Business Breakdowns
· 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?
· Chadd Garcia
[00:00:00] S1: This is the government in healthcare managing reimbursements. And so the regulations are highly complicated. But there are a couple things to think about. First, the government limits high-acuity care payments to 20% of an overall bill. No more than 20% of that bill can be spent in high-acuity care. They also limit the total amount of money that's spent on a patient. And so right now the maximum that can be spent is $34,560. So just under $35,000. If you assume that the average revenue per day for normal care is $200, it's just over that. But say $200, that gives you around 170, 175 days of care before the government stops paying for it. With respect to people coming into the program, there are three signatures that are required that sets up a check and balance. In order to be eligible for hospice care, the patient's attending physician needs to attest that the person is terminal and that the end of life is expected to be imminent. And so they have to sign a form attesting to that. The hospice provider, so in this case VITAS, their physician, has to concur and sign a form. And then finally, the patient or their proxy needs to sign a form and agree to enter the program. That's the check and balance with respect to who gets into it. Ultimately, the government stops spending after the cap is hit, and then on the other side of it, limits how much they're going to spend for high-acuity care. And both of these limitations are done on a portfolio basis, not on an individual basis. So if you're a hospital and you have an associated hospice, for the most part, people that come from a hospital are further along in their disease process. And so their stay in a hospice program is rather short. It could be so short that they're unprofitable, because there is some upfront expense. When you take somebody into the program, you gotta fill out all the paperwork. You have to order medical supplies, you have to order pharmaceuticals for the patients. And so if you do that on day one and they die on day two, then you can be at a loss. Also, these patients need high-acuity services if they come from a hospital. And so the hospitals run the risk of breaching the 20% of the bill being spent on high-acuity care. Then if you look at the other end of the spectrum, let's say you have an assisted living facility.
· Chadd Garcia, Zack Fuss
People that come into a hospice program from an assisted living facility tend to live longer than those who come in from hospitals. Those organizations run the risk of exhausting the $34,560 cap because a person may live for too long. VITAS has a variety of different sources where their patients come from. From a portfolio basis, that allows them to manage both of those limitations to some extent. It could be a pressure valve release for hospitals or for assisted living facilities. Let's say an assisted living facility population, they're at their max. They can start sending patients to VITAS in order to help manage their portfolio. [00:00:00] S0: And so how do you win market share? Presumably, they don't have a monopoly in the regions with which they operate. There's patients that are coming into hospice programs on a daily basis. Can you explain how that works?
· Zack Fuss, Chadd Garcia
[00:00:00] S0: And so how do you win market share? Presumably, they don't have a monopoly in the regions with which they operate. There's patients that are coming into hospice programs on a daily basis. Can you explain how that works? [00:00:00] S1: You have sales representatives that go into hospitals that talk to patients, that talk to families. You have sales representatives that go into assisted living facilities that talk to patients and talk to families. This business was very similar to Roto-Rooter. When going from 2012 to COVID, there were hardly any quarters where they had negative growth. And the ones that they did have were more of a payment timing issue related to the 2013 budget sequestration. But when COVID hit, hospitals shut down letting outside people in, and so did assisted living facilities. And so their ability to market at that point was impaired. Hence the negative comps they experienced in the early days of COVID. It's blocking and tackling, boots-on-the-ground salesforce. [00:00:00] S0: Much like Roto-Rooter, is it fair to say that this is mostly just a business that kind of allocates labor? Presumably they don't have centers that they operate. There are staff members that they send to provide care.
· Zack Fuss, Chadd Garcia
[00:00:00] S0: Much like Roto-Rooter, is it fair to say that this is mostly just a business that kind of allocates labor? Presumably they don't have centers that they operate. There are staff members that they send to provide care. [00:00:00] S1: They do have inpatient care, but that's like 1% of the service. 99% would be in a person's home. But if a patient's needs can't be managed at home, they do have inpatient care. So you do have those assets. To your point, it is much less than managing the labor component of it. One way to get market share is you take advantage of industry disruption. The government sets the reimbursement rate and they do it once a year. And it's based to some extent on inflation. When COVID hit, there was massive inflation within the healthcare sector and it was difficult to get nurses. And so you saw them invest in VITAS. They put $37 million into retention bonuses for their nurses, and then they spent another $3 million recruiting new nurses to come into their program, which set them up really well to take market share once the hospitals and assisted living facilities reopened. And if you look at the results of that, they had negative comps from Q4 of 2020 through Q4 of 2022, and then they had 2 quarters of single-digit comps and then spent double digits, low to high teens, ever since. VITAS can be in a position to take market share when there's a disruption in an industry such as high inflation and a government that may be a little bit slow to increase the reimbursement rate during extraordinary times.
· Zack Fuss
[00:00:00] S0: Bringing it all home. At the onset of this conversation, we elaborated on the capital allocation prowess of the business. In their corporate presentations, they also suggest that there's a willingness to split these two businesses up. Interestingly, the business runs in a net cash position. They're aggressive in their buybacks at times when the stock is dislocated. What is their philosophy around allocating the incremental dollar? Why do they run their balance sheet so conservatively? And at what point would it make sense for these businesses no longer to coexist?