Chemed Corporation (CHE) Earnings Call Transcript
May 17, 2023
Earnings Call Speaker Segments
Welcome to RBC Capital Markets Global Healthcare Conference. I'm Ben Hendrix, RBC's healthcare services and managed care analyst. We're pleased to host Chemed again this year, leading provider of hospice services through its VITAS segment as well as commercial and residential plumbing and drain cleaning services through its Roto-Rooter segment. And with us this afternoon from management are David Williams, Executive Vice President and CFO; Nick Westfall, VITAS CEO; and then also in the room, we have Lisa Reinhard, Vice President and Chief Administrative Officer. Thank you for being with us today, gentlemen.
Thanks, Ben.
Thanks.
Let's start with VITAS. Since its growth seems to be a really consistent theme across the hospice space, we're glad to see it. And it seems like you guys have had some really interesting census dynamics on the back of your hiring and retention program. I'm wondering if you could kind of run us through the landscape of where you've been and where you are and what you expect.
Yes. No, sounds good. So putting in perspective, really encouraged with all operating metrics related to it. And if it goes back 3 quarters or 9 months when we put the recruiting and retention program in place, which was July 1, 2022, through the back half of last year, we added a net 275 clinicians inside of 5 disciplined roles, which exceeded our expectations at that point. And in the first quarter of this year, we added a net 200 to that. And so we've been very successful, not only in hiring, but more importantly, from a improvement in turnover across all categories. And it's not just for those 5 disciplines, it's everyone else. And what that's led to, is the compounding effect of our ability to service ever-increasing demand in all the markets from a referral standpoint. The vast majority of that add of clinical capacity is nursing and admission nurses. And so it's really helped to -- we've helped to perform better from an admission and a census standpoint, accelerate some of that real sustainable trajectory from a week-over-week, month-over-month growth from a census standpoint and admission standpoint is indicative in our first quarter results for sequential census growth was 2.3% Q4 to Q1, 3% year-over-year. And the admissions growth, as an illustration, Q4 to Q1 was up 9%, a little over 9% in all segments. So really hitting on all cylinders and really proud of the team for executing on all those different angles.
Yes. And then the hiring and retention program has started as about a $37 million program, I believe, and that's expanded to just over $40 and has expanded to 12-month period. Is this something that could continue to grow and do you think this is going to be onetime?
No. It's a onetime program. And it was always stated as being a onetime program with it. We're stripping it out of our financials. As you guys know, so you can see it and you can see the salary and wage impact. It will end at the end of June. But what that means, just as a reminder, is everyone we're hiring between now and June 30 will be eligible for that same retention payout 12 months from that anniversary date, which would be in the middle of 2024. And what has occurred, which is very encouraging, is not only all the people that were with us on day 1 of that program being lifted up and were with us for years all the way through the pandemic, have built upon our local culture, have built upon welcoming those new individuals and clinicians at -- to our locations. And so from a retention improvement, that's why I mentioned that's the most important component of it. It's really helped to elevate the culture and have that compounding effect of people wanting to be here, creating even more attractive value proposition for everyone as well as just work-life balance and everything else and their ability to go to the bed side, caring for patients, helping out families, and it's really built upon itself. And so we feel very confident that at the end of the program, the cultural sustainability and continuation of just building clinical capacity but at the same [indiscernible] supporting the growth needs inside the location is -- we feel very good about it.
And just a couple of more minutes to expand on what we did at VITAS because I think they're -- it's easier to conceptualize why this is sustainable. So at the -- in the second quarter of 2022, we saw signs in the first quarter, but in the second quarter of 2022, we actually saw stabilization in what I would call is the availability and the ability to start actually hiring licensed health care workers. So we put the program in place, we call it hiring and retention. But as Nick really said, it's a retention program. We were hiring hundreds of people every quarter. Hundreds and hundreds of people were leaving every quarter. Most of them, the people we had hired from the previous quarter. So the retention program was really designed to break that trend and be more selective on who we're hiring and then you're offering between $2,000 and $15,000. And you think about it, on July 1, 2022, when we put this program, $37 million, and that was just the cost of paying the existing tenured folks their bonuses in 12 months. But what we immediately did is we stabilized the environment. And what I mean by that is the massive turnover stopped. As we're hiring more people, immediately into starting July, August, September, all 3 months were very positive, the work-life got better for our tenured people. The tenured people went through hell for 2.5 years. They went through the pandemic. They were working 6, 7 days a week. They couldn't get any scheduled time-off and they couldn't get emergency time-off, it was hell. So our thinking, and I think it's very correct is these people now over the last 9 months who've gone through hell, their work life got better. Their balance between home and work is good. They get scheduled and unscheduled time-off. We're bringing in qualified people and our tenured people train them, but these people are staying. So from that standpoint, we broke the trend line, and we don't expect to see accelerated turnover on July 1 of '23. They're going to get their bonus payment, but frankly, their life has gotten massively better over the 9 months.
