Encompass Health Corporation

Ladies and gentlemen, this is the operator. Today's conference is scheduled to begin momentarily. Until that time, your lines will again be placed on music hold. Thank you for your patience. Music THE END Oh, my God. THE END Good morning, everyone, and welcome to Encompass Health's first quarter 2021 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'll 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 first quarter 2021 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 first quarter earnings relief, supplemental information, and related form 8-K 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 risk and uncertainties, many of which are beyond our control. Certain risk 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 8-K, the Form 10-K for the year ended December 31, 2020, and the Form 10-Q for the quarter ended March 31, 2021, 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. and at the end of earnings release, and as part of the form 8K 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 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.

Good morning, everyone, and thank you, Christy. we're off to an encouraging start in 2021. Compared to the first quarter of 2020, consolidated revenue is up 4.1 percent, consolidated adjusted EBITDA is up 10 percent, and adjusted EPS is up 20.7 percent. And we've increased our full-year 2021 guidance. Our first quarter performance was characterized by promising volume trends that are contributing to solid revenue and EBITDA growth. Our future growth is supported by attractive business development pipelines across all of our service lines. We're also seeing continued strength in Medicare Advantage discharges for our IRF segment, and we are encouraged by the strong start to the UnitedHealthcare national contract in home health. Now I'd like to take a moment to recognize our incredible employees. I continue to be in awe of how they respond to meet the needs of our patients and business partners despite the external noise in the world. The stories of their compassion and the positive impact they have had on patients are truly moving, and I'm grateful for such wonderful staff who help us put the patient experience at the center of all we do. Let's turn now to our segments. In our inpatient rehabilitation segment, net operating revenues grew 5.6%, adjusted EBITDA increased 9%, and volumes continued to improve. Our average daily census was generally above fourth quarter 2020 levels throughout the first quarter, and we saw the return to discharge growth in March. For the second quarter of 2021, we expect to report strong discharge growth since volumes were most significantly impacted by COVID in the second quarter of 2020. In addition, with the continued rollout of the vaccine, we have fewer hospitals experiencing census caps due to staffing constraints related to quarantines. We're beginning to see the return of elective procedures in many of our markets. However, We believe our patients, elderly patients with complex medical conditions, are not choosing to go first. Our numbers show this. We treated approximately 1600 fewer orthopedic and lower extremity joint replacement patients in the first quarter of 2021 than we did in the first quarter of 2020. If we add back the 1600 lost discharges our total discharge growth for the first quarter would have been 2.2%. We look forward to the full return of elective procedures as our patients' confidence in the safety of the healthcare system grows, and we believe elective surgeries for our patients will improve in the back half of the year. I also want to acknowledge the tremendous job our hospital teams continue to do in managing our labor costs. For the first quarter of 2021, our employees per occupied bed, which we use as a metric to measure our efficiency, was 3.31 compared to 3.38 in the first quarter of 2020 and 3.46 in the fourth quarter of 2020. Our technology and real-time data, combined with our clinical know-how, continue to make us a best-in-class operator. The aging demographic continues to drive increased demand for our services, and we're investing to meet that demand. During the first quarter of 2021, we opened our new 40-bed inpatient rehabilitation hospital in San Angelo, Texas, and we added 15 beds to our existing hospital in Fort Worth, Texas. In April, we opened our new 50-bed hospital in North Tampa, Florida. We plan to open six additional hospitals in 2021 and add over 100 more beds to existing hospitals. For 2022, we plan to open at least 12 new hospitals, and we already have three new hospitals announced for 2023. This development pipeline is strong, and we expect more growth-related announcements throughout 2021. Our growth efforts also include continued dialogue with Medicare Advantage payers on our value proposition. During the first quarter of 2021, we continued to see evidence that our market-by-market efforts with local and regional MA directors are paying off, with same-store Medicare Advantage discharges