U.S. Physical Therapy Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 8, 2023

There are 9 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the U. S. Physical Therapy Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode.

Operator

After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to turn the call over to Chris Redding, President and CEO. Please go ahead, sir.

Speaker 1

Thank you. Good morning and welcome everyone to our U. S. Physical Therapy Third Quarter Earnings Call. With me on the call this morning include Carrie Hendrickson, our CFO Eric Williams and Graham Reeve, our Chief Operating Officers Rick Binstein, our Executive Vice President and General Counsel Jake Martinez, our Senior Vice President, Accounting and Finance.

Speaker 1

Before we begin our discussion around our 3rd quarter and year to date performance, we need to cover a brief disclosure. Jake, if you would, please.

Speaker 2

Thank you, Chris. This presentation contains forward looking statements, which involves certain risks and uncertainties. These forward looking statements are based on the company's current views and assumptions. The company's actual results may vary materially from those anticipated. Please see the company's filings with the Securities and Exchange Commission for more information.

Speaker 1

Thanks, Jake. So my commentary this morning is going to be at a high level and following that, Terry will cover the majority of our very detailed release more completely. Let me start with where volume is. Overall, there have been a number of really good things, With your team of clinicians, partners and support staff we're able to deliver this quarter. And there are a few challenges which we continue to work on as well.

Speaker 1

First and importantly, volumes have been very strong this year and remain so throughout the Q3, Including during our normally seasonally slower summer months, visits per clinic per day came in at 29.7, which is an all time high for us for any Q3 in our company's history. This serves as the best indication related to both The overall demand for our services and the way we are viewed by patients and referral sources alike in a market where there is It's not just excellent, but which are patients and referral sources around the country are seeking out. My sincere thanks to all of you who are listening. That care you provide is not only changing lives for the better, but it is being recognized for driving the highest level of volume ever delivered by us at this time of the year. For the quarter, that throughput coupled with the strong development work that we have continued to produce helped drive volumes year over year by 10.8%.

Speaker 1

Part of those volumes have come through de novo and tuck in acquisitions With 31 additional clinics so far through October, which as you know depresses our volume per clinic average sum, Drags a little bit on results early on. We've added 9 de novo clinics in the quarter and 5 of those were added in September. Keeping that strong de novo growth in mind is a bit of a near term drag. Through the 9 months, our PT operating income, In spite of the strong de novo openings, it's grown 10.9% for the year. So looking back For the quarter, revenue grew 9%, which was impacted by the Medicare rate reductions we have absorbed this year, Coupled with a slightly higher percentage of PTAs onboarded over the past 18 months or so Due to the nationally tight staffing market.

Speaker 1

So let me explain. If you recall, having PTAs Touch a Medicare patient in the course of care results in a 15% reimbursement reduction. And while we are focusing on that in the middle, particularly in Q3, rolled out some new retraining Because we have a slightly higher proportionality of PTAs compared to where we've historically run, That's increased the Medicare rate reduction ever so slightly. So our challenge at present is to This is an area where we expect to see continued improvement as we work and achieve additional successes in our contract negotiations And then some longer term initiatives around further diversifying away from Medicare. Additionally, we've added to our leadership in a revenue cycle area.

Speaker 1

We are optimistic we will identify some opportunities to further enhance our already strong collections effort and further bolster our net rate in time. We have renegotiated a very significant number of contracts in a very positive way. As we explained last night So a couple of different analysts who follow the company, from the time of negotiation until the time that those contracts, There's new rates get implemented. Oftentimes there's a several month delay, but we are making progress. I think good progress.

Speaker 1

I'm happy with the percent rate increases. We just need to see them pick up and gain traction as they're implemented. On the injury prevention side of our service offering, we let the market know at the beginning of this year that we expected growth to be a little bit more muted With pauses and some limited drops from a few of our customers who are expecting their business to be negatively impacted of the heavy inflationary environment coupled with the fear of a coming recession. Good news is that our Briotix Team has been able to replace their lost business with new business that will again provide us with growth when moving forward into the 2024 year, While our Progressive partnership has added a great deal of new business as well, while suffering a loss of one plant in the auto industry, As you know, that industry has been hit particularly hard this year on a variety of fronts. From my perspective, the majority of the accounts Well, we've done exemplary work over the years, but maybe who have paused or dropped Some service component temporarily expect many of those will come back once our economy is in a more stable growth mode.

Speaker 1

Furthermore, we've recently just added to our injury prevention core with the recently announced acquisition It includes both traditional injury prevention business as well as a new service offering delivered via well developed recently introduced software program in ergonomics, which fills the service gap that existed previously with our offering. We're excited about the team and we look very forward to helping them meet the needs of this growing and important market. Finally, our injury prevention teams have done a very nice job overall adjusting and responding to the tighter than usual labor market, which has allowed our quarter over quarter margin percentage to improve 80 basis points from 21.9% in Q3 last year 22.7% this most recent quarter. Last week, myself A few of our executive and development team members attended the Annual Private Practice Section meeting, which this year was held in Austin, Texas. This is for us the most important meeting of the year.

