Business Breakdowns
· Chadd Garcia, Zack Fuss
For the bottom 50% of the industry, whose margins are materially lower, these firms were at jeopardy of going out of business. VITAS was reaching out to the government to advocate that they up the reimbursement rates sooner than the government normally would. That was done to save the industry, not protect their margins, which were lower for a period of time, but still fine. [00:00:00] S0: I think that's a robust summary on the Roto-Rooter business. Tough to find an easy segue over to hospice care from a business characteristic perspective. Maybe just start on the similarities you see between the businesses, and then we'll follow up with what exactly the hospice business does, how it's grown, and the strengths, weaknesses, and challenges facing that business. [00:00:00] S1: Well, to start, both of the businesses are highly fragmented industries. And so, if you look at Roto-Rooter, they're probably 2% to 3% of the overall plumbing market and 15% of the drain cleaning market. If you look at VITAS, VITAS is probably 12% of the hospice market. Neither of them require many assets, but they are people-intensive. They don't require much capital to grow, but they generate high returns on capital and spit off a lot of free cash flow. And then both of them are fairly acyclical. [00:00:00] S0: The hospice business itself was interestingly acquired a few decades ago through a prior financing. How has that business evolved? What does it do? Why do you like the hospice business?
· Chadd Garcia
[00:00:00] S1: The business has compounded its revenue at 6%. They really didn't utilize acquisitions as a way to grow it. So that's all, for the most part, organic and greenfielding. The earnings have grown at a faster rate as they expanded their margins. The EBITDA margins for this business range between 15% and 22%. They were able to do a large acquisition recently. When I look at this business, aside from the high returns on capital that it generates and the massive free cash flow, I look at the tailwinds that this thing has coming up, and I think it's massive. Right before COVID, there were two and a half million Americans who passed away every year. Presently, we have about 3 million that pass away. Fast forward in the 2000s, that number should rise to just under 4.5 million people every year and plateau for a long time. There's definitely going to be a rising demand for palliative care services. And then if you look at one of the other major players in the business, it's the government. The government pays for 96% of the bills for palliative care services, and 93% of that is Medicare. What service does the industry and VITAS provide to the government? 30% of Medicare's expense comes in the form of paying for healthcare in the last year of a person's life. And most of that is within the last six weeks. And it usually comes in two forms: First, paying for curative care that's not effective and could do more harm than good. Or, dealing with episodic events via emergency room visits, ambulance transportation, and hospital visits. There are episodic events that can happen in the final days of a person's life that are quite scary for their caregivers, who are mainly their family members. That often leads to expensive hospital visits. The hospice industry and VITAS train these caregivers on how to deal with episodic events so their patients don't end up in hospitals to be stabilized and then shortly after return back to their house. This industry saves Medicare an ample amount of money, and so that's something that the government should want to support and continue.
· Zack Fuss, Chadd Garcia
[00:00:00] S0: More specifically, the size and scale of the VITAS business growth trajectory. How they've been able to grow their business organically and what the characteristics of it are from a margin perspective. Just take us through the business. [00:00:00] S1: They're doing about a billion six in revenue every year at 16% to 20% EBITDA margins. Historically, the growth has been 6% revenue growth and 12% earnings growth. But with the tailwinds that I just mentioned, I think that growth rate is going to increase for a good amount of time. [00:00:00] S0: How does the business make money exactly? [00:00:00] S1: The business makes money by getting paid to provide care. And that payment comes in a few different ways, but it's easiest to think about it in an average reimbursement rate per day of care. There are some add-ons to that. If high-acuity care is needed, let's say somebody does have an episodic event and that requires a full-time nurse, or let's say that family member who's providing a lot of the day-to-day care needs a break, then they'll provide respite service. For serious patients, they'll provide inpatient care, and so those are reimbursed at a higher rate. The biggest cost for the program would be the nurses that do the day-to-day checkups, setting up the clients, and training the family caregivers. And then you have some medical equipment and pharmaceutical products that the patients need as well.
· Chadd Garcia, Zack Fuss
[00:00:00] S1: The business makes money by getting paid to provide care. And that payment comes in a few different ways, but it's easiest to think about it in an average reimbursement rate per day of care. There are some add-ons to that. If high-acuity care is needed, let's say somebody does have an episodic event and that requires a full-time nurse, or let's say that family member who's providing a lot of the day-to-day care needs a break, then they'll provide respite service. For serious patients, they'll provide inpatient care, and so those are reimbursed at a higher rate. The biggest cost for the program would be the nurses that do the day-to-day checkups, setting up the clients, and training the family caregivers. And then you have some medical equipment and pharmaceutical products that the patients need as well. [00:00:00] S0: And then in terms of controlling margins, clearly you're dealing with CMS and the government as a payer. Can you kind of take us through that dynamic and how their revenue is influenced by the government and the dynamics that they're managing?
· Zack Fuss, Chadd Garcia
[00:00:00] S0: And then in terms of controlling margins, clearly you're dealing with CMS and the government as a payer. Can you kind of take us through that dynamic and how their revenue is influenced by the government and the dynamics that they're managing? [00:00:00] S1: Let's start with the margins part of it, and I think the margin part, they're a bit clever with where they choose to compete. And so before you get to the federal regulations, you have state regulations on whom a state would allow in the business. And so some states are more stringent on who gets into the business, and some are less. If you look at California, they're less stringent. LA County by itself has probably 1,900 different hospice operators, whereas in the state of Florida there's probably 50. State regulations can limit the competition. While VITAS does operate in California, for the most part, they operate in states that have more stringent regulations. The other thing that they do is they pick what cities they want to operate in. So they only operate in higher-population areas. And that allows them to better manage the utilization of their assets, which is namely their people, because they can better manage the utilization levels of their people by serving a larger population base. They have 15 to 22% margins, whereas the bottom 50% of the industry has 6 to 9% margins. [00:00:00] S0: From a competitive landscape, are there any other scale players that are worth evaluating as perceived competition, or is it local players that have subscale?
· Zack Fuss, Chadd Garcia
[00:00:00] S0: From a competitive landscape, are there any other scale players that are worth evaluating as perceived competition, or is it local players that have subscale? [00:00:00] S1: It is highly fragmented. Now, there are large players that are independent. RAM Holdings has one. That business also does some home healthcare business. So it's not a pure-play hospice provider. Hospital systems can have associated hospice providers. Assisted nursing facilities can have associated hospice care, palliative service providers. You can think that the industry is made up of independent mom and pop, quote-unquote nonprofits, and hospice care providers that are associated with other healthcare providers such as hospitals and assisted living facilities. There is a benefit of scale, and so hence VITAS' preference for being in more population-dense areas so they can get the benefits of scale. [00:00:00] S0: And then management is adept at navigating these Medicare caps which limit the amount of time a person can spend in hospice. Because from the government's perspective, they want to provide quality care for end of life, but they don't want it to drag on for months at a time. How is that something that they are able to address? And can you explain that dynamic as it relates to Medicare payments?