US Physical Therapy - Q2 2023
August 9, 2023
Transcript
Operator (participant)
Good day, thank you for standing by. Welcome to the U.S. Physical Therapy second quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. In order to ask a question during the session, please press star one on your telephone keypad. Please be advised that today's conference is being recorded. If you require any further assistance, please press star, then zero. I'd like to turn the call over to Chris Reading, President and CEO. Please go ahead, sir.
Chris Reading (CEO)
Thank you, sir. Good morning, and welcome everyone to U.S. Physical Therapy second quarter 2023 earnings call. With me on the line, include Carey Hendrickson, our Chief Financial Officer, Eric Williams and Graham Reeve, our Co-COOs, Ruth Bernstein, our Executive Vice President and General Counsel, and Jake Martinez, our Senior Vice President of Finance and Accounting. Before I provide a little color on the quarter, we need to cover a brief disclosure statement. Jake, if you would take that, please.
Jake Martinez (SVP of Accounting and Finance)
Chris, this presentation contains forward-looking statements which involve certain risks and uncertainties. These forward-looking statements are based on the company's current views and assumptions. The company's actual results may vary materially from those anticipated. Please see the company's filings with the Securities and Exchange Commission for more information.
Chris Reading (CEO)
Thanks, Jake. This morning, I'm gonna keep my commentary kind of at a high level, and then we'll turn it over to Carey to go through the financials in more detail. I wanna start by thanking our partners, our operations leadership team, our sales and marketing directors, and our digital marketing support and development teams, all of whom are working hard every day to drive patients to our door, where we can affect life-changing care, allowing them to quickly return to work, to sports, and to all those activities that support families, uplift hearts, as well as communities. This would not be possible if not for the care, connection, and dedication of our frontline caregivers, many therapists across our more than 150 individual partnerships.
These first six months, first two quarters of 2023, as a result of the excellent care and outcomes you continue to provide You continue to provide our patients' demand has been greater than ever before in the history of our company. Quarter 1 delivered record visits per clinic per day, the highest ever for what is normally our seasonally slowest quarter at 29.8. March gave us our best single month at that point, at 30.7 visits per clinic per day. I'm pleased and proud to say that despite challenges in the labor market this past year, we were able to continue that quarter 1 momentum.
In fact, we've turned it up even more in the second quarter, with new record volume in April and May at 30.9 for both months, and an overall Q2 volume at 30.4 visits per clinic per day on average. We've produced some very good additions, both acquired and de novo, since quarter two a year ago. We've added 48 clinics in total, and this year, 22 de novo clinics through the end of July, which, as you know, early on, mostly drain our overall average until we get fully up to speed with staff and overall community involvement and referral penetration. These new facilities, of course, become much more highly productive in the years to come, and they will continue to grow for many years, serving patients and families.
This quarter, our mature facility same-store volume grew 2.6% against the strong comparative quarter in 2022. Our same-store for the year is up 4.2% overall. Demand is not an issue for us. Also on the very positive side of the equation was general cost improvement, especially in light of the very significant labor scarcity and general inflation that has plagued every corner of our country these past 4+ months. In spite of that, we've seen salary and related costs per visit, as well as total costs per visit, decline now 3 quarters in a row after peaking in third quarter of 2022, as inflation began to quickly accelerate last year.
Our team has made real progress through very focused multifaceted efforts to address costs, streamline operations where possible, and innovate with new solutions, some of which we're still rolling out across our many partnerships. Which is to say that we're not done yet, and we have more progress to make. In the area of commercial payer contracts, we continue to make progress with rate increases and at the same time absorbing the 2% Medicare rate reduction this year, and the 1% sequester relief phase out, which impacted us in this quarter. This rate area is where we continue to work on multifaceted approach and where we have more opportunity to further improve.
What we've seen over this past year, with tighter than normal labor dynamics and extremely high volume demand, is that on a small percentage basis, the number of licensed PT assistants that we have hired to fill our very strong demand has increased over where we've historically been. That, in combination with the high demand, has resulted in a greater percentage of Medicare visits being touched by a PT assistant, with a further 15% PTA reduction, reimbursement reduction, creates a negative impact on our net rate.
We're in the middle of a large-scale push to elevate this issue across our platform, to retrain any and all of our front desk staff to better optimize scheduling, and to make sure that our clinical leadership is doing everything possible to ensure that we have optimal scheduling and clinically directed resources to not only provide exceptional patient care, but to be sure that we get fully paid for providing that care. We believe this heightened awareness, which may have been diluted a bit, dealing with front office turnover in late 2022, 2022 and early 2023, coupled with the high demand for our services, has resulted in some addressable inefficiencies which flow through to our net rate.