increasing 34%. We're also maintaining our focus on the continued development and implementation of post-acute solutions. We expect to begin piloting our falls prevention model in May as part of our ongoing efforts to produce better outcomes for patients and lower the total cost of care. Leveraging data from our electronic medical record system, our goal is to reduce falls, optimize the quality of care, and reduce overall patient risk inside our rehabilitation hospitals. In regards to regulatory updates, on April 7, CMS released its notice of proposed rulemaking for inpatient rehabilitation facilities for fiscal year 2022. The proposed rule focuses on routine updates and minor technical changes and is consistent with our prior guidance. It includes a net market basket update of 2.2%. There was no discussion of or reference to a review choice demonstration program for IRFs in the proposal. In our home health and hospice segment, we grew adjusted EBITDA by $9.8 million, or 23.9%. Our margins, which were 380 basis points higher than Q1 of 2020 benefited from continued lower cost per visit and the suspension of sequestration. While limitations on electric procedures and facility access restrictions continue to limit our volume growth, we have a lot to be positive about in regards to the volumes we saw in the first quarter of 2021 and how we exited the quarter. Non-Medicare admissions were at an all-time high in March 2021, primarily due to our new national contract with UnitedHealthcare for our home health service line. We're also very pleased with the over 3,000 new referral sources we added during the quarter. We remain confident that our traditional referral sources will return to their historic referral levels as seniors begin to return to the elective surgery market and skilled nursing facilities and senior living communities begin to recover from their depressed census levels. The combination of the return of our former market along with new referral sources we have added throughout COVID leave us very encouraged about the strong organic growth opportunities beginning in the back half of the year. Additionally, we are seeing a resumption of home health acquisition activity and have a solid pipeline of development opportunities. We recently announced a definitive agreement to acquire assets from Frontier Home Health and Hospice. This business is a $36 million revenue home health and hospice provider with nine home health and 11 hospice locations across five states. We expect to close on this transaction in the second quarter of this year. We're also pleased with the progress we're making in regards to our care planning approach and the further improvements we expect to achieve over the balance of the year associated with the use of the Metallurgy Care Module. Based upon the strong results in regards to both quality outcomes and visit efficiency, We have seen a market with high levels of metrologic adoption. We are adjusting our internal operating model to ensure greater adherence to the metrologic recommendations and its proven results. We are making these adjustments in an incremental fashion over the balance of 2021 in order to ensure the model delivers the desired balance between efficiency and outcomes. we expect to see sequential improvement in visits per episode over each of the next three quarters as this new approach is rolled out. Let's turn now to the outlook for the remainder of the year. The past 12 months have proven resiliency of our business, and as you've heard me say many times, we are confident the fundamentals of our business are intact and strong. Our full year 2021 guidance has been increased to reflect our first quarter results and the recent legislative action by Congress to extend the Medicare sequestration suspension through the end of the year. Guidance now includes the following. Consolidated net operating revenues of $5.06 billion to $5.23 billion. Consolidated adjusted EBITDA of $1 billion to $1.03 billion. and adjusted earnings per share of $3.94 to $4.16. Before I turn it over to Doug, I want to touch on the strategic alternatives review of our home health and hospice segment. The review is well underway. We are following a rigorous and disciplined process and continue to evaluate and prepare for all scenarios. including the full or partial separation of the segment through an initial public offering, spinoff, merger, sale, or other transaction. We anticipate being able to provide an update on the status of this process with our Q2 earnings report at the end of July. Until then, we will not speculate on any particular outcome or make any additional comments rather than to say we are dedicated to identifying the best path forward for our company to generate value creation for our shareholders. While we actively pursue these strategic alternatives, we will maintain our focus on operational excellence. We've had a great start to the year, and I look forward to seeing what we can accomplish in 2021 and beyond. With that, I'll turn it over to Doug.