Speaker 1

On the development side of things these past 12 months, When I say 12 months, I'm looking from November really current period to a year ago. It's been a very active period for us. We've purchased an additional 54 clinics over that period. In that same period, we're on pace. We've currently opened 72 clinics, added 72 clinics overall.

Speaker 1

Many of our competitors are hamstrung a bit right now with extremely high debt levels, which can impact a lot of factors, including Their ability to sometimes even close on deals, we've got a clean balance sheet and we are working hard to put money we raised At the end of our quarter 2 secondary offering for this past week was the busiest we've ever been at the private practice We scheduled double the number of individual meetings and held 2 large off-site gatherings, which we believe will continue to help us To drive and differentiate our partner centric model, the model which distributes cash to these newly acquired partners throughout the entirety of the Partnership month in and month out with no on top debt burden from the acquisition itself. That and the back end flexibility and guarantee regarding purchase methodology gives us another meaningful difference with our competitors, Which should further aid us as we work to significantly grow our partner centric company. One final bit of commentary that I know Carrie and I want to speak to really directed toward our analysts and our shareholders. We've been fielding a lot of questions related to the impact of Ozempic like drugs on our physical therapy business.

Speaker 1

Taking a step further, there have been a number of articles in the Wall Street Journal and other notable publications relative to the massive, In some cases, negative impact on multiple areas of the healthcare system through the expanded use of these drugs, Which as you know, help people lose weight among other uses. So let me hopefully help create some perspective here. First, I truly believe physical therapy is going to continue to grow with or without these drugs. It's estimated that currently only about 10% of people with musculoskeletal issues Ultimately end up in a physical therapy office. That number is growing and changing.

Speaker 1

That number will grow and change in time Because there are numerous studies that indicate that physical therapy done early for other much more costly and invasive treatments Worse with only palliative narcotic only pain treatment, not only does it save the patient as well as the payer system significant dollars, But results in better overall health and less downstream cost of medical care for that person for an extended period of time. Presumably because they get moving again, they get their hope back related to the things that they enjoy doing either work or at home with family, socially with friends, resulting in a healthier, happier person. That message will be hammered and marketed to groups like Our Alliance For Physical Therapy, Quality and Innovation, which we refer to as APTQI. And I believe with Grassroots Marketing, we'll continue to expand the physical therapy first initiatives that we have across our space. Secondly and importantly, the vast majority of our business comes about the injuries caused by activity, Not simply because somebody is obese.

Speaker 1

Unfortunately, the disease of obesity in people Ultimately results in them not being able to do a lot of the things that they otherwise might enjoy, But for the limitations created by their weight, while obesity can result in hip and knee arthritis over time, and some of these end up as joint replacements, Bigger majority of joint replacements come as a result of activity created injury often to the meniscus or the fiber cartilage in the joint, which eliminates the padding and then creates osteoarthritis over time. These injuries occur in sports and daily activities Just like squatting and twisting, gardening, running, various types of sports, which are done by people a bit more fit. Since we as a general rule don't see hip replacements very often in our clinics, you're really only talking about knee replacements as a potential impact. I think the market is ignoring all the other possible activity based injuries, while often not severe, come As a result of enjoying life in a physical way, hiking, gardening, running, and of course, our beloved pickleball. So many other things that people can participate in and enjoy if they're not obese.

Speaker 1

So I believe the potential exists. These drugs are successful. Long term don't create unintended health issues, but there will be more patients as a result, not less. So that concludes my prepared comments this morning. Terry, go ahead and walk us through the financials in greater detail and then we'll open it up for questions.

Speaker 3

Great. Thank you, Chris, and good morning, everyone. In the Q3, we had continued strength in patient volumes, strong growth in revenue, Growth in our physical therapy and total operating income and year over year growth in both adjusted EBITDA and operating results per share. In addition, we added 19 clinics during the Q3 through acquisitions and de novos, which is 3 closures. We've now added 72 new clinics since Q3 of last year through acquisitions and de novos, which is 14 closures, which is the net addition of 58 clinics over the past year.

Speaker 3

We reported adjusted EBITDA for the Q3 of $18,600,000 which was an increase of $1,600,000 over the $17,000,000 we reported in the Q3 of 2022. Our operating results were $0.62 per share in the Q3 of 2023, which was a $0.04 increase over the $0.58 reported in the Q3 of last year. Our total company revenues Increased 7.5 percent in the 3rd quarter, growing from $139,600,000 in the Q3 of 'twenty 2 to $150,000,000 in the Q3 of 20 And our total company gross profit increased $1,100,000 from $26,800,000 in the Q3 of 'twenty two to $27,900,000 in the Q3 of 'twenty three. As Chris noted in his remarks, our average visits per clinic per day in the Q3 were 29 point 7, which is the highest volume in the company's history for the Q3 and is a 3.1% increase over our average visits per day of 28.8 in the Q3 of last year. July was at 29.9 visits per day.

