Encompass Health Q3 2024 Earnings Call Transcript

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Provided by Quartr
October 29, 2024

There are 9 speakers on the call.

Operator

morning, everyone, and welcome to Encompass Health's Third Quarter 2024 Earnings Conference Call. At this time, I would like to inform all participants that their lines will be in a listen only mode. After the speakers' remarks, there will be a question and answer period. Today's conference call is being recorded. If you have any objections, you may disconnect at this time.

Operator

I will now turn the call over to Mark Miller, Incubic Health's Chief Investor Relations Officer. Please go ahead.

Speaker 1

Thank you, operator, and good morning, everyone. Thank you for joining Encompass Health's Q3 2024 Earnings Call. Before we begin, if you do not already have a copy, the 3rd quarter earnings release, supplemental information and related Form 8 ks filed with the SEC are available on our website at encompasshealth.com. On Page 2 of the supplemental information, you will find the Safe Harbor statements, which are also set forth in greater detail on the last page of the earnings release. During the call, we will make forward looking statements, which are subject to risks and uncertainties, many of which are beyond our control.

Speaker 1

Certain risks and uncertainties, like those relating to regulatory developments as well as volume, bad debt and labor cost trends that could cause actual results to differ materially from our projections, estimates and expectations are discussed in the company's SEC filings, including the earnings release and related Form 8 ks, the Form 10 ks for the year ended December 31, 2023, and the Form 10 Q for the quarters ended March 31, 2024, June 30, 2024 and September 30, 2024 when filed. We encourage you to read them. You are cautioned not to place undue reliance on the estimates, projections, guidance and other forward looking information presented, which are based on current estimates of future events and speak only as of today. We do not undertake a duty to update these forward looking statements. Our supplemental information and discussion on this call will include certain non GAAP financial measures.

Speaker 1

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 earnings release and as part of the Form 8 ks filed yesterday with the SEC, all of which are available on our website. I would like to remind everyone that we will adhere to the one question and one follow-up rule to allow everyone to submit a question. If you have additional questions, please feel free to put yourself back in the queue. With that, I'll turn the call over to Mark Tarr, Encompass Health's President and Chief Executive Officer.

Speaker 2

Thank you, Mark, and good morning, everyone. We're very pleased with our Q3 performance, highlighted by an increase of 11.9% in revenue and 13.4% in adjusted EBITDA. Q3 total discharges increased 8.8%, including 6.8% in same store. Once again, discharge growth was broad based across geographies, payers and patient type. Neurological and stroke, our 2 most common primary conditions treated grew 9% and 9.7% respectively.

Speaker 2

Within our payer mix, Medicare discharges increased 8.8% for the quarter, while Medicare Advantage discharges grew 12.6%. Going largely to our Q3 results, we are again increasing our 2024 guidance. Doug will cover the details of the quarter and guidance in his comments. The demand for inpatient rehabilitation care is underserved and growing. For more than a decade, the aged cohort most in need of these services has grown at a 4% to 5% CAGR, while the total supply of licensed IRF beds has been essentially static.

Speaker 2

It is estimated that by 2,030, 1 in 5 Americans, more than 70,000,000 people will be aged 65 or older. Older adults disproportionately experience chronic health conditions, which is likely to continue to drive strong demand for inpatient rehabilitation services. We are continuing to invest in capacity additions to meet the needs of patients requiring such services. During Q3, we added 99 beds to our capacity, comprised of 2 de novo hospitals with a total of 89 beds and the addition of 10 beds to existing hospitals. We expect to open 1 additional de novo in 2024, a 61 bed hospital in Houston that will be our 1st fully prefabricated hospital and add approximately 22 more beds to existing hospitals.

Speaker 2

The Houston project marks an important milestone in our de novo construction strategy. Full prefabrication will facilitate lower cost and shorter design and construction times, but the process is not without complexities. Together with our primary prefab partner, Blocks, we have learned a great deal on the Houston project, paving the way for efficiencies on future de novos. These efficiencies are starting to materialize on our Athens, Georgia de novo scheduled to open in the Q1 of 2025. We currently anticipate that at least 2 de novos per annum will be built with full prefabrication.

