Encompass Health Corporation

Good morning, everyone, and welcome to Encompass Health's fourth 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 Chrissy Carlisle, Encompass Health's Chief Investor Relations Officer.

Thank you, operator, and good morning, everyone. Thank you for joining Encompass Health's fourth quarter 2020 earnings call. With me on the call today are Mark Tarr, President and Chief Executive Officer, Doug Coulthart, Chief Financial Officer, Barb Jacobsmeyer, President, Inpatient Rehabilitation Hospital, April Anthony, Chief Executive Officer of Encompass Home Health and Hospice, and Patrick Darby, General Counsel and Corporate Secretary. Before we begin, if you do not already have a copy, the fourth quarter earnings release, supplemental information, and related Form 8-K filed with the SEC are available on our website at EncompassHelp.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 uncertainty, many of which are beyond our control. Certain risks and uncertainties, like those relating to our ongoing strategic review and its impact on our business and stockholder value, as well as the magnitude and impact of COVID-19 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 and the form 10K for the year ended December 31st, 2020 when filed. We encourage you to read them. Your cautions 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 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. 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. Before I turn it over to Mark, I want to reiterate that the strategic review for our home health and hospice segment is ongoing. Our board of directors has made no decision. Accordingly, our 2021 guidance and our longer-term growth targets assume the continuation of the current structure of our business. The guidance and growth targets may change depending on the ultimate outcome of the review. Additionally, because the strategic review is ongoing, we will not be able to comment further on it today. With that, I'll turn the call over to Mark.