Speaker 3

August was a little lower as expected based on normal Seasonality at 29.6 and then September came back up to 29.9. All three of those months were higher than the same month in the previous year. Our net rate was $102.37 in the Q3 of 'twenty three, which was lower than last year's $104.01 per visit, but it was sequentially an increase in the Q2 of 2023, which had a net rate of $102.03 The decline in net rate as compared to the prior year was due to the reductions in Medicare rates, which represent about 1 third of our payer mix, as Chris noted in his remarks. All other payer categories, including commercial and workers' comp increased over the prior year. As we've talked about on the last couple of earning calls, we've either We negotiated or terminated a subset of our Medicare Advantage contract that reimburses at a rate that's less than what it cost us to serve our patients And we'll continue to focus on renegotiations of commercial, workers' comp and Medicare Advantage contracts and we're making other necessary adjustments to address our net rate as well.

Speaker 3

Our physical therapy revenues were $128,100,000 in the Q3 of 'twenty three, which was an Increase of $10,700,000 or 9.1 percent from the Q3 of 2022 due to the addition of 58 net new clinics since last year and our record 3rd quarter average visits per clinic per day, partially offset by the decrease in net rate. Our physical therapy operating costs were $105,000,000 which was an increase of 9.9% over last year. That's also due to the addition of 58 net new clinics since The Q3 of last year. On a per visit basis, our total operating costs were $84.49 in the 3rd quarter, which is a decrease of just less than 1% compared to $85.14 per visit in the Q3 of the prior Our salaries and related costs per visit also decreased about 1% in the Q3 of 2023 versus the prior year From $60.99 in the Q3 of 'twenty two, down to $60.35 in the Q3 of 'twenty 3. This is the 4th quarter in a row that we've reported year over year decreases in both total physical therapy operating cost per visits and salaries related cost per visit.

Speaker 3

The increase in total operating cost per visit on a sequential basis from the 2nd quarter from $80.61 to $84.49 as a normal seasonal occurrence. Salaries on a per visit basis are higher in the 3rd quarter than the 2nd quarter due to covering the vacations of our employees during the summer months and then other significant Costs like rent and depreciation that don't vary by the number of visits are spread over a lesser number of visits. Physical Therapy margin was 18 percent in the Q3 of 'twenty three as compared to 18.7% in the Q3 of 2022 with the change due to the decrease in our net rate versus Even with the decline in our net rate versus last year, our PT gross profit increased 5.4% over the Q3 of the prior year And it has increased 10.9% over the 1st 9 months of this year versus the prior year. Our IIP revenues and expenses We're both approximately $700,000 less than last year, so we ended up with $4,400,000 of IP income in both years. Our IIP margin increased from 21.9% in the Q3 of last year to 22.7% in the Q3 of this year.

Speaker 3

Our balance sheet remains in an excellent position. We have $147,000,000 of debt on our well, excuse me, dollars 145,000,000 of debt on our term loan with a 5 year swap agreement in place that places the rate on our debt at 4.65 percent and we expect it to remain at that 4.65% going forward. As you know, there's a very favorable rate in today's market and below the current Fed funds rate. In the Q3 of 2023 alone, the swap agreement saved us $800,000 in interest expense with cumulative savings of $2,300,000 over the 1st 9 months of 2020 Our interest expense was $2,100,000 in the Q3 of 2023. In addition to the term loan, we also had $75,000,000 revolving credit facility that had nothing drawn on it during the Q3 and we have approximately $120,000,000 or so of excess cash over and above what we need for working capital ready for deployment into growth initiatives.

Speaker 3

In the release, we noted that we expect our full year 2023 Adjusted EBITDA to be within our originally stated guidance of $75,000,000 to $80,000,000 most likely in the low to mid area of such range. We expect to have continued strong volumes in the 4th quarter as we've had all year. Where we fall within the range is going to depend Ultimately on the strength of our volumes in the 4th quarter and how much sequential growth rate we're able to achieve and our net rate from the 3rd quarter Our operations team has produced solid results in the 1st 9 months of 2023 and we'll all work to continue to And with that, I'll turn the call back to Chris.

Speaker 1

Carrie, thank you. Great job. Operator, let's go ahead and open it up for questions.

Operator

We'll take our first question from Joanna Gajank with Bank of America.