Thanks, Mark, and good morning, everyone. We're pleased with the performance of both of our segments. First quarter consolidated net operating revenues grew 4.1%, consolidated adjusted EBITDA increased 10%, and adjusted EPS increased 20.7%. We continue to generate high levels of free cash flow, with adjusted free cash flow increasing 44% year-over-year to $107.4 million. In our inpatient rehabilitation segment, revenue increased 5.6% and adjusted EBITDA increased 9%, with both increases primarily driven by pricing. Growth in revenue for discharge primarily resulted from a higher acuity patient mix, an increase in reimbursement rates, and the suspension of sequestration. Volume growth in the quarter was impacted by COVID-related limitations on elective procedures, as well as census caps at some of our hospitals due to isolations and quarantines. In January of 2021, approximately 30 of our hospitals were impacted by these census caps. By the end of the quarter, seven of our hospitals were experiencing census caps. Today, that number is down to five. The rollout of the vaccine has assisted us in addressing these issues. As of today, approximately 50% of our ERP employees have been vaccinated. While we continue to experience a higher patient acuity than prior years, the rollout of the vaccine and onsite COVID testing capabilities are helping us make progress in lowering our patient's average length of stay. By the end of the first quarter, we had rapid testing devices in all of our hospitals. For the first quarter of 2021, Our average length of stay was 13 days compared to 12.7 days in the first quarter of 2020. By the end of the quarter, our average length of stay was trending lower, as evidenced by a March average length of stay of 12.5 days. Our net operating revenue was impacted in the first quarter of 2021 by an increase in bad debt expense, primarily due to aging-based reserves. As our Medicare Advantage book of business has grown, we are experiencing a higher amount of write-offs associated with patient co-pays and deductibles under certain plans. We are currently reassessing our collection procedures with regard to patient responsibility. We increased our guidance assumption around bad debt from a range of 1.4 to 1.6 percent of revenue to a range of 1.5 to 1.7 percent of revenue to reflect this trend. In our home health and hospice segment, revenue was essentially flat while adjusted EBITDA increased 23.9%. With regard to volumes, total starts of care, which includes both admissions and recertifications, were up 0.6% year over year. We achieved this growth despite entering the quarter with a COVID resurgence and a high level of quarantined employees, as well as unusual winter storm activity in February in Texas and Oklahoma, two states with significant market density for us. Recertifications increased 8.3% due to our servicing of patients with more comorbidities who stay on service longer, as opposed to the shorter-term elective procedure patients we saw pre-COVID. Non-epistotic admissions increased 3%, primarily due to the new national contract with UnitedHealthcare which began in February 2021 and which, as a reminder, moved out of network volume historically paid on an episodic basis to in-network volume paid on a per visit basis. As Mark mentioned, we continue to see a decline in referrals from SNFs, patients residing in senior living facilities, and elective surgeries. Combined, these three areas accounted for approximately 3,700 of our admissions decline in the first quarter of 2021. Had it not been for these 3,700 lost admissions, our episodic admissions growth would have been a year-over-year increase of approximately 3.4%, and that's in spite of the UnitedHealthcare contract shifting patients from episodic to a per visit basis. Our home health cost per visit was down 5% year-over-year, with the primary driver of this improved CPV being the compensation structure changes we made in May 2020, coupled with effective management of productivity of our full-time staff. Within our hospice service line, same-store admissions continued their strong trend with over 11% year-over-year growth. With regard to our capital structure, our net leverage was 3.5 times at the end of the quarter. In March, we issued notice for the redemption of $100 million of our 5.125% senior notes due 2023, and we completed the redemption of those notes in April. Our continued strong free cash flow and well-balanced capital structure support the investments we are making in our growth. We remain well positioned financially and operationally for the future. And with that, we'll open the lines to questions.

Thank you. At this time, I would like to remind everyone, if you would like to ask a question, please press star, then the number one on your telephone keypad. If your question has been answered and you wish to remove yourself from the queue, press the pound key. Our first question comes from the line of Brian Tanquillit of Jefferies.