Given the already very low-cost nature of the incredible care that we provide, this becomes an all-hands-on-deck effort to ensure that we are paid at a level that aligns with the results we are achieving. We're not there yet. We are very focused on working hard to make the necessary adjustments. Other positives for the quarter. You're aware our company completed a secondary offering at the end of May, which has proven to be very successful, allowing us to pay off our highest interest rate debt and further invest the remaining significant proceeds directly to further grow our partner-centric company.
We're currently busy doing just that, you will continue to see us add new partners and expand to new states, while we also explore offerings in other adjacent service areas that we believe we can further strengthen our business in physical therapy, as well as our injury prevention business services. On the IP front, this year seems to be unfolding much the way we expected. We have seen major increases in spend across some of our longest tenured relationships, as we discussed last quarter, we've seen some companies fearful of a pending recession, pull back from prior levels of spend and engagement in a defensive move for them.
Counteracting that, our teams have done a great job of replacing the vast majority of that pullback with exciting new business that I'm happy to, that I'm happy to say we're able to staff now with greater efficiency in much less time than where we were nine months ago. Both of our IP partnerships are working hard together to cross-sell and expand programs, while looking for new opportunities. We continue to explore acquisition-based opportunities as well, as expect that our reinvigorated balance sheet will provide us with dry powder on the runway to do that over the coming quarters and years. Finally, I want to end my comments much the way I started, by thanking those colleagues and many dear friends who've been with me now as I close in on my 20th anniversary here with the company.
It's been an amazing, fun, and exhilarating ride with more good things to come. I feel extremely blessed to be working alongside so many talented and committed team, committed team members across our home office support group, as well as our many partnerships around the country. We've made a huge difference in the lives of millions of patients, and I'm proud to say that my life, and I think the lives of many of our partners and staff, have been made better as a result of the work that we do as well. We're not done. As you've heard, we always have challenges to tackle and things to address. That has been the way... It's been the way it's been for the entirety of my 38 career, including the early chapter as a treating therapist and clinician.
We continue to have the energy and the drive to fight for better reimbursement for the life-improving work that we deliver so consistently every day, for rules and regulations that make sense, and increase access to the very efficient and effective treatment that we provide, versus the much, much more costly and often riskier interventions that should not be positioned as first choice options. I believe physical therapy should be first option, primary care equivalent for prevention and treatment of musculoskeletal injury and disease. We will continue to fight for that rightful place in the healthcare continuum. For those of you who are listening from other companies, please get dialed into the constant work we are doing within APTQI. We need you to fight alongside us, with us, as we work towards these important goals. That concludes my prepared comments.
Carey, if you were to cover the financials in more detail, that'd be great.
Carey Hendrickson (CFO)
Great. Thank you, Chris, good morning, everyone. We had an excellent second quarter in many respects. We had all-time high patient volumes. We had strong growth in revenue, a continuing downward trend in our salaries and total operating costs on a per visit basis. We had growth in our physical therapy, therapy operating income and our physical therapy operating margin percentage, and year-over-year growth in our total company adjusted EBITDA. In addition, as Chris noted, we completed a successful equity offering that further strengthened our capital structure, providing significant capital for future growth initiatives. The equity offering provided us with approximately $164 million in net proceeds through the issuance of 1.9 million shares.
We used $35 million of those proceeds to pay down the debt on our revolving credit facility, which at the time was at a variable rate of about 7.2%, leaving approximately $129 million. We also lowered our leverage ratio, resulting in a 25 basis point decrease in the rate on our outstanding $150 million term loan based on our leverage grid. We've invested that cash at this point in a high-yield savings account prior to deployment into acquisitions. Of course, the return on those net proceeds will increase substantially when we deploy them in the acquisitions.
We reported adjusted EBITDA for the second quarter of $21.7 million, which was the second highest quarterly EBITDA amount in our history, and an increase of $0.4 million over the $21.3 million we reported in the second quarter of 2022. Our operating results, which includes the impact of higher interest expense, was $0.76 per share in the second quarter of 2023. Our total company revenues increased 7.7% in the second quarter, growing from $140.7 million in the second quarter of last year to $151.5 million in the second quarter of 2023.
Our total company gross profit increased $1.4 million from $30.8 million in the second quarter of last year to $32.2 million in the second quarter of 2023. As Chris noted in his remarks, our average visits per clinic per day in the second quarter was 30.4, which is the highest volume for any quarter in the company's history. April and May were both at 30.9, the highest volumes for any month in our history, and our average visits per clinic per day in June was 29.6, which is a normal seasonal decline related to vacations taken in the summer months and higher than the 28.9 that we had in June of last year.
