ADDUS HOMECARE CORPORATION You should read the following discussion together with our unaudited condensed consolidated financial statements and the related notes included elsewhere in this quarterly report on Form 10-Q. This discussion contains forward-looking statements about our business and operations. Statements that are predictive in nature, that depend upon or refer to future events or conditions or that include words like "believes," "belief," "expects," "plans," "anticipates," "intends," "projects," "estimates," "may," "might," "would," "should" and similar expressions are intended to be forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. These risks and uncertainties include, but are not limited to: the impact of macroeconomic conditions, rising global inflation and interest rates, legislative developments, trade disruptions and supply chain disruptions on our business and our customers' businesses; financial market instability and disruptions to the banking system due to bank failures, particularly in light of the closures ofSilicon Valley Bank and Signature Bank inMarch 2023 ; business disruptions due to natural disasters, acts of terrorism, pandemics (including the ongoing COVID-19 pandemic), riots, civil insurrection or social unrest, looting, protests, strikes or street demonstrations; changes in operational and reimbursement processes and payment structures at the state or federal levels; changes in Medicaid, Medicare, other government program and managed care organizations policies and payment rates, and the timeliness of reimbursements received under government programs; changes in, or our failure to comply with, existing, federal and state laws or regulations, or our failure to comply with new government laws or regulations on a timely basis; competition in the healthcare industry; the geographical concentration of our operations; changes in the case mix of consumers and payment methodologies; operational changes resulting from the assumption by managed care organizations of responsibility for managing and paying for our services to consumers; the nature and success of future financial and/or delivery system reforms; changes in estimates and judgments associated with critical accounting policies; our ability to maintain or establish new referral sources; our ability to renew significant agreements or groups of agreements; our ability to attract and retain qualified personnel; federal, state and city minimum wage pressure, including any failure of any governmental entity to enact a minimum wage offset and/or the timing of any such enactment; changes in payments and covered services due to the overall economic conditions and deficit reduction measures by federal and state governments, and our expectations regarding these changes; cost containment initiatives undertaken by federal and state governmental and other third-party payors; our ability to access financing through the capital and credit markets; our ability to meet debt service requirements and comply with covenants in debt agreements; our ability to integrate and manage our information systems; any security breaches, cyber-attacks, loss of data, or cybersecurity threats or incidents, and any actual or perceived failures to comply with legal requirements related to the privacy of confidential consumer data and other sensitive information; the size and growth of the markets for our services, including our expectations regarding the markets for our services; the acceptance of privatized social services; eligibility standards and limits on services imposed by state governmental agencies; the potential for litigation, audits and investigations; discretionary determinations by government officials; our ability to successfully implement our business model to grow our business; our ability to continue identifying, pursuing, consummating and integrating acquisition opportunities and expand into new geographic markets; the impact of acquisitions and dispositions on our business, including the potential inability to realize the benefits of potential acquisitions; the potential impact of the discontinuation or modification of LIBOR; the effectiveness, quality and cost of our services; our ability to successfully execute our growth strategy; changes in tax rates; the impact of inclement weather or natural disasters; and various other matters, many of which are beyond our control. In addition, these forward-looking statements are subject to the risk factors set forth in Part I, Item 1A of our Annual Report on Form 10-K for the period endedDecember 31, 2022 , filed with theSEC onFebruary 28, 2023 . You should carefully review all of these factors. Moreover, our business may be materially adversely affected by factors that are not currently known to us, by factors that we currently consider immaterial or by factors that are not specific to us, such as general economic conditions. These forward-looking statements were based on information, plans and estimates at the date of this report, and we assume no obligation to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes, except as may be required by law.
Overview
We are a home care services provider operating three segments: personal care, hospice and home health. Our services are principally provided in-home under agreements with federal, state and local government agencies, managed care organizations, commercial insurers and private individuals. Our consumers are predominantly "dual eligible," meaning they are eligible to receive both Medicare and Medicaid benefits. Managed care revenues accounted for 36.6% and 35.7% of our net service revenues during the three months endedMarch 31, 2023 and 2022, respectively. 18
--------------------------------------------------------------------------------
Table of Contents
A summary of certain consolidated financial results is provided in the table
below.
