Encompass Health Corporation

Good morning, everyone, and welcome to Encompass Health's third quarter 2020 earnings conference call. At this time, I would like to inform all participants that their lines will be on 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 Chrissy Carlisle, Encompass Health's Chief Investor Relations Officer.

Thank you, Operator, and good morning, everyone. Thank you for joining Encompass Health's third quarter 2020 earnings call. With me on the call today are Mark Tarr, President and Chief Executive Officer of Doug Coulthart, Chief Financial Officer, Barb Jacobsmeyer, President, Inpatient Rehabilitation Hospital, 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 third quarter earnings release, supplemental information, and related Form 8K filed 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 actual results to differ materially from our projections, estimates, and expectations, are discussed in the company's SEC filing, 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, June 30, 2020, and September 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, 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 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 and 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 to everyone. We have a proven track record of working through difficult situations. Since 2009, we have successfully managed through an economic recession, regulatory changes, sequestration, and Medicare payment freezes and cuts. And now we can add a global pandemic to that list. Our teams are doing an extraordinary job in managing through the various COVID-19 challenges. While our operating environment remains difficult due to the pandemic, we remain confident in the prospects of both our business segments and in our ability to overcome these challenges. It's what we do. We adapt, we persevere, and we continue to grow. Let's talk first about our inpatient rehabilitation segment. Our inpatient rehabilitation volumes recovered substantially in the third quarter of 2020. While total discharges were down 1.5% compared to the third quarter of 2019, this number improved significantly from the 10.7% decrease in volumes we experienced in the second quarter of 2020. The remaining lag to returning to prior year volumes primarily is related to orthopedic and lower extremity joint replacement cases. Many of our markets continue to have limited elective surgeries, particularly with elderly patients with complex medical conditions. These patients are the ones that tend to need inpatient rehabilitative services post-surgery. To put this in perspective, total same-store discharges for the third quarter of 2020 decreased by 1,311 patients compared to the same period of 2019. In the third quarter, we treated 1,316 fewer orthopedic and lower extremity replacement patients than we did a year ago, accounting for the entire same-store Q3 decline. We also continue to experience COVID-related challenges in certain geographic markets, specifically Florida where we have 12 inpatient rehabilitation hospitals. We experienced a 12.8% year over year decline in patient discharges in Florida in the third quarter of 2020. Factors such as limited elective surgeries and restrictions on when positive COVID patients can be transferred from an acute hospital to a post-acute setting played a significant role in this volume decrease. It's important to remember that these factors are temporary responses to the pandemic and are not indicative of structural shifts in the market. Net revenue per discharge is being positively impacted by the temporary suspension of sequestration and by a higher acuity patient mix resulting from the pandemic. We saw the acuity of our patients increase in the second quarter of 2020 and continue in the third quarter. And we expect this trend to continue in the fourth quarter. As you can see on page 10 of the supplemental slides that accompanied our earnings release, our expenses did increase as a percent of revenues primarily due to the COVID-19 pandemic. Our hospital teams have done a tremendous job managing our most significant cost, labor. For the third quarter of 2020, our employees per occupied bed, which we use as a metric to measure our efficiency, was 3.44 compared to 3.48 in the third quarter of 2019. This is evidence that our technology and real-time data, combined with our clinical know-how, makes us a best-in-class operator in any environment. We know how to effectively and efficiently manage our hospitals, and can adjust our staffing levels to our volumes. We've also taken aggressive actions to obtain what we believe are adequate supplies of personal protective equipment, even at the elevated utilization levels associated with the pandemic. While some facilities in the post-acute space have faced significant challenges with COVID-19, our inpatient rehabilitation hospitals have been able to help recovering patients return to their independence. These patients, many of whom spent time on ventilators, have endured extended stays in acute care hospitals. They are extremely weak and require intense, multidisciplinary rehabilitation to regain both their strength and cognitive abilities. Since April, we have treated over 3,000 recovering COVID patients, returning 80% back to the communities following their rehabilitation. In the fourth quarter of 2020, we expect limitations on elective procedures in certain markets to continue to impact volume growth, but we believe these volumes will return. It's a matter of when, not if. We remain confident in the long-term outlook for our hospitals, so much so that we've continued to expand our national footprint throughout this pandemic. We've opened three new hospitals thus far in 2020, and we expect to open another one in Toledo, Ohio in mid-November. In addition, by year end, we expect to have added approximately 120 beds to existing hospitals, with 89 of those already added. For 2021, we've announced plans to build eight new hospitals. We've also announced eight new hospitals scheduled to open in 2022. And we're not done making them. All of this fully demonstrates our commitment and confidence in our future. Let's move now to our home health and hospice segment. Our home health volumes recovered substantially in the third quarter of 2020. While same-store admissions were down 4.6 percent compared to the third quarter of 