expectations, the structure of that contract, anything to call out there? And then secondly, on a related note, how does this help you in terms of negotiating incremental contracts, either with your existing partner and the renegotiation process there or just accelerating the process around incremental national payers?

Sure. Well, I think first we can give specifics on a contract, but what I will say is kind of what we've been consistently saying on our either new or renegotiated. We are not willing to enter a new contract unless we can get a discount at 25% to 30% or lower per visit. And on an episodic contract, we're seeing them come in at 0% to 10% of a discount on the episodic. So that's pretty consistent on any of the new regional as well as the national and the convener contracts. And so then the goal is, as you mentioned, is going to be for us to move away from these lower paying historic payers, both national and regional, that have paid us with a much higher discount than what I just quoted, and use that to say, you know, we continue to want to serve those patients, but we're only going to be able to serve those patients if we can come back and renegotiate the fare rates.

Okay, thank you. And just the home health cost per visit trends, they declined from 92 in the second half of last year to 88. Can you just help us bridge what the relief there was and if that's a sustainable rate for the rest of the year? Just any color on what you're seeing in terms of Your cost trend there would be really helpful. Thank you.

Yes, so much of what drove the Q1 cost was an improvement in productivity. So again, it is about clinical staff recruitment, retention, and making them productivity through volumes in the field. Productivity improved 200 basis points year over year, so that's able to offset the merit market and other factors. I'll also point out, I think I said in my script, that the group medical increased 120 basis points. That was impacting the cost per visit as well. So if you take that out, then you're talking about a well-controlled cost per visit in home health.

Our next question comes from Jason Casorla from Citigroup. Please go ahead. Your line is open.

Uh, great. Thanks. Maybe just to follow up on that question, I guess, you know, in context of the four to 5%, um, home health, um, you know, cost per visit growth, I guess, are you assuming that accelerates in the back half of the year? Are you being, you know, kind of prudent around your expectations, given the backdrop, just, uh, just given, you know, where you're at that 1% in the quarter X of medical claim versus the four to 5% guy, just any more color around that front, um, would be helpful.

Absolutely. We're definitely closely watching our group medical costs because recall that we also noted that in our fourth quarter earnings results as well as the Q1 results. I think the other thing that we've also talked about and that is included in that guidance consideration for cost per visit is we recognize that there will be markets where we have to make market adjustments in order to recruit and retain staff. In fact, we're in the process of doing some of that now. again, just in high growth areas where we believe that we need to make those adjustments. So that's one thing that's yet to come and why the guidance consideration is where it is.

Okay, thanks. And then just to follow up, going back to the commentary around the new national and regionals, and I know you threw out that every 5% moves a 2% benefit to EBITDA, but can you give us an idea of what a realistic move like that could be over time? How easy could it E to 75% of that volume over, you know, and maybe help size or frame it for us so we have an idea of what we could really kind of generate on that front. Thanks.

Sure. I will say I think we will have a lot more color on that at the end of the second quarter. Again, with us only being, you know, 10 days into it, it is difficult. What I would say is that when we provided the tools to the field, one of the tools that we did provide was a very quick calculator. If I move X of this to X of this, this is what it does for me at my local branch level. Because there are branches that are going to be able to do this relatively quickly, because they've been turning this other payer away. So I think it's hard to say it from a national level. It is definitely a branch by branch management. And again, in some of these, there's more lives available in some markets than others. So I think we're going to have a much better feel for this company-wide by the end of the second quarter. But we have provided those tools to the field for them to realize, well, if I can move 25, 30, 40% of my business from X to these new ones, that makes a significant difference for me at a local branch level.

Okay, thanks.

Our next question comes from Joanna Gajuk from Bank of America. Please go ahead. Your line is open.

Good morning. Thank you for taking the question. So I guess first of the follow-up question, on the MA Book of Business and this 5% you're talking about. So can you just remind us, when we look at your MA Book of Business, what percent of that book is episodic versus non-episodic?

So I would say on a revenue basis, when you look at our payer mix, Joanna, right now of our total Medicare Advantage revenue anywhere from 25 to 30% in a given quarter would be episodic and the remainder would be non-episodic.

Okay. Thank you. And I guess my other question in terms of your expectations for the upcoming home health proposal, a Medicare rate proposal. So what do you expect to see in that proposal when it comes to behavior adjustment and also recoupment? Thank you.

Sure. I don't think that we would be surprised to see the other half in the proposed rule, so the other half of that behavioral adjustment to come through. I think we will be surprised if they propose to implement any of the temporary cuts in 24 on top of the other half of the permanent. It's possible they would lay out some sort of schedule for how it would be applied, but I think the industry would be surprised if they were part of 2024. There has been a forecast error correction has been requested of CMS when we look at the market basket rate that was given over the last few years. So that is something that was sent to CMS, you know, prior to the proposed rule going to OMB. So, you know, again, anticipate we get the other half. I think what's going to be critical is what sort of market basket do we get with that. Thank you.

As a reminder to ask a question, please press star followed by the number one on your telephone keypad. Our next question comes from Andrew Mock from UBS Financial. Please go ahead. Your line is open.

Hi, good morning. A couple of questions on hospice. Same store hospice admissions were down 11% in the quarter, which I think is the seventh straight quarter of double digit negative organic volume growth. When you take a step back and evaluate that business, what do you attribute the sustained admissions weakness to, and when do you think that will start to stabilize, especially with respect to the new case management system that you're implementing?