Our net rate was $102.03 in the second quarter of 2023, which was a decrease of 1.1% compared to our net rate of $103.18 in the second quarter of last year. The net rate for our commercial and workers' compensation visits both increased approximately 1%, while the net rate associated with Medicare visits was down 3.5%. As we noted in the release, as Chris mentioned, the Medicare rate decrease was primarily due to the 2% rate reduction from CMS that was effective at the beginning of this year, coupled with the fact that the second quarter of last year included a 1% sequestration relief on Medicare rates.
As we've talked about on our last couple of earnings calls, we've either renegotiated or terminated the subset of our Medicare Advantage contracts that reimburse us at a rate that's less than what it costs us to serve our patients. The terminations were effective in June and July, and most of the associated renegotiated rates are also now in effect, so we expect the impact of this work to begin showing up in the second half of 2023. We also continue to focus on renegotiations of commercial contracts, and as Chris noted, we're making other necessary adjustments to adjust our net rates. Physical therapy revenues were $130.1 million in the second quarter of 2023, which is an increase of $11 million or 9.2% from the second quarter of 2022.
The revenue increase at our same-store clinics was excuse me, 1.3%, with patient visits up 2.6% versus the prior year. Our physical therapy operating costs were $102.1 million, an increase of 10% over the second quarter of the prior year. On a per visit basis, our total operating costs were $80.61 in the second quarter, which was a decrease of 0.6% compared to $81.09 per visit in the second quarter of the prior year. We were pleased to see our physical therapy operating cost per visit decrease for the third consecutive quarter after peaking in the third quarter of last year.
Our total operating costs were $85.14 per visit in the third quarter of 2022. It decreased to $84.05 in the fourth quarter. It declined further to $81.97 in the first quarter of 2023. Then declined again to $80.61 in the second quarter of 2023. Our salaries and related costs per visit decreased 1.2% in the second quarter of this year versus the prior year. They've also declined for three consecutive quarters, from $60.99 in the third quarter of 2022, down to $60.04 in the fourth quarter, down to $59.14 per visit in the first quarter of 2023, and then down to $57.59 per visit in the second quarter of 2023.
Our physical therapy margin also improved for the third consecutive quarter, increasing from 18.7% in the 3Q 2022, to 20% in the 4Q, 21% in the 1Q of this year, and then to 21.5% in the 2Q 2023. Really pleased with the progression that we've seen in all of those metrics. Our IIP revenues were $19.2 million in the 2Q, which is down slightly from the 2Q 2022, IIP expenses were even with the prior year at $15.3 million, with IIP operating income of $4 million. Our margin in IIP business was 20.7% in the 2Q 2023.
Our interest expense was $2.6 million in the second quarter of this year, which was an increase of $1.6 million over the second quarter of the prior year. Of course, that higher interest expense is due to the increase in our debt-related acquisitions we closed during or since the second quarter of last year, and also the higher interest rates in the second quarter of this year versus last year. Our balance sheet remains in an excellent position. We have a $150 million term loan with a five-year swap agreement in place that fixes that one-month term SOFR rate on that $150 million at 2.8%.
Including the applicable margin based on our leverage ratio, the all-in rate on our $150 million of debt was 4.9% in the second quarter. It's a very favorable rate in today's market, and it's below the current Fed funds rate. As I noted earlier, the net rate on that term loan moved down 25 basis points to 4.65% after the secondary offering. In the second quarter of 2023 alone, the swap agreement saved us $800,000 in interest expense, with cumulative savings to date related to the swap of $1.5 million over the first 12 months.
In addition to the term loan, we also have $175 million, a $175 million revolving credit facility that had approximately $35 million drawn on it prior to the completion of the equity offering. Of course, we paid that down with some of the net proceeds, so there's now there's nothing drawn on the revolver. Borrowings on the revolver from April 1 through May 30 were at a variable rate just north of 7%. In closing, we've had a very solid first half of the year, we'll continue to work hard to produce the best results possible for all of our stakeholders this year.
The strength of our results in the second quarter give us continued confidence in the adjusted EBITDA guidance range we provided at the beginning of the year of $75 million-$80 million. With that, I'll turn the call back to Chris.
Chris Reading (CEO)
Thanks, Carey. Appreciate that. Operator, let's go ahead and line up for questions.
Operator (participant)
Yes, sir. At this time, if you would like to ask a question, please press star 1 on your telephone keypad. You may remove yourself at any time by pressing the pound key. Once again, that is star and 1 to ask a question. We'll go first to Brian Tanquilut with Jefferies. Please go ahead. Your line is open.
Brian Tanquilut (Senior Equity Research Analyst)
Hey, Brian.
Good morning, guys.
Chris Reading (CEO)
Good morning.
