Release Date: August 06, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Encompass Health Corp (EHC, Financial) reported a 9.6% increase in revenue and an 8.9% increase in adjusted EBITDA for Q2 2024.
- Total discharges for Q2 increased by 6.7%, with same-store discharges growing by 4.8%.
- Medicare discharges increased by 7.2%, and Medicare Advantage discharges grew by 9.6% for the quarter.
- Encompass Health Corp (EHC) added 194 beds to its capacity during Q2, including three new hospitals and one satellite hospital.
- The company resumed share repurchase activity, buying back approximately 200,000 shares for $17 million, and increased its share repurchase authorization to $500 million.
Negative Points
- Bad debt expense increased to 2.9% of revenue, primarily due to an increase in medical necessity claim review audits.
- The company experienced a significant ramp-up in TPE audits from its primary MAC, Palmetto, leading to higher reserves for claims under review.
- Contract labor expenses remained high, with premium labor expense for Q2 at $32.6 million and contract labor FTEs at 1.6% of total.
- The Oracle Fusion ERP conversion is expected to incur costs of approximately $2.5 million in the second half of 2024.
- The addition of the existing Augusta, Georgia hospital to the joint venture with Piedmont is expected to increase income attributable to noncontrolling interest by approximately $3.5 million in the second half of 2024.
Q & A Highlights
Q: How is the higher bad debt versus expectations, and how has it been incorporated into the guidance given the higher audit activity?
A: The largest factor was the TPE audits with Palmetto, which tend to be lumpy. After several quarters of low activity, Palmetto selected 20 claims from each hospital within their jurisdiction, leading to an accumulation of reserves. Since the end of Q2, more claims have been processed favorably, and new claims have not been selected, informing our outlook for the balance of the year. (Mark Tarr, CEO)
Q: How do you view buybacks as a larger part of cash uses in the future?
A: We crossed the Rubicon with regard to cash flow in 2023, generating free cash flow above the level required for discretionary CapEx. Our leverage has been coming down, giving us capacity to allocate free cash flow to other uses. We favor a balanced approach between share repurchase activity and increasing the dividend. (Douglas Coltharp, CFO)
Q: Can you explain the increase in contract labor and any other labor-related trends?
A: Premium labor has stabilized at 1.5% to 1.6% of FTEs. The assumption of SWB being up 4% to 5% a year is prudent given the uncertainty in labor market conditions. Contract labor spend was concentrated in 13 hospitals, indicating localized challenges. (Douglas Coltharp, CFO)
Q: What is driving the growth in Medicare Advantage discharges?
A: The growth is tracking overall market growth. We continue to make good inroads with Medicare Advantage plans, with 90% of our contracted Medicare Advantage revenue on an episodic basis. The discount to Medicare pricing is about 3%, reflecting our value proposition. (Douglas Coltharp, CFO)
Q: What are the startup costs for the quarter and any other items to consider for the back half of the year?
A: Preopening ramp-up costs were $6.9 million for the quarter and $8.7 million year-to-date. Full-year assumption remains $15 million to $18 million. Other items include Oracle Fusion conversion costs, NCI impact from adding our Augusta hospital to the Piedmont joint venture, and potential higher SWB inflation in the second half. (Douglas Coltharp, CFO)
Q: Can you help us understand your exposure to provider tax programs and their impact?
A: Provider tax revenue is volatile and difficult to predict. Most states have some form of program, but visibility into participation is limited. The timing based on the state's fiscal year can cause lumpiness, making it hard to incorporate into guidance. (Douglas Coltharp, CFO)
Q: How do you view the impact of joint ventures on your financials?
A: Adding existing facilities to joint ventures, like the one in Augusta, Georgia, aligns with our strategy in markets where we overlap with partners like Piedmont. This approach helps us leverage local market strengths and expand our footprint effectively. (Douglas Coltharp, CFO)
Q: What are your expectations for same-store discharge growth in the second half of the year?
A: While we don't provide specific quarterly guidance, we expect a discharge growth CAGR of 6% to 8%. Demand for services remains strong, and our hospitals are well-equipped to meet this demand without staffing constraints. (Douglas Coltharp, CFO)
Q: Have there been any changes in contracting interactions with managed care payers due to financial pressures?
A: No significant changes in contracting discussions. The relationship with MA plans is improving, but pre-authorization policies and screening remain challenging in some markets. Our clinical teams work hard to ensure patients needing inpatient rehabilitation care receive it. (Douglas Coltharp, CFO)
Q: Is the increase in audit activity specific to Palmetto, and should we expect reserve releases as claims are processed?
A: The majority of audit activity has been with Palmetto, our largest MAC. As claims are processed and approved, we release the reserves. Unless new claims are selected for review, we expect a reversal of some bad debt expense experienced in Q2. (Douglas Coltharp, CFO)
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