Sure. So I think, you know, there's a combination of things. Obviously, some of it's been the staffing that really had us not going to as many referral sources. As the staffing began to, you know, really get in better place in the first quarter, We did increase the sales headcount in the field because that was something that we did not proactively replace when we had attrition in the past just because it was hard to hire a salesperson to go out there and sell something you didn't have. But we do have good sales coverage now in each of the local markets. And again, on top of that, with the diversification of the referral sources, the case management model was critical to that because if we're going to increase the referrals coming from facilities, We need to be able to take those admissions within 24 hours of getting that referral, and the case management model is going to allow for a greater ability to accept those referrals timely.

Got it. And then on patient days in hospice, that was down 4% sequentially from the fourth quarter, even though admissions was up 7% and discharge length of stay was up four days. Can you help us understand what's going on here that would result in patient days down sequentially when the underlying components seem to indicate up? Thanks.

Sure. And so not only, so your point, our sequentially admissions were up and discharges were only up about half of what admissions. So one would anticipate that our ADC would grow. That really came on the heels of having 137 more deaths in that 1 to 30 length of stay range So you're right, even though our discharge length of stay was up, that was more on the heels of long length of stay, patients that had died on service. But when you have this many that die within that 1 to 30 day, you're not able then to actually see that bump in ADC that you would expect with that admission and discharge sequential movement.

Got it. OK. And I'm just going to make the assumption that I'm last here and use that as an opportunity to squeeze in one more. George, corporate G&A increased $5 million quarter over quarter and $10 million year over year. With all the pressure in the business, you're investing in G&A at a time when most of your peers are pulling back. Can you help us understand why increasing G&A and back office staff is the right investment decision here when there's additional reimbursement cuts on the horizon? Thanks.

Sure. So I think that we need to clarify on the back office staffing increase year over year, Andrew. That's not a adding headcount. That's us having the ability to fill branch director and other administrative members of our back office in the field, meaning we have more people in place and less open positions at this point in time year over year. So I think that's what we're talking about when we talk about the improved back office staffing portion of that. Group medical is playing a significant role in the increase in those costs. And then, of course, the stand-up, the incremental stand-alone cost of being a stand-alone company are also a factor.

Great. Thanks for all the color.

And we have a question from AJ Rice from Credit Suisse. Please go ahead. Your line is open.

With Andrew saying he might be the last one, I figured I'd try one more time here. Let me ask, I actually will ask two here, too. On the convener contracts, Can you just walk us through what you think that will do versus the referrals of having the discharge planner move volume to you? What incrementally, the discharge planners rely on the conveners more so and you think that'll provide incremental volume? How should we think about that part of your renegotiated contracts and how significant and how quickly it'll impact your results?

Sure. So it is different working with the conveners. So some refer to them as benefit administrators, others conveners. And just remember they're independent companies that do provide post-acute services on behalf of the health plan. And there are times that they're the risk-bearing provider. So their goal is really to guide care to high-quality proven providers who can lower the overall cost of care. So they do work directly with those, particularly the facilities, to help make sure that the patients from that payer get to the right providers. If you think about it, historically, the payers have only been focused on kind of creating that network, not necessarily a high-quality network. And as fragmented as home health is, these conveners have played a role in really going and narrowing down who the patients should go to. And so it's really us working alongside the conveners to get the patients to our services. And then I would just add that it's

important to remember that these are new contracts. These are not renegotiated. We've spent a lot of time talking about the importance of more contracts and improved rates. And these convener contracts, as well as the new national payer contract, they are all, both of those, they are new and in better rates.

Okay. And maybe my other follow-up would be that And I don't know what there is to say about it, but I'll ask it. So if you look at the landscape competitively, obviously you've got United having bought LHC, and it looks like they're going to continue to buy in the market. You've got Kindred under Humana being active. Now you've got OptionCare and Amedisys announcing they're joining up. As you guys, you know, sort of are the last, one of the last people standing that's independent and public, And you mentioned, Chrissy, about having to watch where you're at vis-a-vis covenants, et cetera, et cetera. What's the thinking about whether you need to have at some point in the future a big, more deep-pocketed partner that you're aligned with? Is there room to go forward and accomplish everything you're trying to do independently? Have you seen any changes in the market because of some of these deals and willingness to work with you or availability of deals or whatever?

Well, AJ, I think it's difficult to speculate on various announcements and transactions in the industry. We are focused on operating this company and executing on our payer innovation strategy as well as our recruitment and retention of staff strategy. That's really all we can say about those. We just don't speculate on those types of items.

More competition for deals or not really about the same as it was six months ago in your mind?

Well, remember that even the investment communities, you know, received a lot of information recently on the fact that M&A deal was down significantly in the first quarter of this year. The trends have been down. A lot of that having to do with home health reimbursement uncertainty. You know, I read reports recently that stated that the first quarter of 2023 was the lowest transaction quarter since 2018. And so I think that's important to also remember that the bid-ask spread between buyer and sellers are just too high right now.

Okay. All right. Thanks a lot.

Thank you. We have no further questions. I would like to turn the call back over to Mark Brewer for closing remarks.

Thank you so much, Operator, and we appreciate everybody joining our call today. As a reminder, there will be a replay of the call available on our website, and we look forward to talking to you in a couple of months when we recap our second quarter 2023 earnings. Have a great day.

This concludes today's conference call. Thank you for your participation.