Encompass Health Corporation

Ladies and gentlemen, please stand by. We're about to begin. Good morning, everyone, and welcome to Encompass Health's third quarter 2022 earnings conference call. At this time, I'd 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'd 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 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. Please go ahead, sir.

Thank you, operator, and good morning, everyone. Thank you for joining Encompass Health's third quarter 2022 earnings call. 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 risks and uncertainties, many of which are beyond our control. Certain risks and uncertainties like those relating to regulatory developments, as well as volume, bad debt, and labor cost trends that could cause actual results to differ materially from our projections, estimates, and expectations are discussed in the company's SEC filings, including the company's earnings release and related Form 8K. The Form 10K for year ended December 31st, 2021, and the Form 10Q for quarters ended March 31st, 2022. June 30th, 2022, and September 30th, 2022, 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 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 Encompass Health President and Chief Executive Officer, Mark Tarr.

Mark, thank you, and good morning, everyone. We continue to see strong underlying demand for our services in Q3, with total discharge growth of 7.5%, including a 4.1% increase in same-store discharges. Our value proposition is resonating across payers and we are gaining share in what remains an underserved market. Our hiring and retention strategies again proved effective at reducing our reliance on agency staffing, leading to another quarterly sequential decline in contract labor FTEs and expense in Q3. Market conditions for skilled clinicians remain challenging, and the benefits of lower contract labor in the quarter were partially offset by higher sign-on and shift bonuses. Our Q3 profitability was also negatively impacted by hurricane activity, delayed openings at two de novos, and inflationary effects on supplies and utility costs. These factors led us to revise our 2022 guidance as Doug will address in greater detail in just a few minutes. These are not the results we'd hoped for, but we are extremely proud of how our team has continued to respond to this volatile and challenging environment. Our de novo and bed addition strategies are increasing the 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 our ERP business. We opened three de novos in Q3, making that nine year-to-date. We expect to open eight de novos in 2023. We added 20 beds to existing hospitals in the quarter, raising the year-to-date total to 87. We expect to add an additional 100 to 125 beds in 2023. In the design and construction of our de novos, we are furthering our utilization of prefabrication to enhance speed to market, ensure consistent quality, and contain costs. We are working on a number of new initiatives for the next generation of prefabrication and look forward to sharing more details with you in early 2023. As we've discussed previously, we have responded to the challenging labor market for skilled clinical resources in a number of ways, including adding substantial resources to our talent acquisition team. Our strategy of building a centralized recruiting function is generating successes. Same store net RN hires were 459 for the first three quarters of 2022, as compared to 289 in the same period last year, a 62% increase. Q3 same store net RN hires of 183 is up from 149 in Q2 and 127 in Q1. We also remain keenly focused on managing productivity. Our EPOB for Q3 was 3.39, in line with our expectations. We achieved this productivity even while opening three de novos in the quarter. We are also continuing to create favorable outcomes for our patients and thereby our payers. Our Q3 discharge to community rate was 81.9% as compared to 81.3% in the year-ago period, and our discharge to SNF rate was 7% as compared to 7.5% in the year-ago period. Moreover, our staffing challenges had not hindered our ability to provide great patient care as evidenced by our favorable net promoter scoring trends for patient satisfaction. On October 1st, the fiscal year 2023 IRF rule became effective providing us with an approximately 4% Medicare price increase. This is the largest price increase we've had in quite some time. The market basket update leading to this increase is based on trailing information and lags the prevailing inflationary environment. We are optimistic that ensuing reimbursement changes will close that gap. The benefit of this Q4 reimbursement increase is being partially offset by sequestration. On the regulatory front, the Improving Medicare Post-Acute Transformation Act of 2014, known as the IMPACT Act, requires collection and reporting of quality measures and standardized patient assessment data elements across post-acute providers. The 2022 IRF-PAI 4.0 form is now 30 pages of admission and discharge interdisciplinary data elements. Consistent with our prior regulatory update, we began preparations for these changes well in advance to ensure that our associates were well trained and fully ready for transition. We have implemented IRF-PAI 4.0 across all of our hospitals with little to no disruption to our operations. While CMS has not yet announced a start date for IRF review choice demonstrations, it is slated to begin in Alabama first. We have been proactively communicating with our Medicare administrative contractor for Alabama regarding the potential implementation process. With regard to our revised 2022 guidance, we now expect net operating revenues of 4.32 to 4.35 billion adjusted EBITDA of $800 to $820 million, and adjusted EPS of $2.71 to $2.86 per share. The key considerations underlying this guidance can be found on page 13 of the supplemental slides. As I mentioned previously, Doug will provide more details about our revised guidance. With that, I'll turn it over to Doug.