Greetings, and welcome to the Amedisys, Inc. Third Quarter 2020 Earnings Conference Call. [Operator Instructions] It is now my pleasure to introduce your host, Mr. Nick Muscato, Senior Vice President of Finance. Thank you, sir. You may now begin..

Thank you, operator, and welcome to the Amedisys investor conference call to discuss the results of the third quarter ended September 30, 2020. A copy of our press release, supplemental slides and related Form 8-K filing with the SEC are available on the Investor Relations page of our website.

Speaking on today's call from Amedisys will be Paul Kusserow, Chairman, CEO and President; and Scott Ginn, Chief Financial Officer. Also joining us is Chris Gerard, Chief Operating Officer; and Dave Kemmerly, Chief Legal and Government Affairs Officer.

Before we get started with our call, I would like to remind everyone that statements made on this conference call today may constitute forward-looking statements and are protected under the safe harbor of the Private Securities Litigation Reform Act. These forward-looking statements are based on information available to Amedisys today.

The company assumes no obligation to update information provided on this call to reflect subsequent events other than as required under applicable securities laws. These forward-looking statements may involve a number of risks and uncertainties, which may cause the company's results or outcomes to differ materially from such statements.

These risks and uncertainties include factors detailed in our SEC filings, including our forms 10-K, 10-Q and 8-K. In addition, as required by SEC Regulation G, a reconciliation of any non-GAAP measure mentioned during our call today to the most comparable GAAP measure will be available in our forms 10-K, 10-Q and 8-K. Thank you.

And now I'll turn the call over to Amedisys' CEO, Paul Kusserow..

one, focus on continuing to steal market share in facilities; and two, expand our referral base to new non facility-based accounts. And in all cases, continuing to educate all referral sources on identifying the need for hospice earlier. Finally, keep in mind that ADC growth lags admit growth by about a quarter.

So 9% admit growth in Q3 will be reflected in ADC growth in Q4, and we expect to see attractive ADC growth into Q4 and beyond into 2021. Employer of choice. We drove total voluntary turnover to 19.3% for the quarter and 18.5% year-to-date with an early exit rate of 11.3%, down from 13.2% in Q3 2019.

Early exits, we define as employees that leave within their first 90 days has been a focus of ours this year, and we know how valuable our employees are and how hard it can be defined and secure the best talent. Once we have them, there is no reason why they should leave us. And this will continue to be a high priority going forward.

We think we can and should do better on both fronts and expect to show improving results. Next, operational efficiency. We continue to make great progress in deploying PDGM cost levers. In the third quarter, we achieved an LPN RN ratio of 46.7%, up from 40.6% in Q3 '19 and a PTA PT ratio of 49.6%, up from 43.7% in Q3 '19.

As you can see, we are well on our way to our ratio goal of 50-50 by the end of this year which has -- will continue to provide significant positive impact to margin and will improve our care as well.

We also continue to make progress on optimizing our planning and visits, realizing a nearly 2.5 visits per episode reduction during the quarter while delivering equal or greater quality and learning to employ high frequency, low-cost tools like telehealth into our care delivery models.

Overall, our productivity has been improving at a quarter-over-quarter and sequential rate of approximately 5%, as we continue to refine our scheduling practices and documentation, becoming even more efficient in how we take care of our patients.

Our performance this quarter has allowed us to increase our EBITDA guidance range from $245 million to $255 million to $269 million to $272 million, raising the midpoint of our EBITDA range by $20.5 million. Scott will cover the details in his remarks.

None of these results would be possible without our over 21,000 employees' unwavering commitment to providing outstanding care to our patients in their homes. I want to thank every one of you for helping to deliver such a strong clinical, operational and financial results. It all begins with our culture of caregiving, which put the patient first.

As we said, great care equals great economics. Now on to the regulatory front. And as we reported last quarter, we are very pleased with how the rate environment for 2021 is shaping up. In July, CMS finalized the fiscal year 2021 hospice rule, which was comprised of a 2.4% payment rate update.

This correlates directly to our specific hospice payment rate increase of about 2.4%. Given our organic and inorganic growth in hospice, positive rate updates are increasingly impactful and meaningful to our business and position us well for top and bottom line growth in 2021.

Similarly, in late June, CMS issued the calendar 2021 home health prospective payment system rate update where CMS proposed to increase payments by 2.6% beginning in January.

In addition to this positive payment update, CMS also proposed to make permanent the telehealth flexibilities that has been previously granted to home health agencies during the current public health emergency.

Just last week, two bills were introduced into Congress, one in the House and one in the Senate that similarly seek to provide telehealth flexibility and importantly, payment for telehealth visits during the current and future public health emergencies.

We applaud CMS and our congressional champions for their proposals to extend telehealth flexibilities and payment for those visits during this crisis and beyond. We look forward to working with them on this important policy initiative for the home health industry and our patients.