Hello, Brian. Hey, good morning. Congratulations, guys. I guess my question for both of you. So as I think about the guidance raised, it seems to me like you raised it for the Q1 beat and the Medicare sequester extension. So I guess, Mark, how are you thinking about the pace of recovery? It sounds like you're still assuming that nothing will really bounce back in terms of the likely procedures until the back half of the year. And then I guess for Doug, just as I think about the cadence from Q1 to Q2, just any color you can give us to help us model the quarter improvement sequentially. Thank you.

Well, Brian, this is Mark, and I'll address your first point. We do carry a certain amount of very positive momentum out of March and And as we've noted, having the electric procedures come back will have an impact on both of the operating segments. There is a certain amount of uncertainty on exactly when that will happen. We do think that will be a latter part of the year, the second half of the year event. We certainly expect it to happen. We just don't have a lot of insight in terms of exactly when. But we are starting to see the electives come back and a number of markets, so we have reason to be positive on that for the second half of the year. Brian, you're exactly right.

The raise in guidance was solely attributable to those two factors, the Q1 performance and then the benefit of the sequestration suspension for the last three quarters of the year. Recall when we issued our initial guidance at the beginning of this year, We said that embedded in that was an assumption that business would improve and performance would improve in the second half of the year. So some amount of continued improvement was already factored in. As you think about the pacing through the year, some things to consider is second quarter will certainly be our easiest comparison because that was the most severe decline that we saw during 2020 in volumes. It also was the quarter in which we absorbed some $43 million in in extra SWB related to the PTO benefit that we gave to our employees in both business segments. And then just also a reminder that you went the first month of the quarter last year without the suspension of sequestration, and that was prior to us making the compensation changes at home health and hospice. So all of those factor into the second quarter comparison. As you think about Q3 and Q4, the one thing that I would point out is that our pre-opening expenses are going to be more heavily skewed towards those quarters. Normally, you wouldn't think about that in Q4, but we actually have three new hospitals which are slated to open in the first quarter of 2022. Awesome.

Thanks, guys.

Our next question comes from the line of Matt LaRue of William Blair.

Good morning, Matt. Good morning, Matt.

Hey, good morning. Thanks for taking the question. I wanted to ask about your M&A environment on the home health and hospice side. Obviously, you just completed a deal with the accelerated reimbursement reversing, the RAP payment now gone, perhaps higher personnel costs, a bunch of cash flow applications for smaller providers. Just kind of curious if there's been sort of a tick up in maybe inbound interest or what the balance is in terms of opportunities you're seeing out there.

Yeah, Matt, this is April. I would definitely say that, you know, I think recovery, particularly in the home health segment, is underway as far as M&A opportunities. Last year, most of what we saw come to market of significance was in the hospice sector. With some of those pressures that you identified, I think we're definitely beginning to see a little bit more activity this year on the home health side and anticipate that there's going to be, you know, good opportunities for us throughout the balance of the year to pursue some home health acquisitions while continuing to look at hospice acquisitions that help us build our scale and density and market overlap.

Okay, and just trying to understand the timing in terms of the leadership transition for the home health and hospice business and the strategic review. I think the transition date is June 18th, and Margie's alluded to sort of the end of July for the end of the review. My presumption is any new CEO would want to know the outcome of the review, so just trying to understand that sort of gap there and what the plan is for leadership during that interim period.

Yeah, Matt, this is Mark. We'll have a smooth transition there. Clearly, we have engaged a third-party firm to initiate a national search. In terms of the timing on that, it is a bit uncertain in terms of whether that is a 60- or 90-day timeframe, but we are well underway with that. April and I will work collaboratively on a near-term, interim transition to make sure everything operates smoothly. with a core group of the senior management staff there in Dallas. Okay.

Thank you. Our next question comes from the line of A.J. Rice of Credit Suisse.

Good morning, A.J. Hey, everybody. Best wishes to April on future endeavors, obviously. So maybe quickly on the comment on the home health. I know you highlighted that the United contract has helped you show growth in that non-episodic volume area. I wonder how much further help, obviously United is a huge player, so being in that, I wonder, because I don't think you got a full quarter's worth of that benefit. Is there any way to Talk about what that may mean for you for the rest when you get it fully implemented in the quarter, in a quarter.

