U.S. Physical Therapy, Inc.

Good day and thank you for standing by. Welcome to the U.S. Physical Therapy Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. In order to ask a question during the session, please press the star key followed by the number 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to turn the call over to Chris Redding, President and CEO. Please go ahead, sir.

Thank you. Good morning and welcome, everyone, to our U.S. Physical Therapy Third Quarter Earnings Call. With me on the call this morning include Carrie Hendrickson, our CFO, Eric Williams and Graham Reeve, our Chief Operating Officers, Rick Binstein, our Executive Vice President and General Counsel, and Jake Martinez, our Senior Vice President, Accounting and Finance. Before we begin our discussion around our third quarter and year-to-date performance, we need to cover a brief disclosure. Jake, if you would, please.

Thank you, Chris. This presentation contains forward-looking statements, which involves certain risks and uncertainty. These forward-looking statements are based on the company's current views and assumptions. The company's actual results may vary materially from those anticipated. please see the company's filings with the Securities and Exchange Commission for more information.

Thanks, Jake. So my commentary this morning is going to be at a high level, and following that, Terry will cover the majority of our very detailed release more completely. Let me start with where volume is. Overall, there have been a number of really good things which a team of clinicians, partners, and support staff were able to deliver this quarter. And there are a few challenges which we continue to work on as well. First and importantly, volumes have been very strong this year and remain so throughout the third quarter, including during our normally seasonally slower summer months. Visits per clinic per day came in at 29.7, which is an all-time high for us for any third quarter in our company's history. This serves as the best indication related to both the overall demand for our services and the way we are viewed by patients and referral sources alike in a market where there is an abundance of choice. Truly, our partners and our staff locally are providing care which is not just excellent, but which our patients and referral sources around the country are seeking out. My sincere thanks to all of you who are listening. That care you provide is not only changing lives for the better, but it is being recognized for driving the highest level of volume ever delivered by us at this time of the year. For the quarter, that throughput, coupled with the strong development work that we have continued to produce, helped drive volumes year over year by 10.8%. Part of those volumes have come through de novo and tuck-in acquisitions, with 31 additional clinics so far through October. which, as you know, depresses our volume per clinic average some, and drags a little bit on results early on. We've added nine de novo clinics in the quarter, and five of those were added in September. Keeping that strong de novo growth in mind is a bit of a near-term drag. Through the nine months, our PP operating income, in spite of the strong de novo openings, has grown 10.9% for the year. So looking back to the quarter, revenue grew 9%, which was impacted by the Medicare rate reductions we have absorbed this year, coupled with a slightly higher percentage of PTAs onboarded over the past 18 months or so due to the nationally tight staffing market. So let me explain. If you recall... having PTAs touch a Medicare patient in the course of care results in a 15% reimbursement reduction. And while we are focusing on that in the middle, particularly in Q3, rolled out some new retraining, because we have a slightly higher proportionality of PTAs compared to where we've historically run That's increased the Medicare rate reduction ever so slightly. So our challenge at present is to offset the hole in the bucket that Medicare has created with additional better-paying business and at higher negotiated rates. This is an area where we expect to see continued improvement as we work and achieve additional successes in our contract negotiations and in some longer-term initiatives around further diversifying the way for Medicare. Additionally, we've added to our leadership in our revenue cycle area, and we are optimistic we will identify some opportunities to further enhance our already strong collections effort and further bolster our net rate in time. We have renegotiated a very significant number of contracts in a very positive way. As we explained last night, to a couple different analysts who follow the company. From the time of negotiation until the time that those contracts, those new rates get implemented, oftentimes there's a several-month delay. But we are making progress. I think good progress. I'm happy with the percent rate increases. We just need to see them pick up and gain traction as they're implemented. On the injury prevention side of our service offering, we let the market know at the beginning of this year that we expected growth to be a little bit more muted with pauses and some limited drops from a few of our customers who were expecting their business to be negatively impacted by the heavy inflationary environment coupled with the fear of a coming recession. Good news is that our Biotics team has been able to replace their lost business with new businesses It will again provide us with growth when moving forward into the 2024 year, while our progressive partnership has added a great deal of new business as well, while suffering a loss of one plant in the auto industry, which, as you know, that industry has been hit particularly hard this year on a variety of fronts. From my perspective, the majority of the accounts where we've done exemplary work are over the years, but maybe who have