Pay Cuts, Furloughs and PDGM: Pennant Group Weighs in on COVID-19 Disruption

Insight into how the home health industry’s large, publicly traded companies have been impacted by the coronavirus continues to roll in.

The Pennant Group Inc. (Nasdaq: PNTG) was considerably affected by COVID-19 in the first quarter of 2020, leadership said during a Thursday conference call. Nonetheless, the Idaho-based company is optimistic about its near-term growth outlook.

Spun off from The Ensign Group Inc. (Nasdaq: ENSG) last year, Pennant’s portfolio includes 65 home health and hospice agencies plus 53 senior living communities across 14 states.

While Pennant has experienced some disruption, its geographic positioning may have been an advantage in retrospect. The company was forced to deal with some of the early COVID-19 outbreaks in the U.S., mainly via its locations in Washington and California.

From March 11 to May 11, Pennant experienced an 8.2% decrease in its home health census, according to President and CEO Danny Walker. The company’s census is starting to recover this month, however.

“So far in May, we are seeing signs of improvement in our home health census stabilization,” Walker said on the Thursday call.

Overall, Pennant’s home health and hospice services segment revenue was $56.8 million in Q1 2020, a 23.1% increase year over year. Meanwhile, quarterly home health admissions actually increased in Q1 2020 compared to the same quarter a year prior, rising from 5,440 to 6,136.

The company’s home health division is currently caring for at least 34 active COVID-19 patients, with dozens more spread across the Pennant network.

“We have seen these trends continue into the second quarter and expect our results to reflect these challenges,” Walker said, acknowledging that the company is nowhere near past the COVID-19 challenges.

COVID-19 adjustments

Procuring the right resources for its employees has meant a large increase in spending for Pennant. With the help of The Ensign Group, Pennant was aggressive early in its efforts to acquire personal protective equipment (PPE) for its staff, spending over $500,000 more than its usual budget in that area through April.

Pennant is confident that it has built up a large enough pipeline of PPE that it will be able to keep its staff safe for the next several months with no issue, Walker said.

But its staffing situation has been altered by COVID-19. The company has implemented furloughs and flex scheduling across its network.

Additionally, for staff that has been dealing directly with COVID-19-positive patients, the company implemented a “hero pay” payment structure.

Through April, there has been nearly $1 million in COVID-19-related labor costs, Walker said. In addition to furloughs, executives have taken pay cuts that will last for the duration of the public health emergency.

Pennant does see opportunity in the labor market, however, with well over 30 million Americans filing for unemployment insurance since the beginning of March, according to the U.S. Department of Labor (DOL).

“While we maintain financial discipline through this pandemic, we also see opportunity in the dislocation of employees and other industries and are actively expanding our leadership pipeline,” Walker said.

Although it did not apply for governmental funding related to COVID-19, it has received nearly $10 million in relief to date. Like other large home health companies, it has not spent any of that money; Pennant is carefully reviewing terms and conditions that come with the funding before making a decision on what to do with it.

Acquisition opportunities

Pennant also sees COVID-19-related turbulence in the industry as possible means to grow in the coming months, Derek Bunker, its chief investment officer, said on the call.

“Through the pandemic, we continue to maintain a robust pipeline of acquisition opportunities,” Bunker said. “We understand that some investments with the highest returns are executed during periods of disruption. So an important part of our pandemic response was improving our cash position and revolver availability to be ready to move quickly for the right opportunities.”

The company closed on multiple acquisitions at the beginning of the year. Specifically, it has a few hospice deals in the works that they expect to close on during the COVID-19 crisis.

“We think that there are many more opportunities for consolidation as pandemic headwinds persist and disproportionately affect some operators that will be looking for the right strategic buyer,” Bunker added.

PDGM takes a backseat

With reduced visits, Pennant has triggered more low-utilization payment adjustments (LUPAs) than it expected at the beginning of the year.

“Even with that impact baked in, we’re still at about even relative to our previous revenue levels,” Bunker said. “So we’re pleased with that. We think that there could even be some improvement from there based on our ability to execute within a non-panicked environment like the one that existed in the last two weeks of March.”

All the prep that Pennant put into readying itself for the Patient-Driven Groupings Model (PDGM) was not all for naught, Bunker said.

“[Things] are coming in line with our expectations,” he said. “It’s hard to believe that PDGM is kind of an afterthought to this conversation. But our preparation paid off [with the] execution of it and … [being able to] make adjustments thoughtfully.”