The Latest in Post-Acute Care: Q2 Earnings Calls & Inpatient Rehabilitation Facilities

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In this episode, host and VMG Health Chief Commercial Officer Jen Johnson, CFA has a discussion with Valuation & Transaction Director Sydney Richards, CVA, and Valuation & Transaction Manager Savanna Ganyard, CFA about the diverse post-acute care sector.

This month's dose of practical insight on the business side of healthcare covers:

  • Insight into the public companies focused on post-acute care and highlights from their Q2 2023 earnings calls
  • Strategic partnerships around the inpatient rehabilitation facility space
  • Current M&A trends in post-acute care and predictions for 2024

The Pulse on the Public Market tool is a free resource available on the VMG Health website. This tool is created by a team of over 20 experts who listen to, analyze, and summarize earnings calls from 15 public healthcare companies every quarter.

Want to learn more about this topic?

Access the earnings call summaries discussed in this episode and the full Pulse on the Public Market tool linked here: VMG Health's Pulse on the Public Market

Read Richards' full white paper about strategic partnerships around the inpatient rehabilitation facility space linked here: Strategic Partnerships in the Inpatient Rehabilitation Industry: Highlights, Opportunities, and Risks

Access VMG Health's full M&A Report here: 2023 Healthcare M&A Report


Intro 0:06 Welcome to the Healthcare Download with VMG Health. We are the leaders in strategy and transaction advisory dedicated to finding solutions for the healthcare industry. In each episode, we will leverage our expertise to provide trends and timely updates about what is happening on the business side of healthcare so you can move your strategy forward.

Jen Johnson 0:33 In this episode, “The Latest in Post-Acute Care: Q2 Earnings Calls & Inpatient Rehabilitation Facilities,” we will be interviewing two leaders focused on the diverse space of post-acute care. We have Sydney Richards and Savanna Ganyard who are both in VMG Health’s Valuation and Transaction Advisory Division. Savanna is a manager and co-leads our Pulse on the Public Market initiative. She will be providing insight on what the public market had to say about this space during its earnings calls. So Savanna, very nice to have you. Would you like to give listeners just like a one-minute skinny on what the Pulse is, and how they can access it?

Savanna Ganyard 1:10 Of course, thanks for having me on again. As we’ve talked about before, VMG Health follows a handful of publicly traded healthcare operators. And each quarter, we produce a one-page, high-level earnings call summary, coupled with a few interesting quotes on major operational themes for that quarter. We follow around 15 companies, and these summaries are available to the public on our website at, under “Insights,” and you’ll find it there under “Pulse on the Public Market.”

Jen Johnson 1:39 Perfect. Thank you so much. And thanks to your team for all you do on that, it’s a lot of work that goes into it. So, now I’m going to move on over to Sydney. Sydney is a director and she’s part of VMG Health’s Post-Acute Care Affinity Group. She’s recently published a robust white paper on strategic partnerships around the inpatient rehabilitation facility space. So welcome, Sydney. Could you go ahead and let listeners know a little bit about what they can expect from this piece that you recently wrote?

Sydney Richards 2:06 Thanks, Jen. Absolutely. We’re providing a very high-level overview of the IRF industry, key metrics, and also dive into four possible alignment types for operators to consider. When you think of the alignment types as a spectrum, on one side you have an outright sale where you sell all of your equity in an IRF to a strategic post-acute operator. And on the opposite side, you have finding a post-acute operator to perform management for your IRF in exchange for a management fee. So in between, you have joint venture, joint operating agreement options, which simply involve sharing equity and returns with the potential partner.

Jen Johnson 2:37 Perfect. Okay, I’ve read it, and it’s great. And there’s a lot of information in there, we’re going to touch on one of the strategies during this podcast. So, thank you both for being here. Just to level set, in addition to being thought leaders, both Sydney and Savanna are dedicated to helping clients with M&A in the various healthcare sectors. So, we’ll be pulling some insight from our Annual Healthcare M&A Report, as well. And that has an entire section dedicated to post-acute. So, now that we’ve got the intros out of the way, I’m Jen Johnson, VMG Health’s Chief Commercial Officer, and I’m ready to get us started with a dose of some practical insight on the business side of healthcare. I’d like to first set the stage for this podcast. Post-acute care facilities include inpatient rehabilitation facilities, long-term acute care hospitals, skilled nursing facilities, home health and hospice agencies, and now we’ve got hospitals at home. So obviously, this sector covers a lot, and there’s a lot of different dynamics in all six of these different subsectors. We can’t cover all of it in this short podcast, but what we plan to do is get you some really insightful and timely takeaways. So let’s start with one big basic trend, alright. We’ve got the COVID-19 pandemic, which had a major impact on post-acute care by shifting referral patterns towards home health and away from the traditional post-acute facilities. So what I’d like to do is ask Savanna, since home health is where things are trending, can you tell us a bit about what’s going on in this subsector?