Speaker 4

A couple of questions, I guess, here. I guess, on the last comment, Carrie, around the outlook So this year that you slightly lowered it, are you talking about kind of being towards the middle or lower? And so you kind of took off The higher end from Salo. So I guess what are the main drivers for this lowered guidance? It sounds like Q3 Roughly in line, so I guess Q4 seems like there's some indicators that pointing to a slower or lower number for Q4.

Speaker 4

Is that the way to think about this?

Speaker 3

Yes, Joanna. So I mean, I'd say it's within the expectations that we've had for I mean, It's probably a little bit lower than we expected. We need a little more net rate growth to get us to the higher end of the range than we've had. And if we get more growth, we'll position ourselves to close to that middle likely. But you mentioned that it Looks like the Q4 would be less than the Q3 given the guidance that we provided.

Speaker 3

And that's not an unusual pattern. I mean, if you look back the last few years in 2019, we went from $17,000,000 of EBITDA to down to about $15,600,000 in the 4th quarter. Same thing in Q3 of 2021, we went from 19.9 to the Q4 of 2021 about 17,000,000 That was because we had some large acquisitions we made. We made 4 large acquisitions in the Q4, actually 2 really large 2 other acquisitions in the Q4 of last year, and so that bumped our 4th quarter up a little bit. But It's a normal pattern for us that it's somewhat impacted by the holidays, which Which bring down our volume some in late December particularly.

Speaker 3

And then also in our IIP business, there's some seasonal decline because some of the big manufacturers, auto in particular, closed down their plants in the last part of December because of the holidays. So they're just shutting down the plants. When that happens, we don't have people on-site that can bill. So last year in our IP business, if you look back at it, our IP income went down about $1,000,000 or so from the Q3 to Q4. I don't expect it to go down that much this year, but it will likely come down some in the Q4 because of that phenomenon.

Speaker 3

Chris, anything you would add?

Speaker 1

No, I think you've covered it, Terry. Joanna, the business is solid. This kind of follows our normal seasonal pattern. And we're just trying to be clear about where we think we're going to finish.

Speaker 4

Right. No, it makes sense. And I guess just to follow-up on that comment around the net rate growth. So it Sounds like that's where maybe things are a little bit softer. So I guess the question is because you've been talking about negotiating contracts with commercial and Some of the MA contracts improvement in workers' comps.

Speaker 4

So kind of when will we see the benefit, right, to that net

Speaker 3

Yes. Well, we have seen benefit from it. I mean, if you our commercial rates and our workers' comp rates are both Up about 1.5% on a year to date basis. We'd like that to be more, but we some of the negotiations have taken place during the year and it takes a little while for them to take effect. And so we're hoping to see more of that in the Q4 and certainly into 2024.

Speaker 3

The rate for our Personal injury and self pay, which is our other that's about 6% of our revenue, that's up about 2.5% year to date. Medicaid even is up about 1% year to date. The only payer category that's down is Medicare and that's because of the things we've noted, more the higher ratio of PTAs to PTs, that's increased Over the last 18 months or so, and we've had to do that in some cases because the market is tough from a hiring standpoint, but also we've had such heavy volume. So we've needed to hire what we can hire to cover the volume. And then the heavy volumes have also caused a little bit of a downtick in billed units For our Medicare, so and then Medicare Advantage, that's growing as a percent of our total Medicare visits.

Speaker 3

There's a big push out there for Medicare Advantage For Medicare patients to move to Medicare Advantage and that pays us less than traditional Medicare. So some of those things have factored in. Medicare rate this year, like I said, everything else is up. Medicare has been down about 3.5% to 4% year to date.

Speaker 1

So I would say, Joanna, when you look at the contracts we've redone, a lot of them have been double digit increases. Some of those Spread over 2 or 3 years. I've been pleased with the percent change. To your point, we need to see that show up in the P and L and No, we're working to make that happen.

Speaker 4

All right. And if I may, last question on this Medicare rate. So I guess We get the final physician fee schedule, the therapy rate there down 2% or so. There's Potential work in Congress on the relief for disposition fee schedule. So, and I know this rate of this could differ So can you talk about what this reg means to you in terms of the Med Rate update if There's no relief and if there is a relief, what it would be?

Speaker 4

And I guess anything else in direct that we what it could be impactful for revamp therapy? Thank you.

Speaker 1

Jerry, you want me to take it or do you want to take it?

Speaker 3

Yes. You go ahead and I'll fill in if needed.

Speaker 1

That's fine. So right now, I I hate to say it, but sometimes these tables that are published don't correspond with the actual realities for the companies. And so The expected reduction for us is 3.5% in 2024, all factors considered. There are a couple of other things that were in the final rule, extends our ability to Oversee physical therapy assistance in certain type of licensed facilities and do that on a remote basis Other than physically present on-site, and so that's beneficial. That's a continuation of something that was During COVID, that's beneficial.