For the Three Months Ended March 31,
2023 2022
Net service revenues by segment: (Amounts in Thousands)
Personal care $ 190,032 $ 169,632
Hospice 49,082 47,727
Home health 12,485 9,275
Total net service revenue $ 251,599 $ 226,634
Net income $ 12,675 $ 8,470
As of March 31, 2023 , we provided our services in 22 states through 203 offices.
We served approximately 55,000 and 53,000 discrete individuals, respectively,
during the three months ended March 31, 2023 and 2022. Our personal care segment
also includes staffing services, with clients including assisted living
facilities, nursing homes and hospice facilities.
Acquisitions
In addition to our organic growth, we have grown through acquisitions that have expanded our presence in current markets, with the goal of having all three levels of in-home care in our markets or facilitating our entry into new markets where in-home care has been moving to managed care organizations or that present other strategic opportunities. OnFebruary 1, 2022 , we completed the acquisition of the operations ofJourneyCare Inc. ("JourneyCare"). The purchase price was approximately$86.6 million , including the amount of acquired excess cash held byJourneyCare at the closing of the acquisition (approximately$0.4 million ). TheJourneyCare acquisition was funded with a combination of a$35.0 million draw on the Company's revolving credit facility and available cash. With theJourneyCare acquisition, the Company expanded its hospice services inIllinois .
On
On
COVID-19 Pandemic Update
Compared to earlier periods,the United States has generally experienced a moderation of COVID-19 infections and related hospitalizations. However, given the longer-term uncertainties associated with the COVID-19 pandemic, it is difficult to predict the effect and ultimate impact of the COVID-19 pandemic on the Company as conditions related to the COVID-19 pandemic continue to evolve. For the three months endedMarch 31, 2023 and 2022, COVID-19-related expenses in our personal care segment were approximately$0.7 million and$1.7 million , respectively, and are included in cost of service revenues on the Consolidated Statements of Income. Additionally, we recognized revenue of$0.9 million and$1.4 million attributable to temporary rate increases from certain payors in our personal care segment for the three months endedMarch 31, 2023 and 2022, respectively. As ofMarch 31, 2023 , the Company deferred the recognition of$2.9 million of payments received from payors for COVID-19 reimbursement, included within accrued expenses, which will be recognized as we incur specific expenses related to the pandemic, such as expenses related to acquiring additional PPE and COVID-19 related paid time off, or will be returned to the extent COVID-19-related expenses are not incurred. We are not able to reasonably predict the total costs we will incur related to the COVID-19 pandemic, and such costs could be substantial. As the COVID-19 public health situation continues to evolve, federal and state governments have shifted to reducing or terminating certain temporary measures that were implemented to ease delivery of care earlier in the COVID-19 public health emergency. In addition, the current federal public health emergency declaration expiresMay 11, 2023 , and the Biden administration has indicated it will not be extended. We will continue to assess the impact and consequences of the COVID-19 pandemic and government responses to the pandemic, including the implementation of the CARES Act, the PPPHCE Act, the CAA, the ARPA, other stimulus and relief legislation, the President's National COVID-19 Preparedness Plan, and existing and potential additional federal, state and local vaccine mandates, on our business, results of operations, financial condition and cash flows. Given the dynamic nature of these circumstances, we cannot currently predict with certainty the extent to which our business, results of operations, financial condition or liquidity will ultimately be impacted by the pandemic but is not 19
--------------------------------------------------------------------------------
Table of Contents
expected to have a material adverse impact. See Part I, Item 1A-Risk Factors - "The COVID-19 pandemic could negatively affect our operations, business and financial condition, and our liquidity could also be negatively impacted, particularly if theU.S. economic and/or public health conditions deteriorate in connection with the pandemic" of our Annual Report on Form 10-K for the year endedDecember 31, 2022 , filed with theSEC onFebruary 28, 2023 .