And what our local managers and our local leaders really executed upon, which was an ask before we announced what we deemed as the Difference Maker program, which was this is allocating and spending time very intentionally getting back to what made and what continues to make VITAS great and a very attractive place to come work. And so a lot of that is getting back to simply just saying thanks, which is always important when you're running around with your hair on fire, that becomes less of a priority sometimes, and we made it a priority. We made introduction of every new hire to the existing team a priority so that everybody saw the vision that it was going to get better, their personal experience was going to get better, and they were working at the organization that they want to tomorrow. And we just got the results of our entire company survey and engagement study back, and it has substantially improved and off the charts. And that makes me feel even more confident around the sustainability of the cultural impact of what we've been able to create. That puts us on a platform for a very exciting remainder of 2023 and even arguably more exciting 2024.
So hospice is capacity constrained in the industry. There's not enough licensed health care workers in hospice. So it's a competition for that talent. And quite frankly, although it's a variable cost model for hospice, there is some scale in it and we see that. That is why pre pandemic, before the disruption, we were running like a 17.7% adjusted EBITDA margin. We have the ability and we have the bandwidth to actually pay prevailing wages. And our competition who's dealing with single-digit adjusted EBITDA margin, they don't have the ability to even pay prevailing wages. They don't have the ability to have a balanced, normalized scheduled, unscheduled time-off. So we are taking advantage of our balance sheet. We can afford to pay, now it's going to be up to $42 million with the labor expansion. We have a better opportunity. If you want to be in hospice, we have a more stable platform, prevailing wage, a better workload. And we actually have the ability with our margins to pay a little bit more than the competition as well. And we're seeing it already happening. We're seeing not-for-profits who lack scale or trying to do these association ties. They're trying to artificially create scale by making these relationships. That is typically the first sign you see in a troubled industry of a negative spiral down. The other advantage Chemed VITAS has over a lot of our larger competition even is we're pure-play hospice. And what that really means is if we turn around and offer a $15,000 bonus for an RN, we're not disrupting the home health business. We're not disrupting the hospital staffing. We don't create that imbalance of -- well, I'm in home health and you're giving a hospice a $15,000 bonus. Why don't I just transfer to the hospital segment? We saw this in hospitals, right? When they brought in $300,000 a year traveling nurses just to keep a wing open and the disruption that created with the tenured force. Fortunately for us, we can avoid all that. So I think we have an easier path to expand our capacity and pick up market share and frankly, be massively more profitable probably in '24 and '25 as we continue this pick-up of capacity than we were pre pandemic.
Maybe you can expand on that market share capture? I noticed from the beginning of this program, you've talked about that being a massive opportunity. Is there a measurable market share change in your areas right now that you can point to? Is it changing the market dynamics?
There is, and it's very fluid, of course. And so -- and it's very market-specific, of course. So really proud of our team. I would say in the majority of our markets, very confident in saying that we have expanded share. Some are for a variety of different reasons. There are providers who are incapable of continuing. And so not only from a patient perspective, if they're eligible and they're desiring VITAS, we'll be able to bring them on service. But it actually goes back to the attraction of if you want to be in hospice, I want to make sure VITAS is the best place to do it. And so from a word-of-mouth and from a camaraderie standpoint, the communities are so strong on a discipline-by-discipline basis. And I want our nurses, and we talked about that, and I'm just using nurses as an example, to be speaking about what their experience is, right? Particularly if it's positive. And so their fellow nurse that may be working in another industry or for a competitive hospice, when they're not seeing the same improvements from a work life, a satisfaction, an allowance to go out and provide the best care each and every day, and their friend is telling them, "Hey, I'm able to do this. I've been able to experience it. I'm here for 9 months. And oh, by the way, my mentor has been here 35 years and she loves it as well." Those are things that build upon themselves. And so we're seeing, it's not happening in every single market, right? And it never has. We always have opportunities in every market in which we operate. But on balance, it's what's leading to sequential census growth, sequential admission growth in the vast majority of our markets. It's not isolated just to a specific 1 or 2 locations.
And the great improvement we've seen over the last 3 quarters, if you go intra-quarter, it was sequential month-to-month. And that's what's really given us the confidence to sit here and talk this way is the opportunity for expansion of our platform in hospice has never been greater. This has been -- frankly, we always wondered what would trigger consolidation. And I think the government, through a combination of the pandemic, scarcity of health care workers, scale that reach the higher margin and the government actually holding back an inappropriate amount of inflation-adjusted reimbursement, is really creating this opportunity for consolidation that I'm more concerned about it's going to be too ravaging within the industry on these smaller inefficient players that could create a headline risk for everyone in hospice.