Brian Tanquilut (Senior Equity Research Analyst)
Good morning. I guess, Chris, I'll, I'll ask the question. You know, it sounds like based on the metrics that Carey, you know, shared with us this morning, whether it's productivity of the clinic, cost per visit, and all these KPIs, it looks like you're executing very well. As I think about, you know, some, some of those key points, right? I mean, the, the productivity of the clinic and the cost to do deliver care, how much runway do you think there's left to drive some of those metrics?
Chris Reading (CEO)
Yeah, it's a good question. I mean, individual clinician productivity, there's not a lot of elasticity there. Individual clinic throughput, I, I wouldn't call that productivity, but just being the number of patients that we can get through an individual clinic, we've got as much room as we had probably four, five, six years ago. I mean, you know, we, we constantly adjust our hours. We can expand our hours. Most of our clinics are not open on Saturdays. A lot of our clinics, you know, I hate to say this, but a lot of our clinics in certain markets close early on Fridays. We've got capacity on a per clinic basis to continue to have that number increase. That's not, you know, that's not gonna be a limiting factor. We certainly have room to move this net rate.
The net rate this quarter, a little bit of a disappointment, is we really got extremely granular with, you know, where that issue is. I think the fact that we had, you know, the turnover that we had and, and the scarcity we had in 2022, particularly at the front desk, has caused us not to be as dialed in as we need to be from a scheduling perspective. I'm actually encouraged by the fact that it's, I think, addressable. The team, the clinical services team, in conjunction with our operations group, is on top of that, and they're rolling out some very, very detailed training, not just on that, but on a couple other areas that I think will, will help us as we go forward.
You know, on one hand, I wish it was, you know, for the quarter, a little better, but we have made progress, as you pointed out, in all the areas that we've been focused on, and I think we'll make progress there, but we, we know what to do.
Brian Tanquilut (Senior Equity Research Analyst)
Got it. Then maybe since you mentioned rate, you know, obviously, 1% net rate growth on the commercial side, you know, being offset by some of the Medicare stuff. As we think about maybe the number of contracts that you have, you know, without going to perentages, right? I mean, how much opportunity is left to, number one, drive positive rate trend within the, the portfolio of contracts, and maybe the second would be to push a rate increase above, say, a 1% number?
Chris Reading (CEO)
Yeah, we have so many contracts. I wish we didn't have as many as we do, just because of how our company's configured across, you know, more than 150 partnerships. we've got a lot of contract negotiation left in us...
Brian Tanquilut (Senior Equity Research Analyst)
Yeah
Chris Reading (CEO)
... and to do. Carey, I don't know if you wanna comment further.
Carey Hendrickson (CFO)
No, I, I agree. We have lots of contracts. It's a, it's a constant focus for us, Brian. You know, we're, we're out, and we're having good success. I mean, we're having success in these, in these rate negotiations. I'd say the, the big payers are the ones that it, it just takes longer to get, make progress with them, and so, you know, we're, we're continuing to work at it, though, every day.
Chris Reading (CEO)
Brian, some of these contracts, we're getting increases now, but we have then-
Carey Hendrickson (CFO)
Right
Chris Reading (CEO)
... sequential annual increases that are-
Carey Hendrickson (CFO)
Right
Chris Reading (CEO)
... yet to come, even on the ones-
Carey Hendrickson (CFO)
Right
Chris Reading (CEO)
we've completed already.
Carey Hendrickson (CFO)
Yeah, we're, we're working to build in three-year step increases for the most part. So we'll have, so we'll have less to touch each year. We know we're gonna be getting those contractual rate increases as the year goes along. So that's, that's the movement.
Brian Tanquilut (Senior Equity Research Analyst)
That's awesome. ... Yeah, go ahead.
No, that's it.
Chris Reading (CEO)
No, you.
Brian Tanquilut (Senior Equity Research Analyst)
Yeah. Last question for me, Chris. I mean, obviously, you know, you guys did the raise. You're sitting on a bunch of capital right now, a lot of balance sheet flexibility. I mean, what does the market look like? I, I know your space is obviously dominated by a bunch of PE-backed players, and I know, you know, your appetite has been more on the smaller side rather than the big platforms. What does the market today look like in terms of either competition for deals or opportunities popping up that probably are more scaled given your capital availability?
Chris Reading (CEO)
Yeah, I, I think the opportunity is still strong. I think what we're seeing right now is a lot of the PE-backed companies have been decidedly more quiet this year, particularly because a number have either, you know, done significant deals themselves or, or gotten to the point where the interest rate increases or leverage is, is high. I think to a certain extent, the reality that many of these individual operators have kind of missed the peak, you know, has, has set in this year. I mean, you know, we're, we're not, we're not in 2019 anymore, at, you know, at, at the height of this, or, or even early 2021, when things were still really, really hot. I think there's, there's a little timing remorse in the market. Having said that, we're busy.