Speaker 2

With 15 development projects beyond 2024 already announced and underway, our pipeline remains robust and balanced between wholly owned and joint ventures. Many areas in the Southeast and Mid Atlantic regions of the U. S. Were significantly impacted by hurricanes Helene and Milton. We operate numerous hospitals within these geographies.

Speaker 2

We are very proud of our leadership and how they prepared for and performed during and in the aftermath of these hurricanes. And we are humbled by the resiliency of our dedicated employees, some of whom experienced damage to their homes and personal property as well as electricity and water outages. Given our presence in hurricane prone markets, we have well defined protocols for dealing with large storms. These protocols prioritize the safety and well-being of our patients and employees. Our physical plants withstood hurricanes very well.

Speaker 2

25 of our hospitals, including 10 that incorporated at least one element of prefabrication as part of either the initial build or bed addition or in some way impacted by the hurricanes, yet in total experienced only relatively minor damage. This is a testament to the quality and strength of our hospitals. We are still gathering estimates on required repairs, which we currently believe will amount to less than $1,000,000 of expenses to be incurred in Q4. For the safety of our patients and staff, we chose to evacuate our Largo and Cape Coral Florida hospitals ahead of Hurricane Milton with our Largo hospital closing for 5 days and Cape Coral for 6 days. Many patients from these two hospitals were evacuated safely to other Encompass Health hospitals and were accompanied by members of our clinical staff as needed.

Speaker 2

Again, a testament to our hospital staff. 4 additional Florida locations did not admit patients prior to and immediately after Hurricane Milton passed through Florida on October 9 10. By Saturday, October 12, all of our hospitals had resumed normal operations and were admitting patients. Although our operations are back to normal, some of the communities we serve are still in recovery mode. Disruptions to the healthcare systems in those communities may impact our volumes and length of stay in Q4 and we have attempted to account for that as well as the aforementioned facility repairs in our updated guidance.

Speaker 2

Now I'll turn it over to Doug.

Speaker 3

Thank you, Mark and good morning everyone. As Mark stated, Q3 was another strong quarter with revenue increasing 11.9 percent to $1,350,000,000 and adjusted EBITDA increasing 13.4 percent to 269,300,000 dollars Total discharges increased 8.8 percent and net revenue per discharge increased 2.5%. As we saw in Q2, discharge growth in Q3 was skewed somewhat more towards same store based primarily on the timing of de novo openings. Revenue growth in Q3 included a 7,900,000 dollars increase in provider tax revenues, partially offset by $4,500,000 increase in associated expense, netting to a $3,400,000 adjusted EBITDA benefit. Bad debt expense as a percent of revenue was 1.9 percent, down 30 basis points from Q3 'twenty three and a 100 basis points from Q2 'twenty four.

Speaker 3

Recall that in Q2, we had a substantial increase in claims requested for review by our primary MAC. Consistent with our historical practice, we established a reserve against those claims in Q2 as the review was still pending. During Q3, substantial majority of those claims was resolved favorably contributing to strong collections. We had a relatively small number of new claims selected for review under TPE in Q3. Moving on to Review Choice Demonstration or RCD.

Speaker 3

As a reminder, Alabama was the 1st state to implement RCD inclusive of 7 Encompass Health hospitals. RCD began with cycle 1, which ran from August 2023 until February 2024 and had a minimum required affirmation rate of 80%. Cycle 1 participants were given an option of 100% prepayment claims review or 100% post payment claims review for all Medicare claims. We elected 100% prepayment claims review and all 7 of our hospitals completed cycle 1 with an affirmation rate of approximately 89% exceeding the 80% required threshold. Accordingly, we were given the option for cycle 2 of remaining on 100% prepayment claims review, changing to 100% post payment claims review or being subject to a 5% spot audit.