paused or dropped some service component temporarily. I expect many of those will come back once our economy is in a more stable growth mode. Furthermore, we have recently just added to our injury prevention core with a recently announced acquisition that includes both traditional injury prevention business as well as a new service offering delivered via a well-developed, recently introduced software program in ergonomics, which fills the service gap that existed previously with our offering. We're excited about the team, and we look very forward to helping them meet the needs of this growing and important market. Finally, our injury prevention teams have done a very nice job overall adjusting and responding to the tighter than usual labor market, which has allowed our quarter over quarter margin percentage to improve 80 basis points from 21.9% in Q3 last year to 22.7% this most recent quarter. Last week, myself and a few of our executive and development team members attended the annual private practice section meeting, which this year was held in Austin, Texas. This is, for us, the most important meeting of the year. On the development side of things, these past 12 months, when I say 12 months, I'm looking from November, really, current period to a year ago. been a very active period for us we've purchased an additional 54 clinics over that period and in that same period we're on pace but we've currently opened 72 clinics added 72 clinics overall well many of our competitors are hamstrung a bit right now with extremely high debt levels which can impact a lot of factors including their ability to sometimes even close on deals. We've got a clean balance sheet and we are working hard to put money we raised at the end of our quarter two secondary offering tour. This past week was the busiest we've ever been at the private practice conference. We scheduled double the number of individual meetings and held two large offsite gatherings, which we believe will continue to help us to drive and differentiate our partner centric model. model which distributes cash to these newly acquired partners throughout the entirety of their partnership, month in and month out, with no on-top debt burden from the acquisition itself. That and the back-end flexibility and guarantee regarding purchase methodology gives us another meaningful difference with our competitors, which should further aid us as we work to significantly grow our partner-centric company. One final bit of commentary that I know Carrie and I want to speak to really directed toward our analysts and our shareholders. We've been fielding a lot of questions related to the impact of a Zempic-like drugs on our physical therapy business. Taking a step further, there have been a number of articles in the Wall Street Journal and other notable publications relative to the massive impact In some cases, negative impact on multiple areas of the healthcare system through the expanded use of these drugs, which, as you know, help people lose weight, among other uses. So let me hopefully help create some perspective here. I truly believe physical therapy is going to continue to grow with or without these drugs. It's estimated that currently only about 10% of people with musculoskeletal issues ultimately end up in a physical therapy office. That number is growing and changing. That number will grow and change in time because there are numerous studies that indicate that physical therapy done early for other much more costly and invasive treatments or worse, with only palliative narcotic-only pain treatment, not only does it save the patient as well as the payer system significant dollars, but results in better overall health and less downstream cost of medical care for that person for an extended period of time. presumably because they get moving again to get their hope back related to the things that they enjoyed doing, either work or at home, with family, socially with friends, resulting in a healthier, happier person. That message will be hammered and marketed to groups like our Alliance for Physical Therapy, Quality and Innovation, which we refer to as APTQI, And I believe with grassroots marketing, we'll continue to expand the physical therapy first initiatives that we have across our space. Secondly and importantly, the vast majority of our business comes about the injuries caused by activity, not simply because somebody is obese. Unfortunately, the disease of obesity in people ultimately results in them not being able to do a lot of the things that they otherwise might enjoy, but for the limitations created by their weight. While obesity can result in hip and knee arthritis over time, and some of these end up as joint replacements, the bigger majority of joint replacements come as a result of activity-created injury, often to the meniscus or the fibrocartilage in the joint. which eliminates the padding and then creates osteoarthritis over time. These injuries occur in sports and daily activities, just like squatting and twisting, gardening, running, and various types of sports, which are done by people a bit more fit. Since we, as a general rule, don't see hip replacements very often in our clinics, we're really only talking about knee replacements as a potential impact. I think the market is ignoring all the other possible activity-based injuries, while often not severe, come as a result of enjoying life in a physical way, hiking, gardening, running, and, of course, our beloved pickleball. so many other things that people can participate in and enjoy if they're not obese. So I believe the potential exists if these drugs are successful, long-term don't create unintended health issues, but there will be more patients as a result, not less. So that concludes my prepared comments this morning. Terry, go ahead and walk us through the financials in greater detail, and then we'll open it up for questions.

