Encompass Health Corporation (EHC) Q1 2019 Earnings Call Transcript

We are also showing progress in our initiatives to build stroke market share. In the first quarter of 2019, we officially launch our three 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 recommend stroke patients to be treated in an inpatient rehabilitation rather than a skilled nursing facility. Thus far, we've completed life after stroke guide to bring awareness and guidance about life after stroke to individual's and their families. This guide is being distributed to our patients and it's 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 the ASA website and has been downloaded nearly 1,900 times since the end of January 2019. We've also completed eight of 20 Go Red for Women luncheons across the country or over 4,700 attendees have received co-branded education information. In addition five Encompass Health's stroke patients stories have been shared as part of the AHA/ASA support network and promoted via social media posts on each of the American Stroke Association 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 17th, 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 a Medicare reimbursement rates for our Company in fiscal year 2020, which begins October 1st, 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 function 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 that the use of stakeholders that the various functional activities correlate differently to the burden of care and provider costs.

The proposed weighting methodology is new, not yet fully understood. The comment period will help stakeholders to begin examining the clinical and technical aspects of the proposed waiting methodology and to develop questions and other relevant input CMS' consideration. We plan to continue engaging in constructive dialogue with CMS as a Company and as part of our industry trade groups during 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 a 30-day payment period. Reimbursement under this new system also relies more heavily on a patient's clinical characteristics and eliminate therapy service 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 health patients we serve and we are 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 doubling of our billing-related cost.

Also as part of the continuing investments we've 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 were 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 rarer in these 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 of 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 this 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.

Our Home Health segment is also preparing for the start of the Review Choice Demonstration or RCD in June. Following the pause of the Pre-Claim Review Demonstration or PCRD two years ago, CMS worked to revise the Pre-Claim Review program to offer more flexibility and choice for providers. Earlier this month, CMS announced RCD will begin in June 1st, 2019 in Illinois, where we have three home health agencies. We are well prepared for this program and we'll apply the warnings from our Illinois locations that successfully navigated PCRD with an affirmation rate in excess of 90%.

I'll conclude my comments with a discussion of our 2019 guidance. As a result of our strong start to 2019 and our current expectations for the remainder of 2019, included the impact of the 2020 proposed rule for inpatient rehabilitation hospitals on the fourth quarter of 2019, we are reiterating our full year guidance. We continue to expect net operating revenues in a range of $4.5 billion to $4.6 billion, adjusted EBITDA in a range of $925 million to $945 million and adjusted EPS in a range of $3.71 to $3.85 per share. This guidance does not include our planned acquisitions of Alacare which is expected to close in June.

With that, I'll turn it over to Doug.

Douglas Coltharp -- Executive Vice President and Chief Financial Officer

Thank you Mark, and good morning everyone. As Mark stated at the beginning of his comments, Q1 was a strong start to the year with solid revenue and adjusted EBITDA gains in both business segments and operating leverage achieved against our G&A expenses. Our consolidated revenues for Q1 increased 7.5% to $1.124 billion, consolidated adjusted EBITDA rose 8.8% $242.9 million and adjusted EPS increased 11.8% to $1.04 per diluted share.