See "Liquidity and Capital Resources" below for additional information regarding funds received related to COVID-19 pandemic relief.
Recruiting
As the labor market has tightened and unemployment has declined in comparison to earlier levels, the competition for new caregivers, including skilled healthcare staff, and support staff has increased. In addition,the United States economy continues to experience significant inflationary pressures and a competitive labor market. To the extent that we continue to experience a shortage of caregivers, it may hinder our ability to fully meet the continuing demand for both our non-clinical and clinical services.
Revenue by Payor and Significant States
Our payors are principally federal, state and local governmental agencies and managed care organizations. The federal, state and local programs under which the agencies operate are subject to legislative and budgetary changes and other risks that can influence reimbursement rates. We are experiencing a transition of business from government payors to managed care organizations, which we believe aligns with our emphasis on coordinated care and the reduction of the need for acute care.
Our revenue by payor and significant states by segment were as follows:
Personal Care Segment For the Three Months Ended March 31,
2023 2022
% of Segment % of Segment
Amount Net Service Amount Net Service
(in Thousands) Revenues (in Thousands) Revenues
State, local and other governmental
programs $95,320 50.1 % $83,908 49.5 %
Managed care organizations 87,901 46.3 77,390 45.6
Private pay 4,226 2.2 4,626 2.7
Commercial insurance 1,669 0.9 2,024 1.2
Other 916 0.5 1,684 1.0
Total personal care segment net service
revenues $190,032 100.0 % $169,632 100.0 %
Illinois $98,414 51.8 % $84,693 49.9 %
New Mexico 28,474 15.0 25,440 15.0
New York (1) 21,885 11.5 21,385 12.6
All other states 41,259 21.7 38,114 22.5
Total personal care segment net service
revenues $190,032 100.0 % $169,632 100.0 %
(1)The Company has suspended materially all of its new patient admissions under the New York CDPAP program as discussed below.
Hospice Segment For the Three Months Ended March 31,
2023 2022
% of Segment % of Segment
Amount Net Service Amount Net Service
(in Thousands) Revenues (in Thousands) RevenuesMedicare$44,556 90.8 %$43,485 91.1 % Commercial insurance 2,547 5.2 2,244 4.7 Managed care organizations 1,647 3.4 1,715 3.6 Other 332 0.6 283 0.6 Total hospice segment net service revenues$49,082 100.0 %$47,727 100.0 % Ohio$18,451 37.6 %$16,328 34.2 % Illinois 11,480 23.4 9,541 20.0 New Mexico 6,486 13.2 8,233 17.3 All other states 12,665 25.8 13,625 28.5
Total hospice segment net service revenues
20--------------------------------------------------------------------------------
Table of Contents
Home Health Segment For the Three Months Ended March 31,
2023 2022
% of Segment % of Segment
Amount Net Service Amount Net Service
(in Thousands) Revenues (in Thousands) Revenues
Medicare $9,270 74.2 % $6,812 73.4 %
Managed care organizations 2,539 20.3 1,904 20.5
Other 676 5.5 559 6.1
Total home health segment net service
revenues $12,485 100.0 % $9,275 100.0 %
New Mexico $9,116 73.0 % $7,509 81.0 %
Illinois 3,369 27.0 1,766 19.0
Total home health segment net service
revenues $12,485 100.0 % $9,275 100.0 %
We derive a significant amount of our net service revenues in Illinois , which
represented 39.1% and 37.4% of our net service revenues for the three months
ended March 31, 2023 and 2022, respectively.
A significant amount of our net service revenues are derived from one payor, the
Illinois Department on Aging , the largest payor program for our Illinois
personal care operations, which accounted for 21.5% and 20.7% of our net service
revenues for the three months ended March 31, 2023 and 2022, respectively.