Great. Thank you, Chris, and good morning, everyone. In the third quarter, we had continued strength in patient volumes, strong growth in revenue, growth in our physical therapy and total operating income, and year-over-year growth in both adjusted EBITDA and operating results per share. In addition, we added 19 clinics during the third quarter through acquisitions and de novos, which is three closures. We've now added 72 new clinics since the third quarter of last year through acquisitions and de novos. which is 14 closures, which is the net addition of 58 clinics over the past year. We reported adjusted EBITDA for the third quarter of $18.6 million, which was an increase of $1.6 million over the 17 million we reported in the third quarter of 2022. Our operating results were 62 cents per share in the third quarter of 2023, which was a 4 cent increase over the 58 cents we reported in the third quarter of last year. Our total company revenues increased 7.5% in the third quarter, growing from $139.6 million in the third quarter of 22 to $150 million in the third quarter of 2023. And our total company gross profit increased $1.1 million from $26.8 million in the third quarter of 22 to $27.9 million in the third quarter of 23. As Chris noted in his remarks, our average visits per clinic per day in the third quarter were 29.7, which is the highest volume in the company's history for a third quarter and is a 3.1% increase of our average visits per day of 28.8 in the third quarter of last year. July was at 29.9 visits per day. August was a little lower as expected based on normal seasonality at 29.6, and then September came back up to 29.9. All three of those months were higher than the same month in the previous year. Our net rate was $102.37 in the third quarter of 23, which was lower than last year's $104.01 per visit, but it was sequentially an increase in the second quarter of 2023, which had a net rate of $102.03. The decline in net rate as compared to the prior year was due to the reductions in Medicare rates, which represent about one-third of our payer mix, as Chris noted in his remarks. All other payer categories, including commercial and workers' comp, increased over the prior year. As we've talked about on the last couple of earning calls, we've either renegotiated or terminated the subset of our Medicare Advantage contracts that reimburse us at a rate that's less than what it cost us to serve our patients, and we'll continue to focus on renegotiations of commercial, workers' comp, and Medicare Advantage contracts, and we're making other necessary adjustments to address our net rates as well. Our physical therapy revenue for $128.1 million in the third quarter of 23, which was an increase of $10.7 million or 9.1% from the third quarter of 2022 due to the addition of 58 new clinics since last year and our record high third quarter average visits per clinic per day, partially offset by the decrease in that rate. Our physical therapy operating costs were $105 million, which was an increase of 9.9% over last year That's also due to the addition of 58 in that new clinic since the third quarter of last year. On a per visit basis, our total operating costs were $84.49 in the third quarter, which is a decrease of just less than 1% compared to $85.14 per visit in the third quarter of the prior year. Our salaries and related costs per visit also decreased about 1% in the third quarter of 2023 versus the prior year from $60.99 in the third quarter of 22 to down to $60.35 in the third quarter of 23. This is the fourth quarter in a row that we've reported year-over-year decreases in both total physical therapy operating costs per visit and salaries and related costs per visit. The increase in total operating costs per visit on a sequential basis from the second quarter, from $80.61 to $84.49, is a normal seasonal occurrence. Salaries on a per visit basis are higher in the third quarter than the second quarter, due to covering the vacations of our employees during the summer months, and then other significant costs like rent and depreciation that don't vary by the number of visits are spread over a lesser number of visits. Visible therapy margin was 18% in the third quarter of 23 as compared to 18.7% in the third quarter of 2022, with the change due to the decrease in our net rate versus the prior year. Even with the decline in our net rate versus last year, our PT gross profit increased 5.4% over the third quarter of the prior year, and it has increased 10.9% over the first nine months of this year versus the prior year. Our IIP revenues and expenses were both approximately $700,000 less than last year, so we ended up with $4.4 million of IIP income in both years. Our IIP margin increased from 21.9%. in the third quarter of last year to 22.7% in the third quarter of this year. Our balance sheet remains in an excellent position. We have $147 million of debt on our, well, excuse me, $145 million of debt on our term loan with a five-year swap agreement in place that places the rate on our debt at 4.65%, and we expect it to remain at that 4.65% going forward. As you know, that's a very favorable rate in today's market and below the current Fed funds rate. In the third quarter of 2023 alone, the swap agreement saved us $800,000 in interest expense with cumulative savings of $2.3 million over the first nine months of 2023. Our interest expense was $2.1 million in the third quarter of 2023. In addition to the term loan, we also have a $175 million revolving credit facility that had nothing drawn on it during the third quarter. And we have approximately $120 million or so of excess cash over and above what we need for working capital ready for deployment into growth initiatives. In the release, we noted that we expect our full year 2023 adjusted EBITDA to be within our originally stated guidance of $75 to $80 million, most likely in the low to mid area of such range. We expect it to have continued strong volumes in the fourth quarter as we've had all year. Where we fall within the range is going to depend ultimately on the strength of our volumes in the fourth quarter and how much sequential growth rate we're able to achieve and our net rate from the third quarter to the fourth quarter. Our operations team has produced solid results in the first nine months of 2023, and we'll all work to continue to produce the best results possible for all of our stakeholders as we finish out this year. And with that, I'll turn the call back to Chris.

Gary, thank you. Great job. Operator, let's go ahead and open it up for questions.