Speaker 3

Given the processes we have established and the success we had achieved in cycle 1, we elected to remain on 100% prepayment claim review. Cycle 2 began in May 2024 and concludes on October 31. The required affirmation rate in cycle 2 increased from 80% to 85%. We do not expect any of our 7 hospitals to achieve that target by October 31. Many of our RCD non affirmations are based on the application of improper standards or requirements that directly conflict with the Medicare coverage criteria for inpatient rehabilitation facilities.

Speaker 3

We are appealing incorrect determinations and we are working directly with CMS to address our concerns related to these improper standards. We are still early in this process, but we believe our approval rates of approximately 90% cycle 1 better reflect our long term affirmation rates than the lower initial approval rates we have thus far experienced in cycle 2. There is no financial penalty for not beating the affirmation rate in cycle 2. Rather as we enter cycle 3, we will remain at 100% prepayment claim review. The required affirmation rate in cycle 3 increases to 90%.

Speaker 3

SWB per FTE increased 4.1% in Q3, inclusive of a 3.5% increase in salaries and wages per FTE and a 14% increase in benefits per FTE. The large increase in benefits per FTE in Q3 was driven by group medical costs, which included several large dollar claims and an increase in prescription costs. The incurrence of large claims is sporadic and the frequency of such claims tends to be mean reverting. Total premium labor expense for Q3 was $32,600,000 down 2% from Q3 'twenty three and flat sequentially. Q3 contract labor FTEs were 1.5% of total FTEs.

Speaker 3

These metrics are consistent with our expectations of a stable labor market. Net pre opening and ramp up costs were $5,400,000 in Q3 'twenty four as compared to an adjusted EBITDA contribution of $900,000 from the 2023 openings in Q3 'twenty three. We continue to generate significant free cash flow. Adjusted free cash flow increased 27.1 percent to $189,700,000 bringing our year to date total to approximately $500,000,000 We now expect full year adjusted free cash flow of $560,000,000 to $620,000,000 Our leverage and liquidity remain very favorable. Net leverage at quarter end was 2.3 times compared to 2.7 times at year end 'twenty three.

Speaker 3

We ended the 3rd quarter with approximately $148,000,000 in unrestricted cash and no amounts drawn on our $1,000,000,000 revolving credit facility. On October 22, we issued a notice of redemption for an incremental $100,000,000 of our 5.75 percent senior notes due in September 2025. This redemption will settle next month, following which we will have a remaining balance of $100,000,000 on these notes. We are again raising our 2024 guidance. We now assume net operating revenue of $5,325,000,000 to $5,375,000,000 adjusted EBITDA of $1,070,000,000 to 1,090,000,000 and adjusted earnings per share of $4.19 to $4.33 The key considerations underlying our guidance can be found on page 12 of the supplemental slides.

Speaker 3

There are a number of factors to keep in mind as you contemplate year over year comparisons for Q4. Q4 of 2023 included a $22,000,000 revenue reserve related to bad debt stemming from the write off of older claims, predominantly pre-twenty 18. After giving effect to minority interest, the impact of this revenue reserve on Q4 'twenty three adjusted EBITDA was $16,000,000 Q4 'twenty three also included $6,800,000 in favorable reserve adjustments for workers' comp and general professional liability insurance. We are anticipating net pre opening and ramp up costs of $3,000,000 to $3,500,000 in Q4 'twenty four as compared to $1,000,000 in adjusted EBITDA contribution from 2023 openings in Q4 'twenty three. And we anticipate a Q4 adjusted EBITDA impact of $3,000,000 to $3,500,000 related to the addition of our Augusta Hospital to the Piedmont joint venture together with Oracle Fusion implementation costs.

Speaker 3

With that, we'll open the lines for Q and A.

Operator

Thank you. At this time, the floor is now open for your questions. We'll go first to the line of Joanna Gajuk with Bank of America Securities. Please go ahead.

Speaker 2

Good morning, Joanna.

Speaker 4

Hi. This is Christian Porter on the line for Joanna. Thank you guys so much for taking our question. I was wondering because same store volumes were very strong and accelerated quarter over quarter. Just wondering what drove that strength and how much of this was from the addition of new beds?

Speaker 4

Thank you.