Speaker 1

And then there have been some mildly beneficial things around remote therapeutic monitoring, Which are net positive there, not especially dollar wise impactful, but make more sense And we'll make it easier to capture those charges. But on average, think of this as somewhere between a 3.4% and a 3.5% reduction. Now you asked what it would be if it gets mitigated. I don't know the answer to that yet. We've had success in getting it mitigated through Congress every year since the Original 9%, 9.5% cut was proposed, leading into COVID.

Speaker 1

I don't know what it will be if it gets adjusted. We'll have to see.

Speaker 3

And just as a reminder, Joanna, That's 1 third of our business, Medicare is. So that's on our overall rate that will have a lesser impact than the 3.5%, if it ended up at that And, I think we have momentum as I've talked about in all of our other rate categories going into 2024.

Speaker 4

Great. Thank you so much.

Operator

We'll take our next question from Brian Tanquilut with Jefferies.

Speaker 5

Good morning, guys. Good morning. Chris, maybe I'll follow-up to one of your comments that you just made about remote. Obviously, An area or part of your business that we haven't talked a lot about since COVID. So just curious how we should be thinking about your Strategy on integrating remote to your workflow and the investments that you need to make to Really take advantage of that, especially as we stare down this Medicare recut.

Speaker 1

Yes. So remote therapeutic monitoring code that was introduced This year, we've rolled it out. It's been a little bit painful, painful for a lot of companies just because Companies who have the infrastructure that we've all used To be able to perform these additional codes oftentimes are set aside and set alone From the infrastructure that exists in our billing and EMR systems. And so that is and has been Very recently addressed, I think by the beginning of the year, we'll be positioned where All of our Medicare patients will be enrolled, auto enrolled, on our Raintree system, which is Covers about 90% of our company. That integration is completed.

Speaker 1

We believe that'll be done and effectively out by the 1st of the year. So that we have a much greater percentage of our company That is able to efficiently address remote therapeutic issues. Then beyond there, From a digital perspective, I think there have been a lot of companies that have come out that have had some really nice additions. We're not there yet on a fully digital basis, but we continue to work directionally to evaluate that opportunity And make decisions as we move forward. We expect at some point to have the digital offering, Working on some other high priority things at the moment, but that's certainly on the list.

Speaker 5

Got it. And then Chris, maybe since we're talking about virtual, as I think about your IIP business, are you seeing anything that's changing in that world as some

Speaker 1

On the prevention side, not so much. We see continued adoption among and across companies. Of course, companies go through ebb and flow. You know, Uber is a great example company that at the beginning of COVID, we had a very large contract to roll out with them and that got paused. And then over the next couple of years, it rolled out and became substantially bigger than we originally envisioned.

Speaker 1

Men, as an example, it kind of paused again, not completely. We still do a lot of work there. It's still one of our bigger customers. But again, their outlook Effective what how they view the coming year, the year that we're in right now. Actually, we're hopeful that we can continue to expand that relationship as things again normalize.

Speaker 1

So I don't see on the prevention side, a lot of major technological changes. Again, we've added recently software deployment for ergonomics, which companies that want To control and to roll out their own ergonomics program, can now do On a guided basis with our software, that's a new offering for us. But this is really still an embedded model where people need to be On-site and evaluating individuals, certainly we can use technology And video monitoring and certain aspects of evaluative techniques we can now use with Cell phones and other forward camera devices take measurements and do things and I think that will continue to evolve. We're using some of that now, but nothing that we see as disruptive to the core business.

Speaker 5

Got it. And then maybe Carrie or Glenn, as I think about just tying it back to the core business, how much productivity opportunity do Do you think there's left in terms of driving the visits per clinic per day per day?

Speaker 1

Let me address part of that and then I'll let Eric or Graham address The other part of what we really think of as productivity, but on the visits per clinic per day, aren't any real constraints That we generally bump into on that, it's a factor of additional staffing oftentimes where we're If we're currently staffed where we need to be, so if we in order to grow, we've got to hire some increment On a part time basis for additional staff, generally speaking, our facilities can handle it. It's grown this year about As we expected it to grow, all things considered, I think it's been pretty good. I guess you guys Refer to that as productivity. I think of productivity really as the amount of People that our clinicians can see and Eric, you might want to speak to that part.

Speaker 6

Yes, Chris, I think you summarized really well. Our turnover is at an all time low. It hasn't been this low in years. And so I think our partners have done a really, really good job Hanging on to staff, we've had incredible growth. When you take a look at the de novos that we opened up last year and the 32 facilities we've added this year, de novos and tuck ins, It has been challenging to fill those growth positions for us.

Speaker 6

And so to your point, I mean, there's not a cap here. I mean, You look where we were 2 years ago, we hit the 30 mark for a couple of quarters this year. We got a record Q1, Q2 and Q3. So we still continue to see growth opportunities in front of us. We've invested a lot of resources in recruiting.