Thank you. Ladies and gentlemen, if you would like to ask a question, please press star 1 on your telephone keypad. If you find that your question has been answered, you may remove yourself by pressing star 2. Again, that's star 1 to ask a question, star 2 to remove yourself. We will pause for just a moment. We'll take our first question from Joanna Gajunk with Bank of America. Good morning.

Thank you so much for taking that question. So a couple of questions, I guess, here. I guess on the last comment, Carrie, around the outlook for this year, that you slightly lowered it. You're talking about kind of being towards the middle or lower. And so you kind of took off the higher end from stable. So I guess what are the main drivers for this, you know, lowered guidance? Sounds like, you know, Q3 guidelines. roughly in line. So I guess Q4 seems like there's some indicators that pointing to a slower or lower number for Q4. Is that the way to think about this?

Yeah, Joanna. So, I mean, I'd say it's within the expectations that we've had for, you know, I mean, it's probably a little bit lower than we expected. We need a little more net rate growth to get us to the higher end of the range than we've had. And if we get more growth, we'll position ourselves to closer to that middle, likely. But, you know, you mentioned that it looks like the fourth quarter would be less than the third quarter, given the guidance that we provided. And that's not an unusual pattern. I mean, if you look back the last few years, in 2019, we went from $17 million of EBITDA down to about $15.6 million in the fourth quarter. Same thing in third quarter of 21. We went from 19.9 to the fourth quarter of 21, about 17 million. Last year it went up a little bit, but that was because we had some large acquisitions we made. We made four large acquisitions in the fourth quarter, actually two really large acquisitions and two other acquisitions in the fourth quarter of last year. And so that bumped our fourth quarter up a little bit. But, you know, it's a normal pattern for us. that is somewhat impacted by the holidays, which bring down our volume some in late December particularly. And then also in our IIP business, there's some seasonal decline because some of the big manufacturers, auto in particular, closed down their plants in the last part of December because of the holidays. So they're just shutting down the plants. And when that happens, we don't have people on site that can bill. So last year in our IP business, if you looked back at it, our IP income went down about a million dollars or so from the third quarter to the fourth quarter. I don't expect it to go down that much this year, but it will likely come down some in the fourth quarter because of that phenomenon. Chris, anything you would add?

No, I think you've covered it, Terry. Joanne, the business is solid. This kind of follows our normal seasonal pattern, and we're just trying to be clear about where we think we're going to finish.

I know. Makes sense. And I guess just to follow up on that comment around the The net rate growth, it sounds like that's where maybe things are a little bit softer. So I guess the question is because you've been talking about, you know, negotiating contracts with commercial and some of the MA contracts and improvement in workers' contracts. So kind of when will we see the benefit, right, to that net rate?

Yeah, well, we have seen benefit from it. I mean, our commercial rates and our workers' comp rates are both up about 1.5% on a year-to-date basis. We'd like that to be more, but some of the negotiations have taken place during the year, and it takes a little while for them to take effect. And so we're hoping to see more of that in the fourth quarter and certainly into 2024. The rate for our personal injury and self-pay, which is our other – that's about 6% of our revenue. That's up about 2.5% year-to-date. Medicaid even is up about 1% year to date. The only, the only pair category that's down is Medicare. And that's because the things we've noted, you know, more, the higher ratio of PTAs to PTs that's increased a bit over the last 18 months or so. And we've had to do that. And in some cases, because the market is tough from a hiring standpoint, but also we've had such heavy volumes. So we we've needed to hire what we can hire to cover the volume. And again, You know, then the heavy volumes have also caused a little bit of a downtick in billed units for our Medicare. So, you know, and then Medicare Advantage, that's growing as a percent of our total Medicare visits. You know, there's a big push out there for Medicare Advantage, for Medicare patients to move to Medicare Advantage, and that pays us less than traditional Medicare. So some of those things have factored in. Our Medicare rate this year, like I said, everything else is up. Medicare has been down about 3.5% to 4% year to date.

So I would say, Joanna, when you look at the contracts we've redone, a lot of them have been double-digit increases. Some of those are spread over two or three years. I've been pleased with the percent change. To your point, we need to see that show up in the P&L, and, you know, we're working to make that happen.

All right. And if I may, our last question on this Medicare rate. So I guess we We get the final physician fee schedule, the therapy rate there down 2% or so. There's also potential work in Congress on the relief, right, to this position fee schedule. And I know this rate update could differ depending on your geographic mix and whatnot. So can you talk about, you know, what this reg means to you in terms of the net rate update, you know, if there's no relief and if there is a relief, what it would be? And I guess anything else in that reg that could be impactful for rehab therapy. Thank you.

Chair, you want me to take it or do you want to take it?

Yeah, you go ahead and I'll fill in if needed.

