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Q3 2022 Snapshot: A Look Inside the Earnings Calls of Public Healthcare Operators
By: Madi Whyde, Savanna Ganyard, CFA, Jordan Tussy, and Madison Higgins
VMG Health reviewed the earnings calls of publicly traded healthcare operators that reported earnings for the third quarter that ended on September 30, 2022. By focusing on the major players in select subsectors defined below, we analyzed the frequency of certain keywords including inflation, COVID-19, interest rates, premium labor, and others. We used these keywords to identify which topics commanded the room this earnings season. Highlights from the calls are summarized in this article.
- Acute Care Hospitals: Community Health Systems, Inc. (CYH), HCA Healthcare, Inc. (HCA), Tenet Healthcare Corporation (THC), Universal Health Services, Inc. (UHS)
- Ambulatory Surgery Centers: Surgery Partners, Inc. (SRGY)
- Diagnostic Imaging: RadNet, Inc. (RDNT)
- Dialysis: DaVita Inc. (DVA)
- Diversified Managed Care: Humana Inc. (HUM), UnitedHealth Group Incorporated (UNH)
- Laboratory: Quest Diagnostics Incorporated (DGX)
- Physician Services and Other: U.S. Physical Therapy, Inc. (USPH)
- Post-Acute: Acadia Healthcare Company, Inc. (ACHC), Amedisys, Inc. (AMED), Chemed Corporation (CHE), Enhabit, Inc. (EHAB), Encompass Health Corporation (EHC), Select Medical Holdings Corporation (SEM)
- Risk-Bearing Organizations: Agilon Health, Inc. (AGL), CareMax, Inc. (CMAX), Privia Health Group, Inc. (PRVA), The Oncology Institute, Inc. (TOI)
Key Takeaway: Volume
Volume: Although volume trends are unique to each industry sector nearly all operators remained focused on the impacts of COVID.
Poll: Did the earnings call mention COVID-19?
Acute Care Hospitals
On a same-facility basis, admission volumes declined as much as 5.0% from the comparable prior year quarter (Q3 2021) for acute care hospital operators. Despite the weakening of COVID-19, the decline in volumes was attributed to higher-than-average cancellation rates (THC), the migration of certain procedures to outpatient status (CYH and HCA), and capacity constraints (HCA). Inpatient volumes generally remained at or below pre-pandemic levels.
Ambulatory Surgery Centers
Ambulatory surgery center (ASC) operators reaped the benefits of the migration to the outpatient setting and reported positive volume trends when compared to Q3 2021. Surgical volumes were reported as consistent with 2019 pre-pandemic levels (THC), and one operator claimed the business did not experience any material direct impact related to COVID-19 during Q3 2022 (SGRY).
The post-acute sector reported mixed results in volume trends. One operator reported a year-over-year decline of 14.0% in hospice admissions, citing capacity constraints and reduced referrals from acute care hospitals (EHAB). However, another operator indicated that increases in admissions in the second half of the third quarter showed growth that they “haven’t experienced since the start of the pandemic” (CHE).
Volume trends among other industry players including dialysis providers, risk-bearing organizations, and physician services were also affected by COVID-19 in Q3 2022. Headwinds in dialysis volumes are expected to persist for the foreseeable future (DVA), and inpatient volumes for risk-bearing organizations remain below pre-pandemic levels (AGL). Notably, AGL also reported a rebound in physician office visits and outpatient volumes were in line with pre-pandemic levels.
Key Takeaway: Reimbursement
Reimbursement: Declining COVID-19 volumes mean less incremental government revenue for certain industry players who also now contend with an uncertain inflationary environment.
Poll: Did the earnings call mention inflation?
Acute Care Hospitals
Declining COVID-19 volumes resulted in lower acuity patients and reduced incremental government reimbursement. This softened the reimbursement per admission for the acute care hospital segment. Further exacerbated by inflation, these dynamics were evident in reported EBITDA margins which declined as much as 17.0% (CYH) over Q3 2021. In response, some acute care hospital operators are turning to commercial payor negotiations. Rate increases for the next year are anticipated to range from a minimum of 3.0% (THC) to upwards of 6.0% (CYH).
The post-acute sector did not release specific figures regarding contract rate hikes. However, the sector is optimistically looking for high single-digit rate increases (SEM) to provide relief in the current inflationary environment.