Changes in Reimbursement Rates
OnNovember 26, 2019 , theCity of Chicago voted to approve additional increases in theChicago minimum wage to$14 per hour beginningJuly 1, 2020 and to$15 per hour beginningJuly 1, 2021 . In each subsequent year, the City is required to raise the wage based on increases in the Consumer Price Index ("CPI") subject to a cap and other requirements. OnJuly 1, 2022 , the rate was adjusted to$15.40 based on the increase in the CPI. TheIllinois fiscal year 2022 budget included an increase of hourly rates for in-home care services to$24.96 , to be effectiveJanuary 1, 2022 . OnJuly 12, 2021 , in connection with the temporary increase in federal funding for Medicaid home and community-based services authorized by the ARPA, theState of Illinois submitted its Initial Spending Plan and Narrative to CMS for approval. That plan included the acceleration by two months of the rate increase to$24.96 fromJanuary 1, 2022 , toNovember 1, 2021 . The Company recognized$3.6 million related to the rate increase for the year endedDecember 31, 2021 . TheIllinois fiscal year 2023 budget included an increase of hourly rates for in-home care services to$25.66 , to be effectiveJanuary 1, 2023 . This increase offsets the$0.40 increase inChicago minimum wage that occurred onJuly 1, 2022 . InMarch 2023 , theIllinois Department of Healthcare and Family Services submitted a waiver amendment proposal to CMS to further increase in-home care rates to$26.92 , effective as ofApril 1,2023 , which CMS approved. Our business will benefit from the rate increases noted above as planned for 2023, but there is no assurance that there will be additional offsetting rate increases inIllinois for fiscal years beyond fiscal year 2023, and our financial performance will be adversely impacted for any periods in which an additional offsetting reimbursement rate increase is not in effect. 21
--------------------------------------------------------------------------------
Table of Contents
Impact of Changes in Medicare and Medicaid Reimbursement
Home health services provided to Medicare beneficiaries are paid under the
Medicare Home Health Prospective Payment System ("HHPPS"), which uses national,
standardized 30-day period payment rates for periods of care that meet a certain
threshold of home health visits (periods of care that do not meet the visit
threshold are paid a per-visit payment rate for providing care). Although
payment is made for each 30-day period, the HHPPS permits continuous 60-day
certification periods through which beneficiaries are verified as eligible for
the home health benefit. The daily home health payment rate is adjusted for
case-mix and area wage levels. CMS uses the Patient-Driven Groupings Model
("PDGM") as the case-mix classification model to place periods of care into
payment categories, classifying patients based on clinical characteristics and
their resource needs. An outlier adjustment may be paid for periods of care
where costs exceed a specific threshold amount.
CMS updates the HHPPS payment rates each calendar year. For calendar year 2023,
CMS estimates that Medicare payments to home health agencies will increase by
0.7%. This is based on a home health payment update percentage of 4.0, which
reflects a 4.1% market basket update reduced by a productivity adjustment of
negative 0.1 percentage points, and an estimated 3.5% decrease associated with
the transition to the PDGM that is intended to help achieve budget-neutrality on
a prospective basis, among other changes. Home health providers that do not
comply with quality data reporting requirements are subject to a 2-percentage
point reduction to their market basket update. In addition, beginning January 1,
2022 , Medicare requires home health agencies to submit a one-time Notice of
Admission ("NOA") for each patient that establishes that the beneficiary is
under a Medicare home health period of care. Failure to submit the NOA within
five calendar days from the start of care will result in a reduction to the
30-day period payment amount for each day from the start of care date until the
date the NOA is submitted.
CMS began implementing a nationwide expansion of the Home Health Value-Based
Purchasing ("HHVBP") Model in January 2022 . Under the model, home health
agencies will receive increases or decreases to their Medicare fee-for-service
payments of up to 5%, based on performance against specific quality measures
relative to the performance of other home health providers. Data collected in
each performance year will impact Medicare payments two years later. Calendar
year 2023 is the first performance year under the expanded HHVBP Model, which
will affect payments in calendar year 2025.
