Greetings. Welcome to Amedisys Second Quarter 2022 Earnings Call. [Operator Instructions] Please note this conference is being recorded. At this time, I'll turn the conference over to Nick Muscato with Investor Relations. Nick, you may now begin..

Thank you, operator, and welcome to the Amedisys investor conference call to discuss the results of the second quarter ended June 30, 2022. A copy of our press release, supplemental slides and related Form 8-K filings with the SEC are available on the Investor Relations page of our website.

Speaking on today's call from Amedisys will be President and Chief Executive Officer, Chris Gerard; and Executive Vice President and Chief Financial Officer, Scott Ginn. Also joining us is 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 actual 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 to the most comparable GAAP measures will be available in our Forms 10-K, 10-Q and 8-K. Thank you.

And now I'll turn the call over to President and CEO, Chris Gerard..

Thanks, Nick, and thanks to everyone for joining us. Today, Amedisys announced our second quarter 2022 results. Before we get into the performance update, I want to give a heartfelt thank you to all Amedisys employees. The work you do and the care you perform on a daily basis is an inspiration, and I am truly grateful for all that you do.

The topic on everyone's mind has been the proposed home health rule for 2023. As most of you know, on June 17, CMS released the 2023 home health proposed rate update, which detailed a reduction to overall home health payments by the aggregate amount of 4.2%.

As you're all aware, the driver behind this reduction is CMS' proposed permanent cut of 6.9% to the 30-day base payment rate that was derived from a 7.69% permanent behavioral assumption adjustment. CMS has also proposed a market basket increase of 3.3%, reduced by a productivity adjustment of 0.4% for a total market basket update of 2.9%.

We do anticipate the market basket increasing before the -- for the final rule as CMS uses more recent data to provide for this inflationary update, albeit the methodology and data that CMS is using is woefully inadequate to capture the true inflationary impact that providers across all of health care are experiencing in providing care throughout the country every day.

CMS also stated but not formally proposed that it is due to collect approximately $2 billion in overpayments from 2020 and '21 combined. Not surprisingly, Amedisys, along with the entire home health industry, strongly disagrees with CMS' assertions of an overspend of this magnitude. In fact, we believe there has been no overpayment at all.

The budget neutrality methodology employed by the agency is extremely flawed. As we have in the past, Amedisys has been prepared to engage with CMS directly and alongside our colleagues in the home health industry.

The proposed cuts based on behavior adjustments is unsound, and we are working on a comment letter that will thoroughly outline our position around the assumptions, our experience throughout the first 2 years of PDGM and the impact of the ongoing pandemic.

It is also confusing to us in the industry as well as members of Congress and congressional staff why CMS is making such a drastic cut to reimbursement during times of extraordinary inflation.

With that being said, we have been preparing for this scenario and have been in discussions with our congressional champions for months to formulate a thoughtful legislative approach that prohibit CMS from instituting these drastic proposed cuts.

On Monday, Senator Debbie Stabenow, Democrat for Michigan; and Senator Susan Collins, Republican for Maine, introduced Preserving Access to Home Health Act in the U.S. Senate, and we expect a companion bill to be introduced in the House in the coming days.

Thank you to Senator Stabenow and Senator Collins for your bipartisan commitment to championing a pause to the potential cuts to home health agencies and maintaining access for home health patients.

This legislation, upon enactment, would pause the implementation of any temporary or permanent adjustments to the base payment rate under the budget neutrality mandate of PDGM until 2026.

This would allow time for the industry and CMS to work on a much more reasonable and predictable methodology that adequately measures the impact in transition from old HHRG 60-day payment system with the new PDGM 30-day payment system as well as fully accounting for the impact that COVID-19 has had on utilization, patient mix and the level of care provided by home health agencies.

Based on limited data and information released by CMS to date, the proposed cut to reimbursement in 2023 appears to be the result of a flawed methodology and lack of full recognition of current labor inflation.

Now that the bill has been introduced, we, along with the industry, will continue explaining to staff and members of Congress the impact of the proposed cuts on home health agencies, patient access and the need to pass this legislation by the end of the year. With that, let's jump into the segment performance, and we'll start with Home Health.

For the quarter, Home Health same-store total admissions were flat. Lower utilization of home health benefit, largely driven by less total discharges to post-acute settings, coupled with elevated utilization of telehealth and in some markets, clinical staffing challenges impacted our ability to grow during the quarter.

On the quality front, I'm excited to announce that for the October 2022 preview, our Home Health Quality of Patient Care Stars score is 4.49 stars with 100% of our care centers reaching 4 stars or greater. Quality has been and always will be core to all we do at Amedisys.

And this continued improvement is really something all of us here at Amedisys are proud of. For the quarter, we performed 13.2 visits per episode, up 0.2 visits sequentially and down 1 visit year-over-year.

Our implementation and utilization of Medalogix has helped us to continue to make progress, optimizing the care we deliver to our patients while constantly focusing on improving our quality scores. On clinical mix, in Q2, we achieved 48% LPN utilization and 53% PTA utilization.

We have made tremendous progress on our clinical mix, and we'll continue to increase our utilization of both LPNs and PTAs throughout the year. However, as we optimize visits per episode, increasing these percentages becomes more challenging. Now moving on to Hospice.

For the quarter, Hospice same-store admits grew 6% and ADC was slightly positive at 0.2%. This represents our first quarter of ADC growth since Q3 of 2020. Additionally, we saw a 2.5% sequential increase in ADC. Continued progress on the ADC front will help to drive performance in the second half of the year.