Savanna Ganyard 4:04 Yes, the home health space boasts really strong patient trends spurred, as you noted, by the COVID-19 pandemic. As we mentioned, in our M&A Report released earlier this year, there was an estimate from McKinsey that up to 265 billion, or 25% of the total cost of care for Medicare and MA patients, could shift from traditional facilities to the home by 2025. Despite all these positive tailwinds, the sub-sector, though, is currently facing rate cuts and staffing pressures. This has really made the space a hot transaction environment in that we have this sector that’s been touted in some ways as the future of healthcare, but recent market dynamics have made it difficult to be an operator in the space.

Jen Johnson 4:47 Okay, interesting. So obviously, it’s impacting M&A activity and strategies in this space. So, I’m wondering if I could go ahead and ask Sydney now, could you talk a little bit about the trends VMG Health has seen and what these larger players are doing about this new trend and strategies?

Sydney Richards 5:02 Absolutely. So, some of the major post-acute publics include Encompass, which is largely IRFs; Amedisys, home health and hospice; Select Medical, which is inpatient and outpatient rehab, as well as LTACHs. We used to consider LHC Group before UnitedHealth acquired them back in February. So in general, we’re seeing more home health and hospice activity than IRFs or LTACHs, which makes sense when you consider the shift towards outpatient, as previously mentioned, and also the lower cost of care. Similarly, we see a lot more IRF activity than LTACHs, which also makes sense based on the aggregated Medicare margin, which was about 15% for IRFs versus -0.5% for LTACHs. Note this is pre-COVID data in 2018 from Medpac. MedPAC no longer publishes LTACH data now in 2023, and it’s a similar pattern for SNFs, there are just less transactions than IRFs. Hospitals are increasingly incentivized to coordinate care across the acute and post-acute spectrum as well, through bundled payments, readmission penalties, and other value-based programs. So, that could drive increasing utilization and demand for best-performing post-acute operators. Additionally, we’re definitely seeing the beginning of players layering in post-acute to their value-based care strategies. Private equity firms as well are increasingly interested in post-acute, mainly home health and hospice, largely through a platform-building strategy. PE firms capitalize on the arbitrage opportunity between higher EBITDA multiples commanded by larger agencies and a lower EBITDA multiples on small agencies.

Jen Johnson  6:31 Okay, wow. So, there’s a fair amount of activity and a number of players out there. And we all know, obviously, lowering the cost of care is going to continue to shape strategy around this space. So, what I’d like to do now is move to understanding what we’ve learned from the most recent public company earnings calls since there are a few public companies focused purely on post-acute, let’s go ahead and move over to Savanna. Since your team tracks these earnings calls each quarter, could you walk us through what public companies are focused on post-acute care? And specifically, any highlights from Q2 earnings calls?

Savanna Ganyard 7:04 Yes, so out of the 15 companies that we follow for the Pulse on the Public Market, in the post-acute space we keep up with three. Those being Encompass Health, which as Sydney mentioned earlier, they own and operate rehab hospitals throughout the U.S. And for some context, about 40% of their IRFs are joint-ventured. We also follow Select Medical, they operate critical illness hospitals, post-acute rehab hospitals, outpatient rehab facilities, and occupational health and urgent care clinics across the U.S. For some context on their revenue streams, their critical illness recovery hospitals are around 35% of revenue. Their IRFs comprise around 14%, outpatient rehab comprises 18%, and their Concentra, their occupational health and urgent care division comprises 28% of revenue. The last company that we follow in this space is Enhabit, they provide home health and hospice services, Enhabit was spun off from Encompass last summer and is one of the nation’s largest freestanding home health businesses. During previous quarters, we have also followed Amedisys but recently ceased coverage due to the potential combination with Optum, who actually already owns LHC group, as Sydney mentioned earlier. Encompass and Select Medical boasted positive Q2 results to which the market reacted positively. They saw mid-single-digit stock price increases the day after announcing earnings, both operators noted strong revenue growth and continued improvement in labor costs. Additionally, both operators raised guidance for the remainder of 2023 as they anticipate strong demand and performance throughout the remainder of the year. Enhabit’s Q2 earnings release was less favorable with management noting that the pace of progress has not been fast enough in 2023 to meet their initial guidance. It seems that they are facing a couple of the challenges I mentioned earlier in the home health sector.