We expect the home health rule to be finalized in the coming days and to be consistent with our comments here. The rule traditionally comes out around or on Halloween. We don't expect to be scared this year, a treat, not a trick.

These two payment updates will be significant tailwinds for our company as we enter 2021, producing an approximate incremental $40 million in 2021. The 2021 rate updates for both home health and hospice are just a small piece of why we continue to be increasingly excited about what the next few years appear to have in-store for our company.

I want to spend a little time talking about the tremendous opportunity we see in front of us that could propel us to significant future growth and innovation for 2021 and beyond. Last week, we completed our annual strategic planning process.

Our market and regulatory analysis projects the next five years based on what we see demographically and regulatorily as well as the industry dynamics to be very strong tailwinds, which should drive outsized growth for Amedisys and the industries we play in.

For example, demographics are in our favor, thanks to the baby boomers, now between 56 and 76, keeping in mind our average patient age is 78 to 80, meaning we will be experiencing a surge of potential patients in the coming years as baby boomers age into the at-home care sweet spot.

More people are turning 65 years old and aging into Medicare faster than they have ever before, over 10,000 a day. The burgeoning 75-plus population, coupled with ever-increasing unsustainable healthcare costs, puts us in a very advantageous position, as an aging-in-place company, delivering the highest quality care at the lowest cost to seniors.

Also, besides demographics, psychographics are in our favor. nine out of 10 of these baby boomers want to age and die at home. Add to that, economics, at home care is what people want. It's the cheapest type of care and it's the most suitable for the types of long length, chronic illnesses that we will be treating in the future. Moving to regulatory.

CMS implemented massive and comprehensive home health payment reform in 2020. So the rate outlook over the next five years is projected to be stable and positive in both home health and hospice. When you put all the market forces together, add what we have, quality, scale and capital, things look very promising, and that's why we're so excited.

Besides demographics, psychographics, economics and regulatory, there is a new accelerator, COVID-19. It is not new news that COVID-19 severely impacted patients in institutional settings, such as skilled nursing facilities and assisted living facilities. A significant portion of COVID-19 deaths have occurred in institutional settings.

COVID has accelerated the desire to be cared for in the home, which is now stronger and more urgent today than it ever has been, and we are innovating to meet this demand, working to be able to increase our capacity to care for more traditional patients as well as moving up the acuity scale, focusing on new sicker patients that had no other options but institutions.

By developing a SNF-at-home product, for those who want to avoid a SNF stay, we are showing we can give patients a home alternative. We have made good progress in this product development, which focuses on a package of services in conjunction with traditional home health, aimed at keeping higher acuity patients at home and out of institutions.

SNF- at-home represents an interesting new growth avenue for the company and will be an opportunity for growth even beyond the pandemic. The time to work with referral sources on taking their higher acuity patients is now. And we're capitalizing on that.

Finally, given our scale, acquisition and integration capabilities, strong cash flows and balance sheet flexibility when the current temporary COVID subsidies holding the home health market together are lifted, the true impact of PDGM will finally be felt within our industry.

We will be ready to continue our organic and inorganic expansion in home health and are well positioned to capture more and more market share of a still highly fragmented market. As a result of our 2019 planning and 2020 execution, we are thriving in PDGM and have worked incredibly hard and proactively to turn headwinds into tailwinds.

We have navigated and are understanding how to audit during COVID. We are active on building new territories via de novos and innovating around our core, as mentioned. The growth algorithms we've developed for Amedisys in 2021 and beyond are truly exciting.

And I believe we have positioned ourselves optimally to fully capture any opportunities that come our way. Finally, as noted in our August 10, 8-K for tax and estate planning purposes, I exercised 500,000 of my vested stock options and retained 100% of the underlying shares after tax and option costs.

As I just laid out, and as Scott will expand upon, we have many years of tailwinds ahead of us, and I am excited to retain approximately 1.3% ownership of the company. During my almost six years at Amedisys, I have not sold a share.

This transaction resulted in a very positive tax benefit and subsequent EPS impact, which Scott will deal with in his prepared remarks. We believe this method was the best course of action for the company and our shareholders. With that, I'll turn the call over to Scott, who will run us through our Q3 performance and full year 2020 guidance.

Scott?.

a 2.4% reimbursement increase in hospice and a proposed home health increase of 2.6%; continued operational improvement in our four hospice acquisition; significant opportunity for admission growth aided by BD staff expansion in 2020 COVID-19 disruption; and significant improvements in our gross margin driven by changes to visit utilization and staffing mix in the second half of 2020.

This will conclude our prepared remarks. Operator, please open the line for questions..

[Operator Instructions] Our first question is coming from Brian Tanquilut of Jefferies..