Key Takeaway: Labor
Labor: Unsurprisingly, management teams across the sector were faced with questions about labor trends and management techniques during their earnings calls. Contract labor remained pivotal for the operations of some, but premium labor appears to have softened during the quarter.
Poll: Did the earnings call mention premium or contract labor?
Acute Care Hospitals
The reliance on contract labor continued its downward trend in Q3 helping moderate expenses. HCA even indicated overall labor costs were stable due to targeted market adjustments. However, contract labor and premium pay remain at uncomfortably high levels for most acute care hospital operators. UHS revealed during their call it will be unlikely to reach pre-pandemic levels in the near future.
Staffing challenges persisted among the post-acute operators and directly impacted volume by as much as 60.0% (AMED). Increased indirect labor costs including orientation, training, and sign-on bonuses were the leading drivers of decreased EBITDA (AMED). Wage inflation, particularly for nursing positions, is expected to rise as much as 5.0% next year (SEM). However, several management teams are optimistic wages will stabilize to historical levels (SEM, EHC) in the near future.
Other industry players, including dialysis and physical therapy providers, also faced challenges with contract labor during the quarter. USPH reported labor costs were approximately 200 basis points higher than Q3 2021 levels, and DVA indicated such costs showed no improvement.
Key Takeaway: Go Forward Expectations and Guidance
Go Forward Expectations and Guidance: Considering the quarter’s performance, the companies we reviewed were divided relatively evenly in terms of revised FY 2022 revenue guidance, (i.e., raised, lowered, unchanged). In general, the quarter brought about a more pessimistic view of FY 2022 EBITDA, and the majority of public companies lowered their guidance for the year. Further, most stakeholders were left with no guidance for FY 2023.
Poll: Did the earnings call mention a recession?
Acute Care Hospitals
FY 2022 revenue and EBITDA guidance among the acute care hospital operators was generally left unchanged except for THC which lowered EBITDA guidance. However, all companies that were reviewed declined to provide FY 2023 guidance during the call, and primarily cited economic uncertainty (HCA).
The post-acute sector appeared nearly unanimous in the outlook for the rest of 2022, and most operators lowered their revenue and EBITDA guidance. Unsurprisingly, no one offered FY 2023 guidance during the earnings calls.
Interestingly, risk-bearing organizations mostly raised their revenue guidance for FY 2022 (AGL, CMAX, PRVA). However, EBITDA guidance was less predictable and was lowered (AGL, TOI), raised (PRVA), and unchanged (CMAX).
Most other healthcare operators followed similar patterns in terms of providing guidance for FY 2023. Of the companies we reviewed, only DVA revealed an outlook for the next year. The company anticipates revenue to be flat (driven by unfavorable volume trends) and margins to continue to feel the impact of labor market pressures.
Where Are My Earnings? Quality of Earnings Analysis in Post-COVID-19 Urgent Care Transactions
Written by Melissa Hoelting, CPA
The COVID-19 pandemic sent shockwaves throughout the urgent care industry and fundamentally changed the business of urgent care centers (UCCs). At the start of the pandemic, UCCs had to quickly adapt to offer a new service line and meet the high demand for COVID tests. As the pandemic has progressed and evolved, UCCs have had to continue to adapt to address the effects of vaccination, variants, and at-home testing to their volumes. In addition to this, they have had to adjust to the changing landscape around reimbursement in regard to government mandates on COVID testing and an increase in new patients. As the pandemic has evolved, the VMG Health Quality of Earnings team has been involved in urgent care transactions and has worked firsthand with our clients to quantify the effect of these changes on EBITDA.
COVID-19 History at Urgent Care Centers
Urgent care centers were at the forefront of treatment and testing services throughout the COVID-19 pandemic. After initial volume disruptions during the early onset of the pandemic, urgent care centers experienced significant increases in testing volumes and new patient visits. Average patient visits per clinic (“APVC”) reached record highs during the summer of 2020 when UCCs ramped up testing capabilities and adopted telehealth services. Overall, UCCs with COVID-19 testing capabilities retained more volume than those without testing capabilities.
In addition to the increased visit volumes, the patient mix between new and established patients shifted. Prior to April 2020, patient mix between established and new visits averaged approximately 60% established and 40% new patients. Following COVID spikes, new patient visits became a greater ratio of total visits and represented over 50% of patient visit mix after April 2020 and into 2021. This mix shift had an impact on reimbursement for many urgent care centers. Clinics saw an increase of 52.0% in average net revenue per visit in 2020 as new patients were reimbursed at a higher rate than established patients. This was partially offset by a rise in “no-visit” patients where an E&M code was not billed (e.g., only testing services performed).