As we continue to focus on both admission and ADC growth, we're going back and being more targeted in where we're adding our BD reps. Our focus is shifting away from simply growing our head count to driving productivity as our reps move throughout the tenure bands.

Also adding to the improvement in ADC has been the normalization of discharges as a percent of ADC. As we discussed in our Q1 call, discharge rate peaked at 39% in January and has sequentially improved versus our internal modeling since that point.

To quantify how impactful discharge has been to our performance, had discharge rates mirrored 2019 experience, year-to-date June ADC would have been 874 higher, resulting in an additional $29 million in revenue and $20 million in EBITDA for the Hospice segment. Now I would like to discuss Contessa's performance during the quarter.

We continue to be pleased with the progress Contessa, our high acuity segment, is making as it's generating meaningful growth in Q2 and positioning itself for a material ramp in both admissions and revenue for the second half of 2022. Total admissions in Q2 for hospital and SNF-at-home were 345, representing year-over-year growth of 35% for Contessa.

Despite the favorable growth, this performance was behind budget due to delays in closing scheduled partnerships. This volume represents 35% of the budgeted admissions missed for the quarter. Contessa is still tracking towards closing these partnerships to eventually bring this additional volume on platform.

Contessa's palliative-at-home model continues to demonstrate strong progress and momentum, evidenced by hitting 131% of budgeted engaged member months in the second quarter.

The volume softness Contessa experienced on hospital at home and SNF-at-home models was partially offset by business continuing momentum towards increasingly favorable reimbursement mix. In Q2, Contessa had 30% of episodes at full risk and 70% at limited risk compared to 21% and 79%, respectively, at the end of last year.

Contessa continues to focus on finalizing health plan contracts with managed care organizations to shift volume into the full risk bucket. Contessa continues to demonstrate strong abilities to manage medical spend through its clinical management of patients admitted onto its programs.

For a third straight quarter, we saw a favorable direct MLR performance relative to expectations, largely due to high-quality outcomes, which resulted in patient satisfaction of approximately 90%. For the quarter, segment EBITDA on a consolidated basis was a favorable to budget by 5%.

This was driven by appropriate cost control measures at the corporate level. While volume was behind for the quarter, Contessa made meaningful strides in 2 key areas to bridge the gap to meet target metrics for the year.

First, Contessa accelerated business development efforts by launching its previously announced partnership with Penn State Hershey; and in mid-June, closing 2 additional partnerships with marquee systems, Baylor Scott & White Health and Memorial Hermann Health System. We expect these systems to be operational by year-end.

Secondly, we continue making progress on integrating the nursing function into Amedisys Home Health operations as opposed to relying upon third-party home care agencies. This places the responsibility of recruiting and managing the nursing staff necessary to accept all referred patients squarely in our control.

As of the close of Q2, Contessa had filled 81% of required nursing staff, thus increasing the team's ability to meet targeted admission metrics. We anticipate having this integration completed by August 1, the 1-year anniversary of closing on the acquisition of Contessa.

We are confident Contessa will continue making significant progress with more partnerships as we close out the second half of the year, both with health systems as well as health plans that are interested in direct relationships. In summary, I am proud of the results we produced during the second quarter of this year.

Though the environment in markets we operate in have changed, we continue to gain share, deliver the highest quality care and differentiate ourselves. With that, I'll turn it over to Scott who will take us through a more detailed review of our financial performance for the quarter.

Scott?.

Thanks, Chris. For the second quarter of 2022 on a GAAP basis, we delivered net income of $0.91 per diluted share on $558 million in revenue, a revenue decrease of $6 million or 1% compared to the second quarter of 2021.

For the quarter, our results were impacted by income or expense items adjusting our GAAP results that we have characterized as noncore, temporary or onetime in nature. Slide 14 of our supplemental slides provides detail regarding these items and the income statement line items each adjustment impacts.

For the second quarter on an adjusted basis, our results were as follows. Revenue increased $9 million or 2% to $566 million. EBITDA decreased $9 million or 11% to $74 million. Excluding the acquisition of Contessa, the EBITDA decline was $2 million.

Decline in our base business was largely driven by the partial return of sequestration and lower volumes. EBITDA as a percentage of revenue decreased 190 basis points to 13.1%. Excluding Contessa, EBITDA as a percentage of revenue declined 40 basis points to 14.6%. EPS decreased $0.22 or 13% to $1.47 per share. Contessa drove $0.18 of the decline.

Sequentially, EBITDA increased $8 million on a revenue increase of $21 million. Growth in volumes and the closing of 2 acquisitions offset a partial return of sequestration, which was a negative impact of $4 million. While we're encouraged with the sequential improvement, our Q2 volumes are below our internal expectations.

Now turning to our second quarter adjusted segment performance. Keep in mind segment-level EBITDA is pre-corporate allocation. In Home Health, revenue was $349 million, down $1 million from prior year, which includes $14 million from our Q2 acquisitions and a $4 million impact related to sequestration.

Revenue per episode was up $62 or 2%, which is a result of a 3.2% increase in reimbursement, partially offset by the reinstatement of sequestration at 1%. Visiting clinician cost per visit is up 6% year-over-year and flat sequentially.

The visits per episode declined 7%, which offset the cost per visit impact, resulting in a cost per episode decrease of 2%. The increase in cost per visit was driven by planned wage increases which were effective August 1, 2021, sign-on bonuses, wage inflation, new higher pay, visit mix and an increase in salaried employees.