For us, sometimes, you know, we're ready to go, and then the partner has something, and things push a little bit, and that's happened on a couple of occasions this year. You know, we'll still get those things done. It's just taking a little bit longer. We're looking at bigger deals, too, and opportunities not just in PE, but in injury prevention. You know, it's gonna be lumpy. It's always been lumpy, but we're gonna get good things done.
Brian Tanquilut (Senior Equity Research Analyst)
Awesome. Thank you, guys.
Chris Reading (CEO)
Thank you, Brian.
Operator (participant)
Thank you. We'll take our next question from Joanna Gajuk with Bank of America. Please go ahead.
Chris Reading (CEO)
Good morning, Joanna. Good morning.
Joanna Gajuk (Director, US Equity Research)
Hey, good morning. Thanks so much for taking the question here. In terms of these commercial rate increases, if I can just follow up there, so the 1%, you, I guess, experiencing right now, are you kind of suggesting that, you know, as you negotiate incremental, the additional contracts, that rate increase could actually accelerate into next year?
Carey Hendrickson (CFO)
You know, Joanna, it's just gonna depend on the timing. It's kind of like, kind of like M&A. It's, it's lumpy. It's which ones you get and what, you know, the timing of those. I certainly expect those commercial rates to continue to, to increase over time. We're working hard at that. As far as the, the rate of increase, it's hard to say, you know, but, but, you know, this.
Chris Reading (CEO)
There should be a build, though.
Carey Hendrickson (CFO)
Yeah, there should be a build.
Chris Reading (CEO)
These contracts last, and they go on, you know, for years, and every additional one builds on.
Carey Hendrickson (CFO)
Yeah
Chris Reading (CEO)
the, what we've done previous, so.
Carey Hendrickson (CFO)
Yeah, as we just mentioned, too, we also have step increases built in for on the ones that we've renegotiated, so those should continue to, to help us as we go forward. I think. I mean, I feel, you know, there's always a lot of work to be done on commercial rates because there are so many contracts. We've got, you know, we've still got a good bit of work to do, but we've, but we've made good progress, and I think we're gonna continue to make good progress. I know we are. We should see those rates, you know, continue to go up as we go forward.
Joanna Gajuk (Director, US Equity Research)
Gary, wouldn't you say the increases that we're seeing, they're not 1% increases?
Carey Hendrickson (CFO)
No.
Chris Reading (CEO)
They're, in some cases, double-digit-
Carey Hendrickson (CFO)
Right
Chris Reading (CEO)
% increases.
Carey Hendrickson (CFO)
Yeah.
Chris Reading (CEO)
you know, 3% to 5% or 6%.
Carey Hendrickson (CFO)
Yeah
Chris Reading (CEO)
increases. We're just not touching the whole, whole portfolio yet.
Carey Hendrickson (CFO)
That's right. We're getting, you know, 3%-5%, 6% increases in, in year one, and over a 3-year period, a lot of times it's like a 10%-12% increase over that 3-year period that we've, that we've got built in. I'll also say, we're also making progress on some of the other Medicare Advantage contracts, you know, because those are, those are a focus for us as well, and those we can impact. You know, we've terminated, a number of those contracts I mentioned in my remarks, there are other ones that we can still renegotiate, and we're working on those, those as well. Because, because, you know, Medicare Advantage is becoming a bigger portion of our Medicare visits overall, and so we've got to... That we can, we can address somewhat.
We can't address, you know, what CMS hands down, but we can address, at least to a certain extent, those Medicare Advantage contracts and how they relate to those CMS rates.
Joanna Gajuk (Director, US Equity Research)
You say on the commercial, it's just kind of, accumulates over time because you obviously have a 3-year contract, so you renegotiate it, like 1/3 of your book, and then you're negotiating, you know, another 1/3. You know, so kind of like a, you know, over a 3-year period, you're gonna have, this flowing through, through, through the book. Eventually, it's gonna be more effective of what's going on in all of the contracts versus now only 1/3 of this contract. That makes sense. On this last comment on the MA part of the business, is there a way to think... I know it's a small portion, but to your point, it becomes bigger with the Medicare population.
how, I guess, how, how, how to think about, you know, the portion of that business that already kind of, you know, was reset and a portion that, you know, how big is the portion that kind of you're still trying to either renegotiate or, or, or drop these contracts?
Carey Hendrickson (CFO)
within Medicare, the commercial advantage-
Chris Reading (CEO)
Medicare Advantage.
Carey Hendrickson (CFO)
... Medicare Advantage? Yeah.