That's fine. So right now, I hate to say it, but sometimes these tables that are published don't correspond with the actual realities for the companies. And so the expected reduction for us is 3.5%. All factors considered. There are a couple of other things that were in the final rule. Extends our ability to oversee physical therapy assistance. in certain type of licensed facilities and do that on a remote basis other than physically present onsite. And so that's beneficial. That's a continuation of something that was done during COVID. That's beneficial. And then there have been some mildly beneficial things around remote therapeutic monitoring, which are net positive there, not especially Dollar-wise, impactful, but make more sense and will make it easier to capture those charges. But on average, think of this as somewhere between a 3.4% and a 3.5% reduction. Now, you asked what it would be if it gets mitigated. I don't know the answer to that yet. We've had success in getting it mitigated through Congress, you know, every year since the original 9%, 9.5% cut was proposed leading into COVID. I don't know what it will be if it gets adjusted. We'll have to see.

And just as a reminder, Joanna, that's one-third of our business, you know, Medicare is. So that's on our overall rate, that will have a lesser impact than the 3.5% if it ended up at that rate. And I think we have momentum, as I've talked about in all of our other rate categories, going into 2024. Great.

Thank you so much. We'll take our next question from Brian Tenquillet with Jefferies.

Good morning, guys. Good morning. Chris, maybe I'll follow up with one of your comments that you just made about remote. Obviously, an area or part of your business that we haven't talked a lot about since COVID. So just curious how we should be thinking about your strategy on integrating remote to your workflow and the investments that you need to make to really take advantage of that, especially as we stare down this Medicare rate cut.

Yeah, so remote therapeutic monitoring code that was introduced this year, we've rolled it out. It's been a little bit painful, painful for a lot of companies, just because the companies who have the infrastructure that we've all used to – to be able to perform these additional codes oftentimes are set aside and set alone from the infrastructure that exists in our billing and EMR systems. And so that is and has been very recently addressed. I think by the beginning of the year we'll be positioned where all of our Medicare patients will be enrolled, auto-enrolled, um on our rain tree system which is covers about 90 of our company that integration's completed we believe that'll be done um and effectively out by the first of the year so that we'll have a much greater percentage of our company that is able to efficiently address remote therapeutic issues. Then beyond there, from a digital perspective, I think there have been a lot of companies that have come out that have had some really nice additions. We're not there yet on a fully digital basis, but we continue to work directionally to evaluate that opportunity and make decisions, you know, as we move forward. We expect at some point to have the digital offering, working on some other high-priority things at the moment, but that's certainly on the list.

Got it. And then, Chris, maybe since we're talking about virtual, as I think about your IIP business, are you seeing anything that's changing in that world as some virtual offerings emerge in the market?

Yeah. On the prevention side, not so much. We see continued adoption among and across companies. Of course, companies go through ebb and flow. Uber is a great example, a company that at the beginning of of covid we had a very large contract to roll out with them and that got paused and then over the next couple of years it rolled out and became substantially bigger than we originally envisioned and then as an example it kind of paused again not completely we still do a lot of work there it's still one of our bigger customers but again their outlook you know, affected what, what, you know, how they, how they viewed the coming year, the year that we're in right now. And actually we, you know, we're hopeful that we can continue to expand that relationship as things, as things again, normalized. So I don't see on the prevention side, um, you know, a lot of major technological changes. Again, we've added recently software deployment for ergonomics, which companies that want to control and to roll out their own ergonomics program can now do on a guided basis with our software. That's a new offering for us. But this is really still an embedded model where people need to be onsite and evaluating individuals. Certainly, we can use technology And video monitoring and certain aspects of evaluative techniques we can now use, you know, with cell phones and other forward camera devices to take measurements and do things. And I think that will continue to evolve. We're using some of that now. But nothing that we see as disruptive to the core business.

And then maybe, Kerry or Glenn, as I think about just tying it back to the core business, how much productivity opportunity do you think there's left in terms of driving the visits per clinic per day?

Let me address part of that, and then I'll let Eric or Graham address that. the other part of what we really think of as productivity. But on the visits per clinic per day, there aren't any real constraints that we generally bump into on that. It's a factor of, you know, additional staffing oftentimes where we're, you know, if we're currently staffed where we need to be. So in order to grow, we've got to hire some increment. on a part-time basis for additional staff. Generally speaking, our facilities can handle it. It's grown this year about as we expected it to grow, all things considered. I think it's been pretty good. I guess you guys refer to that as productivity. I think of productivity really as the amount of people that our clinicians can see. And, Eric, you might want to speak to that part.