Good morning, guys. Congrats on a very strong quarter. I guess, if we're limited to one question, Paul, I'll just ask. As we think about growth, right, so you clearly showed acceleration in the second -- in the third quarter from Q2 despite COVID being in the background.

So how should we think about the remaining growth acceleration opportunities? And what do you think will be driving that both from a macro and company-specific perspective? I guess to add to that, where do you think volume growth could go from that 6% organic number that you saw in Q3? Thank you..

Thanks, Brian. Yes. We feel good about where we are, obviously, in terms of growth. I think the key for us is on the hospice side. Our admit growth is very good and strong. What we've -- when you have a flat ADC, it's going to pass through. And so we should start to see a good ADC increase, which is what we've been focused on.

So we can tee up particularly good -- particularly well for next year. So we feel good about it. In home health, the growth has just been fantastic. I don't know, Chris is with me.

Do you have any comments on that?.

Yes. Yes. I probably -- Brian, I'll just kind of through home health and then hospice as well. So on the home health side, yes, we're really happy with how we came out of Q3. We also progressed nicely through the quarter. So that gives us some encouraging signs for the balance of the year.

We see that really, it's an opportunity for us to continue taking share, which we feel like we're doing, both with facility business as well as with our physicians groups. We had 17 -- over 1,700 unique new referral sources in Q3 that had not referred patients to us in the previous year. Our team is really gelling nicely.

And we've got a bunch of reps that are really starting to get into that kind of the maturing stage, if you will, where they're starting to see some additional growth on top of the ramp-up from being new hires. So I feel really good about the home health side. Hospice, what we like that you see that we had the 9% admit growth in Q3, but flat on ADC.

And so if you look at the previous three quarters, we had 1% admit growth -- 1% admit growth and 0%. And our length of stay has been relatively flat. So there's -- it's not a surprise that we were flat in ADC in Q3. But a couple -- a few data points is, one, is we had the 9% admit growth that we should see acceleration in ADC in Q4 and beyond.

On top of that, we also had over 800 uniquely, our new referral sources referring to us in the quarter that had not in the previous year. And then also, we had a really good progression throughout the quarter on admit growth on hospice. So that's encouraging for us for future kind of ADC growth and continued to admit growth.

And the last piece I'd say is that we've really invested in new reps on the hospice side. We have 73 new reps in Q3 this year versus last year. It's a 20% increase in the number of reps. So as they get really kind of productive and get on board, that's going to open up opportunities for additional growth..

Our next question is coming from Matt Larew of William Blair..

Hi, Matt..

Good morning. I wanted to ask a little bit more specifically about the fourth quarter. And Scott, obviously, a relatively tight range there.

So does that maybe just reflect the visibility that you guys have into the cost profile into PDGM, perhaps even into the hospice census? Maybe just help us understand what it assumes about volume growth dynamics and just kind of where the upside downside stress test is around fourth quarter..

Yes, Matt, thanks. I mean we feel good. And kind of, as Chris has talked about the trajectory we're seeing going in, I mean, it's certainly a nice progression for us. And in those rates, we're assuming kind of a similar growth type movement that we see here.

We do think admits around hospice will accelerate as we move forward, just the timing growing ADC is a little slower as we talked about the lag, but we do see that accelerating. You're going to see the normal increases in cost as we move into that around what we see around health insurance going up.

I mean, you have some of those movements, we do have a rate good guide. But yes, we feel like the visibility is there, especially on the cost side, really felt good with the revenue levers coming through this quarter on the rate side. That really offset that year-over-year impact of -- I mean excuse me, PDGM.

So yes, I mean, we feel that it's certainly in our sites, less fearful of kind of the ability to handle COVID. So most of the costs are baked in. We're looking at a nice October from a volume perspective. So we feel good. That's why we tightened the range..

And I think you know, Matt, I mean, we increased it in the mid-range of $20.5 million. So it's a big jump. So we feel good about that..

Yes. Indeed. And then Paul, just quickly on SNF-at-home, the product you're developing. Maybe just give a sense for what the payment mechanism might be given that there might be an additional basket of services associated with it? And would you be targeting [to miss at] payers that referral sources? Would be interested to hear a little bit about that.

And then I'll jump off. Thank you..

Yes. Thanks, Matt. Yes, the SNF- at-home, basically, we've always been anxious to show since we've been producing very good quality, as you've shown in your research quality equals growth. We believe that there is an opportunity, particularly as the market is demanding, unless people want to go into SNFs particularly people with less acuity.

And it's become less attractive for the SNFs to take these that there's an opportunity to take the lower acuity patients in SNFs and take care of them at home. Fee-for-service really doesn't have the payment mechanisms to do this. So the people we're talking with now are largely risk-based entities.

So in risk-based taking an MA, also bundles, also ACOs. So that's where we've been focusing on it. If there's not -- what we're trying to do is have traditional home health and then use some of our personal care networks around that. And then we're working with some doc groups that would refer into that. So we have to piece it together.

