Encompass Health Corporation

Good morning, everyone, and welcome to Encompass Health's second quarter 2020 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 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 Christy Carlisle, Encompass Health's Chief Investor Relations Officer. Please go ahead.

Thank you, operator, and good morning, everyone. Thank you for joining Encompass Health's second quarter 2020 earnings call. With me on the call today are Mark Tarr, President and Chief Executive Officer, Doug Coulthard, Chief Financial Officer, Barb Jacobsmeyer, President, Inpatient Rehabilitation Hospitals, Patrick Darby, General Counsel and Corporate Secretary, and April Anthony, Chief Executive Officer of Encompass Home Health and Hospice. Before we begin, if you do not already have a copy, the second quarter earnings release, supplemental information, and related Form 8-K file with the SEC are available on our website at encompasshealth.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 risk and uncertainties, like the magnitude and impact of the COVID-19 pandemic, that could cause our 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 8 , the Form 10 for the year ended December 31, 2019, and the Form 10 for the quarters ended March 31, 2020 and June 30, 2020, when filed. 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, reconciliations 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 of which are available on our website. Before I turn it over to Mark, I would like to remind everyone that we will adhere to the one question, one follow-up question rule to allow everyone to submit a question. If you have additional questions, please feel free to put yourself back in the queue. With that, I'll turn the call over to Mark.