G&A increased approximately $7 million, mainly driven by our Q2 acquisitions, which added $4 million. The remainder of the increase was driven by planned wage increases, additional BD resources and higher travel and training costs. Segment EBITDA was $72 million with an EBITDA margin of 21%.

EBITDA declined $9 million on lower-than-anticipated volumes, the impact of episodic payers shifting to per visit contracts, the partial return of sequestration and raises. Sequentially, segment EBITDA was up $1 million on a $13 million increase in revenue, which is net of a $3 million impact from sequestration.

Now turning to our Hospice segment results. The second quarter revenue was $198 million, up $7 million over prior year. Net revenue per day was up 4%, driven by a 2% hospice rate increase that went to effect October 1, 2021, and lower revenue adjustments, partially offset by the reinstatement of sequestration.

Hospice cost per day increased $2.88 primarily due to raises, wage inflation and sign-on bonuses. EBITDA was $42 million, up approximately $1 million. G&A increased $2 million due to planned wage increases, higher travel costs and the rollout of Medalogix/Muse. Sequentially, segment EBITDA increased $5 million on a $5 million increase in revenues.

The sequential improvement in revenue and EBITDA was driven by a 2.5% increase in ADC. Both the revenue and EBITDA increases are net of the $2 million sequestration impact. Turning to our total general and administrative expenses.

On an adjusted basis, total G&A was $182 million or 32.2% of total revenue, up 150 basis points, mainly due to Contessa and our recent Home Health acquisitions, which added $9 million and $4 million in additional G&A, respectively. Excluding Contessa and our Home Health acquisitions, our G&A is down $1 million over prior year.

Sequentially, G&A is up $3 million. However, excluding our Home Health acquisitions, G&A is down $1 million. For the quarter, we generated $57 million in cash flow from operations. Our net leverage ratio at the end of the quarter was 1.5x. During the quarter, we spent $17 million on stock buybacks.

We have $83 million remaining under our previously approved buyback authorization. Turning to M&A. As stated in our last earnings call, we have signed and closed both the Evolution and AssistedCare acquisitions.

Our pipeline remains full with both Home Health and Hospice acquisitions, and we will look to deploy capital opportunistically throughout the remainder of the year. That said, until we have better line of sight into 2023 home health reimbursement, I'd expect home health M&A to be slower to materialize.

We're updating our 2022 guidance of revenue given the volume impacts in the first half of the year while reiterating our EBITDA and EPS guidance ranges, which can be found on Page 16 of our supplemental slide deck. Our new revenue guide is $2.29 billion to $2.31 billion.

Though volumes in both Home Health and Hospice have been slower to return than original modeling, we have significantly outperformed from a cost management perspective.

Continued progress in both total admissions for Home Health and ADC for Hospice, along with decelerating losses at Contessa and our continued cost management make our previous stated guidance ranges for EBITDA and EPS achievable.

As we move from Q2 to Q3, we will see impacts from the normal seasonality items such as an increase in health costs of $3 million to $4 million; our annual rate cycle, which is effective August 1, with an expected impact of $5 million; 1 additional holiday totaling $2 million.

And for this year, we have the additional negative impacts of the return of full sequestration of $4 million and $2 million related to conveners. This ends our prepared remarks. Operator, please open the lines for questions..

[Operator Instructions] And our first question comes from the line of Brian Tanquilut with Jefferies..

Chris, I guess my question for you is -- so in the past, in the different conferences, you've talked about how the strategy... [Technical Difficulty].

And we're moving on to the line of Matt Larew with William Blair..

Just wanted to ask about -- given the relative trends in Medicare business, maybe, Scott, could you just kind of remind us or level set us with where margins today sit for -- on the MA side, private episodic relative to Medicare fee-for-service and then maybe where some of the big call-outs are other than the rate? Maybe there's something aside driving those differences in margins..

Yes. Thanks, Matt. I would say we're still in that kind of 25% to 30% with some decent movement on the -- we'd like to see the rate get better, but it's moving that way. I think some of the other relationships and some of the other -- even on some of the convenience, we're getting some better rates.

So we expect to see that over time improve as we shift, but certainly, that's -- it's still some ground for us to cover in order to decrease that differential because it's still significantly different than where our margins are. And as we talked, our episodic visit margins have been expanding.

Really pleased with what's going on there with a rate increase plus a decrease in really our cost per episode. So nice things there, but you're still in that 20% to 30% versus the mid-40s, potentially higher before you consider kind of some other costs related to it. But there's a gap to cover..

Yes. Matt, it's Chris. I would add that we do have some new contracts that have come online recently that are going to drive better margins. Also, we've been talking about some new payment models we've been working on. I was hoping to have something announced by today.

But literally with one of our two -- one of our biggest plans, top 5 plans that we do business with, we're pencils down on a new payment arrangement, a case rate arrangement, just waiting for ink to get on a paper before we could talk about it.

So we expect to have something announced really soon on that that's going to allow us to actually expand some of that margin. And the last thing I'm going to say is -- on this point is that we have a broad -- a pretty broad range of payment arrangements on our per visit Medicare Advantage.

And we're actively going through and portfolio managing those contracts, and we're going to be exiting contracts that really just don't make economic sense for the organization. So we expect to see that result in some margin expansion on that per visit business.

And we will kind of call out some of these older contracts that are just not covering our cost of doing business..