It's a different model. We want to show it works. We anticipate if we do it in a capitated environment and then we can take it to CMS and see if -- because the benefits would be much lower in cost, if we could then take it to CMS and see if we could get some changes in the fee-for-service rule.

But starting without any proof is a hiding to nothing in CMS. Thanks, Matt..

Our next question is coming from A.J. Rice of Credit Suisse..

Maybe I'll just ask from my one question about the acquisition landscape, what you're seeing out there, both in home health and hospice? How has pricing changed? And I know Cares Act and some of that funding have pushed off some of the deals you thought you might see in the back half into the first half of next year.

Is that still you're thinking as to when we'll see some of that roll out?.

Yes, the last deals we saw, and then I'll have Scott talk about it because it comes -- this comes under him. But we've seen -- and hospice pricing has been very high. So we've seen -- and frankly, we've done in the last 18 months, we've done four deals.

Really happy with the deals and the pricing we got post synergies as well as just the ability to incorporate them into our legacy system. So that's what we're focused on in hospice. We're always looking. We have some regional hospices that were out there looking nice-sized regional hospices that were out there looking at.

We think now, obviously, with the -- how home health is performing, though. It's a real opportunity to go out and look for home health assets. Home health, particularly in some of the areas where we think that we can start to fill in.

Also, and I'll have Scott cover this, we've been doing an incredibly good job on de novos and are still putting out between 10 and 15 de novos a year. So I'll turn that over to Scott..

Yes. But yes, I agree with Paul's comments around the pipeline, excited about it. And certainly, heavy lean on the home health side. And if you look at our cash flow position, we've got tremendous opportunity into 2021 to really take some inorganic growth into the portfolio. Excited about that. De novo, as Paul said, it's been a big win for us.

We continue to move forward on those. We did do a little bit of a pause this year when we hit COVID, but those are running well. We're doing branches, that's really a nice view for us. We're probably kind of getting those open anywhere from eight to 12 months by an average cost to license of about $400,000. But we've built a nice rhythm there.

And would you expect to see us as we talk about 2021 when we give guidance. We want to invest some dollars in increasing that pipeline of de novos..

And to answer your question specifically, A.J. We're seeing hospice decently run hospices with no -- that are relatively clean over 15 times. So it's gotten a little crazy, particularly when it is a PE platform with which they can use to lever. They can justify their pricing that way or at least they tell us.

There hasn't been many home health deals that have been clean. So they've always had these other assets around them. What we expect is if sequestration is added back on and when the loans become due for the receivables and for payroll is that's when we expect the shakeout to occur.

If the government pushes this out further, it's probably going to hold us back on what we anticipate as a large consolidation opportunity with PDGM in full, particularly as the RAP is going to be eliminated in January. But we're -- what we've seen rough throughout is trading maybe 12 times, 13 times, something like that.

But post synergies, it's below 10% for us. So that's why we're looking and that's where we think the market is going to be. And a lot of our competitors now, frankly, have seen what we've been doing in hospice center now deciding to go after hospice. So I think that's going to push the hospice pricing up even more. .

Our next question is coming from Joanna Gajuk of Bank of America..

Good morning. Thank you for taking the question here. So another topic here.

Can you talk about your Medicare Advantage book of business on the home health side? Can you kind of update us on the progress toward your goal of increasing that risk-sharing percentage of your contracts? So -- and with that, what are you seeing in terms of average pricing? Have you seen improvement just looking on the average book of business for MA? Thank you..

Yes, I'm going to punt to Chris on that. But in general, we're really happy with where we're at. We've got a great team doing this. Just have made a lot of progress so we feel -- we know this is the future, and so we're very aggressive in terms of our ability to go out and learn as much as we can in risk-bearing environments.

But Chris, why don't you talk about what we got?.

Yes. Joanna, so it's still -- it's kind of a slow and grueling progress -- or process that we're going through in terms of just getting plans to give us opportunity to earn additional rate based on quality metrics. The plans are very open to that. They're doing that.

We have now over 20% of our actual contracts out there that have some sort of upside based on quality metrics. We did some recent analysis. It's over 30% of our actual MA admits have some upside opportunity.

Many of those are still new enough arrangements that we're not able to really report out the actual gains from that, but we should be able to do that in upcoming quarters.

Again, the makeup is typically still a per visit rate that may be a little bit better than what we've experienced in the past with upside in a percent range based on those quality metrics. Ideally, we want to really kind of close the gap between our Medicare fee-for-service and our Medicare Advantage.

The challenges that we run into is it's still a very fragmented industry out there even though the plans are interested in quality. A lot of times, they're also just as interesting who's going to take the lowest rate.

And until there's some consolidation in the industry and some of those willing to take unfavorable rates are off the table, it's probably still going to be an uphill battle for us. But we're still -- we're moving it forward. Our rates are inching up, but we still got quite a ways to go..