Yeah, we're happy to talk about that. So we did begin that contract in February, so we really got kind of a mixed bag in the first quarter. So we had strong volumes in April from that contract and, excuse me, in March and are continuing to see those into April. And so we feel like... Without, frankly, even a whole lot of sales push, we've seen significant increase, a little more than doubling of our monthly admissions coming from the United Relationship. I think until we get on the other side of some of the staffing challenges, you know, we're going to want to kind of walk that tightrope carefully because what we don't want to do is over-pursue the United Relationship to the detriment of our Medicare patient base. Obviously, the reimbursement rates are a bit different there, and we want to find that balance where we can serve both populations effectively. And so I think, you know, hopefully the biggest opportunity is going to be to improve our staffing balance so that we can run hard at both opportunities, but definitely feel like when we see a full quarter of United in the second quarter, um, it will be an upward trajectory from Q1 as it'll be fully baked into the second quarter's numbers.

Okay. Maybe just my follow up, um, on the frontier acquisition, you guys announced, uh, um, It looks like if I net out the tax benefit, it's about 2.4 times revenues. I know you haven't said historically where you price home health acquisitions, but I know some of the peers have said it tends to be historically a little less than two times revenues. I wonder, is there something about that acquisition that warrants a little more fulsome price, or is that sort of where the market is these days coming out of the pandemic for home health assets, some perspective on the pricing, I guess?

Yeah, AJ, I would say you need to look at a couple things. First of all, you're looking at a trailing revenue number, and that revenue number was obviously impacted by COVID and is not necessarily representative of the run rate of the business. The second is within the frontier opportunity, we see great organic growth opportunities to come from adding additional scale and density into those western markets, and we see substantial margin improvement opportunities to be additive to EBITDA growth as well.

AJ, we're excited about this acquisition and think the Frontier is a great asset. It's going to be a great complement to what we have in our home health and hospice segment.

Okay. Thanks a lot.

Our next question comes from the line of Kevin Fishbeck of Bank of America.

Hello, Kevin. Hello. Thanks. Great. So I guess one first question here. I want to reconcile your comments about, you know, some of your referral sources seeing depressed volumes and as they rebuild, you know, you'll see the benefit of that. Because I guess, you know, some of those referral sources, one might think, are being pressured, and yet the volume is coming to you, right? So, I mean, some of this is about volume skipping over some of those sites of care, people staying in their home longer versus going to an out or a nursing home. So, you know, I would think that as they return volume, that might put pressure on your core business. I mean, are you saying that net-net, you still think as those things grow, you will be a net positive? And why isn't, you know, that more of a get and a take at the same time?

Well, I think you're absolutely right. There are some good guys. So, for example, seeing our admissions from skilled nursing facilities come down, seeing those patients discharged from SNF to us is probably part of what's contributing to our admissions from acute care hospitals of patients that are bypassing that component. So there are some puts and takes in that. You know, we think that there's opportunity for both. We think the market has realize that not every patient needs to be admitted to SNF, but we also think in time that SNF admissions will recover as patients become more receptive to that environment. So I think we'll see both. I think we'll see a continuation of our higher direct admissions, but I think we'll also see those facility types recover, just as we've seen in our own IRP division, As those recoveries happen, we'll continue to see those downstream opportunities. I think what you're going to see is kind of this overall acuity level increase, that the acuity level of the average patient is going to increase, the acuity level of the average home health patient is going to increase. Same with IRFs and then even to some extent patients residing in assisted living senior housing communities may even elevate. And so I think as all that happens, it really presents an opportunity for both recovery from our prior referral sources and the continuation of maintaining these sort of net new opportunities that we're seeing.

Okay, that's helpful. And then I guess this dynamic you're talking about as far as MA growing fast and that's creating low-income pay collections and higher bad debt, is that a permanent thing? Does MA always have a higher collections issue, or is this more a function of you're growing MA so rapidly that it's kind of growing pains? alongside that and you would expect that number to come down.

