Encompass Health Corporation

Good morning, everyone, and welcome to Encompass Health's second quarter 2022 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 speakers' 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 Mark Miller, Encompass Health's Chief Investor Relations Officer.

Thank you, Operator, and good morning, everyone. Thank you for joining Encompass Health's second quarter 2022 earnings call. With me on the call today are Mark Tarr, President and Chief Executive Officer, Doug Coltharp, Chief Financial Officer, and Patrick Darby, general counsel, and corporate secretary. Before we begin, if you do not already have a copy, the second 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 risks and uncertainties, many of which are beyond our control. Certain risks and uncertainties, like those relating to the spin-off of Inhabit Inc. 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 year ended December 31, 2021, and the form 10Q for the quarter ended June 30, 2022, when filed. We encourage you to read them. Your caution 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 on 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 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 any additional questions, please feel free to put yourself back in the queue. With that, I'll turn the call over to Mark Tarr.

Mark, thank you, and good morning, everyone. The strategic review of Encompass Home Health and Hospice business culminated in the spinoff of Inhabit on July 1st to be an independent, publicly traded company. Inhabit reported its Q2 results yesterday after the market closed and has its earnings call following this call. Accordingly, we will not be commenting on Inhabit's Q2 results. Q2 was another solid quarter for our inpatient rehabilitation business. Demand for our services continues to grow. Our value proposition is resonating across payers and we are gaining share in what remains an underserved market. Our de novo and bed addition strategies are increasing availability of the highly specialized services we provide to meet this rising demand. Our commitment of substantial capital to these capacity expansions underscores our confidence in the future prospects of the IRF business. We opened three de novos in Q2, making that sixth year to date. We'll open three more de novos in the second half of 2022, bringing the total to nine openings for the year. We expect a similar number of openings in 2023. We added 38 beds to existing hospitals in the quarter, raising the year-to-date total to 67. We expect to add a total of approximately 90 beds to existing hospitals in 2022, an additional 100 to 150 beds in 2023. Our total discharges grew 4.9% in the quarter and 1.6% on a same store basis. This was on top of 18.7% total discharge growth and 16.9% growth on a same-store basis in Q2 2021, resulting in an impressive two-year CAGR. As has been the case for the past several quarters, the continued strong demand for our services in a tight labor market for skilled clinicians necessitated elevated utilization of agency staffing and sign-on and shift bonuses. As we had foreshadowed on our Q1 call, we did see sequential improvement in contract labor costs during Q2, with both the number of contract labor FTEs and the negotiated rates declining. Consistent with our Q1 comments, we chose to redeploy a portion of the contract labor savings into sign-on and shift bonuses for our internal FTEs. Contract labor plus sign-on and shift bonuses total $56.9 million in Q2, compared to $63 million in Q1 and $28.7 million in Q2 of 2021. Our Q2 agency rate per FTE was approximately $222,000 compared to approximately $240,000 in Q1 of 2022. We've responded to the challenging labor market conditions for skilled clinical resources in a number of ways, including adding substantial resources to our talent acquisition team. We have built a centralized recruitment function now comprising over 60 professionals. This strategy is gaining headway. Same store net new RN hires were 276 for the first half of 2022 as compared to 117 in the same period last year. For the second half of 2022, we expect sign-on and shift bonuses to remain elevated as we continue to hire more RNs and use existing staff to fill in gaps. This will facilitate a decrease in our utilization of contract labor. Assuming normalizing industry conditions, we expect agency rates to decline further. However, the pace of the decline remains uncertain as agency rates remain highly variable and the extension of the public health emergency may prolong the duration of elevated rates. CMS last week issued the 2023 final IRF rule. For IRFs, the final rule will implement a net market basket update of 3.9%. We estimate that taken as a whole, the final rule will result in a net increase of approximately 4% for our Medicare payments beginning October 1st, 2022. As a reminder, this increase does not include the impact of sequestration. While the rate update in the IRF rule is positive relative to current reimbursement rates, it does not adequately compensate for our elevated operating costs. On the regulatory front, on July 1st, CMS sent a report to Congress on a prototype for Unified Post-Acute Care Prospective Payment System, or PACPPS, as required by the Impact Act of 2014. CMS did not make legislative recommendations to Congress as to what should happen with the prototype and cautioned that substantially more analysis and research are required. For these and other reasons, it is too early to elevate or evaluate any potential impacts to our business from the PAC TPS. On July 20th, we announced that our board of directors declared a quarterly dividend of 15 cents per share to be paid in October. The decline from our recent historical rate is in response to the completion of the spinoff of Inhabit and reflects our continued commitment to a robust de novo hospital strategy. We are affirming our guidance issued on June 7th for 2022 IRF revenue, adjusted EBITDA, and adjusted EPS. The key considerations underlying this guidance can be found on page 18 of the supplement slides. With that, I'll turn it over to Doug.