Speaker 2

Kristin, this is Mark Tarr. As I noted in my comments, it was very broad across geographies. All of our 8 geographic operating regions had nice growth. We saw nice growth in our stroke and other neurological categories. We saw the continued ramp up of the facilities we brought on for the past couple of years.

Speaker 2

So we believe that we continue to take market share. We believe that our value proposition continues to be out there relative to the quality outcomes that we're able to achieve and is recognized as our ability to get patients back home and not readmitted back to the acute care hospital.

Speaker 3

I do think the bed additions had a favorable impact. Prior to Q3 on a year to date basis, we had added 100 and 15 beds, including 40 beds in the satellite location. And so those are accounted in same store. It's also the case that in the first half of the year, the 23 de novo openings were rolling into same store and those are still in ramp up mode. So that provides a little bit of a tailwind to the same store number as well.

Operator

And we'll hear next from Andrew Mook with Barclays. Please go ahead.

Speaker 5

Hi, good morning.

Speaker 4

Hi, how are you? Total FTEs have been up about 7% to 8% for the last year or so. Should we expect that to continue to increase in that ballpark to keep up with the discharge growth? Or should we expect that to moderate as we distance ourselves from some of the severe labor issues of 2021 2022? And then relatedly, it sounded like there were some additional group medical expenses hitting the SWB line in the quarter.

Speaker 4

What was the underlying wage inflation? And what's the outlook for that going forward? Thanks.

Speaker 3

Yes. I'll take the second part of the question first. And SWB per FTE or SW per FTE was up 3.5%, so pretty consistent with what we saw in Q1 and Q2. With regard to the total FTEs, we're pretty much at a stabilized EPOB of about 3.4 now. You'll have some noise from quarter to quarter based on the timing of new openings.

Speaker 3

But generally speaking, we would expect that the growth in total FTEs will be pretty highly correlated to discharge growth.

Speaker 2

And as we've noted in the past, at this EPOB level, we feel like it's at a level that is conducive with us being able to continue to retain staff and also produce the outstanding outcomes. So we have put a lot of focus on that in the past couple of years as well.

Speaker 3

And we do believe that we are seeing tangible evidence of the impact of EPOB as well as a number of the other initiatives we've been pursuing on our turnover rates. The Q3 annualized turnover rate for RNs was 20.7% and for therapists 7.6% and those are very strong numbers.

Speaker 4

Great. Thanks for all the color.

Operator

Next, we'll hear from the line of Ben Hendricks with RBC Capital Markets. Please go ahead.

Speaker 5

Hello, Ben. Hi.

Speaker 6

This is Mike Murray on for Ben. Congrats on the quarter and I appreciate all the commentary you gave on the hurricanes. Just given your expectations for lower volumes, could you provide a ballpark estimate for revenue impact in the Q4?

Speaker 3

We really can't because as we said, our hospitals resumed normal operations very quickly. So the impact of discharge growth and to revenue from those disruptions would have been relatively minor. What we're still evaluating is whether or not the systems in the communities in which we operate hospitals have been impacted in any way that might cause us, for instance, to see a longer length of stay because there aren't available places for patients who have been treated in our facilities to be discharged. We are confident that the updated guidance ranges for revenue and adjusted EBITDA incorporate any impact that we're going to see from the hurricanes, whether it's the volume, whether it's the length of stay or making the repairs to the facilities that will be expensed in Q4.

Speaker 6

Okay. And just a follow on, so you had some de novos in development, in areas that were impacted by the hurricanes. And sorry if I missed this, but are you expecting any delays in construction as a result? Thanks.

Speaker 3

We are not. And you're right. We're scheduled to open 5 hospitals in the state of Florida next year. And those sites were all secured in advance of the storm and came through very well. So any of the relatively minor disruptions that we may have experienced there, we believe we will be able to make up and stick with the timeframe that is depicted on the schedule in the supplemental slides.

Speaker 6

Awesome. Thank you.

Operator

And now we'll turn to the line of Brian Tanquilut with Jefferies. Please go ahead.

Speaker 2

Good morning. Good morning, Brian.