It's a combination of the two, Kevin. You've got the rapid growth in MA, which is certainly a component of it, but then there have also been some pretty significant structural changes within some of the larger MA plans that have increased the burden and the responsibility on the patients. Many of the patients simply don't understand that and they come in ill-prepared to meet that obligation. I will say also that that historically we haven't had to have personnel in our hospitals or in our centralized business office devote a lot of time to collecting on these, and we're in the process now of revising those procedures in an appropriate way to be a little bit more upfront about it, if you will, although it's not always easy to do that based on the status of our patients at admission. It's not a significant movement, but it was noticeable, and that's why we factored it in. I should also note that when you're looking at bad debt associated with Medicare Advantage, there's not an ability to recover that through cost reports as there is with Medicare fee-for-service.

Okay, great. Thanks.

Our next question comes from the line of Stephen Valliquette of Barclays.

Hello, Stephen. Hey, thanks. Good morning, everybody. Thanks for taking the question. So within the inpatient rehab business and the higher acuity patient mix that drove some of the strength in those results, you've talked about that for a couple of quarters now. I guess I'm curious whether there were any notable changes around that in the first quarter of 21 versus what you were seeing in the back half of 20. How are you thinking about the acuity levels in the remainder of 21 based on what you're seeing today, just given the rapidly changing environment in the last 30, 60 days or so? Thanks.

We'll let Barb Jacobsmar weigh in on that.

Yeah, so really there's a component of we've seen similar acuity that we saw at the end of 2020. I think a big piece that's going to make a difference is as the COVID number of patients decreases, that will impact acuity. But a larger component is going to be the return of these elective surgeries. And, again, as Doug mentioned earlier, we just don't know the timing on that. But as those patients come back into our hospitals, that will have an impact to lower the overall acuity as those patients do tend to have a lower CMI rate.

Steve, we discharged over 4,000 COVID patients in the first quarter of 2021. And as I mentioned, we had 1,600 orthopedic cases that we had in 2020 that didn't have in 2021. So as Barb said, you kind of have a combination of two things happening. You have elective orthopedic procedures coming back in that have a lower acuity. At the same time, you'll have fewer COVID patients that have a higher acuity. So we would expect some normalization to return on our overall case mix index or acuity.

Okay, that's perfect. Thanks.

Our next question comes from the line of Pito Chickering of Deutsche Bank.

Hello, Pito.

Morning, Pito.

Hey, good morning. Thanks for taking my questions. In April, it was a pleasure to work with you over the years. I know you aren't giving any commentary on the strategic review until July, but conceptually, do you think your home health assets have enough scale to be a standalone company or would be more beneficial to merge with a larger asset in the market that is also looking for a strategic review?

I think the scale is sufficient to accommodate any of the array of alternatives that are currently on the table.

Okay, and then on the visits per episode, a nice decrease during the quarter. You actually mentioned how that was going to decrease throughout the year. Can you quantify for us what ending we are in for the metallogics to roll out and how much more the visits per episode can decrease through 2021? And is there room for more declines in 2022?

Yes, you know, I think we're still fairly early. We really completed the deployments. in the middle of last year and with all the things going on during COVID, I will say that although we completed that deployment, it may not have been the top priority of each of our branches during that period to think about how to successfully deploy that. So I think we're seeing steady progress with that tool. You see that in the continuing trends within our visits per episode quarter over quarter. And I think that trend will continue to improve throughout the balance of 2021 and probably even into the early parts of 2022, but I think we'll begin to see sort of full realization this time next year, but I would expect sequential improvement between now and then.

Okay, and then if I could squeeze in one more. I know that you're not giving monthly data anymore, but the first quarter was extremely volatile with the COVID surge and the storms in February. Is there any chance you can quantify for us how the home health admissions trended in March? Thanks so much.