In certain states, payment of claims may be impacted by the Review Choice
Demonstration for Home Health Services , a program intended to identify and
prevent fraud, reduce the number of Medicare appeals and improve provider
compliance with Medicare program requirements. The program applies to home
health agencies in Illinois , Ohio , North Carolina , Florida and Texas and may
expand, in the future, into additional states. Providers in states subject to
the Review Choice Demonstration may initially select from the following claims
review and approval processes: pre-claim review, post-payment review or a
minimal post-payment review with a 25% payment reduction. Home health agencies
that maintain high compliance levels will be eligible for additional options
that may be less burdensome. We are currently unable to predict what impact, if
any, this program may have on our result of operations or financial position.
The IMPACT Act requires HHS, together with the Medicare Payment Advisory
Commission , to work toward a unified payment system for post-acute care services
provided by home health agencies, inpatient rehabilitation facilities, skilled
nursing facilities, and long-term care hospitals. A unified post-acute care
payment system would pay post-acute care providers under a single framework
according to a patient's characteristics, rather than based on the post-acute
care setting where the patient receives treatment. As required under the
statute, CMS and the HHS Office of the Assistant Secretary for Planning and
Evaluation issued a report presenting a prototype for a unified post-acute care
payment model in July 2022 . CMS noted in its report the need for additional
analyses and acknowledged that the universal implementation of a unified
post-acute care payment system would require congressional action. The Medicare
Payment Advisory Commission is required to submit a report to Congress by June
2023 .
Hospice
Hospice services provided to Medicare beneficiaries are paid under the Medicare
Hospice Prospective Payment System, under which CMS sets a daily rate for each
day a patient is enrolled in the hospice benefit. CMS updates these rates each
federal fiscal year. Effective October 1, 2022 , CMS increased hospice payment
rates by 3.8%. This reflects a 4.1% market basket increase and a negative 0.3
percentage point productivity adjustment. Hospices that do not satisfy quality
reporting requirements are subject to a 2-percentage point reduction to the
market basket update. Beginning in 2024, the reduction to the market basket
update for failure to report quality data will increase to 4 percentage points.
22--------------------------------------------------------------------------------
Table of Contents
Overall payments made by Medicare to each hospice provider number are subject to an inpatient cap and an aggregate cap, which is set each federal fiscal year. The inpatient cap limits the number of days of inpatient care to no more than 20% of total patient care days. The aggregate cap, which limits the total Medicare reimbursement that a hospice may receive based on an annual per-beneficiary cap amount and the number of Medicare patients served, was updated to$32,486.92 for federal fiscal year 2023. If a hospice's Medicare payments exceed its inpatient or aggregate caps, it must repay Medicare the excess amount.
The CDPAP is a self-directed care alternative program that allows eligible individuals who need help with activities of daily living or skilled nursing services to choose their caregivers. We provide support services as a CDPAP fiscal intermediary.
InApril 2022 , theNew York legislature passed the fiscal year 2023 state budget, which amended the Fiscal Intermediary Request For Offer ("RFO") process to authorize all fiscal intermediaries that submitted an RFO application and served at least 200 clients inNew York City or 50 clients in other counties betweenJanuary 1, 2020 , andMarch 31, 2020 , but that were not initially awarded a contract, to contract with theNew York State Department of Health . These fiscal intermediaries are permitted to continue operating in all counties contained in their RFO application, provided they submitted an attestation and supporting information to the NYSDOH no later thanNovember 29, 2022 . The Company submitted an attestation onNovember 22, 2022 . For the fiscal intermediaries whose attestation and supporting information meet all requirements, the NYSDOH will issue award letters on the contract award date, which was anticipated to beApril 1, 2023 . However, theNew York State Department of Health has not yet awarded these contracts. Any fiscal intermediary that does not receive an award letter must cease fiscal intermediary operations. The Company continues to assess the future of its participation in this program. Given the current profitability of the program, the Company has suspended materially all of its new fee-for-service patient admissions through County Social Service Departments in the CDPAP program.