During January 2022, through funding from the American Rescue Plan, at-home COVID testing kits were offered online for free. As of May 2022, over 70 million households have visited COVIDTests.gov to order free at-home tests and 350 million tests have been delivered through the program. The program has offered several rounds of free at-home testing mailed through USPS, and eight additional tests were approved for distribution as of May 17, 2022. In addition, pharmacies, online stores, (e.g., Amazon), and retail locations have expanded the accessibility of at-home testing kits.
Volume-Related Quality of Earnings Adjustments
To quantify the impact of these trends on an urgent care center’s quality of earnings, we must first distinguish between the three types of visits – asymptomatic COVID visit, symptomatic COVID visit, and traditional urgent care visit. Many UCCs now require an office visit whenever a COVID test is administered, therefore we cannot solely use CPT codes to separate between asymptomatic and symptomatic visits but instead must rely on the ICD-11 codes. Based on ICD-11 codes, asymptomatic COVID visits include patients who only have a COVID test code and, in some cases, a comorbidity code such as having high blood pressure, being a smoker, etc. Symptomatic COVID visits include both a COVID test code and symptom codes (i.e., cough, sneeze, sore throat, etc.). Finally, traditional UCC visits include all remaining visits. Once these visits have been categorized we can begin adjusting to expected go-forward volumes.
First, we evaluate the appropriate run-rate of asymptomatic COVID testing. At the start of the pandemic, few individuals received an asymptomatic COVID test since facilities often experienced shortages of tests and chose to prioritize symptomatic patients. In 2021, asymptomatic testing increased as individuals sought testing to meet requirements imposed for travel, employment, and other reasons. Recently, asymptomatic testing demand has fallen (decreased?) as many cities, states, and countries have either eliminated testing requirements or replaced them with vaccine requirements. Due to the changing landscape of asymptomatic testing, we use a narrow time frame of three to six months to determine the appropriate run-rate volume.
Next, we determine the go-forward state of symptomatic COVID testing. Before the prevalence of vaccines, symptomatic COVID testing dominated UCC volume. At this time, the only downward pressure on volume came from supply shortages. After widespread availability of vaccines in early 2021, UCCs began to experience periods of both high and low demand for symptomatic testing as new variants began to emerge. In addition to this more seasonal nature of demand, at-home testing became more prevalent, and was further accelerated by the funding from the American Rescue Plan in January 2022. Based on all these factors, we use a look back period of eight to 12 months for calculating average go-forward volume. This timeframe ensures we capture seasonality while only including months with similar circumstances regarding vaccinations and at-home testing.
Finally, we evaluate the expected recovery of traditional urgent care volume. During the period of stay-at-home orders in 2020, UCCs saw a large fall off in non-testing volume. This was especially prevalent as many facilities temporarily became COVID-only sites. After stay-at-home orders were lifted, facilities still saw lower non-testing volume due to other restrictions put in place such as mask mandates and social distancing. These restrictions resulted in a milder cold and flu season at the time. As traditional volumes remain depressed, 2019 represents the ideal benchmark for estimating future urgent care volume as it is the last year untouched by COVID.
However, relying on 2019 volumes to determine a new run-rate comes with its own challenges stemming from capacity constraints, hiring challenges, and volume trends. In 2019, most UCCs were ideally operating close to full capacity with only traditional visits. Thus, we need to balance expected COVID test volume with a return to normal to ensure we do not project total monthly volume beyond the capacity of a location. Additionally, many UCCs have reported hiring challenges due to the shortage of nurses and mid-level providers which make up the bulk of staff for most facilities. We address this challenge to our calculation by holding conversations with management to understand the specific facility’s hiring challenges and to determine if traditional capacity needs to be reduced. Finally, as of April 2022, Experity reported that non-COVID visit volumes were only at 72% of pre-COVID levels. This trend means we cannot peg a complete return to pre-COVID levels because volumes have not recovered despite life returning to normal in many states. With all these challenges, we can no longer use 2019 as a benchmark since the landscape of urgent care volume mix has changed dramatically over the last two and a half years. As a result, we elect to use the average of the last six to eight months to capture seasonality and current trends. Although these volumes trend lower than 2019, they reflect the changing reality of the volume mix and capacity concerns.