Yes. And we're also seeing, Joanna, we're seeing some opportunities with bundles and hospitals. So we're getting -- having more conversations there, large areas where they do have specific regional concentration, which plays well when we have that coverage. Also, Chris and his team have done a fantastic job on driving down our readmissions rate.

So what's our rate? It's like 11% or something..

So our 30-day rate is 11% and our ACH rates are 14.5%.

Yes. So it's really good. So we're continuing to drive that down, continuing to show differentials there, and that's what a lot of the payers are interested in. And in certain marketplace -- marketplaces, we're able with the cooperation, particularly of hospitals, to drive that into single digits.

So we feel very good about it, and that's what a lot of the payers are very interested in..

Our next question is coming from Matthew Gillmor of Baird..

Okay thanks. I have a question back at you. I heard you didn't like the music..

Paul, it's just -- I think it's fortunate that you're good at your job. You don't have to be DJ-ing and pick up that song..

I'll let you pick next time, how about that?.

Let me try to follow-up on some of the 2021 comments. I know you're not in a position to give guidance, but just hoping you could help us sort of think through a framework. If we did the math right, I think you're sort of at a $75 million quarterly run rate for the back half of this year.

Is that kind of a good jumping-off point as we're then thinking about organic growth into 2021? And sort of what are the puts and takes? I know, obviously, the sequester is one of those things. But just how would you frame it up versus the back half run rate..

Scott, you got that?.

Yes. Yes. I got it, Matt. So yes, I think, Matt, you're right. That's a good starting point. I mean, there's some noise in there, but $75 million I would say is good. And if you look at our guidance, we kind of put fourth quarter in a similar range of that $75 million number. I think there's probably four things off the bat I'd consider moving into there.

One is rate. We've talked to that before. And you think of what we expect in rate increases for next year, net a sequestration, that's probably about a $20 million good guide. I would talk to -- the other one will be CCH and AseraCare as they expand.

We had said before, just a loan on CCH, we get a $14 million to 16 million expansion and expected to close somewhere around $34 million to $36 million for this year. Obviously, with COVID-19, that will be impacted for us. So that number, I think, still sequentially, you're probably between those two, somewhere around that $20-ish million range.

And then the other items to think through are -- I do think some hospice visits are going to come back for us. I talked about that in the prepared comments. We're seeing a reduction in visits in facilities, specifically, which is probably about 110 basis point good guide in the hospice margins. So I see that's coming back.

And then traveling training will come back around. We've seen that probably for the quarter, down around $4 million year-over-year. So some of that will normalize for us. And then we think our growth prospects are very strong. You see us moving into what was there in Q3.

We think that continues to move forward and certainly with some low marks in Q2, we're going to have an ability to grow that pretty significantly. The other thing that we'll be looking at, and Paul mentioned earlier with de novos. We're going to want to continue to expand that.

That certainly is going to be an EBITDA drag, but we think those in our data we're seeing on our de novos make us pretty bullish on doing that. And then we're going to make some investments in the organization at this high rate of growth. We're going to continue to look at that. But those are the big items to look at.

But just off the bat of between rate and CCH, we're talking about giving you roughly $40 million as you move forward. And then the other items, we'll work to finalize as we get closer to -- close out the year and kind of look at our plans for next year..

Yes. Thanks. And also, Matt, my radio station, we're going to put that in, too..

Our next question is coming from Andrew Mok of Barclays..

Hi. Good morning. I wanted to follow-up on your SNF- at-home service and your desire to expand capacity to take market share. How far along are you in that process? And has capacity been a constraint to volume growth from SNF diversion so far into the pandemic? Thanks..

Yes. Let's talk about jump-ball. And then, Scott, why don't you talk about SNF- at-home or either way, Chris..

Yes. I'll start. This is Chris. On the SNF diversion, which we kind of distinguish that from kind of the futuristic SNF- at-home, which is more kind of down the road. It is real. It's happening right now. There are some pockets of areas out there in. Our growth rates were even a little bit ahead of our internal expectations in Q3 and accelerating into Q4.

So we have run into some areas where we do have some staffing constraints. But what we've shown that we can do in the past and we continue to do today is when we see those areas, we react pretty quickly.

And we've been able to utilize contract clinicians where necessary as well as kind of triaging visits if necessary as well so that we can make sure we take care of the patients. We're not turning away any business related to capacity.

The one thing I'll put out there, though, is about 2% of our clinical staff at any given point in time over the last few months has been on quarantine leave related to COVID-19. So if we run into any kind of spike there, then that would also kind of create some additional constraints.

But our staffing -- our clinical capacity right now is not inhibiting our growth..

Scott, why don't you take the other one?.