Yeah, Chris, I think you summarized it really well. Our turnover is at an all-time low. It hasn't been this low in years. And so I think our partners have done a really, really good job of hanging on to staff. But we've had incredible growth. When you take a look at the Dinovos that we opened up last year and the 32 facilities we've added this year, Dinovos and Tuckins, it has been challenging to fill those growth positions for us. And so to your point, I mean, there's not a cap here. I mean, you know, we – You look where we were two years ago. We hit the 30 mark for a couple of quarters this year. We had a record first quarter, second quarter, and third quarter. So we still continue to see growth opportunities in front of us. We've invested a lot of resources in recruiting. We have eight recruiters that work for us. We really leverage social media as well as our relationships with the various school programs. I think there's 210 accredited PT schools out there. We have clinical affiliation agreements with 155 of them. So we're continuing to play the short game and the long game as it relates to staffing. The long game being developing these relationships with the school so as these kids come out and do their clinical rotations, which is part of the program, they're more likely to end up working for us having done rotations. So that's a big investment for us. And then on top of that, just for more resources as it relates to reaching licensed staff out there. But the volume and demand is there. Staffing is what, you know, us and everyone else in the industry has got to solve for in order to continue to grow at the rate we've been growing.

Awesome. Thank you, guys. Thanks, Brian.

We'll take our next question from Larry Solo with CJS Securities.

Morning, Larry. Thanks, guys. Good morning. Hey, good morning, Chris. Thanks for the call. Just a couple thoughts. I know you're not ready to give guidance for 24, but just from a high level, as you think about sort of the components, pricing, price will end up down this year. 1% is going to be a little bit more than that. And pretty well documented, it's a Medicare cut there. But it feels like you have some good momentum on the commercial side. You mentioned you're, you know, on average getting at least what's like, you know, mid-single-digit annual increases on a lot of these positive negotiations. And I suppose some of them haven't actually hit the P&L yet, and I suppose there's a lot more in the queue that you could start turning over. So it's fair to say that just from a high level, you think pricing could actually all in go up next year, even if the Medicare rate is not changed by Congress.

Sure. Sure. Yeah. So I would say, first of all, it's, it's, it's early for us to look at that and, and, and give any color really related 20, 24. Yeah. We'll be ready for that. Um, you know, certainly the next time that we, that we have our earnings call for the end of the year, but I would say it's going to, you know, we'll, we'll see where Medicare ends up. Right. So how much of a, of a hurdle we have there, but we do, as I mentioned, have momentum in the other pair categories. And we have, as Chris noted earlier, put in place step increases. So it may be that we have an increase of a total of 12 or 13%, and we have a step in over three years where it's 5% in year one, 4% in year two, and then another 3% in year three. We have those kinds of step increases that we're building into our contracts that will have continual increases. So I think we will have continued momentum in both commercial and workers' comp on both of those. And, you know, so I think certainly I feel good about our ability to, as we sit here today, I feel good about our ability to offset the Medicare rate reduction going into 2024.

Yeah, Larry, the short answer is, I mean, the final rule just came out Thursday, late Thursday afternoon last week. We're still in the middle of our budgets and a lot of analysis, and we're pushing really hard on these contracts, but we're not at a point where we can give you a clear conclusion yet, unfortunately, for next year. Just too many moving parts and too short a period of time yet, but we're working hard at it.

That's fair. You mentioned a lot of good internal growth, especially last year. And this quarter on the de novo side, I think you mentioned 9 and 5 in September alone. I know de novo, they don't cost a significant amount to get on their feet. But is there, I suppose, some inefficiencies initially? And even with the acquired clinics that, you know, just by themselves, it's in the acquisitions and the de novo ramp, you have some sort of, you know, built in a little bit of dry powder to improve margins just from those two things. Is that a fair statement?

Eric, do you want to take that?

Chris, sorry about that. My phone blinked out a little bit. That's okay. That's okay. No, I got it. I got it.

So, yeah, Larry, on the de novo side, you know, while they don't cost a lot of money to get out of the ground, it's not really the issue. They do bleed us a little bit, you know, particularly in the first six months before they or until they break even. Some break even much quicker than that. Early on, certainly those ones we opened in September are going to be a drain for a bit. Then on the acquired clinics, yeah, there is, you know, you refer to it as dry powder. There is usually some upside that occurs oftentimes in rate changes. reset at the point where we do the deal. We credential that deal in the 60 days before closing to a date certain basis. And then we get a pickup and rate usually not across every contract certainly, but across some of the contracts. And then there are other things that take a little bit more time that may be maybe a little slower to happen. You know, program development and productivity or efficiency changes over time, those take a little bit longer, and we're patient with those because we want to make sure the relationship, particularly at the clinical level, is really strong and stays strong, and we're able to do that. So there is upside in the acquired clinics, There is some short-term downside in the de novo clinics.