Operator

Good morning, guys. This is Megan Holth on for Brian. Congrats on the quarter. Just going back to your bad debt really quick. We noticed that you're guiding 4Q bad debt reserves to a midpoint of 2,225.

Operator

Is that a step up from Q3? Is that just conservatism? Or is that attributed to the small new audit claims that you guys mentioned in 3Q?

Speaker 3

Before Q3 that was kind before Q2 and Q3 where you had some noise in each one of those, that was kind of the run rate that we were at. And so we don't think it's reflecting anything other than what we suggest as a normalized level of activity. In Q3, we benefited from a decrease in our aging based reserve and some of that was attributable to processing some previously denied claims.

Operator

Got it. Thank you so much. And next we'll hear from the line of Pito Chickering with Deutsche Bank. Please go ahead.

Speaker 2

Hey, Pito.

Speaker 7

Hey, good morning, everyone. This is Kieran Ryan on for Pito. Thanks for taking the question. It looks like 4Q EBITDA margin guidance is maybe down somewhere about 50 bps from 3Q excluding the provider taxes. I don't think there's any negative seasonality from 3Q to 4Q on margins or EBITDA dollars.

Speaker 7

So just wanted to confirm, is that kind of just the opening costs and any potential impact from hurricane headwinds? Or is there anything else we should be thinking about sequentially?

Speaker 3

Yes. I think it's really that series of year over year considerations that I reviewed at the end of my prepared comments, and those are laid out in the guidance considerations.

Speaker 7

Okay. And then on free cash flow, it looks like the working capital tailwind came down pretty significantly, but you still raised your guidance quite a bit in free cash flow dynamics in the quarter and if there's anything we should pay attention to there for 2025? Thanks.

Speaker 3

I think probably the most significant item in Q3 was just the strong collections of AR we had and a lot of that was moving through that boldness of claims that had been selected for review under TPE at the end of Q2. Thanks.

Operator

And next we'll go to the line of Scott Field with Stephens. Please go ahead.

Speaker 5

Good morning.

Speaker 4

Well, fine. Good morning. We'll find out, but close enough. Good morning. Wanted to first question just ask about just in understanding that you're not providing guidance at this point, but you wanted to maybe frame the key headwinds and tailwinds for 2025.

Speaker 4

And just from, I guess, the bigger picture, any modeling considerations at this vantage point that you think it is important to call out for analysts and investors?

Speaker 3

So as we head into 2025, our starting assumption, and we've got the better part of another quarter to continue to flush this out is that we'll see SWB per FTE inflation of somewhere in the 3% to 3.5% range. We think it's kind of settling down there. We have not yet put a fine pencil to what pre opening and ramp up costs will be on a year over year basis, but it's probably not going to be too distinct from the impact that we're seeing this year. And the last thing I'd call to attention is already on a year to date basis through Q3, we've had a favorable EBITDA impact from net provider taxes of $13,000,000 As we've mentioned previously, it's difficult to have a lot of confidence in the visibility of those provider taxes on a go forward basis because those programs vary from state to state and they're typically implemented on an annual basis. We know of the $13,000,000 that's been included in EBITDA on a year to date basis that approximately $4,000,000 to $5,000,000 relates to out of period.

Speaker 3

So I think it's a fair assumption that that portion is not likely to repeat going into 2025. Some portion of the balance, maybe even a substantial portion of the balance probably will. Those are the things that come immediately to mind, Scott.

Speaker 4

Okay. Thanks, Tom. That's helpful. And then just on my follow-up question. Wanted to circle back just on some of the comments that Mark had made around the sort of lessons learned on the prefabs and then starting to see efficiencies realized more on the Athens facility.

Speaker 4

I was hoping maybe you can sort of frame if there's any type of quantitative figures you can share with us in terms of like maybe in the initial process, how much maybe additional costs you had just as you were sort of working your way through this new format? And then as you sort of move towards the efficiencies, how much you think you could bring down those costs, for example, on the Athens facility and then as you continue to launch more of the prefabs?