Well, good morning, everyone, and thank you, Christy. we have a history of adapting to change and doing it well. Looking back on 2020, I'm proud of our company and how we responded to the changes going on in the world around us. Both of our business segments quickly responded to meet the needs of our patients, our employees, and our business partners. The patient experience has always been at the center of what we do. This year in particular, the impact of our caring and compassionate teams has been on full display. As our hospitals were forced to close their doors to visitors, and as our homebound seniors were isolated from family and friends, often the only direct contact patients had for weeks at a time were their Encompass Health clinicians. I've heard countless stories of how our staff kept patients connected to loved ones and showed them the kind-hearted care they so deserved. COVID-19 shut most of the world down. Our employees came to work, putting the well-being of our patients first. They truly are heroes. Turning to the performance of both of our segments in 2020, our inpatient rehabilitation segment opened four new hospitals and expanded existing hospitals by 117 beds. They successfully responded to regulatory changes impacting our reimbursement, achieving better than initially expected pricing, and continue to demonstrate our value proposition to Medicare Advantage payers with Medicare Advantage discharges increasing 34% year over year. We also continue to develop and implement post-acute solutions. We fully deployed our proprietary readmission prevention model. This program uses predictive analytics to determine the risk of a patient's readmitting after they discharge from an Encompass Health Hospital. In our pilot market, use of this tool lowered the 30-day readmission rate by 280 basis points. So we're excited how this tool further enhances our value proposition to healthcare providers and payers. In addition, we deployed a home health agency quality reporting tool and began development of a SNF quality reporting tool to ensure we are accessing the highest quality clinical partners and for building preferred provider networks in all of our markets. In addition, we expanded our proprietary marketing tool known as the Post-Acute Care Strategic Analysis, or PACSA, to include DRG-level information on cost and quality to enhance our conversations with providers and payers. In our home health and hospice segment, we once again delivered industry-leading margins in spite of the pressures brought on by PDGM rate changes and COVID-related challenges. In the fourth quarter of the year, we exceeded our prior year adjusted EBITDA margin by 250 basis points. This strong margin resulted from the effective management of our field clinicians via our new therapy compensation model and our continuous focus on productivity. The effective management of our patient care plans supported by the Metallurgic Care Tool and the effective management of our spending on routine administrative costs. Both of our segments continue their focus on clinical collaboration. Our Medicare clinical collaboration rate is over 43 percent, and our Medicare Advantage rate increased to over 15 percent in 2020. Additionally, in the fourth quarter, we executed a new national contract with UnitedHealthcare for our home health service line that will bolster not only our clinical collaboration opportunity for Medicare Advantage patients, but will also produce a new avenue for referral growth. We have a lot to be excited about as we enter 2021. Our inpatient rehabilitation segment is well positioned as the market leader and is ready to meet the increasing demand of their growing senior population. From 2010 to 2018, the supply of IRFs remained relatively stable, yet the 65-plus population grew 32%. There's a supply and demand imbalance, and we're one of the few companies with both the operational expertise and capital necessary to build and operate freestanding IRFs. We have eight new hospitals expected to open in 2021, and we expect to add 100 to 150 beds to existing hospitals. We'll also continue development on the 10 new hospitals we expect to open in 2022. We have a robust development pipeline, and we expect more growth-related announcements throughout the year. We will continue to educate stakeholders about the value proposition of our inpatient rehabilitation hospitals. We'll continue to use data to show our outcomes and total episodic costs to healthcare providers and payers, demonstrating that we are the high quality, cost effective provider they want and need. Specifically, we plan to build on the momentum we had in 2020 with Medicare Advantage by focusing on getting more one-on-one meetings with local and regional inmate medical directors who heavily influence the preauthorization process. We also will remain focused on developing and implementing post-acute solutions. Our robust technology capabilities, including the use of predictive data analytics, differentiate us from our competitors. We'll monitor the data from the readmission prevention model we deployed in 2020, and we'll develop and pilot a fall prevention model specific to inpatient rehabilitation. Our strategic sponsorship of the American Heart Association slash American Stroke Association is continuing. In 2021, we plan to co-brand and launch stroke continuing education programs for healthcare providers. As part of our education efforts for patients and families on the importance of inpatient rehabilitation after a stroke, we are featuring Encompass Health patient success stories on the Association Support Network blog and launching how-to videos to assist stroke survivors with completing daily activities. Let's talk now while we're excited about home health and hospice. a strong demographic tailwind, a strong and increasing patient preference for in-home care, a growing number of seniors experiencing four or more chronic conditions and the cost effectiveness of treating those conditions in the home, reimbursement visibility that is better than we've seen in a decade, and accelerating opportunities for market share capture both organically and through industry consolidations. As you may recall, in December, we announced that we are exploring strategic alternatives for our home health and hospice business. Being one of the top providers in the nation, as measured by both our financial results and our quality outcomes, allows us to consider a wide array of transactions and structures. Our strategic review is ongoing and no timetable has been established for its completion. So, we remain focused on the diligent execution of our strategy for both segments. In 2021, we look forward to the full return of elective procedures and the resulting growth that will produce for our home health service line. We also look forward to the continuation of the strong admission trends we have experienced in hospice. In addition, we believe there is strong interest in partnering with Encompass Home Health among accountable care organizations and Medicare Advantage payers seeking value-based payment arrangements. Over the past few years, we have participated in various ACO arrangements where we demonstrated our value through the achievement of savings for these organizations. We will continue to build and rely upon these experiences to become even more innovative in the way we work with Medicare Advantage payers. Our goal here is simple, to deliver higher quality outcomes for their members and better shared financial outcomes for our organizations and their plans. With the combination of industry-leading 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. Operationally, we're excited about the full deployment of the MediLogix care module and the further improvements it will produce in both quality outcomes and our operating margins. This tool assists us in ensuring our patients have a care plan that includes the right number of visits performed by the right level of staff at the right time to achieve the desired outcome. We're also collaborating with two home care organizations that provide personal care to support a SNF at home program in order to meet a growing need for these services in our markets. Additionally, we're rolling out a virtual visit platform with a national payers capitated program. This virtual platform app allows patients to participate in a secure video call via a personal device such as smartphone, tablet, or computer with their physician, nurse, care manager, or other medical staff. As we look ahead into 2021, we are confident the fundamentals of our business are intact and strong. In fact, we believe COVID-19 has created an even stronger awareness of the high level of care we provide in our inpatient rehabilitation hospitals and further reinforce home as a preferred care setting. We expect stakeholders will increasingly divert admissions away from SNFs to higher value IRFs and home care providers. And as the population ages, the demand for our high quality services will increase. Our initial guidance for 2021 includes consolidated net operating revenues of $5 to $5.17 billion, consolidated adjusted EBITDA of $925 to $955 million, and an adjusted earnings per share of $3.31 to $3.53. we remain confident in the long-term prospects for both of our business segments. Yesterday, we issued longer-term growth targets for our company, which you can see on page 16 of the supplemental information that accompanied our earnings release. This outlook included an eighth 10% CAGR for consolidated net operating revenues, an eighth 10% CAGR for consolidated adjusted EBITDA, and a 5% to 7% CAGR for adjusted free cash flow. These targets are supported by our strong financial foundation and the substantial investments we've made and will continue to make in our businesses. We feel very good about the strength of our organization, its team, and the opportunities that lie before us. Now with that, I'll turn it over to Doug.