Okay. That's helpful. And then, Chris, you cited, I think, telehealth as a headwind to utilization. I was curious. That's the first time I remember you citing -- giving a sense for how that's appearing as competition. I think at times, we thought it potentially could be complementary or even extending some of your capabilities.

Could you maybe flesh that out a little bit and give a sense for how you're thinking about telehealth in the broader context of home health long term?.

Yes. So during the PHE, it's actually working to our advantage in terms of facilitating patients getting onto service and having face-to-faces being done by telehealth. So that's not what we're referencing.

We're really referencing kind of the fact that our demographic, our base population that we serve, they're not going in to see their physician face to face. Oftentimes, they're being -- this is being done on video, telehealth-wise. And there's just -- we feel like there's missed opportunities to identify the need for home health and/or hospice care.

They're not having head-to-toe assessments. They're not listening to lungs. They're not looking at range of motion. And just -- it's not as thorough of an assessment when it's happening in telehealth. And in this day and age also, if they're symptomatic at all, they're definitely doing it by telehealth.

And so we feel like that's driving down utilization a little bit of home health. We've noticed the physicians that we have strong relationships with that have not had change in their actual patient mix are seeing different behaviors in terms of their utilization. And it's not a loss of market share.

It's actually just less utilization of home health that we're seeing right now. And that's something that we think we need to solve for and we will. But that's kind of one of the, I think, unintended downsides of the proliferation of telehealth today..

Our next question is from the line of Justin Bowers with Deutsche Bank -- pardon me, that's coming from the line -- question coming from the line of Brian Tanquilut with Jefferies..

Chris, sorry about that. What I was asking earlier, in the past, in a few conferences that you attended, you talked about how Medicare Advantage is kind of like part of the strategy and it's a new growth area, if anything. Maybe there's a little bit of pivot there.

So wanted to hear your thoughts and maybe articulate that here, kind of like the strategy there and the thinking on Medicare Managed.

And also, any update on the contracts that you've alluded to moving to reimbursement case rate basis?.

Yes. Thanks, Brian. Number one, you look at the Medicare fee-for-service population. It's declining. It peaked -- topped out around 39 million. Now it's starting to decline. And Medicare Advantage penetration is 53% and accelerating. This is where we knew the puck was going. This is a lot of the rationale behind us acquiring Contessa.

And now on the Home Health side, it's really kind of driving a little bit of a pivot in strategy for us, is that how do we lean into Medicare Advantage in a way that it is not a vendor-payer relationship, it's more of a partner relationship so that we can have kind of the economics as well as the dynamics that make us want to take more of that business and drive more volume and utilize our capacity more towards that business, at the same time, drive up quality and drive value proposition for the plans.

And so what we have kind of started to really settle in on is a case rate model to where it really removes the need for a convener to control and do utilization management of the business that we do day in and day out and allows us to use the tools that we've been using in PDGM to optimize our episodes, to use those tools for these Medicare Advantage patients.

We feel like that will actually unlock additional capacity with our existing clinical staff. And if we have a fixed rate on the per admission basis, then that will actually create a little bit of margin opportunity for us at the same time.

And that will create kind of the motivation for us to take that new capacity and actually take more of the members from the Medicare Advantage plan we have the case rate arrangement with. So in the discussions and where we've gotten to today, it really is something that will lay out and create value for the plan.

Economics of the plan, very similar to what the conveners are generating today, but also unlock additional capacity for us to take more of their members.

And it will also remove some barriers from us that are unnecessary and just hindrances today in terms of the utilization management, which we can do ourselves, and allow us to actually see better margin expansion on that and lean into that growth..

Our next question comes from the line of Justin Bowers with Deutsche Bank..

Just trying to get a better -- can you help us understand some of the utilization dynamics you're seeing across both of the segments? And then would -- the change in the revenue outlook, is it concentrated in one area or another? Or is it split between both segments?.

Yes. So let's start with Hospice. If you think about -- we saw elevated discharge rates in the first quarter that put us behind consensus.

And I called out that if we had 2019 discharge rates, we'd be sitting on about 875 or 874 more patients today, which we completely changed the outlook for -- the top line outlook for Hospice in the profile of Hospice.

So as we started the year in the whole and start to climb out of that from an ADC perspective, that builds in terms of pressure on the top line for the back half of the year. We got -- we moved into growth in Hospice in the second quarter, slight growth.

And we expect to continue to accelerate that growth through Q3 and Q4, but we just can't make up the ground that we lost in the first quarter. So that was driving down the top line on the Hospice side. On the Home Health side, similar dynamics as well.

We're seeing softness in utilization on Medicare fee-for-service for Home Health, but we're also seeing record demand from Medicare Advantage, which actually drives lower top line opportunity but -- growth opportunity but it's going to be impacting the top line. So we had to adjust for that in the second half of the year as well.

We have data that shows that even in that Medicare fee-for-service population, utilization of home health has declined from 8.8% of members using home health in the course of a year in 2019 to 8.1% in 2021 and still looks like it's declining further today. So there is the shift that's happening.

It's going to Medicare Advantage, where we're seeing record demand for our services, but it's also kind of a hit to the top line. So all that being said, it's equal parts -- it's just pretty much equal parts adjustment down in Hospice and Home Health really related to how we work through the first half of the year.

We feel good about what we have out there in the updated guide. And the last is we didn't adjust down any on the Contessa top line..

Okay. Got it.

And the fee-for-service dynamic is partially what you related to -- what you were referring to in Matt's question around telehealth?.

