Encompass Health Corporation

Good morning, everyone, and welcome to Encompass Health's second 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 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. Please go ahead.

Thank you, Operator, and good morning, everyone. Thank you for joining Encompass Health's second quarter 2021 earnings call. With me on the call today are Mark Tarr, President and Chief Executive Officer, Doug Kohltharp, Chief Financial Officer, Barb Jacobsmeyer, 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 second quarter earnings relief, 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 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 8K, the Form 10K for the year ended December 31, 2020, and the Form 10Q for the quarters ended March 31, 2021, and June 30, 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, 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 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.

Mark Williams Christy, thank you, and good morning, everyone. Business momentum accelerated in the second quarter of 2021. We had strong revenue and adjusted EBITDA growth in both segments over Q2 2020 and Q2 2019. Our second quarter performance reflects the resiliency and sustainability of our business model. As a result of our strong operating trends and year-to-date performance, we are again raising our full year 2021 guidance. Our clinical teams remain focused on the patient experience. It's their commitment to our patients that truly drive the results of our business. And I thank them for the outstanding work they do. In our inpatient rehabilitation business, revenue increased 21.5%. Discharges were up 18.7%. and adjusted EBITDA increased 40.9%. We have successfully positioned Encompass Health inpatient rehabilitation hospitals as the trusted choice for patients, providers, and payers. As the trusted national leader in rehabilitative care, we have developed and continuously enhanced clinical programs and protocols that have proven to be highly effective in treating patients requiring care in an inpatient rehabilitation hospital. We continue to improve care through advanced technology and innovative treatments that maximize recovery for our patients and prevent costly readmissions to acute care hospitals. Let me give you examples of these post-acute solutions. We completed the rollout of our readmission prevention model in October 2020. While it's too early to draw any conclusions regarding the complete rollout, I remind you that our pilot program for this model resulted in a 280 basis point decrease in readmission rates. We expect to see similar results from the complete rollout. We began piloting our fall prevention program in 11 of our hospitals in May. Throughout this pilot, we are focused on determining the effectiveness of the model and our existing fall prevention precautions, identifying additional fall mitigation practices, and making refinements to the model based on our learnings. We expect to begin enterprise-wide rollout of this model in the fourth quarter of this year or early in the first quarter of 2022. In addition, we began piloting Cerner's virtual patient observer platform in May in two of our hospitals. This platform is a remote patient monitoring system that allows a trained technician to monitor multiple patient rooms from a central monitoring station. We believe it can improve patient safety by reducing patient falls and lowering costs by reducing adverse events. Third, our expertise in treating stroke patients continues to contribute to our growth. In May of this year, we announced an extension through 2024 of our strategic sponsorship with the American Stroke Association for its national Together to End Stroke campaign. A primary goal of the campaign, which is also an essential part of Encompass Health's longstanding mission, is to transition more patients back to their communities with greater functional recovery, develop evidence-based tools to inspire hope in the stroke community, and reduce stroke mortality across the U.S. During both 2019 and 2020, our rehabilitation hospitals served more than 34,000 stroke patients. That number is expected to grow to over 36,000 in 2021. The strength of our value proposition to payers is also evident via our continued success with Medicare Advantage plans. Approximately 50% of new Medicare beneficiaries in our markets are choosing to enroll in Medicare Advantage plans over traditional Medicare. Compared to the second quarter of 2019, our same-store Medicare Advantage discharges increased 41.3%. We will continue to focus on capturing the growth in this pair. We also continue to benefit from new store growth and have a robust development pipeline intact. During the second quarter of 2021, we added 41 beds to existing hospitals and opened two new inpatient rehabilitation hospitals, one in North Tampa, Florida, and the other in Cumming, Georgia. That brings our opening in 2021 to three new hospitals, and we expect to open an additional five in the back half of the year. Specifically, we plan to open hospitals in Waco, Texas, Greenville, South Carolina, Shreveport, Louisiana, and Pensacola, Florida during the third quarter. In addition, we expect to open 12 new hospitals in 2022, and we already have nine hospitals slated to open in 2023. Last week, we announced our first hospital scheduled to open in 2024. That represents over 1,300 new beds from 2021 through 2024. And that's before we add 100 to 150 beds to existing hospitals in each of those years. Turning now to our home health and hospice business, Revenue increased 14.6%. Total admissions increased 14.7%. Total starts of care were up 10.9%. And adjusted EBITDA increased 311.3%. Operationally, we continue to execute against a solid backdrop that includes aging demographics, and the fact that 75% of patients seeking care would prefer to receive it in the comfort of their home. We remain focused on the overall quality of our payer mix, which prioritizes those payers that recognize our value proposition. Value-based contracts are a growing focus for us and an increasing portion of our Medicare Advantage admissions are being tied to a value-based payment model. As payers emphasize reimbursement models driven by value, we believe they will continue to seek out leading clinical outcomes and cost-efficient services. 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. Early results from these efforts are encouraging, and we have more potential providers in the queue. Additionally, we've rolled out a virtual visit platform with a national payers capitated program. The virtual platform app allows patients to participate in a secure video call via a personal device, such as a smartphone, tablet, or computer with their physician, nurse, peer manager, or other medical staff. We continue to assess the effectiveness of these interventions and identify opportunities to drive better outcomes through their appropriate use. We are also pleased with the progress we're making in regard to our care planning approach associated with the use of MediLogic's care module. Our visits per episode were 17.1 in 2019 and 16.4 in 2020. For the second quarter of 2021, visits per episode were 15.6. And throughout this period, when visits per episode have been declining, we've continued to enjoy industry-leading low hospitalization rates with no degradation in our quality. We believe the measured approach we are taking to care planning and adoption of metallogics is the best approach for our patients and our companies. Our teams are also focused on the integration of the assets of Frontier Home Health and Hospice, which added nine home health and 11 hospice locations to our portfolio in June. I also want to express my excitement about the appointments of Barb Jacobsmeyer as CEO and Chrissy Carlisle as CFO to our home health and hospice business. Barb is a proven leader with extensive healthcare operating experience We are confident she's the right person to lead this business going forward. Chrissy's extensive financial expertise and familiarity with our business make her ideally suited to take on the CFO role. I worked closely with both Barb and Chrissy for many years and know they will do an excellent job. Next, in regards to regulatory updates, On June 28, CMS released its notice of proposed rulemaking for home health agencies for calendar year 2022. The proposed rule includes a 1.7% net rate update and includes a proposal to expand CMMI's home health value-based purchasing demonstration nationwide from its current nine-state footprint. CMS also provided its preliminary analysis of the first year of PDGM. As we look ahead to the remainder of the year, we've increased our full year 2021 guidance based on results to date and strong operating trends. Our full year 2021 guidance now includes the following. Consolidated net operating revenues of $5.1 to $5.25 billion. consolidated adjusted EBITDA of $1.05 to $1.07 billion, and adjusted earnings per share of $4.32 to $4.47. Before I turn it over to Doug, I want to touch on the strategic alternative review of our home health and hospice segment. As we mentioned in our earnings release, based on the analysis of alternatives to date Our Board of Directors believes a full or partial separation of the home health and hospice business will enhance the long-term success and value of the business. The final form is still to be determined as we continue to pursue a separation transaction by either public or private means. Many of the key preparatory actions required for separation have been completed, including but not limited to audited carve-out financial statements for the home health and hospice business, a confidential submission of a draft registration statement on Form S-1 with the SEC, and certain required regulatory filings. While no assurance can be provided, we expect to announce a transaction in the second half of 2021. As we continue to pursue a transaction, we cannot comment further at this time.