Rising Labor Costs Hit Addus, Ensign

With minimum wage laws taking effect across the country and new overtime protections in place for home care workers, providers large and small are facing increased challenges in controlling labor costs.

Two of the most prominent home health providers in the nation—Addus HomeCare Inc. (Nasdaq: ADUS) and The Ensign Group Inc. (Nasdaq: ENSG)—are no exceptions, with some markets in particular emerging as pressure points.

Speaking to analysts in the wake of second quarter 2016 earnings results, leaders of the two companies singled out these more cost-intensive labor markets, described specific challenges around rising wages, and detailed efforts to get a better handle on labor management.

Bracing for Higher Wages 

Downers Grove, Illinois-based Addus serves approximately 30,000 people per week in 21 states, with a particularly strong focus on managed care populations. After challenges in bringing acquisitions up to speed and in timing its managed care initiatives, new leadership recently came in, including CEO Dirk Allison. The company’s earnings-per-share of $0.31, announced Monday, was in line with analyst expectations, although the company fell short of expectations on revenue.

Still, Allison is upbeat about changes to reduce costs, and he is “very pleased” with the “great progress we have made in a fairly short period of time,” he told analysts on an earnings call Tuesday.

Yet, wage issues are among the crop of concerns that Addus still is working through, and that the company anticipates having to grapple with in the coming months. It singled out New York and Illinois in particular.

In the Land of Lincoln, Chicago’s minimum wage increased on July 1 to $10.50 an hour, part of a planned series of increases to culminate in a $13 an hour minimum wage by 2019.

“The problem we have with Illinois is because it’s a citywide minimum wage increase, not a statewide [one],” Allison said. The state does want to “help out” Addus, he said, but there is not significant pressure for lawmakers at that level to act because the wage mandate is coming from the city of Chicago, not Springfield.

Addus’ approach is to continue working with contacts in the state legislature to obtain additional funding from the state to cover some of the cost increases, he said. The hope is that after elections in November, more cooperation between the state legislature and the administration of Gov. Bruce Rauner (R) will move the ball on this issue.

In pursuing further growth, Addus is looking at areas that do not have minimum wage pressures, which should help with labor cost containment, Allison added.

New York Gov. Andrew Cuomo (D) signed a $15 dollar an hour statewide minimum wage into effect in April, with various timetables for reaching that number depending on a business’ size and location in the state. In February of this year, Addus announced the acquisition of South Shore Home Health Services Inc., a personal care agency headquartered on Long Island, with annual revenues of about $52 million.

The gross margin of South Shore is lower than Addus’ as a whole, and “that’s probably something we did not understand as much when the acquisition was made,” Allison said. Going forward, the South Shore business likely will continue to operate at that lower gross margin than the base business, in part due to the challenges around minimum wage, he explained.

Controlling a Major Expense

Labor costs are “by far our biggest expense,” Ensign Group President and CEO Christopher Christensen said Tuesday on a call to discuss the company’s second quarter 2016 earnings. Based in Mission Viejo, California, Ensign owns 16 home health operations, 14 hospice agencies, and three home care businesses as part of its overall portfolio of operating companies. Ensign also has skilled nursing, assisted living, and other health care facilities across 14 states.

For Ensign, labor costs have risen in the last few months in markets such as Texas, Arizona, Utah, Idaho, and parts of California, Christensen said. Part of the issue is that unemployment rates have fallen, making it more challenging to find “extraordinary nurses,” he said.

Wage growth typically accounts for 1% to 2% of the company’s cost of services in those markets, and it has been “probably” slightly more than that, according to Christensen.

In addition to the wage pressure, labor costs were an issue in the second quarter of the year because implementation of a new, organization-wide human resources system did not go as smoothly as planned.

“We are excited about the new system, but the timing and execution of the implementation, which was my mistake, proved to be a bigger distraction to our transition efforts than I predicted,” Christensen said.

The implementation of the labor management system, the slower than anticipated transition of some newly acquired skilled nursing facilities, and occupancy issues were three challenges that resulted in “soft” earnings results for the second quarter overall, Christensen said. Still, the company’s earnings per share of $0.33 was in-line with analyst expectations, and its revenue of $410.5 million beat expectations by about $10.31 million.

Its Cornerstone Healthcare home health and hospice operating subsidiary contributed, growing the segment income by about 45% year-over-year and increasing revenue by $8.5 million to reach $28.5 million for the quarter.

Going forward, Ensign will probably “take a breather” on home health acquisitions and focus on fully developing its existing portfolio, according to Christensen. Assuredly, managing labor costs is going to be a key part of that effort.

The labor management system now is in place company-wide, and the rockiest phase of the implementation should be over, Ensign leaders said. Still, they see the enormous and growing demands from this side of the business.

“Attracting and retaining the best talent and providing them with the best resources available requires a higher level of sophistication and more human capital than ever before,” Christensen said.

Written by Tim Mullaney

Photo Credit: “Salary” by Evan Jackson, CC BY-SA-2.0