Speaker 6

We have 8 recruiters that work for us. We really leverage social media as well as our relationships with the various school programs. I think there's 210 accredited PT schools out there. We have clinical affiliation agreements with 155 of them. So we're continuing to play the short game and the long game as it relates The staffing, the long game being developing these relationships with the schools.

Speaker 6

So as these kids come out and do their clinical rotations, which is part of the program, They're more likely to end up working for us having done rotation. So that's a big investment for us. And then on top of that, just for more resources as it relates to Reaching licensed staff out there. But the volume and demand is there. Staffing is what, you know, us and everyone else in the industry has got to solve In order to continue to grow at the right, we've been growing.

Speaker 5

Awesome. Thank you, guys.

Speaker 1

Thanks, Brian.

Operator

We'll take our next question from Larry Solow with CJS Securities.

Speaker 7

Good morning, Larry.

Speaker 8

Thanks guys. Good morning. Hey, good morning, Chris. Thanks for the color. Just a couple of follow ups.

Speaker 8

I know you're not ready to give guidance for 'twenty four, but just So a high level, as you think about sort of the components, pricing price will end up down this year 1%, it's going to be a little bit more than that. And you pretty well documented it's a Medicare cut there. But it feels like you have some good momentum on the commercial side. You mentioned you're on average getting at least Looks like mid single digit annual increases on a lot of these positive negotiations. So I suppose some of them haven't actually Hit the P and L yet and I suppose there's a lot more in the queue that you could start turning over.

Speaker 8

So fair to say that just from a high level you think Pricing could actually all in go up next year, even with the Medicare rate is not changed

Speaker 1

Terry, you want to address that one?

Speaker 2

Sure, sure.

Speaker 3

Yes. So I would say, 1st of all, it's early for us to look at that and give any color really related to 2024 yet. We'll be ready for that Certainly, the next time that we have our earnings call for the end of the year. But I would say, it's going to we'll see where Medicare ends Right. So how much of a hurdle we have there.

Speaker 3

But we do, as I mentioned, have momentum in the other payer categories. And we have, as Chris noted earlier, put in place step increases. So it may be that we have an increase of A total of 12% or 13% and we have a step in over 3 years where it's 5% in year 1, 4% In year 2% and then another 3% in year 3. We have those kinds of step increases that we're building into our contracts that will have continued increases. So I think We will have continued momentum in both commercial and workers' comp on both of those.

Speaker 3

And So I think certainly I feel good about our ability to as we sit here today, I feel good about our ability to offset the Medicare rate reduction going into 2024.

Speaker 1

Larry, the short answer is, I mean the final rule just came out Thursday, late Thursday afternoon last week, we're still in the middle of our budgets and a lot of analysis And we're pushing really hard on these contracts, but we're not at a point where we can give you a clear conclusion yet, Unfortunately for next year, just too many moving parts and too short a period of time yet, but we're working hard at it.

Speaker 8

That's fair. How about just in terms of you mentioned a lot of good internal growth, especially last year. In this quarter on the de novo side, I think you mentioned 9 and 5 in September alone. I know de novo, they don't call a significant amount to get on their feet. But Is there, I suppose, some inefficiencies initially?

Speaker 8

And even with the acquired clinics that just by themselves between the acquisitions On the de novo ramp, you have some sort of built in a little bit of dry powder to improve margins just from those 2. Okay. You got a fair statement.

Speaker 1

Yes. Eric, you want to take that?

Speaker 6

Chris, sorry about that. My phone blinked out a little bit ago. Can you That's okay.

Speaker 1

It's okay. No, I got it. So on Yes. Larry, on the de novo side, while they don't cost a lot of money to get out of the ground, it's It's not really the issue. They do bleed us a little bit, particularly in the 1st 6 months before they Or until they break even, some break even much quicker than that.

Speaker 1

But early on, certainly those ones we opened In September, we're going to be a drain for a bit. Then on the acquired clinics, Yes, there is you referred to as dry powder. There is usually some upside that occurs Oftentimes in rate reset at the point where we do the deal, we credential that deal In 60 days before closing to a date certain basis and then we get a pickup in rate usually Not across every contract certainly, but across some of the contracts. And then there are other things that take a little bit more time that Maybe a little slower to happen, program development and Productivity or efficiency changes over time, those take a little bit longer and more patient with those Because we don't want to make sure the relationship, particularly at the clinical level is really strong and stays strong and we're able to do that. So there is upside in the acquired clinics.

Speaker 1

There is some short term downside in the de novo clinics.

Speaker 6

And Chris, the one thing I would add to that, the one comment I'd add on the de novo clinics is none of those de novo clinics are flyers. You know, it's not building and they would come. I mean, those clinics were built because they were established referral relationships in the community. The biggest Challenge and potential drag on those de novo clinics goes back to staffing. Typically, it's staff who might be relocating from an existing facility to help Zap it.