Speaker 3

Yes. So you've got 2 primary advantages that we're trying to achieve. One is shortening the actual construction process because that obviously can note speed to market and the faster we get these things open, the faster we can start to generate cash flow from those. If we look specifically at Houston and again, this was a learning exercise for us because it was the first fully prefabricated facility we did. We laid the 1st module in Houston in June, in the early part of June.

Speaker 3

And we got all of the final permitting and licensing, final inspection will happen in the 1st week in November. So that's really fast, right? You're talking about a little over 5 months there or just about 5 months and that compares to conventional construction which would be 11 to 12 months. And we think we're going to be even a little bit faster than that for Athens. From an expense perspective and so ultimately what we're looking at because the elements of the timeframe that you're not really able to impact much with prefabricated construction, You get some savings with regard to the design process because we're using a lot of replication from project to project.

Speaker 3

But permitting and site work are going to continue to vary pretty significantly from location to location. And so there's not really an opportunity there. But again, from laying the first module to when the door opens is a pretty substantial time improvement. The on the cost side, Houston, because we were still setting the learning curve, was essentially a breakeven with conventional costs. We do expect that as we hone the process further and we'll see a little bit of the impact on assets, it's really going to be for future projects, we'll get there, that will move towards an estimated 15% cost savings versus conventional construction.

Speaker 2

Scott, this is Mark. So I'll just pitch in there. We've been at this now for a number of years on an incremental basis, first starting with bathrooms and head walls and then working our way up to the Uber modules. And it has really turned out to be a nice what we consider to be a competitive advantage in terms of building our hospitals. I also commented on the fact that these have been tested in a number of severe storms in terms of their quality and soundness of construction.

Speaker 2

So we just couldn't be happier in terms of the success and the way this is working its way through our implementation phase.

Speaker 4

Okay, great. Thanks for the color.

Operator

And now we'll hear from the line of Jared Hayes with William Blair. Please go ahead.

Speaker 5

Hey, Jared. Good morning.

Speaker 8

Hey, good morning and congrats on a solid quarter. Maybe just taking a step back and kind of really thinking about sort of the durability of growth again as we look out to 2025. I'm curious, do you feel like the same store growth trends, is that largely reflecting sort of the underlying demand environment for IRF services? Or do you feel like you are taking, I guess, more than your fair share as you capture market share from other care settings like SNFs, which I know has been kind of a focus area from recent years. So just any thoughts around that?

Speaker 2

I think it's both. It's hard to put an exact number on what is taking additional market share versus just organic growth from a demographic tailwind. But it's some of both, some marketplaces, it's more evident than others in terms of where we're taking it from, in terms of whether they're nursing homes or other providers in the marketplace. As I noted in my general comments, the aging demographics and the increased demand just by the aging population for inpatient rehab services is certainly playing its way out and can be seen in our same store growth.

Speaker 3

As we've stated on a number of occasions, we believe that the traditional measure of looking at market share in the IRF space, which is to look at the number of discharges we have over the total industry discharges, grossly under represents the total addressable market for IRF services. And one of the primary reasons we think that is that we can look upstream at the number of annual discharges coming out of all of the acute care hospitals in the U. S. That are prima facie CMS13 compliant. And obviously, only 60% of the patients treated in any particular IRF during the course of the year have to be CMS-thirteen compliant, but only 14% of that total population of acute care hospital discharges that are CMS-thirteen compliant are winding up in an IRF bed.

Speaker 3

Now we recognize that the number shouldn't be 100% for various reasons, including the fact that a portion of that population would not meet medical necessity criteria, but that the potential for that number to be a lot higher than 14% is out there. It's important to note too that that 14% that winds up in an IRF bed includes existing Encompass Health facilities. And in virtually all of the markets in which we operate, we convert higher than 14% of the CMS 13 eligible discharges in that market into the IRF bet. If you strip us out, that number on a national basis is probably at a high single digit. And we know in more mature markets where we've been operating for a period of time, it's not unusual for us to see that conversion rate at 30% or higher.