Jen Johnson 8:55 Okay, so it’s a decent quarter for operators, especially with inpatient rehabilitation exposure. I think this is a good time to go ahead and introduce IRFs into this conversation. We understand the investment demand for IRFs is strong, due to strong, low-cost clinical outcomes, rising patient demand, and high margins for efficient operators. So, now Sydney since you wrote a white paper, which includes a discussion of the JV strategy for these facilities, can you walk the listeners through what this strategy looks like?

Sydney Richards 9:24 Yeah, so let’s go through a fairly prolific joint venture model seen commonly across the nation. Under this model, for example, an acute care hospital may have an inpatient rehab unit onsite at their acute care hospital. Maybe due to lack of strategic resources, competition, staffing challenges, or otherwise, the unit may not be performing to its full potential and driving the most to the health system’s bottom line. Or maybe the hospital needs that physical space for use for another service line, or for transitioning from semi-private to private beds. As a result, they decide to partner with the strategic post-acute operator to join forces and build a de novo inpatient rehab hospital together, on or off the campus of the main hospital. The health system may contribute their current IRF business into a new entity, which may be owned 50/50 with the post-acute operator in exchange for cash. Some of the benefits of this approach are access to the mile-deep industry expertise by the IRF partner, the health system can free up beds and/or physical space in the hospital, the health system will receive cash upfront for the value of the existing unit, as well as enjoy future returns based on the success and growth of the new IRF. There are also unique arrangements, such as a brand contribution where an IRF joint venture can license the local health system’s brand and the health system can receive royalty funds, or upfront equity in exchange for the IRF joint venture’s use of the brand. This gives the health system an opportunity to monetize an existing asset. There are, of course, some downsides and risks to partnering. First of all, the joint venture is a new entity, it can take a good amount of time to set up and it also can be difficult to unwind. Also, loss of control of the beds and reputation risk with opening up to a new partner. In general, this is why it’s so important to note that all post-acute partners are different from each other, likely with different cultures and strengths and weaknesses. Finding the right partner can make a difference. Lastly, if you’re removing a fairly high revenue unit offsite to a new hospital, you’ll have to account for the overhead elsewhere that was previously allocated to the IRF unit.

Jen Johnson 11:26 Perfect. That’s fantastic. And I’m really glad you covered that strategy on this podcast because we see JV strategies across all healthcare sectors, and what you outlined is very similar, similar pros, similar cons, no matter what sector you’re involved in. So, that was super helpful. I know that you cover other strategies in the white paper, along with the pros and cons so everyone can check that out on our website. Let’s go ahead and keep on the subject of IRFs. And I’d like to ask Savanna, of anything notable from listening to the recent earnings calls from Encompass Health and Select Medical since these two operate in the IRF space.

Savanna Ganyard 12:02 Both Encompass and Select commented on the strong performance in their inpatient rehab lines of business. This service line continues to see really strong volume growth. The operators also expect these positive trends to continue by commentary from Encompass’ CEO Mark Tarr. He said, “Given the strong demand for inpatient rehabilitation services, we have continued to invest in capacity additions.” Select’s executive chairman also noted that the development pipeline remains strong. I think one interesting tidbit, based on what Sydney was talking about as it relates to JVs. Encompass expects 40% of their pipeline to be JVs. And most all of the projects that Select mentioned during their call were also joint ventures, so they’re definitely seeing a lot in that space as well. Additionally, a week before earnings releases, CMS released the 2024 IRF Final Rule. From that we learned that the operators expect to see a little over 3% increase for IRFs, beginning October 1 of this year. In addition to these positive, top-line tailwinds, as I mentioned earlier, and consistent with what we’ve heard from operators and other sub-sectors, it appears that Encompass and Select experienced some moderation and contract labor this quarter. While things are still not back to pre-pandemic levels, it definitely seems like that environment has stabilized, and they’re hopeful for continued improvement in 2024 and 2025.