And, Chris, the one comment I would add to that, the one comment I'd add on the de novo clinics is none of those de novo clinics are flyers. You know, it's not build it and they will come. I mean, those clinics were built because there were established referral relationships in the community. The biggest challenge and potential drag on those de novo clinics goes back to staffing. Typically, it's staff who might be relocating from an existing facility to help staff it. A lot of times, again, those clinics, we take advantage of the opportunity to open them when we have the support, but sometimes very difficult to challenge right out of the gate, and that tends to be the biggest hurdle in terms of how fast they ramp.

To follow up on that, how is the staffing? Obviously, it's been a couple of years of a tough stretch in staffing and labor. Certainly, labor pricing is much higher today, but it does feel like at least you guys are having much more success in getting better, you know, I don't know about quality, but hopefully quantity of labor.

Go ahead, Eric.

Yeah, no question. I mean, I think the recruiters are doing a great job. As I said earlier, you know, our retention is at an all-time low here over the course of the last five years. And I think we do a better job filling positions than most other organizations. But there's no question it's a challenge. And Chris referenced this earlier in his opening comments as it relates to PTA usage. I mean, our facilities, our staff, have licensed physical therapists and licensed physical therapist assistants. And we've had to rely, especially with the growth stroke that we've had, on bringing PTAs on board in order to service the patient volume as opposed to not servicing it. And, again, with roughly 33% of our business being federally funded, every time the PTA touches a patient, it has an impact. And you saw that. If you see the breakdown on our rate, every category has gone up from a net revenue per visit perspective, with the exception of that federally funded bucket that includes Medicare and Medicare Advantage. We got very aggressive this year in terms of terming Medicare Advantage programs that we felt did not pay us the appropriate amount of money below our actual cost of providing service. So I think we've done a nice job there. We're just going to continue to have to push in this category. and to chris's point you know regarding these dinos the rolling out of additional programs takes a little bit of time in particular the workers compensation initiative which has really been successful this year i mean that's an initiative that's really just over a year old we've grown rate for three consecutive quarters and and our third quarter 23 was almost four percent higher than our third quarter 22 in terms of workers compensation rate so you know these types of programs do have an impact but they take a little while to roll out in in um in new to nova clinics as well as newly acquired partners okay i appreciate all that call out if i can just sneak one more in just on the acquisition uh for something to get your cue on the pt side on the physical therapy side it sounds like your queue of opportunities uh remains

strong and you want to put your capital to work um can you just just comment just on the the ergonomic software the ergonomic software and the sort of i.t acquisition you made a little bit different than your normal acquisition how you any color on that how you plan to leverage that

Yeah. So these are some people that I've known for a number of years. They're really, really good folks. They've been working on the software product, software sales product, or software service product a number of years. It's really, really strong. It'll enable us. We have We employ ergonomists. We do virtual ergonomic programs. But some of our customers don't want – they want to do it themselves, and yet they don't have the tools really available to do that. And so we think – we think that we can deploy this software not just to new customers who are new to us, but to existing customers across our portfolio, and as well with many, many, many more salespeople than these folks have had in their own company, utilize our sales force to ramp that up. And so that was part of the offering. The other part of the offering was more in line with what we already do, which is just, you know, embedded people on the prevention side. But it's a nice fit for us. It's a new offering, and we should be able and expect to be able to sell it to our existing client base in many cases.

Chris, my one additional comment on this would be, I mean, this is a niche that our Bariatix team recognized. This is a client profile that we weren't servicing today. These are folks that are going to be a little bit more cost-conscious, that not just want to manage these types of projects on their own, the ergonomics projects, but need to from a financial perspective. We do see a cross-selling opportunity, but Bariatix was looking at going down the path of, of creating their own software spending the time and money to do it in order to chase this market segment that they weren't servicing today so this ergo plus represented an opportunity for us to go in first with software that was already developed and they were really under resourced uh ergo plus in terms of their ability to market and and sell that software so We feel we have an opportunity here to dump gas on a fire. It's a terrific product. We think this is a great market opportunity for us and really excited about this acquisition.

Great. Appreciate the enthusiasm. Thanks for all the color.

We'll go next to Calvin Sternick with JPMorgan.

Hey, Calvin. Good morning. Morning. Thanks for squeezing in here. Just one quick one for me on IAP. I know that some of their customers have pulled back on spending, just given some of the macro concerns. How are those conversations evolving? Are employers still hesitant? Are you seeing any signs of a shift in demand next year? And I know you talked about expecting net growth for 2024. Is the expectation at this stage that the growth rate improves year over year but still below the 20%? Just any color you could give on sort of what the IIP revenue growth rate looks like for next year would be helpful. Thanks.