That's 1 thing I wanted to talk to you about, 1 thing I wanted you to share with the group here because I love talking to you about CMS and your views on inflation. And would like to hear your take on the [ 2.8% ], how you think hospital market basket rates are evolving and get your insight there and what you expect to see for the future.
So what you're really calling is the Inpatient Prospective Pay System or the IPPS and think hospital wage index basket that they get their increase from. And what they do is they have 7 quarters of forward-looking estimates of what inflation is going to be. But there's no -- and that has been in place for years and years and years. But there really isn't a mechanism, and CMS deliberately didn't put a mechanism of true-up the forecasted inflation to actual. So that's the situation we're in. Last year, there was a bipartisan letter that came out of the Senate to CMS, very, very, very concerned about how that wage index capacity hasn't been appropriately updated. CMS actually proposed rules to final rules, made some adjustments. Hospice actually picked up 100 basis points from the proposed rule. An even stronger letter is in the process of working its way through the Senate as we speak, and it has even more bipartisan support than it did last year. So without a doubt, I expect that to put pressure on CMS. And Nick is maybe tired of hearing this, and I'll project my age a little bit, but when I graduated from college, inflation was 15%. And I saw firsthand as a business consultant how quickly inflation can ravage a business model. And it ravages variable cost models massively faster than business models that are predominantly fixed cost or even a decent balance. While post-acuity certainly hospice throwing home health is predominantly labor -- is labor and fringes. Labor, labor, labor. I mean, raw labor for us in [ routine home care ] is $60 a day. The next large cost is $6.30 for durable medical equipment. So it's labor, and that's what's ravaging these models. Now you're talking about access. You're talking about access, first and foremost, in rural markets or small urban markets. But this is going to be a major problem in a lot of plays, unless CMS actually starts increasing reimbursement much closer to the rate of inflation in these care models, or it will be crushing to the small players and massively beneficial to the larger players. I like the opportunity to pick up share but not in this very, very disruptive way.
And Ben, just to draw a bridge of why we think it's important and it's something we've tried to draw that bridge forward from an advocacy standpoint as well, something that the audience may not know is a few months back, a really important updated study from the University of Chicago came out on NORC and a lot of valuable insights. What [ it helped ] to highlight is in 2019 using Medicare claims data, the hospice benefit saved $3.5 billion to the Medicare Trust Fund. There aren't very many health care service lines that could claim that whatsoever. We've always advocated hospice was the first almost fully capitated value-based arrangement back in 1983. The data has always supported it. There's a huge opportunity to expand that total cost of care savings. In fact, the longer someone's on the benefit, the more that expands. And so as we think about a country, think about debt ceiling since that's the political hot button right now, hospice is part of the solution. And so that's one of the other reasons where we talk about the balance, we want a fair shape from an inflationary standpoint. But it's a really important thing for patients and families and outcomes inside of the country, but also an equally important thing for the sustainability of the Medicare Trust going forward.
Remember, $0.30 out of every Medicare dollar spent on Medicare beneficiaries in the last 12 months of life, a significant portion of those [ $0.30 ] is actually in the last 6 weeks of their life. Think of it as curative care that doesn't cure. The hospice value proposition is to pull people out of curative care that doesn't help them. Stop them from going to the ER for an episodic event. They get admitted. Alleviate the episodic event, but they're still terminal, and they can't keep going to sort of cycle of accessing curative care inappropriately. Hospice is better for the patient. 98% of hospice shares delivered into the patient's home. Better for the patients, better for the family, better for the payer. So as Nick says, it's part of the solution if appropriately utilized. And I would be very, very, very surprised in spite of all the noise you get from MedPAC or different government entities, different thoughts on hospice. But it's irrefutable. If you keep people out of curative care that doesn't cure, it's better for the paying system.
Yes. And to -- as an extension of that, I've seen some data that suggests earlier adoption of hospice, that's certainly a tailwind and growing receptivity to the benefit. And so how is that progressing and what are you seeing?
So let's break it into 2 buckets. The good news is the growing receptivity appears to be back towards what I would call more normalization like we were experiencing pre pandemic, which is encouraging. But to give you an idea of how far I view it as we have to go as an industry and for the country, right, our median length of stay is 15 days. The industry has fluctuated between 18 and 19 for decades, meaning half the patients that come on hospice discharge inside of just a little over 2 weeks. What the study helps to highlight related to it as well is that some -- we have an enormous opportunity with, in 2019, about half of those hospice beneficiaries were inside of that realm as well, and a large percentage were for 10 days or less. And if you just shifted and had earlier identification of hospice for a week, 2 weeks, 3 weeks earlier, you're talking billions of dollars more of savings just for the same enrolled population. I can't -- The #1 thing I get from our patients -- from the family members after a patient has passed is, "Gosh, I wish I knew about that. I wish I knew about the benefit earlier." When they're sending a note to talk about how wonderful the care was and they wanted to do it through a survey but wanted to send it to the CEO as well. And it just goes to illustrate, this is the solution for so many different pieces. But eliminating the negative stereotypes on the H-word or that it's death panel risk, there's a long way to go with it. And there's some things we can structurally do to help with that, whether it's events, care planning and goals of care conversation. That will take time. But in the short term, we can't collapse the industry. We can't significantly impair rural hospices, which we don't operate in those markets. That's not for the benefit of the country. And those are some of the things we're trying to advocate against in the very near term to help solve the long-term trajectory.