Speaker 6

A lot of times, again, those clinics, we take advantage of the opportunity to open them, you know, when we have the support, but sometimes Sounds very difficult to challenge right out of the gate, and that tends to be the biggest hurdle in terms of how fast they ramp.

Speaker 8

And to follow-up on that, how is the staffing I mean, Obviously, it's been a couple of years of a tough stretch in staffing and labor. Certainly, labor pricing is much higher today, but It does feel like at least you guys are having much more success in getting better more I don't know my call, but hopefully Quan will hear later.

Speaker 1

Go ahead, Eric.

Speaker 6

Yes. No question. I mean, I think the recruiters are doing a great job. As I I said earlier, our retention is at an all time low here over the course of the last 5 years, and I think we do a better job filling positions Than most other organizations, but there's no question it's a challenge. And Chris referenced this earlier in his opening comments as it relates to PTA usage.

Speaker 6

I mean, our facilities, our staff have licensed physical therapists and licensed physical therapist assistants. And we've had to rely, especially with the growth stroke that we've had, I'm bringing PTAs on board in order to service the patient volume as opposed to not servicing it. And again, with roughly 33% of our business being federally funded every time the PTA touches a patient, that has an impact, you know, and you saw that. If you see the breakdown on our rate, every category has gone up from a net revenue per visit perspective With the exception of that federally funded bucket that includes Medicare and Medicare Advantage, we got very aggressive this year in terms of terming Medicare Advantage Programs that we felt did not pay us the appropriate amount of money below our absolute cost of providing service. So I think we've done a nice job there.

Speaker 6

We're just going to continue to have to push in this category. And to Chris' point regarding these de novos, the rolling out of additional programs takes a little bit In particular, the workers' compensation initiative, which has really been successful this year. I mean, that's an initiative that's really just over a year old. We've grown rate for 3 consecutive quarters, and our Q3 'twenty three was almost 4% higher than our Q3 22 in terms of workers' compensation rates. So these types of programs do have an impact, but they take a little while to roll out in And new to nova clinics as well as newly acquired partners.

Speaker 8

Okay. I appreciate all that color. If I could just sneak one more in just on the acquisition, Brian, it sounds like your Q on the PT side. On the physical therapy side, it sounds like your Q other opportunities remain Strong and you want to put your capital to work. Can you just comment just on the Ergonaut, the software, the ergonomic software and the sort of IT acquisition you made A little bit different than your normal acquisition.

Speaker 8

How you any color on that? How you plan to leverage that? Thanks.

Speaker 1

Yes. So These are some people that I've known for a number of years. They're really, really good folks. They've been working on the software product, software sales product, Our software service product, the number of years, it's really, really strong. Enable us, we have we employ ergonomists, we do virtual ergonomic programs, but some of our customers They want to do it themselves and yet they don't have the tools really available to do that.

Speaker 1

And so we think that we can deploy this software Not just to new customers who are new to us, but to existing customers across our portfolio And as well with many, many, many more salespeople than these folks have had in their own company Utilize our sales force to ramp that up. And so that was part of the offering. The other part of the offering was More in line with what we already do, which is just embedded people on the prevention side, but it's a nice fit for us. It's a new offering and we should be able and expect to be able to sell it to our existing client base in many cases.

Speaker 6

Chris, my one additional comment on this would be, I mean, this was a niche that our Briotix This team recognized this is a client profile that we weren't servicing today. These are folks that are going to be a little bit more cost conscious, Not just want to manage these types of projects on their own, the ergonomics projects, but need to from a financial perspective. We do see a cross selling opportunity, but Briotix was looking at going down the path of creating their own software, Spending the time and money to do it in order to chase this market segment that they weren't servicing today. So this Ergo Plus represented an for us to go in feet first with software that was already developed. And they were really under resourced, ergo plus in terms of their ability To market and sell that software.

Speaker 6

So we feel we have an opportunity here to dump gas on a fire. It's a terrific Product, we think this is a great market opportunity for us and really excited about this acquisition.

Speaker 8

Great. Appreciate the enthusiasm. Thanks for all the color.

Operator

We'll go next to Calvin Sturniak with JPMorgan.

Speaker 1

Hey, Calvin. Good morning. Good morning.

Speaker 2

Thanks for squeezing me in here. Just Just one quick one for me on IAP. I know that some of your customers have pulled back on spending just given some of the macro concerns. How are those conversations evolving? Are employers still hesitant?

Speaker 8

Are you seeing any signs of

Speaker 2

a shift in demand next year? And I know you talked about expecting net growth for 2024. Is the expectation at this stage that the growth It improves year over year, but still below the 20%. Just any color you could give on sort of what the IIP revenue growth rate looks like for next year would be helpful.