Exactly..

Okay. Okay. And then for the full year outlook, you guys had a beat, and there was some confusion around the accrual there. But is the way -- in terms of the back half outlook, you had the beat in the first half. You're having somewhat increased pressure -- lower demand on the top line but better cost control.

So those kind of make up the gap and enable you to keep the full year guide. So that's part 1.

And then part 2, with the ZPIC audit, is there any remaining potential outstanding, I guess, liability? Or is this kind of like maybe the last roll? Or has this issue been resolved at this point?.

Yes. I'll take that. So starting with that contingency accrual. So yes, that goes back -- and we've got a full disclosure in our 10-Q, been around for a while. So it's based on a 2015 acquisition that got a ZPIC in 2017. We initially booked an accrual versus our assessment. I think it's in the -- gross number, somewhere around $26 million.

We get an indemnity of somewhere around $11 million against that. So that's all been recorded for a while. We brought this all the way through the ALJ. We got ALJ findings on -- there's 2 different provider numbers impact, and we got those a couple of weeks ago.

So we ended up having to adjust the accrual based on, one, we did not break the extrapolation, which is what we're fighting for; and two, we did not win as many claims as we thought, which reassesses the amount. We have not gotten the final letters around this. So that's our estimate of where that is. It could be a minimal movement there.

So that's kind of what's in that large number. Also, there's an interest component to that. You notice in our adjustment there's about $4 million we were forced to go back and accrue interest back to that 2017 date. So that's why it's such a sizable amount. So I think we pretty much have made a pretty good determination of it.

We have to make some decisions. There's still one more layer we can go ahead and push against to see if we could win some more of these, but we got to make those decisions. I think we're pretty close. As far as the first half to second half, we did 140 in totality here. Certainly, pulling down volumes going into the second half does put pressure.

We've done a great job on cost. I think what I'm most excited about is if you look at both sides of the business from a margin perspective, they're performing very well at the gross margin line.

Home Health is only down 50 bps despite an 80 bps impact of losing sequestration and still some pressure on the softer episodic volume, so really good performance there. So that's really helping us lean into the rest of the year. Similar in the Hospice. It's actually up 20 bps on a 70 bps impact from sequestration loss.

So those dynamics are helping feed into the actual what we think we can drop from EBITDA. So we think we get there. If you think to the midpoint, we get another 140. I do think there's a step down as we move from Q2 to Q3 relative to normal.

Normally, we see about a $5 million decline from Q2 to Q3 when you take out some of the COVID years that were abnormal, and that's driven by we give raises in Q3, we have higher health costs in Q3 and there's an extra holiday. So you've got those normal trends.

And then, this year, we're introducing about another $4 million related to -- I'm sorry, related to the sequestration going back in play, another $2 million because of conveners. We've done really better than that $14 million we've called out to date, but there's still an incremental [2, 1] from Q2 to Q3.

There's another $1 million related to kind of additional raises above what our normal trend has been. So combine that with about that normal $5 million plus that $7 million I just called out, it's about a $12 million directional number into Q3, and we expect to build that as our Hospice census continues to grow.

And then now the good news around the hospice rate finalization, about 110 bps better than we thought. That's going to be a $78 million good guide in Q4, and we've got some other cost initiatives that really help stamp that up in Q4 as well. So we expect a strong exit rate, but Q3 has been traditionally a more difficult quarter for us..

The next question comes from the line of John Ransom with Raymond James..

So let's just talk about Contessa. You put out some projections when you bought the asset [at $250 million].

How do you feel currently about those projections and where you mark the valuation?.

Yes. We still feel good about the acquisition and the acquisition price. We do have some learnings that we've talked about in previous quarters. That still persists, but we're actually seeing them improve. Part of it is really kind of within our control, and that's our ability to staff these admissions as they come in.

And as a reminder, in Q1, we were only able to staff about half of the admissions. We had about a 50% conversion rate. And the other 50% was what we call ancillary misses, and that was due to kind of our stable of acute care RNs that dropped through this Q2 to about 30%, so a 70% conversion rate. And we exited the quarter even better.

So we had our best month in June in terms of our ability to staff the volume that's coming in. So as with our existing JVs, the volume and demand is still there, and it's still strong. And it's in line with what we were expecting, what we've modeled out. Now what also we're learning is getting deals online has taken a little bit longer.

And I think part of that is the complexity of the deals that we're talking about today versus what Contessa had in the pipeline at the time we acquired them.

And if you think about Contessa doing just a hospital at home joint venture with a small system or a regional system and utilizing contract home health and hospice business to be able to staff the care in the home, the deals were pretty simplistic.

The types of deals we're talking about now, because of our experience operating -- as operators of home health and hospice, are getting more comprehensive to include actually putting the hospital at home, Home Health and Hospice Businesses in the JV as well as ours.

So it's taken a little bit longer to get deals done as well as we had some regulatory delays on -- particularly on our New York deal that we lost a quarter on in the first year. So if you normalize for all that, we're in line with what we had laid out for this year as well as our growth trajectory.

Now to put rocket fuel on all of this, you think about the risk-based programs that we're really close to being able to announce.

And having a statewide kind of fully attributed full risk model out there is going to drive significant upside on the top line, and we still think we'll have enough of that show up in 2022 to keep us in line with kind of what our top line projection or our guide was for this year.

So the end of -- the long and short of it is we think we're still going to hit that number.