Speaker 8

Okay, great. I think that's super helpful. And then maybe I'll just ask a quick follow-up on the quarter. It sounded like the Medicare Advantage discharge growth was solid. I think that was running a couple of points higher than the Medicare traditional Medicare discharge growth.

Speaker 8

It does look like in the revenue mix for the quarter, MA declined a little bit sequentially just as a percentage of total revenue. So I'm curious, I assume that's related to sort of a mix dynamic terms of the conditions that were treated in the quarter. Is there something else we should be thinking about from a revenue mix perspective?

Speaker 3

No. As Mark cited, the growth has been broad based across the payers. So if you look at Q3 specifically, Medicare up 8.8%, Medicare Advantage 12.6% and Managed Care saw solid growth at 9.1%. On a year to date basis through Q3, Medicare up 9.3%, Medicare Advantage 11.1% and Managed Care up 8.5%. Looking at a 3 year CAGR from 2020 through 2023, again it reflects very balanced growth.

Speaker 3

Medicare over that period of time, up 7.4%, Medicare Advantage 8.9%, and managed care 11.3%. I think what this really demonstrates is that our value proposition really extends well across all payer classes. We have to solve the case that we create more value for our referral sources when we're not trying to cherry pick patients between payers.

Speaker 8

Absolutely. Makes sense and thanks for all the color.

Operator

We'll turn to the line of Matthew Gillmor with KeyBanc. Please go ahead.

Speaker 2

Good morning.

Speaker 5

Hey, good morning, guys. This is Zach Cagerty on for Matt. Appreciate you taking our question. So we've been getting questions on election implications for hospitals, especially on the exchange subsidies and Medicaid supplemental payments. I guess could you remind us what your exposure is to these programs or if you see any other election related items that we should be aware of?

Speaker 3

Yes. I think from our perspective, the program that seems to be getting the most airplay because of its size is Tennessee. And it's really not a factor for us in the state of Tennessee. So we've talked quite a bit about our net provider tax numbers. For us, these the numbers are substantially smaller than they are for acute care hospitals or some other settings.

Speaker 3

They've been challenging to predict. If you look at the last 2 years proceeding this year, the EBITDA impact from our net provider taxes was nominal. It was give or take a couple of $1,000,000 On a year to date basis this year, it's been $13,000,000 but $4,000,000 to $5,000,000 of that relates to out of period. So as I stated in my earlier comment, is it reasonable to believe that some amount of that continues into 2025? Yes, I think it probably is.

Speaker 3

We just don't have a good estimate because of the lack of visibility. And relative to your question just

Speaker 2

around the whole presidential election and if there's one preference over another, we really don't see a threat from either one. And if you look back historically, while there's been Republican or Democrat, it doesn't seem to have had a significant impact one way or the other.

Speaker 5

Okay. That's helpful. And then just as my follow-up, as you guys continue to reduce leverage in the business, is there a leverage ratio that you guys are targeting?

Speaker 3

There's not. We're obviously very comfortable kind of in the current range. We used to say that we felt like a run rate leverage of about 3 times was appropriate. Obviously, we're substantially below that right now. It feels like just based on some of the macro factors that are out there that the market is appreciating 2.5 is the new 3.0.

Speaker 3

We recognize that if we get much below the current level of leverage, there's an inefficiency that kind of creeps in from a cost of capital perspective. We continue to think that we have good opportunities to deploy cash towards capacity expansions and that will be our top priority. And I think the our Board of Directors signaled some of the other potential utilizations of cash with the increase in the dividend that occurred in Q2 as well as the increase in the share repurchase authorization.

Speaker 5

Great. Appreciate the time guys.

Operator

As there are no further questions in queue at this time, I'd like to turn the floor back over to Mr. Mark Miller for any additional or closing comments.

Speaker 1

Thank you, operator. If anyone has additional questions, please call me at 205-970-5860. Thank you again for joining today's call.

Operator

Ladies and gentlemen, that will conclude the Encompass Health's 3rd quarter 2024 earnings conference call. Thank you for your participation. You may disconnect at this time and have a wonderful day.

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Encompass Health Q3 2024
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