Yeah, so we had a strong March. As I mentioned, the non-Medicare admissions in March were very strong, particularly from the United Relationship as that became fully online in March. And so, you know, I think we came out of the quarter feeling good about the trajectory that we were on, and we'll continue to see how it unfolds here in the second quarter. But We're encouraged, particularly when you think about the displacement. When you think about the United, you can't think about it as only the United non-Medicare additions. You really have to think about the net impact of those because we were bringing in about 700-ish a month admissions that were episodic. And so previously they were in our episodic admissions. So although we're excited about a doubling of that that we're seeing as we've moved into this contracted rate, you also have to take into account you've got some puts and takes with that. So you're going to see our episodic jump, but we're going to be carrying about a 2,000 admin a month to 2,100 admission per quarter impact on our episodic by having that shift to non-episodic. So just, you know, Keep that in mind as you look at the numbers. In total, our total admissions for the quarter, you know, were the highest we've seen since COVID and continuing to make progress. So I think we're encouraged by what we're seeing. We're encouraged by the recovery and acute care hospital discharges. So a lot of things moving in the right direction.

Great. Thanks so much. We're very happy with the volume trends of both of our operating segments and the trends that we see upstream that will carry over into Q2. So very happy to see these trends turn around for us.

Yeah, without throwing any cold water on that, I do want to remind you that the effect of those winter storms in February will linger into the second quarter, because although it's not impacting new admissions growth, it is impacting research, The emissions that were lost due to the storm, you don't get a research on those, and that impacts the volume in the first month and the second quarter. All right. Thanks, Doug.

Once again, if you'd like to ask a question, please press star, then the number one on your telephone keypad. Your next question comes from the line of Matt Borsch of BMO Capital Markets.

Hello, Matt.

Morning, Matt.

Good morning. Maybe if you could talk about – I think you said that – at your IRFs that the vaccination rate today is about 50%. I'm just curious where you think you can get that, what you're doing to increase that, and how you think that's going to affect or not the business over the course of the year.

Yeah, so currently we are at 50%. We survey all of our staff on a regular basis, and about 77% of our staff are saying that they ultimately want to receive the vaccine. The vaccine rollout has been slower in some markets than others as far as our availability. We do have the availability now in all of our markets, so I think we'll continue to see that number rise. But Our chief medical officer has done a great job on doing education for our employees on the value of the vaccine. So we're just going to continue to support it in our markets.

I will say that we were seeing a lot of interest in the one-dose J&J vaccine. And when you had the unfortunate news regarding that, even though it's been reinstated, that took a little bit of the wind out of our sails with regard to the progress we were making. We're getting people back focused on both the safety of the J&J vaccine and converting some of that volume over as well to the two-dose vaccines.

Well, I had the J&J shot, and I'm fine, so there's one data point for you.

That's good.

If I could just sneak in one last one. The patient's that are coming to the Earth, bypassing the SNFs. Is that, you know, does that create some challenge? I'm sure everything does, but I mean, is that just a good trend, or is there some of that that, you know, that isn't necessarily what you want?

No, it's actually a good trend. What's been great is that historically, we did very well on getting the conversions of Medicare Advantage stroke patients, but many of the other diagnoses, MA tend to push towards SNF mainly from a cost perspective. What COVID has allowed us to do is there has been patients who did not want to go to skilled. We had waivers for a short period of time. But what it's allowed us to do is get some of those other types of patients so that we can have actual outcomes to show these MA regional directors that these patients do well, they go home, they have a low return to acute. So it's actually helped us reinforce that value proposition for other diagnoses outside of the stroke diagnoses.

Right. I think one of the things that the pandemic did show is that there clearly is a difference in the various post-acute settings and the types of patients that can be cared for in each. And clearly, the IRF segment was one of the winners in that in terms of the quality and the outcomes they were able to get with COVID patients, some because they have the resources and clinical know-how to treat these types of patients with the higher acuity. So, I'm very proud of what we did on our earth and our home health services in terms of caring for the COVID patients.

So good stuff. Thank you.

Our next question comes from the line of Frank Morgan of RBC Capital Markets.