The SNF- at-home piece, I'd tell you that we're getting pretty close. We've got to finalize a contract, which we're working pretty hard to get that done over the next few weeks. It will be a pilot. So what that may look like in the first iteration of it could ultimately change before we push it out much further. We're excited about it.

I think it gives us the ability to move up the scale here from an acuity level, which is what we want to do as far as our strategy in the home. And I think we're going to build it in a way that gives us some certain upside, if we do a great job that we think we will. So we're excited about it.

I need to get it across the finish line, but we'll be talking more about it as that pilot kind of begins to roll out. And ultimately, when we see -- we are able to measure our success..

Yes. So we feel good about it. Jump-ball business, we're winning more than we used to and then getting clearly some interest, again, risk-bearing payers deciding that they want to push more from the lower acuity levels in the SNF into the home. So we're feeling good about it..

Our next question is coming from Matthew Borsch of BMO Capital Markets..

So I wanted to ask about what you're seeing in terms of competition or potential competition in home health from large hospital systems, large physician groups, possibly integrated plans like Optum.

How much of that is on your radar screen now? And should it be?.

Yes. I think, obviously, we look at competition. Home health is still very much a local and a regional play. And so it varies. Sometimes we see some of the folks you talk to in some of the bigger national players. In general, though, it's a mom-and-pop business. So we see a lot of players there.

Again, we believe with our quality scores and the correlations that come out of that from a growth perspective, as long as we focus on quality, good service, good transition, we're tending to win pretty disproportionately. We're gaining share out there. So we feel very good about that.

We don't see much disruptors out there, outside of the traditional space. There's a lot of news and noise on it in the venture and PE worlds, but we haven't seen a lot of -- or virtually any disruption from some of these new models that are out there.

I don't know, Chris?.

No, I agree. I think that for these large systems, if they want to enter into the space, it's not a simple thing to do. And it's -- and for them to be able to do it in a way that actually is, either kind of harms us anywhere or takes share away from us, we're just not seeing it.

Navigating kind of their own existing kind of payer world in systems, a lot of times, it doesn't line up well with home health, which is more of a traditional Medicare fee-for-service business.

So we see it in pockets, but it really is an area that a lot of times, our flexibility, our service reach, geographic service reach and things like that actually helps us gain business from these hospitals that have their own systems..

What we are seeing, though, due to COVID is we're seeing hospitals start to put together preferred provider relationships, which means instead of 15 home health agencies that are calling in, what they'll do is they'll generally go by quality and then they'll limit it. And so we -- it's the same pie of fewer players. So we find that attractive.

And then also, frankly, what we're also seeing is a lot of people, if they can have procedures done outside of hospitals, in ambulatory environments, we've seen some good growth there. So we're out there looking at some of the ambulatory world as well.

Again, institutions in this environment, we've just seen a lot of real consumer reluctance to want to, to walk into an institution. So we're trying to be good partners on one side, and yet, we're also trying to follow the business on the other side..

Our next question is coming from Justin Bowers of Deutsche Bank..

Paul, I'm actually surprised it took this long. Is it due for someone to comment on Timbuk 3. Although I would have thought I would have been one of the elder statesmen. So just on just taking a step back, Paul, it sounds like you guys have gone under a bit of a strategic process.

And if I think about some of the comments you made about the tailwinds earlier, how are you guys thinking about kind of the long-term growth algorithm of the enterprise? Is there any way that we could, at a high level, like maybe put some numbers around that?.

Yes. I mean, we just -- superstar Nick here did a wonderful job, but we just finished up with it and the Board. And what we do after we do strategic planning is we take it out to our leaders, about 100 of them, and we make sure they buy into it, and then we turn it into a work plan and deliver it against the work plan.

I mean, I think that if you just apply the -- and we'll start to push this out. But if you look at the natural growth rates in home health and hospice and Personal Care, they're the best in anything in healthcare. If you look at the margins, home health and hospice, tremendous margins.

If you look at -- so just with the regular wind at our back from an industry perspective, you also look ahead at regulatory, you're looking at very good updates, good consistent updates, which we haven't seen in home health in the past 10 years. Now the PDGM is settling in, we have -- we can start to implement against that.

So we feel very good if we just sit in place and stay in our core businesses. I think we have the best business mix of anybody out there with very good weighting in home health and hospice, and then moving on personal care largely into networking. So I think we feel very good about it.

If we go above the industry, which is what we expect, that's going to clearly accelerate even more. So we expect to be 2, three points above the industry from a growth perspective. If we -- due to our cash flow, if you add $300 million, $250 million, $300 million a year in M&A, and you add that, which we can easily do, stay still very low leveraged.

You add that in and then you're going to accelerate even more growth. And then you add in some of our innovative products that's going to ease even more growth. So we'll be bringing this out, but it's -- you add all this together, again, if we just sit and float down the river, it's still pretty nice. It's a nice ride for the next four or five years.

