Enhabit, Inc.

Good morning, everyone, and welcome to Inhabit Home Health and Hospice's third quarter 2024 earnings conference call. At this time, I'd like to inform all participants that their line will be in a listen only mode. After the speaker's remarks, there will be a question and answer session. 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 Joby Williams and Habit's Senior Vice President and Treasurer.

Thank you, operator, and good morning, everyone. Thank you for joining our call today. With me on the call is Barb Jacobsmeyer, President and Chief Executive Officer, and Chrissy Carlisle, Chief Financial Officer. Before we begin, if you do not already have a copy, the third quarter earnings release, supplemental information, and related form 8K filed with the SEC are available on our website at investors.ehav.com. On page two of the supplemental information, you will find the St. Harbor statement, 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 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 our SEC filings, including our annual report on Form 10-K, which are available on our website. 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 this supplemental information and the earnings release. With that, I'll turn the call over to Barb.

Thanks, Jovi. Good morning and thanks for joining us. Quarter 3, 2024 marks our fourth sequential quarter demonstrating the success of our volume growth strategies. At the start of this year, we laid out our 2024 priorities and I want to provide an update on the status of those and the ongoing and new initiatives to return our business to revenue growth and improve our profitability and margins. We are pleased with the continued progress of our hospice segment and anticipate continued growth. Our priority has been on growing census and gaining operating leverage against the fixed cost structure associated with the case management staffing model. Our average daily census continues its sequential growth each month since January 2024. In the third quarter, our average daily census increased 6.9% year over year. Completing the transition of all branches to our centralized admission departments this year with the focus on timely responses to our referral sources has been successful as evident with both our increased admissions and an increase in our referral conversion rate from 74.2% last year to 77.4% this year. The flat cost per day year over year is the outcome we expected as our increased census offset the fixed costs that were added in 2023 to implement our case management model. The build-out of our business development teams and their local strategies are finding the right balance of referral sources to increase admissions to inhabit and grow our average daily census. Our case management model and our use of technology ensures we are there throughout the patient's length of hospice stay and present when they need us most as evidenced by our visits in the last days of life, which are 53.2% higher than the national average. For our home health segment, we are pleased with the progress of our team's successful use of Pulse to manage our Just Right care plan. Use of Pulse allowed us to be more efficient with Medicare visits per episode declining from 14.9 to 14.4 from the same period a year ago, thus increasing revenue per visit. In addition, leveraging predictive analytics bolsters our ability to deliver a better way to care for patients in a more efficient manner without compromising patient outcomes. This improved visit utilization supported strong admission growth in the quarter of 5.6% versus the 1.6% last year. The ability to utilize these additional visits for starts of care for new patients is a continued focus for our branch leaders. Medicare fee-for-service has stabilized at 44% of our home health admissions over the past three quarters. Growing Medicare fee-for-service continues to be a top priority for our leadership team. While we saw a sequential decline in fee-for-service admissions, we continue to see improvement in trends. Fee-for-service admissions declined 2.5% from quarter two to quarter three, compared to a 4.7% sequential decline in 2023. Half of our branches had sequential improvement in quarter three over quarter two. We continue to focus on deploying best practices utilized by these branches to all of our branches in an effort to retain and grow our fee-for-service Medicare volume. We are actively evaluating consolidation or closure of branches that we believe will not reverse their fee-for-service Medicare decline and that are not producing acceptable returns for our shareholders. I will discuss this more later in the call. Our payer innovation strategy continues to foster non-Medicare growth. Non-Medicare admissions grew 20.1%, driving total admissions growth of 5.6% year over year. In the third quarter of 2023, 19% of our non-Medicare visits were in payer innovation contracts. That rate grew to 45% in the third quarter of 2024. In the third quarter of last year, 63% of admissions were in combined Medicare fee-for-service and payer innovation contracts. In the third quarter of this year, the percent of our admissions in Medicare fee-for-service and payer innovation contracts has