Thank you, Christy, and good morning, everyone. The challenges presented by the ongoing COVID-19 pandemic have been and continue to be significant. But thanks to the amazing efforts of our talented and devoted team members throughout the organization, we believe we have implemented plans across our organization that will allow us to continue to succeed in the face of the ongoing challenges. Now let's first talk about our volumes. Our patient volumes in both business segments have substantially rebounded from the low point experienced in April. At the end of June, inpatient rehabilitation census had rebounded to 95% of pre-pandemic levels, and home health starts of care had rebounded to pre-pandemic levels. These positive volume trends have continued in July. Volume disruptions caused by the pandemic vary by market. Most of our markets have seen a meaningful level of recovery. Factors that have impacted our volumes include the number of COVID-19 cases in a community, the status of operations at acute care hospitals, the number of exposed or positive staff in quarantine, delays in obtaining COVID-19 test results for patients and employees, and capacity limitations created by semi-private rooms in some of our hospitals. While COVID patients do not comprise a large percentage of our patients, many of our hospitals, home health agencies, and hospice agencies treat patients recovering from the virus. These patients, many of whom have spent time on ventilators, have endured extended stays at an acute care hospital. They are extremely weak and require intense rehabilitation to regain both their strength and cognitive abilities. Unfortunately, some facilities in the post-acute space have faced significant challenges with COVID-19. In contrast, our rehabilitation hospitals and home health agencies have been able to help recovering patients return to their independence and pre-COVID lives. The resurgence of the pandemic in some markets they had previously reopened, such as Florida, Texas, and Arizona may temporarily inhibit further growth volume. However, these resurging markets also are where we are seeing Medicare Advantage plans once again relax preauthorization requirements. When the preauthorization requirements were relaxed in May, we experienced a higher conversion rate of these patients. Let's move now to pricing. where the COVID-19 pandemic is impacting each of our segments differently. Net revenue for discharge is being positively impacted in our inpatient rehabilitation segment by a higher acuity patient mix resulting from the pandemic and the suspension of sequestration that began May 1st. The acuity of our patients increased in the second quarter of 2020 due to the deferral of elective procedures and patient anxiety causing only the most acute patients to seek medical treatment. While revenue per episode in our home health business is also benefiting from the suspension of sequestration, the COVID-19 pandemic is exacerbating the expected negative effects of implementing PDGM. Lupus remain higher than we'd like, but they have significantly improved as of the end of the second quarter. Some patients, families, and senior living facilities remain cautious about allowing our clinicians into their homes and buildings, but the treatment refusals have decreased. To further reduce patient anxiety, we have improved communication with patients and families regarding our infection control procedures and adapted our visits to ensure proper social distancing during periods where hands-on treatment is not required. In addition, as acute care hospitals simply declined and visitation restrictions were implemented, our admissions source mix shifted from institutional to more community-based, which carries a lower reimbursement under PDGM. Additionally, the declines in admissions coupled with the need to maintain proper COVID risk monitoring of patients in later stages of their care plan resulted in the patient mix shifting from early payment periods to late payment periods, which also carry a lower reimbursement level. The COVID-19 pandemic related impact on patient volumes, staff productivity, and medical supplies also is increasing our operating expenses. Safety of our patients and employees is of paramount importance to us. making the availability of personal protective equipment a priority for our supply chain management teams. Increased PPE utilization and increased unit cost has been a significant challenge to healthcare industry. PPE cost has increased eight times on average. In our inpatient rehabilitation segment, utilization of PPE has increased approximately 12 times for masks and four times for gowns. This type of PPE was not widely used historically in our home health and hospice segment, so these costs are predominantly new for that segment. We've taken a number of actions to address ongoing PPE issues. This includes identifying and contracting with secondary supply sources, as well as securing additional warehouse space and logistical support from our primary distributors so we can have larger levels of inventory on hand. We are confident we now have adequate inventories of PPE, and we have secured supply sources to meet our immediate foreseeable needs. While these challenges remain in the near term, they will eventually abate. And as the population ages, the demand for high-quality care we provide across our three service lines will increase. Throughout this pandemic, we've continued to expand our national footprint. We've opened three new hospitals in 2020, including two added in the second quarter in two states that are new for us, Iowa and South Dakota. And we expect to open a new 40-bed hospital in Toledo, Ohio in the fourth quarter. In addition, we expect to add at least 120 beds to existing hospitals in 2020, with 53 of these beds already operational. Recall that at our Investor Day earlier this year, we discussed a growth target of six to 10 de novos per year starting in 2021. For 2021, we've already announced plans to build eight new hospitals, and we've announced five new hospitals planned for 2022. Specifically, at our Investor Day, we announced we had identified 15 high potential de novo markets in Florida. As of today, our expected 2021 and 2022 hospital openings include five new Encompass Health IRFs in Florida. And we're not done. In Florida or in other under bedded markets across the country, you can expect more announcements in the coming months. All of this demonstrates our commitment to and confidence in our future. We also continue to seek opportunities to expand our national presence in home health and hospice. While we continue to believe PDGM will result in consolidation of the home health industry, current M&A activity is minimal, as even small agencies are focused solely on their response to COVID-19 pandemic and are being supported by the PPP and CARES Act funds. Thus far in 2020, we've opened or acquired two new home health locations and one new hospice location. We remain diligent in assessing opportunities and keeping our ear to the ground in local markets. We believe depressed volumes, the inability to easily flex costs, and the expanding of all government support may bring small agencies to the forefront soon. And we are hopeful there are also will be opportunities of scale that will choose to come to market later this year or early next year. Now, no healthcare earnings call would be complete without a regulatory update. In the second quarter, CMS released the fiscal year 2021 proposed rule for inpatient rehabilitation facilities and calendar year 2021 proposed rule for home health agencies. Both rules were largely in line with our expectations and contained minimal changes to the 2020 rules. The IRF proposed rule includes a net market basket update of 2.5%. The Home Health proposed rule includes a net market basket update of 2.7%. For Home Health, it is also important to note that CMS acknowledged in the proposal that it had insufficient information to determine if the negative 4.36 behavioral adjustment was an accurate assumption for 2020. CMS indicated they will revisit it in future years. Also on the regulatory front, CMS announced plans to extend the RCD program into North Carolina and Florida effective August 31, 2020. We and many in the industry believe the timing of such a rule-out is ill-advised given the amount of added interaction the RCD process requires with physicians in already taxed environments like Florida. However, we have proven our ability to meet the standards in Texas, Ohio, and Illinois, and we are equally confident we can do so in Florida and North Carolina if necessary. In summary, Our business fundamentals aren't changing, and we believe the pandemic has created an even stronger awareness of the level we provide in our hospitals and the value of our home care service lines. While our operating environment continues to change rapidly along with the COVID-19 pandemic and each market's response to it, we remain confident in the prospects of both of our business segments based on the increasing demands for the services we provide to an aging population. This confidence is further supported by our strong financial foundation and the substantial investments we have made in our businesses. We have a proven track record of working through difficult situations, and I believe in our ability to overcome current and future challenges. With that, I'll turn it over to Doug.