Yeah, thanks. I guess on a macro basis, I would say yes, I expect the growth rate to pick up next year. I actually expect 24 from a macro economic standpoint will not be great for the country. You know, I think we still have some headwinds. But we're making good progress with sales that will carry us through next year, I think. In terms of the exact percentage of growth, as Kerry mentioned before, not done with our budget yet. We're still working through that. We haven't guided to that yet. It would be premature for me to say. to peg that number at this point in time. We certainly haven't used the 20% number. I think that was the number that we had coming out of 21 was the last most recent number, maybe finishing 22, I guess, before we got it to 23. Bottom line is we're not there yet. We should be there sooner than later. And once we have that number, you know, we'll work that into our guidance and give you a little bit more transparency than we're able to right now.

Great. And then maybe one more on workers' comp. I know you had a couple of quarters there where volumes have been increasing and payer mix is improving. Just wondering how you're thinking about that trend continuing into next year. Do you think the momentum in workers' comp really – is there an opportunity for it to accelerate, or if you're thinking about it as basically, you know, sort of steady progress year over year?

We're working on something I can't really talk about right now. I don't – we're working hard. Let me just say we're working very hard on the comp side to do something that would – that would be a difference maker for us, but we've got some more work to do. It's certainly a focus, and we have the resources and the attention on it, and I expect to make continued progress.

All right, great. Thanks.

Once again, ladies and gentlemen, if you would like to ask a question, that is star 1. We'll go next to Mike Petusky with Barrington Research. Hey, Mike.

Good morning. Hey. Good morning, Mike. Good morning. Good morning. So, Chris, on the meeting you all attended, private PT organizations, You know, what we've sort of heard out there, not in terms of PT specifically, but in terms of health care in general, is a lot of the private owners have not gotten the memo that valuations have come down in transactions and that expectations are sort of out of whack with reality of interest rates, et cetera. And I'm just curious, you know, you guys, as Kerry pointed out, you've got a lot of, you know, opportunities from a balance sheet perspective, the revolver, to do something. I guess, what was the vibe at the private meeting? I mean, do you think this, you know, in the next 12 months, you know, do you hope to be as active, more active than the last 12 months? Thanks.

Let me just say, we have more really strong discussions that are going on right now than we've, than we've ever had. Um, and there's a good mix, not just smaller practices, but some larger practices as well. I expect it to be a good year. Um, a very good year. We had one deal that we still expect to get done. Um, that was, that was, you know, bigger in size for us that got hung up around, um, a divorce proceeding that slowed everything down. This would have been a fantastic year if not for that. I expect next year to be even better based upon the activity that we have right now. In terms of valuations, look, I think it depends on A lot of things. There are a lot fewer buyers in the market right now because individual private equity companies are really at kind of the limit many are. And so it's a good time for us, and we expect to, you know, make hay while the sun shines, as they say.

It's sort of pivoting, but staying on the idea of making hay, how far along would you estimate in terms of your efforts at getting better pricing in commercial and workers' comp? I mean, if this was a nine-inning baseball game, are we in the third inning, seventh inning? Where would you sort of say in terms of your efforts to sort of renegotiate rates with your various customers, are you? Jerry? Yeah. You know, it's hard to put it in that kind of – but I would, you know, I'd say we're about the fourth inning or so. We still have some work to do, but we've done a lot of good work. Fourth and fifth inning is somewhere in that range. But we haven't necessarily seen all the impacts of that come into our net rate yet, but that's where we are from a negotiation standpoint, if that makes sense. Yeah, I thought in honor of the Texas Rangers, I'd throw the baseball analogy. There you go. Correct. I appreciate that. Sorry, Astros. Okay. So I guess in – I didn't hear, if you guys mentioned, October patient volumes. Any insight into that? And sorry if I missed it, if you mentioned it or not.

I don't think we mentioned – go ahead, Karen.

Yeah, we didn't mention – But I'd say it's coming in strong. I mean, we don't have the final numbers yet for exactly where it was, but based on we get weekly reports on the progress through the month, and it's come in at our expectations and continuing to be strong just like it has been all year long. Very good. Thanks, guys. Appreciate it. Thanks, Mike.

At this time, we have no additional questions standing by. I'd like to turn the conference back over to management for any additional or closing comments.

Thank you. Well, thanks, guys. I know this was a little bit longer call than normal. Perry and I are standing by and happy to take additional questions offline. Thank you for your time this morning, and I hope you have a great rest of your week.

Thank you, everyone.

Once again, ladies and gentlemen, that does conclude today's program.