It's going to be a little bit different mix between the palliative versus the JVs, but also we have additional JVs coming online this quarter and scheduled to come on in the fourth quarter as well that we think that we're going to have a really nice exit trajectory..

Okay. And just a follow-up on the Medicare Advantage question. Is it reasonable to expect that you'll have these case rate deals done by the end of the year with at least 2 or 3 payers? What's the -- I know the timing is slipping on what you really hope.

But what's a realistic expectation between now and the end of the year? And what percent of your kind of -- your current visit-based revenue, what percent of revenue do you think you can cover by the end of the year with some of these contracts?.

Yes. I would be -- John, honestly, I'll be shocked and surprised if we don't have it announced by the time we announce Q3. So the end of the year, I feel very, very good about. I think that we'll have one we're talking about in the coming weeks. And 2 of these contracts -- we're talking about 3 different unique contracts we're working on today.

And I'm confident in all 3 of them by the end of the year. But even if we get 2 of them, 2 of them comprise about 60% of our per visit business that we do today. That's about 10% of our total Home Health revenue that we're looking at today, would be under these unique new payment arrangements..

And so I guess just thinking about logic, we would just think about the big MA -- there are 3 big MA players. So I would think you'd try to go shoot those elements first versus some regional Blue Cross plan or something.

So is that -- and do you think that the dominoes will fall -- if you can knock down the big 3, do you think some of the dominoes will fall with some of the other plans?.

Yes, I do because I think we're going to execute to where the plans are going to be very happy, and we're going to see that we're going to want to take more of that business. So our execution is going to, in my opinion, determine whether or not other plans are going to fall in line..

[Operator Instructions] The next question comes from the line of Matthew Borsch with BMO Capital..

You have Ben Rossi here filling in for Matt. Just quickly following up on the MA side that you just mentioned. You talked about it's 60% of your total business.

Could you convert that into maybe your MA volumes as well?.

So can you repeat the question? I want to make sure I get it right..

You're talking about 60% of the business impacted by these new contract negotiations, including 10% of revenue in Home Health.

Could you just maybe translate that to the possible MA volumes across the segment?.

Yes. So I think I'm going to get to the answer you're looking for. If I don't, just ask further. But basically, right now, in our Home Health business, 20% of our revenue is in a per visit arrangement.

We have contracts on the table that we're trying to get executed with plans that comprise 60% of that 20% that will be paid in a more of a per case -- case rate basis versus a per visit basis where we'll see opportunity for market expansion and margin expansion as well as organic growth because as we unlock additional clinical capacity, we're turning away a lot of business in that space today.

We do about 200 -- in that 20% of our Home Health business, we do about 200,000 visits per month or 600,000 per quarter. And we expect that we're going to be able to see that size of our business grow pretty significantly as we come out. I hope I got to what you were asking..

Our next question is from the line of Sarah James with Barclays..

I wanted to go back to the comments on telemedicine impacting demand.

So should we think about that as more impacting visits per episode, so people are mixing telehealth with in-person? Or are there certain types of patients that can fully shift over to telemedicine? And if it's the latter, how much of your current business is in that type of situation that could alternatively be served by telemedicine?.

No. So what we're talking about here is just underutilization of the home health benefit patients that are not getting referred to home health today that would have been referred to home health pre the pandemic and the utilization of telehealth.

The reason we feel that is that before 2020 and the pandemic, the population that we serve was in a routine of seeing their practitioner face to face 2 to 3 times a year. And every time that they had some sort of ailment, they would go in and see their doctor.

And the doctor had really had the opportunity to be face to face with them, do head-to-toe assessments. They also do other types of kind of testing and kind of diagnostics to determine if possibly home health or hospice could be or should be a delivery that they're getting in the home.

What we see happening now is the patients are not getting face to face with their doctor, and we feel like there's missed opportunities for home health to be ordered by the physician. The most basic ones I can kind of lay out is that there is value in listening to somebody's lungs when they come in for an exam.

And if that's not happening because you're just doing it through video conference, there's opportunities for things to be missed and actually conditions to actually worsen over time.

Somebody actually getting up and moving around and seeing their gait and their range of motion and things like that from a therapy perspective, doctors use that to be able to determine whether or not they feel like that patient should be receiving home health care.

So we just think that this is a new dynamic that's kind of been spun up during the pandemic that's going to not go away. And we just got to find ways to identify physicians that may be utilizing and ordering for home health less today than they were pre pandemic and make sure that we capture those opportunities..

The next question comes from the line of A.J. Rice with Crédit Suisse..

A couple of quick questions here. First of all, around the contract labor utilization rate. I think you're at 3.5% this quarter. That's down from being over 4%.

Where do you think that could be? And are you seeing any easing on the rates itself that you're having to pay for contract labor? And any thoughts on how that trends in the rest of the year as well?.

Yes. I mean we're breaking pretty close to where we thought we would exit, I mean. So we're kind of in a -- as you said, you got that right, that's 3.5% for the quarter. We'd said we'd be happy kind of getting that 3.2% type of range.

And there's -- as we look across our portfolio, there's some areas of opportunity from a growth perspective that we're really trying to hammer on staffing to help in particular. So we may move that a little bit in order to take some more business in. So we'll see there.

But if we stay in that kind of range at 3% to 3.5%, we would certainly be happy and keeps us in our modeling for the full year. Rates are kind of hit/miss based on some geographies. They've softened a bit, but really haven't gotten to where we'd like to see them. But I think it's -- you're not seeing the pressure that you saw before on the rates..

