Edited Transcript of EHC earnings conference call or presentation 26-Apr-19 1:00pm GMT

Our supplemental information and discussion on this call will include certain non-GAAP financial measures. For such measures, reconciliation to the most directly comparable GAAP measure is available at the end of the supplemental information, at the end of the related press release and is part of the Form 8-K filed yesterday with the SEC, all of which are available on our website. (Operator Instructions)

With that, I'll turn the call over to Mark.

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Mark J. Tarr, Encompass Health Corporation - CEO, President & Director [3]

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Thank you, Crissy, and good morning to everyone joining today's call. Our first quarter was a good start to 2019 with consolidated revenue increasing 7.5%, consolidated adjusted EBITDA increasing 8.8% and adjusted EPS increasing 11.8%. We also made significant progress in the first quarter on our strategic and operational priorities.

We recently signed a definitive agreement to acquire Alacare Home Health and Hospice. With 23 home health and 23 hospice locations across Alabama, this acquisition is consistent with our objectives of creating new overlap markets, adding density in existing home health markets and building scale in our hospice business.

The Alacare acquisition will result in 3 new overlap markets: Gadsden, Huntsville and Montgomery, allowing us to bring the benefits of clinical collaboration to patients in these areas. We expect to close this transaction in June. We continue to make progress on clinical collaboration and achieved a 36% clinical collaboration rate in the first quarter of 2019, a 250 basis point increase over the first quarter of 2018. This marks the first quarter our clinical collaboration rate exceeded 35%, and we've revised our near-term objective to 40%.

We are also showing progress in our initiative to build stroke market share. In the first quarter of 2019, we officially launched our 3-year strategic sponsorship with the American Heart Association/American Stroke Association. This sponsorship allows us to bolster stroke awareness through provider, patient and community education, highlighting the AHA/ASA guidance that strongly recommends stroke patients to be treated in an inpatient rehabilitation hospital rather than a skilled nursing facility. Thus far, we've completed the life after stroke guide to bring awareness and guidance about life after stroke to individuals and their families. This guide is being distributed to our patients and is available for anyone to download electronically from the American Stroke Association's website. This jointly branded guide between Encompass Health and the AHA/ASA has been visited more than 7,500 times on the ASA website and has been downloaded nearly 1,900 times since the end of January 2019. We've also completed 8 of 20 Go Red for Women luncheons across the country where over 4,700 attendees have received cobranded educational information.

In addition, 5 Encompass Health stroke patient stories have been shared as part of the AHA/ASA support network and promoted via social media post on each of the American Stroke Association's channels. We've also continued our development of post-acute solutions that focus on improving patient outcomes and lowering cost of care by reducing hospital readmissions across the entire episode of care. In the first quarter of 2019, we continued to refine our 90-day post-acute readmission prediction model, and in April, we launched a pilot project that combines this model with several other existing tools in the Houston market.

Moving now to the regulatory front. On April 17, 2019, CMS released its fiscal year 2020 proposed rule for inpatient rehabilitation facilities. Recall that the 2019 final rule included changes to the patient assessment and case mix system for inpatient rehabilitation hospitals in fiscal year 2020, referred to as the transition to the care tool payment system. CMS is moving forward with this transition and the proposed rule for 2020 included an updated CMG table incorporating a second year of data and reflecting several other provisions stemming from dialogue with the provider community. If implemented and proposed, we estimate the rule would result in Medicare reimbursement rates for our company in fiscal year 2020, which begins October 1, 2019, that would be flat to down 0.25%. Additional information regarding how each component of the proposed rule is estimated to impact our company can be found on Page 26 of the supplemental information that accompanied our earnings release.

We appreciate CMS releasing an FAQ document last August to clarify information under the new system. Since we received that information from CMS, we have focused on working with our hospitals to improve the documentation that captures each patient's functional abilities under the new care elements, and we are seeing improved inter-rater reliability across our hospital portfolio.

We also want to thank CMS for being open to provider feedback on potential effects of care assessment measures on CMG's relative weights and length of stay. Notably, CMS is now proposing to weight the functional assessment items to produce a weighted functional score whereas the fiscal year 2019 proposal did not weight the assessment items. This initial attempt by CMS to implement a weighted functional score reflects the views of stakeholders that the various functional activities correlate differently to the burden of care and provider costs.

The proposed weighting methodology is new and not yet fully understood. The comment period will help stakeholders to begin examining the clinical technical aspects of the proposed weighting methodology and to develop questions and other relevant input for CMS' consideration. We plan to continue engaging in constructive dialogue with CMS as a company and as part of our industry trade groups during the proposed rules comment period.

In home health, CMS is replacing their current home health prospective payment system with the Patient-Driven Groupings Model, or PDGM. Among other changes, this system will revise the current 60-day episodic payment with 30-day payment period. Reimbursement under this new system also relies more heavily on a patient's clinical characteristics and eliminates therapy services thresholds.

In addition, to achieve budget neutrality, CMS assume behavioral changes will offset a 6.4% reduction in the base rate. Our preparation for these changes includes the continued use of technology to generate objective, evidenced-based care plans and to drive incremental efficiencies and administrative support functions.

We are working with MetaLogics to further refine our care plans for all home health patients we serve, and we're working with Homecare Homebase on key system enhancements to ensure the increased billing frequency, PDGM will require as part of its move from the 60-day payment periods to 30-day payment periods does not result in a doubling of our billing-related costs.

Also as part of the continuing investments we made in our care transitions program, we're seeing an increase in admissions from acute care hospitals, which is driving our expected impact from PDGM to be less negative than we had previously estimated.

We are also encouraged by the support we are receiving from Congress as evidenced by the bipartisan Senate Bill 433, and we are hopeful we will soon have a companion bill in the house, also with bipartisan support. Bipartisan support is rare in this day, and we believe the support home health is receiving shows the value of home care is widely appreciated by third parties as not only a low-cost setting but also as the preferred setting for care for many of America's seniors.

We expect to provide updated estimates on the impact of PDGM to our revenue after the proposed home health rule for calendar year 2020 is released this summer. As a reminder, neither of the proposed new payment systems changes the long-term outlook for our company, which is predicated on the demographic trend driving increasing demand for the services we provide.

We believe we are well positioned as a company to work through these changes, and we have a proven track record of being able to do so. We have successfully managed through economic recessions, regulatory changes, sequestration and Medicare payment freezes and cuts growing adjusted EBITDA in 40 of the last 41 quarters.

We provide necessary services to an aging population and consistently produce high-quality patient outcomes in a cost-effective manner. As the population continues to age, the demand for our facility and home-based services will grow, and we will meet that demand with enhanced capabilities and expanded capacity.