Hi there, Frank. Good morning. Hopped on late, so hopefully this one hasn't been asked. In HCA's earnings call, they talked about expanding their post-acute continuum and specifically called out rehab hospitals as an area of focus, particularly in Florida. Just curious about your thoughts on that and, you know, what you see as the likelihood of that occurring. And then the second one was just more of a general question. When you talk about emission caps, obviously that number coming down for you nicely in the quarter, is there a lag, much of a lag from the time you lift those and kind of go back to normal before you actually see volume pick up? That's it. Thanks.

Okay, so first on the question regarding HCA, we do have HCA in many of our markets. Obviously, the majority of those are units inside their hospitals. We've also heard locally in many of the Florida markets about them wanting to add a unit. In actuality, that's usually a good thing because it increases the awareness of their internal team on the value of inpatient rehab, and many times those units can't take care of all of their IRF patients. So we're used to working with them in our markets. And then on the capacity constraints being lifted, usually there's about a week or two delay because referral sources, when there's a cap in one of our hospitals, the referral sources need to find a place for those patients to go. So it takes usually about a week or two to get back letting them know there's bed availability. But the recovery is pretty quick after that.

Yeah, just one further comment, Frank, on the ACA. Historically, they have not ventured into freestanding IRFs. And so, as Barb said, most of what we see with regard to IRF volume for HCA is in units, and as you know, those tend to be considerably smaller, so they're really not a source of great incremental supply to the markets in which we have overlap.

Okay, thank you very much.

Our next question is a follow-up from the line of Peto Chickering of Deutsche Bank.

Hey, guys, did you miss me? A quick follow-up here on Kevin's question. You did quantify the few thousand referral sources and the pivot away from SNF and assisted living referral sources. I'm curious how active those new referrals were during the quarter, how they ramped throughout the quarter. Any numbers that you can give us on admissions from those referrals, and how should we think about those changing throughout the year?

Yeah, I don't know that I have the data right off the top of my head. The reality, generally, when you bring in a new referral source, it is the beginning of a relationship, and it creates the opportunity to prove your impact that you can make for their patients. And so, you know, generally as we see new referral sources come in, there is a ramp that occurs over time as they start to see the value of and the quality of our services on their patients' behalf. And so we would expect those to continue up. And let me be clear that we are not pivoting away from the SNF or senior living businesses. It's just that right now, the capacity levels within those particular housing alternatives for senior living and then the SNF environment are down, and we are kind of the we're seeing the impact of that on our admissions, we believe confidently that those are gonna return, and as they do, our referrals from those sources will go up as well. So we're not leaving them, we're just recognizing that they're in a bit of a depressed time, and that's having an impact on us, and so we're seeking those alternative referrals. Knowing those potential residents and patients are still out there, it's just a matter of how do we access them more effectively in this period.

Okay, and then one more follow-up here. Costs for visits continue to be held very consistently at these levels. Since you announced the restructuring last year, despite the COVID costs you guys saw during the quarter, as we analyze those costs in the third quarter, I'm curious how we should think about wage pressure from these levels. Will it go up in the 3-5% range, or is there still room for increased productivity to maintain costs for visits at these levels throughout the next 18-24 months?

Yes, I think we expect cost per visit is something that we will continue to stay laser-focused on. We know we still have some productivity opportunity, but we also recognize, particularly in the nursing discipline, that salary and wage pressure is very real for us in those markets, that there's a lot of competition for nurses in the market. And so I think we'll see, particularly in the nursing discipline, that we'll continue to seek productivity gains but also recognize that there are going to probably be some salary increases, whether they come in the form of base salary increases or, you know, hiring incentives or retention incentives. So we're looking at a whole array of things to make sure we control those, but we're not going to give up on continued productivity improvement either.

Thank you. I will now return the call to Chrissy Carlisle for closing comments.

If anyone has additional questions, please call me at 205-970-5860. Thank you again for joining today's call.

Thank you. That does conclude the Encompass Health first quarter 2021 earnings conference call. You may now disconnect your lines and have a wonderful day.