Joanna Gajuk (Director, US Equity Research)
Oh, inside MA, yeah.
Carey Hendrickson (CFO)
Yeah. Yeah, yeah. You know, right now, I'd say, the Medicare Advantage rep-- I mean, it's, it's grown as a percentage. It's, it's around 40, 40%-45% of our, of our total Medicare bucket. If you look at all the Medicare visits, it's about 40%-45% of it. And that's up from where it was in the, in the upper 30s last year at this time. That, that piece, there's been a push to get people to Medicare Advantage. You know, I'd say we're still early innings on that too. We've done some really good work as it relates to i- identifying some of these contracts that we just know are not, they're, they're not-... they're not suitable, and so we've, we've terminated those. We've identified the primary ones that are in that situation.
We've got still others that address. We've again, we've, we've made progress on those as well, and those are the same kinds of increases we're seeing. A lot of times those are double digit right off the bat, because we're going from the, it could be, you know, where they paid 80%-85% of Medicare and bumping those up to 100%, or it may be from 80%-90%. Those are really nice, sizable increases on some of those contracts we're making.
Joanna Gajuk (Director, US Equity Research)
That's good to hear. The last piece, I guess, on the pricing, workers' comp. What do you spend now in terms of your mix? I guess, because that's the, the highest, rate...
Carey Hendrickson (CFO)
Right
Joanna Gajuk (Director, US Equity Research)
of all the different payers, right? What's the mix there? Kind of, I know you kind of, you know, the, the, the bucket, so to speak, declined during the pandemic, and I guess was, there was some work being done to kind of bring it back maybe to 14% pre-COVID. Kind of, any update on that front? Thank you.
Carey Hendrickson (CFO)
Yeah. So far, our mix-- Go ahead. I'm sorry, Eric, were you going to say something?
Eric Williams (COO)
Yeah, I was gonna, I was gonna weigh in, this is Eric Williams, in terms of where we're headed on the workers' comp side. Yeah, we started putting in a lot of efforts, 2nd quarter of last year to rebuild some of the relationships with, with the networks. We brought back in the individual who actually built the workers' comp program for us years ago. In 2nd quarter of this year, this is the 3rd straight quarter where we saw an uptick in volume. Still a lot of opportunity. The volume we actually saw in Q2 was the highest volume we've seen over the course of the last 6 quarters. We signed some new network agreements here, beginning of the year.
We've got a number of additional, contracts in play right now, and we feel optimistic in terms of our ability to continue to drive this as a higher percentage of our mix. It was just under 10% here in, Q2 of this year.
Carey Hendrickson (CFO)
Right. I'll just say, for workers' comp to increase as a percent of the mix is really notable because, as you know, our volumes incr-- has been increasing pretty significantly. They're, they're increasing at a pace that is greater than our overall increase. That's, that's good. They were closer to 9% in the first quarter as part of the mix, and workers' comp is about 10% in the second quarter. To, to address just kind of the mix overall, Joanna Gajuk, commercial is about 47% in the second quarter, Medicare is 34%, workers' comp is 10%, Medicaid was about 3.5%, and then there's just everything else, you know, which is maybe 6% or so.
Joanna Gajuk (Director, US Equity Research)
Great. It's super helpful. If I may just squeeze, last one on, on, on pricing and I guess the outlook into next year. The Medicare proposal calls for, call it all in, you know, 3.25% rate cut or so, which if that was finalized, would be, would be worse than, 2023 rate cuts. What's your, what's your take on that proposal, and, you know, how much work, I guess, is being done, and what's your, what's your visibility to Congress, you know, stepping in again and, and trying to, lessen that cut here?
Chris Reading (CEO)
Obviously, those- that, proposed rule came out middle to the end of July, as it does every year. We're early in that process. Again, I mentioned APTQI, you know, in my prepared comments. We, our Liberty Partners, our lobby group, the leadership in APTQI, all of our individual member companies who are very active in Washington, are all putting a full court press. You know, we just... unfortunately, it is difficult in, you know, when these get finalized in December on a short runway, to make changes necessary to immediately come out of the gate and overcome these. This is now a few years in a row. We think it's very misplaced, these, these reductions.
you know, they're, they're, they're picking on, you know, probably the greatest value in healthcare, you know, for returning people to function from significant, significant injuries, and, and, and surgeries, which don't work without physical therapy. It's, it's early, you know, and it's summer, and, and so we've got, as we have in the past, a lot more work to do. I'm hopeful we'll make progress. I'm, you know, not gonna give you much more than that on a crystal ball because I don't know yet. The effort is massive directionally in that regard.
Joanna Gajuk (Director, US Equity Research)
Well, thank you. I appreciate the call.
Carey Hendrickson (CFO)
Thank you, Joanna.