Okay. And then maybe just on the issue of the PDGM. I appreciate the prepared remarks around that PDGM potential adjustment. I guess I would ask when do you think -- obviously, we'll get the final rule in November, and we'll see if CMS makes an adjustment -- beginning of November and see if CMS makes an adjustment.

But congressional action, I guess, can happen anytime. Are you getting a sense of when this all might come to a head, if it's going to happen? And then also on this issue, I know with the original PDGM rollout, you guys were able to mitigate a lot of that and offset it.

Any early thoughts on if it did get implemented, whether you'd be able to mitigate some of it? Does a cut like that being implemented give you more flexibility to go to your workforce or other places and say, "Hey, we need some help here because of this cut?".

Yes. A.J., I'll take the second part, and then I'll let Dave talk a little bit about the activity on The Hill and kind of our optimism around getting something done with Congress that's going to help offset or alleviate ourselves from the major cut that's on the table today.

But we already had on our road map some transformation activities in our organization that we feel are really long overdue, and there's a lot of opportunity around it.

And it's around kind of more centralized functions that are being 100% decentralized in the organization today and more automation around some functions that we're requiring people to do today.

So we've identified a spend around decentralized functions in the tune of about $175 million a year that creates a lot of dependency on accuracy in the field, also puts revenue protection at risk if you have inconsistencies there. And actually, these are duties and functions that can be done in a more streamlined manner.

And so we have been working through some of this and identifying some opportunities over the last 1.5 years or 2 years. And given the threat of the rate cut, we're kind of pulling that forward a little bit.

There will be some that will impact actually the back half of this year and a couple of functions that we've already identified and we're able to kind of get moving on.

We think long term, there's about probably a $15 million to $30 million opportunity just around automation and centralization of functions that are being done manually today in a very decentralized fashion. So we want to -- we will give more color on that, but just know that we've been identifying this.

We already have some things in play that we'll be able to talk about later this year, and it's going to be an offset to either wage inflation that we're dealing with today or potential rate cuts. It's something that we have to do..

A.J., it's Dave. Thanks for the question on legislation. We, along with the industry, are really excited about the developments on The Hill, especially the introduction of the bill in the Senate. And I think you'll see -- in the coming days, you will see a companion bill in the House. And I think we've already shared that publicly.

So to answer your question, look, based on our conversations with members of Congress, proposed rule is not what they contemplate when they voted for budget neutrality and the Bipartisan Budget Act of 2018. So we're seeing a lot of support for a 3-year pause in the application of the budget neutrality mechanism.

And so really, to get exactly to your question, I think one of the most likely vehicles for legislation, the Medicare Extenders package, which, as you know, would be at the end of the year and likely beyond the final rules. So sometime between -- final rule usually comes out late October, November 1.

So the Extenders package could be after that, but that's a very viable and likely vehicle for our legislation..

Our next question comes from the line of Ben Hendrix with RBC Capital Markets..

This is Mike Murray on for Ben. Just a follow-up on the case rate strategy.

How do you think the rates will initially compare with fee-for-service rates? And do you see them converging over time?.

Yes. They will -- I mean it will start to close the gap. It will still be less than Medicare fee-for-service on PDGM or episodic basis. On -- but what will happen is we'll see our actual revenue per visit kind of migrate from around $126 to $128 visit today to get into that $175 to $185 over time.

And also, as we're moving some of these administrative hurdles that we have to do on that type of business, we'll see our actual margin expand as well from low 20% to the high 30s to low 40s.

So -- and then the last piece on top of that is as we unlock this additional capacity, we see an additional 2 to 3 percentage points of organic growth that will come with that expansion as well..

Our next question comes from the line of Andrew Mok with UBS..

I just wanted to better understand how higher fuel costs are impacting your business. You add back a fuel supplement to your adjusted results, but I think you have a mileage headwind in your guide for the back half of the year.

So what exactly is the fuel supplement? And what's the earnings sensitivity to every penny of mileage reimbursement?.

Yes. From a -- as we change the mileage reimbursement itself, $0.01 is about $1 million. So we certainly felt that in our base business through our fleet costs. We're probably talking about another $800,000 in the first half.

The sliding piece is just -- is flexing up and now down based on -- as we re-established where our base fuel prices were and where we thought they'd be at the beginning of the year. So you're seeing that number kind of peak in June and then come back down now as gas prices are settling. So that number, that's not a permanent number.

We expect that to go away as things get to some normalcy, hopefully sooner rather than later. But we do plan on increasing our normal reimbursement $0.02 in the back half of the year. So you get half a year of that, so kind of $800 million to $1 million type of impact in the back half..

Our next question is from the line of Tao Qiu with Stifel..

So in your prepared remarks, you highlighted that quality metrics continue to improve in Home Health, even though visit per Medicare episode continue to stay at this low level of 13.2. Do you think there's still more room to optimize visits or this will stabilize once labor and COVID disruption settle some more? This is the first part.

And then how should we think about visit per case or visit per month in the new managed care payment model you talked about? How does this stack up against visit per episode or fee-for-service?.

Yes. So in terms of -- I'll take the latter part first. On the visits per episode -- as we get into the new case rates, we expect to see visits per admission very much in line with what business per admission looks like on the Medicare PDGM side. So right now, it's a little bit higher and the length of stay seems to be a little bit longer.