2019, they improved significantly from the second quarter of 2020 when we saw a 17.3 percent decrease in admissions. And we came out of the quarter stronger than we entered it with year-over-year same-store admissions growth of 2.2 percent for the month of September. We achieved this success even with our year-over-year admissions related to elective procedures down approximately 20%. Additionally, continued facility access restrictions has negatively impacted the volume of patients admitted onto our service who reside in assisted or independent living facilities, and these admissions down approximately 40% year-over-year. We also continue to experience COVID related challenges in certain geographic markets, specifically in Texas, where admissions were at 95% of our 2019 levels in the third quarter of 2020, mostly due to limited elective procedures. While admissions in Florida dipped to 91% of historic levels in August, They rebounded nicely in September to finish the quarter above 100% of Q3 2019 emissions. Even in the face of restricted access to some of our historic referral sources and with limited elective procedures in many of our markets, we continue to perform at a high level. Cost controls remain strong in home health, with our cost per visit down almost 4% in spite of COVID-19. related expenses associated with PPE and staff in quarantine. Our most significant decline in volume has been in the physical therapy discipline due to the decline in elective procedures and being shut out from assisted living facilities. To adjust for this, in May, we made a shift in our compensation structure for therapists, lowering each therapist's base pay by 20% and in turn lowering their productivity expectations for each pay period by 20%. This change allowed us to save costs and do so in a manner that did not result in any broad furloughs, layoffs, or terminations. We plan to keep this compensation structure going forward as it allows us to better flex our therapy staffing and allows our therapists to earn additional compensation by exceeding their productivity levels. Although the pandemic has made some collaboration efforts more difficult and necessarily virtual in nature, we believe there is a strong interest in partnering with Encompass Health home health and hospice segment among ACOs, and Medicare Advantage payers seeking value-based payment arrangements. We have partnered with more than 100 Medicare Shared Savings Program ACOs around the country, adding nine new ACOs to this list in the third quarter of 2020. A recent analysis of 2019 claims data revealed that we grew our share of ACO beneficiaries by 16 percent in 2019 versus 2018, whereas the rest of the home health industry remained flat year over year. Similarly, our continued efforts to enter value-based payment arrangements with Medicare Advantage payers yielded the addition of two new contracts in Q3, with more discussions ongoing and anticipated to result in additional contracts over the coming quarters. With the combination of industry-leading hospital readmission rates resulting in more healthy days at home for our patients, success in prior risk-based payment arrangements, and a commitment to scale and density at the regional level, Encompass Health is the clear choice for organizations engaged in risk-based payment models for America's seniors. And after several months of unusually slow M&A activity, in the home care sector, we are encouraged that the pipeline of acquisition opportunities is rebuilding, particularly for hospice. Despite the pandemic, we're continuing to find new and effective ways to provide care to our patients and support our clinicians in both business segments. Reducing readmissions remains a focus for us. As many of you know, our REACT model focuses on preventing acute care transfers while patients are in our inpatient rehabilitation hospitals. This month we rolled out our readmissions prevention program, which uses information from more than 400,000 patients who have been through our inpatient rehabilitation hospitals or home health agencies to estimate a patient's risk of hospitalization after discharge. We use this score combined with social determinants of health and our clinical judgment to estimate and act on a patient's overall probability of being hospitalized and hopefully prevent a readmission from occurring. In our overlap markets, our hospital and home health teams are working together to ensure a smooth transition to the home and have established clinical protocols to help mitigate the need for both emergency care and hospitalization for high-risk patients. This is another way we are using data from our electronic medical records from both segments to predict a potential decline in health status and act in a timely manner to prevent it. This is good for patients and payers. While many uncertainties continue to exist, our visibility has improved. and will have more information and experience in managing operations during the pandemic. Therefore, we have issued guidance for the fourth quarter of 2020. You can see this guidance in our earnings release, as well as on page 17 of the supplemental slides that accompany the release. We expect to be in a position to provide full-year 2021 guidance and a longer-term outlook when we report our Q4 and full-year 2020 earnings at the end of January. While many uncertainties still exist, our company is well positioned to drive long-term growth. As I mentioned at the beginning of my comments, we have a proven track record of adapting to and working through challenges, including this pandemic. Our business fundamentals aren't changing. In fact, the pandemic has created an even stronger awareness of the high level of care we provide in our inpatient rehabilitation hospitals and the value of our home health and hospice service lines. And as the population ages, the demand for high quality care will increase. I believe our future is bright. Before I end, I want to thank all of our employees who continue to make Encompass Health a leader in integrated healthcare. 2020 has been an unprecedented year. Our nation has been through a lot, and yet our employees have continued to care for our patients, striving for better outcomes compared to those of other care settings. I can't thank them enough, and I know our patients are grateful for their efforts, too. With that, I'll turn it over to Doug.