Chris Reading (CEO)
Sure.
Operator (participant)
Thank you. We'll take the next question from Larry Solow with CJS Securities. Please go ahead.
Chris Reading (CEO)
Go ahead.
Larry Solow (Managing Director, Partner, Equity Analyst)
Great. Hey, good morning, guys. A lot of my questions are answered already, but just to see, I guess, just to beat this topic to death here on the pricing. It does feel like, I guess, just in terms of your guidance, just on the shorter term, you feel like you have a little bit of a tailwind, at least going to the back half, just from fixing up some of the scheduling, misalignments and, and walking away from some of these Medicare, agreements.
Chris Reading (CEO)
Mm-hmm
Larry Solow (Managing Director, Partner, Equity Analyst)
... that you just spoke to, right? Again, not asking you to give you forgot on the back half of pricing, but perhaps this is at least a low watermark for the year. We could just slowly work our way up in the back half. Is that fair to say?
Chris Reading (CEO)
We do believe there's potential to move that rate up. Yes, based on the, on the things that we've talked about today, the things we think is addressable and relate, and related to the work we've already done. Yeah.
Carey Hendrickson (CFO)
Right. Right. Obviously, the negotiation is much more of a, a multi-year thing. You touched on sort of, I was going to ask just that, like, not getting 1% price increases, you're getting-
Larry Solow (Managing Director, Partner, Equity Analyst)
Probably more than that, or a lot more than that, mid-single digits or whatever, but you have so many contracts, right? I, I gather, right, that you're only moving 5% at a time or whatever, right? It gets divided by 20 or maybe not that much, but, the multiplier effect. But so fair to say that you still probably haven't worked through, you know, a lot or majority of your contracts haven't changed.
Carey Hendrickson (CFO)
Yeah.
Larry Solow (Managing Director, Partner, Equity Analyst)
on.
Carey Hendrickson (CFO)
Yeah, that, that's right. Not, not even close. We've got a lot more to do.
Larry Solow (Managing Director, Partner, Equity Analyst)
Right. Right, right. Okay. Okay, great. Just, just in terms of, of, of volume, obviously, a, a good-- really good, strong first half. Really, back half of the year, you know, is there anything sort of incorporated? You kind of-- I think the average volume in the first half is, like, 4.8% up if we look at both quarters. Do you expect those trends to continue in the back half or, you know, more, I think, you know, more historical rates and more 2%-3%, which is what we actually saw this quarter, but any thoughts on that?
Chris Reading (CEO)
I mean, if you, if you look back to, to last year, to the front part of last year, we didn't have the scarcity that we, you know, really became acute kind of in, in, I would say, probably in June of last year and forward. We, you know, we didn't have, you know, the inflation and all the other things. So the front half of this year, actually, the, the part that we're in or just completed, had tougher comps.
Larry Solow (Managing Director, Partner, Equity Analyst)
Mm-hmm.
Chris Reading (CEO)
The second half, you know, of, of a year ago, of 2022, we actually we couldn't address all the volume that, you know, we, we might have just because staffing was so tight. So I can tell you, staffing's not easy right now, but it, it feels a lot better than it did a year ago. We've made adjustments, our team has done a really good job. I'm hoping we can expand some of those same-store, you know, numbers just because in, in part, volume has continued to be strong, our comp is a little bit weaker in the second half of the year.
Carey Hendrickson (CFO)
Yeah. Yeah, the weakest comp will be here, though. I would say the, the first quarter was such a big jump because it was, you know...
Chris Reading (CEO)
Sure.
Carey Hendrickson (CFO)
We've never experienced volume like that in January and February, particularly. That was a really nice jump in the first quarter. I wouldn't expect it to get back to, like, the 6% mature clinic growth...
Larry Solow (Managing Director, Partner, Equity Analyst)
Right
Carey Hendrickson (CFO)
... you know, in the, in the second half of the year. You know, as Chris mentioned, the comps are a little bit are not quite as strong as you go into the back half of the year.
Larry Solow (Managing Director, Partner, Equity Analyst)
Gotcha. You're probably, obviously, like you said, more-- well, better positioned at the, to the, the, you know, beginning of this back half than you were last year, too. In terms of your staffing. Okay, just, just last question, Carey, while, while you're here. Just, you know, you mentioned you've done a really good job staying, costs on a, on a per visit basis are down. Overall costs are, are, you know, really hung in there. Overall margin in the last two years has actually been pretty steady, des- despite, you know, rapid inflation and, and price pressure, which, you know, mo- which is really commendable to you guys. Well, can you just explain to me or, you know, how come on a, on a...