Jen Johnson 13:27 Okay, thank you. So, that’s all very recent news and very good news. So, let’s go ahead and just finish up with inpatient rehab. And I’d like to move to Sydney and ask just two questions that I’m sure most people are curious about. What are 1.) Your expectations for this space as it relates to margins? And then 2.) What are some of the benefits hospitals can expect if deciding to collaborate with a post-acute care operator?

Sydney Richards 13:51 Sure, first, IRF margins are continuing to rise, aggregated IRF Medicare margins were at a five-year high in 2021 at 17%. It should be noted that Medicare is usually the best payer for these. So, that’s even up from the 2018 numbers I cited earlier. Partnering with a post-acute operator can help your organization provide the best quality care while achieving best-in-class margins. Operationally, a partnership can help with reducing length of stay and readmission rates and also provide access to clinical and operational best practices. Collectively, these enhancements improve both patient outcomes and financial returns

Jen Johnson 14:25 Perfect. So, let’s go ahead and finish this up with some M&A thoughts with a brief overview of what VMG Health expects in the post-acute care space as we move into 2024 from Savanna.

Savanna Ganyard 14:36 As noted in our M&A Report, we expect transaction volume to continue to focus on home health and hospice agencies. Given the trends discussed earlier, coupled with the fact that that market is still fairly fragmented, we also expect to continue to see interest in IRFs under various transaction structures due to the value propositions in the space as identified in Sydney’s article. That being strong clinical outcomes, stable regulations, increasing patient demand, and high margin.

Jen Johnson 15:05 Perfect. Okay. Well, I wanted to touch on one last topic before closing out on our post-acute care podcast and it is hospitals at home. This has become a huge trend and in line with CMS’ aim to lower the cost of care. So, Sydney, can you give listeners just a brief overview of how this came about and what it is?

Sydney Richards 15:25 Of course. So hospital-at-home is a healthcare delivery model that allows patients to receive acute-level hospital care at home, instead of being admitted to a traditional hospital. The idea is emerging as providers seek to do more with less as hospital-at-home models have been shown to reduce costs, improve outcomes, and enhance patient experience. Hospital-at-home actually had its groundwork long before COVID, but was very limited to specific conditions, and seemed most appropriate for home treatment. Now, the COVID-19 pandemic has accelerated adoption of hospital-at-home for some health systems. COVID-19 certainly highlighted the importance of flexible delivery care models that could adapt to surges in demand. It’s also interesting to consider the very straightforward future application of AI in hospital-at-home, where patient data monitoring and even outcome prediction could be handled by AI versus an RN or physician. So, for post-acute operators, hospital-at-home services can be hugely beneficial to help them keep patients out of the hospital setting. So, we definitely expect significant growth in this arena.

Jen Johnson 16:24 Perfect. I’ve heard nothing but that, everyone’s talking about it. I know it’s still early, but I think we’re going to see a lot of growth there and hopefully some innovation around there as well. So we have certainly covered a lot of material on an incredibly diverse sector. And so what I like to do is I always like to recap our episodes. So, this is pretty short and sweet. First, we’ve got post-acute care, which includes a lot of different subsectors, and they all really do have different industry dynamics. Second, the trend is moving to lower-cost settings such as the home. And third, there are numerous strategies to partner with specialty providers in the market to be more efficient. So, Sydney and Savanna, again, we appreciate you both for the excellent insight and want to make sure listeners know they can reach out to either of you anytime with questions. And be sure to check out our post-acute care page on VMG Health’s website for more resources on this sector. Everybody, take care.

Outro 17:20 Thank you for listening to the Healthcare Download with VMG Health. Make sure you subscribe to the show wherever you listen to podcasts to receive new episodes when they release the first Wednesday of each month. You can also go to or visit the episode notes to follow VMG Health’s monthly newsletter and to learn more about this conversation.

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