Scott, do you want to add anything? I don't know if I cover that..

No. I think you hit a lot of high points. And I think certainly, we're bullish about where we are as a company. The opportunity in front of us is tremendous.

And I think the fact that we've come through COVID-19 as strong as we have, we continue to accelerate margins, which was really -- if you think about our ability to do acquisitions and as we start looking at pricing on home health assets, looking at our own internal margin, is going to help us be very competitive there. So prospects are great.

I always have some work to do, but really feel wonderful moving into 2021..

Our next question is coming from Bill Sutherland of The Benchmark Company..

So I've been hearing that the actual PDGM up codings apparently running behind what CMS had estimated originally.

So given it's supposed to be budget-neutral, is there a potential down the road for some positive offset to this, if this really is -- I mean, are you seeing that?.

Yes. First of all, thank you. I love that question. Yes, after 2022. And so if you look at the Dobson DaVanzo report, which came out from the partnership, it showed that there was a gap in spending or an anticipated gap in spending of about 21.5%. If this continues, then I think as of 2022, I'll turn to Dave Kemmerly here..

Yes, Bill, good question. It's important to note and remember that the bipartisan budget Act of 2018 mandated that the transition to a new payment model, in this case, PDGM in 2020 be budget neutral. And it even provides a mechanism for a true-up, if you will, in 2022.

So thus, if the data from the early part of 2020 holds throughout the year, the remainder of this year and then into 2021, there will be a rate give-back or increase in the payment rate update for 2022. So when you see that final rule in November of 2021, there should be a rate update for 2022 if the behavioral functions are playing out like the row.

It was flawed. We said it was flawed going in, and it's playing out even prior to COVID that data that Paul referenced from Dobson DaVanzo, that study which looked at data from January, February, March, maybe in early April, clearly showed that it wasn't budget neutral..

Yes. So while we aren't going to wait by the mailbox for checks from CMS, what we will anticipate is we will go to Congress, and we will push this if there is continued under spending because of the mandate. And we have some good friends there, so we anticipate the industry will do this. And then my guess is they'll try to make it up on rates.

So I view this as a very positive. I also -- if you look at the fragmented nature of the industry, what you see is a lot of people are still paper-based. A lot of people are still having problem with the rules. It's just as we said, it increased in the amount of administrivia and everyone has to deal with.

So -- and we think they guessed wrong on the cut. So we think at some point, they're going to have to make it up. So it's a good sign, in my opinion. Thanks, Bill..

Our next question is coming from John Ransom of Raymond James..

So just for the record, Paul, what kind of music do you like? I'm just -- I need to get caught up on this..

Human Nature. I like it if Steve Earle is here in town. So any time he's playing -- or Neil Young, which shows my I'm outdated. So -- but I can't know him unless we play that here so..

At least you didn't say smooth jazz or bro-country..

Elevator music, yes, there we go.

I guess it just strikes me that all of us in the chattering community killed a lot of trees over the past 12 months obsessing over PDGM. And for you guys, it just ended up kind of being basically net flat. So just maybe help understand a little bit all the doom and gloom versus the reality.

What levers you pulled maybe with LUPA, maybe with codings, but just a little more behind the covers of how you turn what everybody thought was dogs living with cats and the John Pillsbury Doughboy walking around those [indiscernible]. It just kind of turning into a net flat.

Wouldn't that be a lot of chatter for something like this just ended up not being a big deal?.

Yes, I think for us, and I got to give -- not that I like to do this, but I got to give Chris Gerard, a lot of credit. He had us drilling on this. He and Tiani, who runs home health, had literally set up trial and pilots that were acting like PDGM was there the last fall.

So the amount of prep work that was done, the amount -- and our coding folks did a fantastic job. They were prepping. Melissa Butler there has just done a fantastic job. So we were really working hard on this, and we were working scared, too, but we were very planful. And so I think the result has been extraordinary.

I don't know if, Chris -- he's swooning that I complimented him so much..

No, it was really -- it was preparation. It was really us disaggregating all the components, identifying the revenue levers and the cost levers and picking a path to those. I mean, we. Utilized Medalogix Care, which has helped us tremendously in our PSE management side.

We really drilled down into our 2019 data to see how those would play out in 2020 under PDGM. And we really quickly identified opportunities around lost billing periods and coding opportunities as well.

And then just really just kind of spreading that through the organization and creating kind of our own kind of scorecards that we managed off of, allowed us to really identify quickly where we're seizing the opportunity where we had more opportunity to seize and just executed on it. So it sounds like it was easy.

It was not easy at all, and it still is a challenge for us, and we still have work to do but I think it's just a good old preparation, breaking it down, communicating well all the way upstream and downstream and then, again, execution..

Yes, it's just like we don't -- behind all this beauty, John, there's a lot of work, just so you know that. That was a joke..

