Leaders with the Pennant Group Inc. (Nasdaq: PNTG) are expecting a net negative impact of 1% in its Medicare home health revenue for 2023 following the announcement of the U.S. Centers for Medicare & Medicaid Services’ (CMS) final payment rule.

Despite the expected drop, Pennant COO John J. Gochnour feels confident that the company will pull the right levers in order to continue its growth, even in a challenging reimbursement environment.

“On the final rule, the negative behavioral adjustments represent a headwind for providers in our industry,” Gochnour said during the company’s third quarter earnings call Tuesday. “Pennant’s home health and hospice segment began in, and has thrived through, periods of uncertainty and reimbursement cuts — much like today — thanks to the scalability of our operating model built on local leadership, our commitment to maintaining a strong and flexible balance sheet and our opportunistic approach to acquisitive growth.”

Pennant has been preparing for the implementation of the final rule and, much like the change to reimbursement when the Patient-Driven Groupings Model (PDGM) was implemented, it is confident it can make necessary changes to adapt to a new environment.

The Eagle, Idaho-based Pennant is a holding company of independent operating subsidiaries. Under its umbrella, Pennant has 89 home health and hospice agencies and 49 senior living communities located throughout 14 states.

While the final rule from CMS was a net improvement over the proposed rule, Gochnour said it still wasn’t close to what the home health industry hoped it would be.

“We still have operational work to do in order to offset it,” Gochnour said. “The good news is we’ve been working on that, projecting a much larger cut, and in the face of this new information we’re able to continue to dilate our operations.”

Pennant continues to experience high wage pressures in Q3, up about 2.2% in the quarter.

“[The wage pressure] is ameliorating, but not as quickly as we’d like it to, which means that we have to focus on other levers as we continue to be competitive and seek to establish ourselves as the employer of choice in each community that we serve,” Gochnour said. “A few of those opportunities still remain in the way we’re managing episodes. We still think that we have a significant opportunity to manage those episodes more tightly and to continue to improve the utilization of mid-level staff.”

Pennant plans to hire more licensed practical and vocational nurses, physical therapist assistants and other caregivers who can provide routine home visits.

For its home health episodes, Gochnour said that about 40% are early episodes. That’s an indication, he believes, that Pennant has an opportunity to build stronger relationships with its hospital partners in order to take advantage of the types of patients it’s serving.

“We see that there’s some opportunity to continue to improve our relationships with hospital partners and be the provider of choice for those institutional, early referrals — as well as for all community referrals,” he said. “We see a number of levers to offset [the final rule’s effect]. Our margin will continue to be lumpy as we go through the acquisition and transition process with new operations, but we do see continued opportunity for improvement in the fourth quarter and in 2023.”

Home health admissions were up 10.2% in the third quarter of 2022 for Pennant compared to 2021. Medicare home health admissions were also up by over 10% and home health revenue increased by 16.5%.

“Our leaders exercise rigorous cost discipline in the face of significant increases in the cost of labor, fuel and other inflation-sensitive areas,” Gochnour said. “Our clinical metrics continue to be the foundation of our success, highlighted by the majority of our home health agencies operating at a CMS star rating of 4.5 or above.”

Total revenue for the quarter was $118.4 million, an increase of 5.7% from the third quarter in 2021. Revenue for home health and hospice was $85.8 million, an increase of 8.6% year over year.