Speaker 1

Yes, thanks. I guess on a macro basis, I would say yes, I expect the growth rate to pick up Next year, I actually expect 24 from a macroeconomic standpoint will Not be great for the country. I think we still have some headwinds, but we're making good progress with Sales that will carry us through next year, I think. In terms of the exact Percentage of growth, as Carrie mentioned before, not done with our budget yet. We're still working through that.

Speaker 1

We haven't guided to that yet. It would be premature for me to peg that number at this point in time. We certainly haven't used the 20% number. I think that was the number that we had coming out of 21 was the last most recent number, maybe finishing 'twenty two, I guess, Before we guided to 23. So bottom line is we're not there yet.

Speaker 1

We should be there sooner than later. And once We have that number. We'll work that in toward guidance and give you a little bit more transparency than we're able to right now.

Speaker 2

And then maybe one more on workers' comp. I know you've had a couple of quarters there where volumes have been increasing and payer mix is improving. Just wondering how you're thinking about that Trend continuing into next year, do you think the momentum in workers' comp really is there an opportunity for it to accelerate or should we be thinking about it as basically sort of Steady progress year over year.

Speaker 1

We're working on something I can't really talk about right now. I don't we're Working hard. Let me just say we're working very hard on the comp side to do something that would That would be a difference maker for us, but we've got some more work to do. It's certainly a focus and we have the resources and the attention on it and I expect to make continued progress.

Operator

We'll go next to Mike Petusky with Barrington Research.

Speaker 1

Hey, Mike.

Speaker 7

Good morning. Good morning, Mike. Good morning.

Speaker 3

So, Chris, on the meeting

Speaker 7

you all attended, private PT on patients. What we've sort of heard out there, not in terms of PT specifically, but in terms of A lot of the private owners have not gotten the memo that valuations have come down in transactions and that expectations are Out of whack with reality of interest rates, etcetera. And I'm just curious, you guys, as Carey pointed out, you've got a lot Of opportunities from a balance sheet perspective, the revolver to do something. I guess, what was the vibe at the private meeting? I mean, do you think this in the next 12 months, do you hope As active, more active than the last 12 months?

Speaker 7

Thanks.

Speaker 1

Let me just say, we have more Really strong discussions that are going on right now than we've ever had. And there's a good mix, Not just smaller practices, but some larger practices as well. I expect it to be a good year, A very good year. We had one deal that we still expect to get done that was bigger in size for us They've got hung up around a divorce proceeding that got Slowed everything down. This would have been a fantastic year if not for that.

Speaker 1

I Expect next year to be even better based upon the activity that we have right now. In terms of valuations, look, I think it depends on A lot of things. There are a lot fewer buyers in the market right now because individual private equity companies Really at kind of the limit many are. And so it's a good time for us and we expect To make hay while the sun shines, as they say.

Speaker 3

And it's sort of pivoting,

Speaker 7

But staying on the idea of making hay, how far along would you estimate in terms of your efforts at getting Better pricing in commercial and workers' comp. I mean, if this is a 9 inning baseball game, are we in the 3rd inning, 7th inning? Where would you sort of say in terms of your efforts to sort renegotiate rates with your various customers, are you?

Speaker 1

Jerry?

Speaker 3

Yes. It's hard to put it in that kind of measurement, but I would we're I'd say we're about the 4th inning or so. We still have some work to do, but we've done a lot of good work 4th and It's somewhere in that rate, but we haven't necessarily seen all the impacts of that come into our net rate yet, but that's where we are from a negotiation standpoint. Does That makes sense.

Speaker 7

Yes. I thought in honor of the Texas Rangers, I'd throw the baseball in Alex.

Speaker 2

There you go.

Speaker 7

Sorry, Astros. Okay. So I guess in I didn't hear if you guys October patient volumes, any insight into that? And sorry if I missed it if you mentioned NERLYNX.

Speaker 1

I don't think we mentioned. Go ahead, Carey.

Speaker 3

Yes, we didn't mention. But I'd say It came in it's coming in strong. I mean, we don't have the final numbers yet for exactly where it was, but based on we get weekly reports on the progress through the month And it's come in at our expectations from and continuing to be strong just like it has been all year long. Very good. Thanks guys.

Operator

At this time, we have no additional questions standing by. I'd like to turn the conference back over to management for any additional or closing comments.

Speaker 1

Thank you. Well, thanks guys. I know this is a little bit longer call than normal. Perry and I are Standing by and happy to take additional questions offline. Thank you for your time this morning and hope you have a great rest of your week.

Speaker 3

Thank you, everyone.

Operator

Once again, ladies and gentlemen, that does conclude today's program. Thank you for your participation. You may disconnect at this time.

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Earnings Conference Call
U.S. Physical Therapy Q3 2023
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