Once we have determined go-forward monthly volumes for the three test types, we can make the appropriate quality of earnings adjustments. We begin by creating cash waterfalls for each volume type to calculate accrual basis revenue. Using this revenue, we calculate the historical average reimbursement for each visit type. Due to changing reimbursement trends for COVID testing and office visits in recent years, we use the average of the last six months in our calculation of adjusted revenue. Once we have determined the revenue adjustment, we estimate the associated variable expense impact for each visit type based on common size percentages, direct allocation, and invoice review. Volume estimates are the key to the calculation of both the revenue and expense adjustments, which emphasizes the importance of reasonable estimates.
Additional COVID-Related Quality of Earnings Adjustments
Besides impacting urgent care volume and mix, COVID-19 also impacted the ramp up of de novo facilities opened just before and during the pandemic. Average startup location volumes historically averaged between 10 to 20 visits per day in the first six months of operations for de novo locations opening between 2016 and 2019. Volumes for these locations stabilized at approximately 30 – 40 patients per day after 18 to 24 months. However, startup locations that opened in 2021 saw an average of 32 patients per day in the first month, and 60 visits per day after just six months.
For a quality of earnings analysis, the changes to the ramp up of de novo facilities create a challenge for quantifying a run-rate adjustment. First, there are concerns about sustainability of patient volume as COVID testing declines. In the beginning of the pandemic, shortages of tests meant individuals sought tests wherever possible even if it meant traveling to a further center. Some parent companies even made de novo locations into COVID-only sites to raise awareness of the new location. As a result, some patients may return to a different location for future visits which creates uncertainty when estimating the impact of a return of traditional urgent care volume. To combat this challenge, we engage in discussions with management to identify existing sites that serve a similar demographic and can be used as the volume being averaged to calculate run-rate.
The case mix changes also cause issues in conducting a revenue hindsight analysis. Due to government mandates around reimbursement for COVID testing, UCCs experienced higher reimbursements for patients getting a COVID test since many payors were obligated to pay all claims. Additionally, many COVID tests were administered either with no office visit or with an office visit of a lower E&M code level than typical. Furthermore, UCCs that did require an office visit often saw new patient visits becoming a greater ratio of total visits following COVID spikes and new patients represented over 50% of patient visit mix after April 2020 and into 2021. This patient mix shift drove an increase in average net revenue per visit for many UCCs. Finally, stay-at-home orders and people working from home have driven a slowdown in reimbursements from payors. As a result, historical collection trends were skewed during 2020 and into 2021. All these factors necessitate a close analysis of the revenue data for UCCs which often entails performing separate analysis by visit type (i.e., test vs. non-test) or CPT code (i.e., new patient vs. established). Due to the changing landscape of patient and visit type mix since the beginning of the pandemic, the revenue hindsight analysis has become a large area of focus for all parties to the transaction.
Typically, the last, most straightforward adjustments we perform in our analysis center on non-recurring COVID revenue and expenses such as CARES Act funding and rent abatement. Many UCCs participated in the various economic relief programs and received Paycheck Protection Program (PPP) loans, HHS stimulus grants, Economic Injury Disaster Loans (EIDL), etc. As these amounts were received or forgiven, many UCCs recognized the amounts as income. Additionally, UCCs often took advantage of temporary rent or payroll tax abatements that were recaptured or will be recaptured at a later date. These amounts represent non-recurring or temporary measures, and we always include adjustments to eliminate their impact from earnings.
With all these complications and uncertainties arising from COVID testing, both buyers and sellers in the UCC market need to engage a quality of earnings team for their transactions. Over the last two and a half years, the outlook of COVID and testing has changed week-to-week and month-to-month. During 2021, our team was engaged as a sell-side advisor and conducted an original analysis in addition to two roll forwards for one client. Each of our analyses was at a different point in 2021 and each analysis had unique trends around vaccination, variants, and seasonality. By engaging a quality of earnings team, our client was able to get a deeper analysis of its earnings to quantify the effects of this changing landscape on its EBITDA. From the expansion of at-home testing to the potentially permanent depression of traditional volume, quality of earnings will be crucial in analyzing the changing nature of the COVID and UCC landscape as we continue to return to normal.