Q3 2024 Earnings Summary
- The company expects an annual EBITDA benefit of approximately $100 million to $120 million from new or expanded state Medicaid Directed Payment Programs in Tennessee and New Mexico. This benefit is net of provider taxes and could be retroactive to July 1, 2024 if CMS approves the programs in the fourth quarter. This potential increase in EBITDA is expected to significantly boost earnings going forward.
- Medicare reimbursement rates are going to be favorable for next year, and the company is seeing increases in commercial contracting similar to this year. Additionally, the Medicaid DPP programs could materially increase realization on Medicaid business in the future, supporting revenue growth prospects.
- The company is experiencing a shift from Medicaid to additional exchange business due to Medicaid redeterminations, which is beneficial as exchange plans typically reimburse at higher rates than Medicaid. There has been no significant change in uninsured business, suggesting a favorable payer mix shift that could positively impact revenue. ,
- Increased claim denials and slow adjudication processes are impacting cash collections and EBITDA. The company experienced a doubling of denials compared to the prior year, resulting in an approximate $10 million headwind in the third quarter. About 70% of initial denials are still in the adjudication process, with only 25% of denied cases successfully reversed. This issue is expected to continue into the fourth quarter.
- Reduction in EBITDA guidance by $40 million at the midpoint, primarily due to hurricanes and increased denials. The guidance change reflects an $18 million variance in the third quarter and an expected $22 million impact in the fourth quarter, with more than half of the fourth-quarter impact due to hurricane-related closures, such as the shutdown of the Punta Gorda facility. ,
- Net revenue guidance reduced by $100 million at the midpoint, largely due to announced divestitures and operational challenges. The company expects the divestitures to impact fourth-quarter revenue, and the reduction also reflects the effects of hurricanes and increased claim denials. ,
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EBITDA and Free Cash Flow Guidance Reduction
Q: Why was EBITDA guidance cut by $40M and free cash flow by $100M?
A: The $40 million EBITDA guidance reduction includes an $18 million miss in Q3, with the remaining $22 million due to Q4 hurricane impacts and ongoing denials. The $100 million free cash flow reduction stems from the EBITDA decline, slower cash collections due to increased denials, timing shifts of state program funds to Q1 2025, and the sale of working capital from a Pennsylvania divestiture. -
Increased Claim Denials
Q: Are denials mainly from Medicare Advantage and linked to the 2-midnight rule?
A: While the 2-midnight rule may be a catalyst, payers are increasingly aggressive across many denial areas, primarily in Medicare Advantage but also in commercial plans. Denials are above prior trends and expectations. -
Denied Claims Headwind
Q: When did the denied claims headwind start, and how to combat it?
A: Denials increased steadily throughout the quarter, slowing the adjudication process. About 70% of denied claims from this year remain unresolved. The company now has physician adviser coverage across its portfolio and enhanced appeals capabilities to address these denials. -
Q4 EBITDA Guidance Impact
Q: Can you parse the $22M Q4 EBITDA guidance reduction?
A: Over half of the $22 million reduction is due to hurricane impacts, particularly from the closure of the Punta Gorda facility. The remainder is attributed to ongoing denial issues, expected to mirror Q3 levels. -
DPP Programs in TN and NM
Q: Is the $100–$120M DPP benefit net of provider taxes?
A: Yes, the estimated annual net EBITDA benefit of $100 million to $120 million from Tennessee and New Mexico DPPs is net of provider taxes and potential offsets like sunsetting existing reimbursements. If approved in Q4 as expected, the plans are retroactive to July 1, 2024, potentially adding six months of benefit. -
DPP Guidance Inclusion
Q: Is the DPP retroactive benefit included in Q4 guidance?
A: No, the potential six-month retroactive benefit, estimated at $50–$60 million, is not included in 2024 guidance since CMS approval is pending. -
2025 Outlook and Headwinds
Q: Will hurricane and denial headwinds affect 2025?
A: While some hurricane impacts persist, 2024 serves as a good starting point for 2025, adjusted for divestitures. The DPP programs, not in 2024 guidance, are expected in 2025 pending CMS approval. Business interruption insurance recoveries may also occur in 2025, supporting growth expectations. -
Divestitures Valuation and Progress
Q: How are divestitures progressing and what's the expected valuation?
A: The company expects to complete $1 billion in divestitures at an average 10× EBITDA multiple, improving leverage and margin profile. Valuations align with past transactions, and confidence is high in closing deals by year-end. -
Revenue per Admission
Q: What's the outlook for revenue per admission considering payer mix and acuity?
A: There's opportunity for growth in revenue per admission. Despite current impacts from lower inpatient acuity and geographic mix shifts, favorable Medicare reimbursement rates, commercial contract increases, and Medicaid DPP programs are expected to enhance revenue going forward. -
Softer Acuity Causes
Q: What's causing inpatient acuity softness, and will it persist?
A: Softness in inpatient surgical acuity is due to the shift of procedures like total joint replacements to outpatient settings and reduced elective spine and cardiovascular cases. Strong clinic visits suggest demand remains robust, and volumes are expected to recover. -
Hurricane Disruptions Recovery
Q: Will hurricane disruptions have lingering effects into 2025?
A: Full recovery from hurricanes will take time. While some care has shifted to nearby facilities, business interruption insurance reimbursements expected in 2025 should mitigate financial impacts. -
IV Shortages Impact
Q: Are IV shortages affecting hospital procedures?
A: No operational disruptions have occurred due to IV shortages. The company sources primarily from BD, not Baxter, and has implemented logistics efforts to maintain inventory and operations. -
Exchange Admissions
Q: What percentage of admits come from exchanges, and is it affected by Medicaid redetermination?
A: Approximately 7% of admissions are from exchanges, consistent with national averages. There's been a shift from Medicaid to exchanges due to redeterminations, with no significant increase in uninsured volumes. -
Denials Across Payers
Q: Are denials concentrated among specific payers or broad-based?
A: Denials are relatively broad-based across payers, not limited to specific ones. The company is enhancing physician adviser coverage and appeals capabilities to address this issue.