If I just look on a year-over-year basis, your, your margins, you know, salaries, the percentage of revenue and, you, you know, is still up. Is that just a more of a function of the acquired clinics' pricing, or what's, what's kind of driving that?
Carey Hendrickson (CFO)
Yeah, it's, it's, it's, it's a combo, you know, because when you're looking at those percentages, you're looking at... There's a double impact, right? There's the impact of volume, and there's the impact of rate. I think that the rate and how that influences revenue when you're looking at those costs as a % of revenue is really, is what impacts that.
Chris Reading (CEO)
Yeah. I, I, I totally agree. It's, it's driven off... It's, it, it's a driver. It's reflective of the pressure that I think we've dealt with pretty well, but the pressure on that, right?
Carey Hendrickson (CFO)
Yeah. That's why, you know, the best metric we believe to look at for those costs is looking at it on a per visit basis.
Larry Solow (Managing Director, Partner, Equity Analyst)
Naturally, I totally understand why you do that. Yeah, for sure. Okay, great. I appreciate that call. Thanks, guys. Thanks again.
Chris Reading (CEO)
Thanks.
Operator (participant)
Thank you. As a reminder, if you would like to ask a question, please press star one at this time. We'll take our next question from Matt Larew with William Blair.
Madeline Martin (Senior HR Business Associate)
Hi, this is Madeline Mulvihill. Hi, guys, it's Madeline on for Matt. Just 1 on the segment. I know it was down slightly this quarter, and you mentioned that some contracts, you talked to some customers about delaying contracts or pushing them back or putting pause on them. With the macro environment starting to improve, have you seen these customers reengaging, wanting to restart contracts, beginning discussions for that, at all?
Chris Reading (CEO)
You know, I'm, I, I, I'm gonna tell you, and, and I don't know that I'm that, day-to-day close to know if we have certain contracts where people were concerned and, and, and now that, you know, they're not. I, I, honestly, I think, I, I, I think, things are kind of still with those few customers, not a lot, and it's heavily weighted on the tech side of the business or their business is, is heavily tech-influenced. I still think they're, they're kind of, you know, same outlook that they were before. Now, having said that, we've added a lot of good customers this year. Across both partnerships, we've further diversified our, our, our client base. To my knowledge, and Eric, you might speak to it, I don't know if we've seen any big reversals that are meaningful yet.
Eric Williams (COO)
No, I would agree with that. I think, I think you summed it up, summed it up perfect, Chris. I mean, you know, the, the IIP businesses have done a nice job of trying to diversify their portfolios, but the, the tech sector and the automotive sector got hurt really hard, and, and that was business that we saw fall away, tail end of last year. We've seen other customers on, on the retail side and distribution side actually increase. On a macro basis, I think things have stabilized. And, and I think there's opportunity for growth here going forward, but not near as robust as it was in, in 2022.
Madeline Martin (Senior HR Business Associate)
Great, thank you. Then again, on IIP, can you talk a little bit about what you expect past 2023? I know this is a more muted year. The long-term growth for that segment to be... I think last year, same-store growth was in the 20% range for the first three quarters of 2022. Just what can we expect that segment to grow over time?
Chris Reading (CEO)
Look, I don't you know, we haven't had IIP all that long, and the growth has been extraordinary. You know, so for me, right now, with as many moving parts as are in between politics and the economy and, and interest rate environment and the Fed, the all the many things that influence CEOs and CFOs to make decisions that aren't uniform, you know, across the, across the country, because different sectors, as Eric mentioned, you know, recover at different rates or get hot or cold at different times. I expect us to be ahead of our PT growth and to be very positive as we go forward. All other macro things being relatively stable and equal, we've demonstrated that we can grow this business through acquisition. Our clients, generally speaking, are very, very sticky. They stick with us.
Most clients expand, particularly those, those clients that have, you know, numerous operations positioned around the country. I'm, I'm not gonna, I'm not gonna be able to peg, you know, a growth rate at this point because I just don't have optics that are, that are clear enough to do that.
Madeline Martin (Senior HR Business Associate)
Got it. Thank you.
Chris Reading (CEO)
Okay.
Operator (participant)
Thank you. At this time, we have no further questions in queue. I will turn the call back to Chris Reading for any additional or closing remarks.
Chris Reading (CEO)
Yeah. Thanks, everyone. We know we covered a lot. We appreciate your time and attention this morning. Karen and I are available today and the rest of the week, and next week. We've got board meetings front loaded next week, but after that, we'll, we'll come back up for air. If you have any questions or any follow-up necessary, please give us a call, and have a great day.
Eric Williams (COO)
Thank you all.
Operator (participant)
This concludes the U.S. Physical Therapy second quarter 2023 earnings conference call. You may disconnect your line at this time. Have a wonderful day.