Our next question is from Benjamin Mayo of UBS..

I got pulled off for a little bit. So if I -- if you guys covered this, just tell me and I'll cut back in the queue.

But can I get an update to Asana and AseraCare? Really just how they're tracking versus plan -- any modifications to the integration plan given the pandemic changes? Anything change in your view on the slope of the integration plan? And maybe just some comments on the team, turnover would be helpful..

Turnover on the newly acquired company?.

Yes. Yes. Anything -- yes, any turnover that's beyond normal that you would call out positively or negatively..

Yes. I'd say, in general, the integration has gone extremely well. We've learned a lot from our early days when we acquired Infinity and then Tenet's assets. So we have a really strong team, Mike North has -- who we brought in from Humana a long time ago, who was in charge of integrations there, worked with me there, has been doing that.

And then Kris Novak has done a great job. I think the idea is that the technical integrations have gone extraordinarily well, largely because we've been doing that. The -- also, the synergy pull outs have gone on track and on time. And so we've been tracking that. We have a pretty strong discipline and execution on that.

The cultural pieces are always what you try to figure out when you get in. So we've been really good about retaining folks. There has been more cultural changes with CCH, which was more decentralized than with AseraCare, for example, and Asana. But in general, we feel really strong about it.

Scott, this comes under Scott Ginn and Chris so I don't know if I missed anything, guys..

No. I think we're pleased with -- certainly, you can't ignore the COVID-19 impact from a plan perspective and where we thought we would be. So we'll be a bit behind of that schedule in CCH, but we're seeing some nice improvement, some good growth numbers from admissions that are really getting us back in line with where we need to be.

So we're pleased with that, but you've got the COVID distraction. As I said, I don't know if you're on when we talked about -- we've talked about a $14 million to $16 million incremental improvement coming out of CCH.

We know we're going to be a little below where we thought we would exit, but still think the incremental build will be strong going into next year. AseraCare is a great asset. That one is really performing probably slightly ahead of expectations financially.

And as we -- this cloud of COVID kind of becomes the norm to us, and we continue to operate more. We're comfortable where we're heading from a plan perspective. I mean, just kudos to the team that did the integration, basically when we were in lockdowns, had to train remotely, couldn't get to see some of these folks.

So it's a tribute to our team as well as the AseraCare team on that asset as well as all of our other operations folks to this time. But feel good about them. It's a nice group of assets. Now you pool all four of these together and blend them in with our legacy, we feel great about where this hospice asset heading in 2021..

Our next question is coming from Frank Morgan of RBC Capital Markets..

Good morning. Most of my questions have been answered. But I guess, given your view of the industry backdrop over the next several years and the opportunities around potential acquisitions.

I guess, what is your comfort with leverage when you think about doing deals, the size of deals and what type of leverage stretch would you be willing to assume given the backdrop? And then the second question was just about LUPAs in the quarter. I'm guessing that probably wasn't a big issue, but any specific data on that, that would be great.

Thanks..

Yes. Scott doesn't let us lever up, so I'll let him take this one..

Scott, we'll let us lever up. And I mean, it's just -- it's a great sign. I mean, so we're going to do -- to start with the obvious, I mean, cash flow from ops is going to be greater than $300 million this year. It had some really good things that helped us out.

But just to be to be over $200 million, I think at least three straight years is strong for us. You can see through AseraCare, we'll continue to pay down our revolver pretty aggressively. I mean, we'll probably be close to pay it off by the end of the year. We'll probably leave that term loan out there.

But from a pure leverage perspective, it's the right deal, the right assets. We would go up to 3 times. Anything above that, we would probably maybe potentially use our stock if it was right and something transformative, but we would let this thing lever up.

I mean considering what's available under our revolver right now, with our availability in the -- from cash generation, you're looking at really close to $500 million right there from an ability to fund deals. So a lot of great opportunities out in front of us. And as our base operations continue to get better.

It makes us more bullish and our belief that we can integrate well, operate well and then pay down the debt..

And Frank, this is Chris. From a LUPA perspective, our Q3 number was 8.6%. That was down from 9.2% in Q2. So I feel really good about our ability to manage those..

At this time, I'd like to turn the floor back over to management for any additional or closing comments..

Great. Thank you very much, Donna, and thank you for the suggestion of Johnny Cash next time as intro music. We'll take a look at it. I do love Johnny Cash as well. But I want to thank everyone who joined us on our call today.

I'd also like to thank, again, all of our employees in the field and those who support them and for helping to deliver such a strong quarter. Please keep doing what you're doing, taking care of the people who need us the most. We hope everyone has a wonderful day.

We hope you stay safe, and we hope you vote on Tuesday, and we look forward to updating you on our ever-evolving progress and purposeful work on our next quarterly earnings call. Until then, take care. .

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines at this time. And have a wonderful day..