But keeping in mind, of a predictable death, only 50% of people actually receive a single day of hospice care. 50% receive no hospice care. And then you start thinking of the service, which is actually days of care, moving that median is critical to actually extend the life of the Medicare system.
In the last few minutes, I do want to be able to have some time to touch on Roto-Rooter. You had a very strong first quarter, exceedingly strong January and February. You were concerned in mid-March about a little bit of a lull. And I wanted to see kind of what your thoughts are since then and how you're thinking about that business.
One, exceptionally bullish on the sustainability and the increase in profitability of Roto-Rooter. What we are seeing, of course, is a slowdown in our growth rate. If you actually just look at Q1 of 2023 and compare it to Q1 of 2019, our residential revenue was up 71%. A little bit on tariff because we also have the Hoffman acquisition, although they were predominantly commercial, not residential. And our commercial business is up 41%. So we've had a phenomenal growth rate, and now we're actually seeing the growth rate come down to really, right now with the inflation currently, it's going to be above mid to upper single digits. With that said, we saw an extremely strong January. But we hate to say -- I hate bringing up the word weather in any discussion, but in this case, weather benefited with frozen pipes, that made January strong, but the phone was ringing. February was good. 2 out of the 5 weeks of March were really solid. 3 out of the 5 weeks in March were what we call it at the low end of our expectation corridor. And the only reason we called it out is, a, we said we're having a phenomenal quarter, and I think people thought that could be up as much as 10%, and it could have and it turned out to be up 8%. But what is kind of troubling is the phone -- there's nothing we could make any of you folks in this room to or listening to this conference to call Roto-Rooter until you meet a problem. I could send all of you a half-off coupon if you use it immediately, for $400 to snake out your drain, and I don't think I'll get much takers on that. We're waiting for the phone to ring. The phone is actually ringing a little less. We are -- Google has a very fragmented revenue base, but we are actually 1 of the top 3 -- we're the -- like 300 in terms of one of the top payers to Google. We work closely with them. It's a great partnership. And they provided us industry-level data on searches for plumbing and drain cleaning services and [ clips ]. And the industry is down or not, the industry is. So we continue to pick up share, but we are seeing a little bit of maybe consumer exhaustion. If they can defer something, they want to defer it. But I'm still very comfortable with our guidance overall for Roto-Rooter when we will update it in July. But the guidance we gave is the guidance we currently have from February. And Roto-Rooter is probably the most sustainable business model I've seen in my 40-year business history. It is an incredible model. And as long as you get to the customer first and provide a great warranty at a fair price, you're getting the work. And that's what we pick up share, three 24/7 call centers. We are queuing up jobs for 8:00 a.m., 8:30 a.m., 9 a.m., and we dispatch people at 1:00 in the morning if it's critical. We are getting the business from the competition, and we'll continue to take share.
That's great. And I think you actually had seen in maybe fourth quarter a little bit of a lull in like residential excavation but that kind of pops back a little bit. Is that indeed the case? And is that kind of evidence of showing that, that fatigue will kind of correct?
I think in that case, what you're really seeing is still a major, major chunk of excavation is not deferrable. If you're mainline collapsed, you can't live in that house until you get that sewage line. If a pipe burst, you have to get it down. So I think the excavation is just a pointing out that says the vast majority of our jobs, well above 90%, are not deferrable. They need it fixed. Remember, no one gets a warm fuzzy and satisfaction from paying us $5,000. They do it because they have to.
Great guys. That brings us to the time. Thank you very much for being with us today.
Thanks, Ben.
Thanks, Ben.
Read the full transcript via the API
You're viewing the first half of this call. Get the complete Chemed Corporation transcript - plus 252,000+ transcripts from 12,000+ companies, speaker segments and full-text search - through the EarningsAPI REST API or hosted MCP server.
Get an API key View API docs →For developers and AI pipelines
Programmatic access to Chemed Corporation earnings transcripts and 252,000+ others is available through the
EarningsAPI REST API and the hosted MCP server.
Quarterly plans from $105 - full transcripts, speaker segments, full-text search,
and the /api/v1/transcripts/recent polling endpoint for ETL pipelines.