HHS Proposed Rule: "Assuring Access to Medicaid Services"
OnApril 27, 2023 , HHS introduced a proposed rule titled "Assuring Access to Medicaid Services." The proposed rule has a stated goal of improving access to services for Medicaid beneficiaries. As part of this proposed rule, HHS is proposing that state Medicaid agencies provide assurances that a minimum of 80% of Medicaid payments for personal care and similar services be spent on compensation to direct care workers. The proposed rule would allow states four years to implement changes required by a final rule, with extended time specified for managed care delivery systems. The proposed rule is subject to comment and specifically requests comments on the 80% threshold, related definitions and the implementation period. The ultimate impact of any final rule, which could be adverse for periods after implementation, but could also benefit our business by improving access to services, depends on the requirements set forth in any final rule.
Components of our Statements of Income
Net Service Revenues
We generate net service revenues by providing our services directly to consumers and primarily on an hourly basis in our personal care segment, on a daily basis in our hospice segment and on an episodic basis in our home health segment. We receive payment for providing such services from our private consumers and payors, including federal, state and local governmental agencies, managed care organizations and commercial insurers. In our personal care segment, net service revenues are principally provided based on authorized hours, determined by the relevant agency, at an hourly rate, which is either contractual or fixed by legislation, and are recognized at the time services are rendered. In our hospice segment, net service revenues are provided based on daily rates for each of the levels of care and are recognized as services are provided. In our home health segment, net service revenues are based on an episodic basis at a stated rate and recognized based on the number of days elapsed during a period of care within the reporting period. We also record estimated implicit price concessions (based primarily on historical collection experience) related to uninsured accounts to record revenues.
Cost of Service Revenues
We incur direct care wages, payroll taxes and benefit-related costs in
connection with providing our services. We also provide workers' compensation
and general liability coverage for our employees. Employees are also reimbursed
for their travel time and related travel costs in certain instances.
23--------------------------------------------------------------------------------
Table of Contents
General and Administrative Expenses
Our general and administrative expenses include our costs for operating our network of local agencies and our administrative offices. Our agency expenses consist of costs for supervisory personnel, our community care supervisors and office administrative costs. Personnel costs include wages, payroll taxes and employee benefits. Facility costs include rents, utilities, and postage, telephone and office expenses. Our corporate and support center expenses include costs for accounting, information systems, human resources, billing and collections, contracting, marketing and executive leadership. These expenses consist of compensation, including stock-based compensation, payroll taxes, employee benefits, legal, accounting and other professional fees, travel, general insurance, rents, provision for doubtful accounts and related facility costs. Expenses related to streamlining our operations such as costs related to terminated employees, termination of professional services relationships, other contract termination costs and asset write-offs are also included in general and administrative expenses.
Depreciation and Amortization Expenses
Depreciable assets consist principally of furniture and equipment, network administration and telephone equipment and operating system software. Depreciable and leasehold assets are depreciated or amortized on a straight-line method over their useful lives or, if less and if applicable, their lease terms. We amortize our intangible assets with finite lives, consisting of customer and referral relationships, trade names, trademarks and non-competition agreements, using straight line or accelerated methods based upon their estimated useful lives. Interest Expense
Interest expense is reported when incurred and principally consists of interest and unused credit line fees on the credit facility.
Income Tax Expense
All of our income is from domestic sources. We incur state and local taxes in states in which we operate. The effective income tax rate was 22.0% and 27.9% for the three months endedMarch 31, 2023 and 2022, respectively, compared to our federal statutory rate of 21%. The difference between our federal statutory and effective income tax rates was principally due to the inclusion of state taxes, non-deductible compensation, excess tax expense/benefit and the use of federal employment tax credits.
© Edgar Online, source