grown to 73%. Considering our termination notice with United, we expect the shift to payer innovation contracts may accelerate. I would like to provide an update on negotiations with United Healthcare. We have maintained an ongoing dialogue with United and have diligently focused the conversation on the value of care that we provide them and their members. While we have not yet executed an agreement, we have made significant progress on aligning terms with United that would be acceptable to us. Until we have an executed agreement, we will maintain our strategy of replacing United Census. We are on track with our plan to replace this volume, and in fact, since getting notice on August 1st through October, our total payer home health census across all payer types grew by 884, while our United Patient Census declined 1,022. Our teams are doing a great job replacing these admissions with payers that recognize our strong clinical value. Our conversations with many of our other payers reinforce that their focus is on timely access to high-quality home health providers in order to manage their overall costs. Despite all these positive trends related to admissions and growing our payer innovation contracts, during the third quarter, our home health segment continued to see a decline in recertifications. Several factors contributed to the decline, but the primary drivers were an increase in admissions, from acute care facilities with shorter predictable lengths of stay and the ongoing payer exchange within congregate living settings. The latter is particularly impactful because admissions in those settings typically recertify at a higher rate due to the combined effects of their age, chronic illness burden, and functional impairment level. We have already begun to mitigate these challenges and are focused on expanding and diversifying sources of referrals. In regards to the final home health rule, CMS finalized a permanent adjustment cut that will result in a negative 1.8% impact, offset by a positive market basket update of 3.2%. After productivity adjustments and fixed dollar loss ratio adjustments, the result is a 0.5% increase versus the proposed negative 1.7%. The continued cuts to home health reimbursement are destabilizing the home health landscape and are detrimental to larger policy goals of providing equitable, high-quality healthcare to seniors in their homes. On the advocacy front, the Alliance for Care at Home, formerly NAC, the National Association for Home Care and Hospice, and PQHH, the Partnership for Quality Home Healthcare, have continued to work with our congressional allies on relief to include in a legislative vehicle. We remain actively engaged with our trade associations and the industry on these advocacy efforts. While other healthcare sectors are repeatedly receiving meaningful positive annual payment updates, this is the third straight year where the CMS home health rule establishes rates that fail to keep up with inflation and instead present a significant headwind to revenue growth. This reality means we have to make some difficult decisions. Given the current pricing environment and mix shift we have experienced, we have undertaken a more exhaustive review of all of our home health and hospice branches. While the operational performance review of each of our home health and hospice branches occurs on an ongoing basis, our current review has indicated that we should take steps to consolidate or close approximately eight to 10 underperforming branches by early 2025. For branches that we do not close that are not performing as well as we expect, we will further remediate their underperformance with additional corrective actions. We will have more details on the number of branches and profit enhancement measures undertaken in the remaining locations, along with the anticipated impact to 2025 EBITDA on our quarter four earnings call. With our focus on profitable revenue growth, we continue to strategically invest in our de novo strategy. This strategy complements our organic growth strategy in both segments and allows us to enter a new market at a low capital cost. We do a thorough analysis of markets, including Medicare CAGR, Medicare Advantage penetration, and access to clinical labor as we prioritize our de novo locations. In addition to the three de novo locations already open this year, we currently have three locations awaiting CMS approval and nine additional active projects. The EBITDA from the de Novos that were opened in 2022 and 2023 is funding the 2024 de Novo project year to date. Before I turn it over to Chrissy, I want to thank our teams for their heroic efforts and teamwork serving our patients and supporting each other during Hurricane Helene and Milton. Twenty-nine of our home health branches were impacted by Hurricane Helene, and 21 were impacted by Hurricane Milton, with 12 of those branches impacted by both. We will discuss the financial impact of these hurricanes more during our guidance update. Although the hurricanes did impact us financially, as well as impacting our teams personally, I am glad to report that all of the affected branches are back to serving patients in the affected areas. And now I will hand it over to Chrissy.