LHC Group Inc. (Nasdaq: LHCG) had to overcome challenges linked to Hurricane Ida and the COVID-19 pandemic during the third quarter, both of which somewhat depressed its financial performance.
But the in-home care provider isn’t pushing the panic button just yet, as its leadership firmly believes in the long-term outlook for home-based care and pending legislation to help support it.
“The challenges or headwinds that we faced in the third quarter are related to temporary issues that were caused by the hurricane and a spike in COVID cases, impacting our capacity to meet the demand for our care,” LHC Group Chairman and CEO Keith Myers said during the company’s Q3 earnings call Thursday. “And yes, the higher labor costs will be a hill to overcome for us all.”
Based in Lafayette, Louisiana, LHC Group’s network includes 556 home health locations, 167 hospice locations, 130 home- and community-based services (HCBS) locations and 12 hospitals.
Labor challenges were brought on by quarantined staff and industry-wide shortages, resulting in a much higher reliance on contract labor.
Around 4% of LHC Group’s home health visits in the quarter utilized contract labor, which is way up from its traditional 1% rate. That represents a massive added cost for the company.
“For every 100 basis points we can reduce our dependence on contract labor nursing, we would save $1.25 million per quarter, net savings,” LHC Group President Joshua Proffitt said on the earnings call. “That’s the net difference between contract labor costs and employee labor costs. So that’s a real needle-mover as we go into next year, and a real focus of ours on the operation side.”
To curtail that, employee hirings have risen for the company. LHC Group hired almost 1,000 more employees in the third quarter than it did in the first quarter, for instance, from over 4,000 to over 5,000.
In home health care, that represented a net hiring number – considering the loss of employees, too – of 306 in the third quarter.
“Although there is a contraction in the nursing labor market and across health care, I do think due to our flexible scheduling and some other benefits … we’re seeing an uptick in the number of applicants and the number of hires we’ve made,” Proffitt said. “This is an issue we’re all facing, but I feel encouraged by the trends we’re seeing.”
Just like the losses from Hurricane Ida, which reached over $3 million for the company in the quarter, LHC Group sees those hiked costs as money that can be recovered as temporary challenges dissipate.
Specifically, the company believes it can recoup 60% to 65% of the losses tied to the COVID-19 spike.
Offsetting gains will also come, Myers believes, from tailwinds behind the entire industry over the coming years.
“It’s been a very long time since this industry had the cumulative tailwinds it does today from a demand, legislative and policy perspective,” Myers said. “While there are some entrenched lobbying efforts working to slow down the progress, the overwhelming desire among patients and their families is to be treated in the home. We need to get that right from a policy standpoint, and I’m confident that we will.”
LHC Group’s net service revenue was about $556.5 million in Q3, a nearly 5% increase from the $530.7 million it posted in Q3 of 2020.
HCBS revenue decreased slightly, but the home health and hospice segments both increased revenue year over year, by just over 3% and 38%, respectively.
While the company remains steadfast in its M&A efforts, the amount of forthcoming acquisitions will likely be watered down by the tough labor environment. Because of that, LHC Group is “locked down” on its M&A at about $300 million of acquired revenue moving forward, LHC Group CFO Dale Mackel said on the call.
“That net revenue will contribute roughly $20 million to $25 million of EBITDA for 2022 as we soften that margin a bit,” Mackel said. “It will always take 12 to 18 months to get our newly acquired entities to the corporate standards, but we softened it 100 to 150 basis points because … there are a lot of labor headwinds that we’re dealing with right now. And so we were just being realistic about how those are going to play out in terms of our acquired businesses next year.”
Vaccination mandates
As LHC Group executives offered up comments about labor issues and vaccine mandates, the Centers for Medicare & Medicaid Services (CMS) released its interim emergency regulation guidance.
The company explained that while it was close to achieving a 70% vaccination rate across its employee base, a federal mandate was not much of a concern.
For one, it has already been subject to mandates in states that have implemented them on their own. The company also said that it is above the vaccination rate in almost all of the markets it serves.
“I think this helps us, I really do,” Myers said of the mandate. “Because a lot of our hospitals and health system partners have wanted to go in that direction. And some did, and asked us to follow. But our concern was that if we went out and implemented something like this, then we could have employees leaving us and going to other providers who were more [relaxed] in this area. So by leveling the playing field, … I really do believe this helps us.”
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