And that was one of our key learnings out of utilizing Medalogix and PDGM, is that there are visits that we have historically performed that bring no real incremental value to the patient. And that's the science behind Medalogix, is getting your utilization right so that you're matching the visits to the actual care needs of the patient.

And it's worked well there, and we plan on using the same tool in the exact same way as we work through our case rate patients. So we expect that you'll see a lot of similarities in the length of stay and the number of visits of a patient that's in the case rate gets versus a PDGM patient.

In terms of visits per episode and where we are, we said last quarter, we think this year is going to settle out around 13.2 to 13.3 visits per episode. We are real pleased with kind of where we are right now.

We're also very pleased with our quality outcomes and now that we have actually 100% of our care centers -- our legacy care centers at 4 stars or greater. We're at an all-time low on hospitalization rates, 30-day and 60-day, and we're having great improvements on our patient satisfaction scores as well. So we're real happy with where we are.

We're not going to try to drive it further. I will say though that the Medalogix data suggests there's probably about 1/2 to 3/4 of a visit more that could be reduced, but we're not aggressively trying to do that.

Our clinicians are doing a great job of providing excellent quality for our patients, and the outcomes are exactly where we want them to be..

Our next question is from the line of Scott Fidel with Stephens..

Just had two quick numbers questions. The first, just around the adjusted EBITDA add-backs. Those have been creeping up the last couple of quarters to around $19 million in the second quarter. Just interested in terms of how you see those sort of flushing out as we get into the back half of the year.

I know you did sort of call out a few different items related to that. And then the second one would be just an updated estimate on the convenor impact. I think Scott had mentioned that you guys are maybe doing a little bit better than that $14 million that you're expecting. Just interested in where you see that shaking out now for this year..

Yes. Just on the add-backs, it has ticked up. We had some kind of unusual items here in Q3. If you look at Q4 -- I mean, Q2, I'm sorry, if you kind of like think around [$15 million] as the kind of the EBITDA type number related to acquisitions or this contingency accrual we closed on 2 deals.

It's somewhere around, I think, $70 million, $80 million in the quarter. So those are always going to be heightened. And at that point, we had a real opportunity around some back-office savings that we took advantage of quickly so that there's some severance numbers not at Amedisys, but the acquiring companies that are front end to this.

That's why you're seeing those elevated. I expect all of those to tick back down as we move into the back half of the year unless we -- unless there's qualification as we do a large acquisition and you have a lot of integration and acquisition costs which are very hard to predict and why they've stuck in those lines.

And then I think the other question was....

The conveners, Scott. You had called out like 14....

Oh, yes. Yes. So we've signaled a $14 million hit. And just reminding people, when we look at that, there's 2 components to that.

If you had someone that was moving from an episodic payment to a convener -- even if it was a better per visit rate, which most of them have been, than what our traditional 125-ish type of range we've been talking about, if you're stepping down from an episodic reimbursement, there's a rate hit and then there's a utilization hit that we put in.

Now we've done better on some of the rate pieces, and some of the utilization hits have not been where we thought they'd be. So that's actually -- I really haven't given a number on that. But it's -- I would say it's below -- significantly below that $14 million we've signaled.

But there is an incremental $2 million as we go into Q2 to Q3, both rate and utilization driven..

Our next question comes from the line of Whit Mayo with SVB Securities..

I really just have one question. I still struggle a bit with the face to face -- or the reinstatement of the face to face. And can you just maybe share some of the field-level strategies that you're putting around this to prepare? I just have really bad acid flashbacks when I think about the implementation of this the first time.

And I know you guys aren't as worried as others, but it just might be helpful to hear what you're doing in terms of reeducation in the field.

And is there any way you could share what percent of your starts of care, if that's what we want to call it, are initiated with an actual physical face-to-face assessment today?.

Yes. So start on the latter part. It's -- about maybe 10% of our starts of care today are initiated with a virtual face to face versus a physical face to face. So I mean, I think that that's still significant. It's a risk for us.

We -- our strategy is leveraging our 1,300 sales reps that basically spend time in the physicians' offices and the referral sources' offices multiple times a day, every day to kind of, number one, remind them that this is -- only during the PHE is this allowed to be virtual and that it's going to have to be done in a physical format and then also educating our referrals and really starting to encourage physical face-to-faces today versus virtual so that we're moving into it a little bit to the extent that we can.

So we're already seeing less of a dependency on that in a virtual format today just because we've been encouraging us getting back into the routine of going and seeing your practitioner in order to be able to comply with the face-to-face requirement..

Our final question is from the line of Joanna Gajuk with Bank of America..

This is Nabil Gutierrez filling in for Joanna. Just a quick one. So Hospice census improved sequentially.

What are you assuming for the rest of the year?.

We assume for it to continue to grow from where it is. So we should be in year-over-year and sequential growth as we balance out this year. We're seeing good stabilization in the discharge rates.

Our median length of stay has been consistent around 24, 25 days for several months now, and we've been kind of shifting a little bit of focus away from hospital referrals to more physician and community referrals, which is helping to stabilize that and add to the growth.

So we expect to see sequential growth as well as year-over-year growth for the balance of the year..

At this time, we just come to the end of our question-and-answer session. I'll turn the call over to Mr. Chris Gerard for closing remarks..

Yes. Thank you, Rob, and thanks to everyone who joined us on our call today. And once again, thank you to all of Amedisys employees who have helped to deliver another strong quarter of performance. I hope everyone stays well, and I look forward to seeing you all on the road in the coming weeks. Thank you..

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation..