Mark Tarr: Given our outcome, as well we provide in our hospitals though, A.J., I would say that if we had the opportunity to work with payers, and as Doug noted, we have certainly reached out to them in terms of including a value-based component, it’s just been – it’s been difficult for them to think about how to administer that.
A.J. Rice: Okay. And maybe just then a follow-up on the labor. You talked a lot about the RN side of it. Anything new or different? What kind of an increase for physical therapists and therapists generally? Is it similar to last year? Is there anything changing there? And maybe just to remind us, what percent of your labor is RNs versus therapists?
Mark Tarr: So, just in general, on the marketplace for therapists, we’ve seen some limited number of markets that have had a little bit more pressure on therapists, not just PT, but it’s OTs and speech therapists as well. But that’s been pretty much isolated on certain markets where there’s been pressures. Nothing near what we’ve seen relative to nursing, but we’ve had to respond in those markets the same way we’ve responded in markets for nursing. But keep in mind, I mean, our turnover on therapy is around 8% for licensed therapists. So, it is nowhere near the degree of turnover that we have in nursing.
Doug Coltharp: And A.J., to your second question, in terms of our hospital staffing, and this is based on the number of FTEs, about 37% of the staff is comprised of nursing, 21% is therapy, and the balance would be administrative and support personnel.
A.J. Rice: Okay. Great. Thanks a lot.
Operator: And we’ll take our next question from Pito Chickering with Deutsche. Please go ahead.
Pito Chickering: Hey, good morning, guys. Thanks for taking my questions. First one here is, how should we think about fixed cost leverage from OpEx and GA on the 8.5% revenue growth throughout the midpoint of guidance? Any color on what percent of these expenses are fixed versus variable?
Doug Coltharp: No, that’s a good question. There’s a little bit more influx right now because of the inflationary rates that we’re seeing around food and utilities. And again, we’ve got to go through the first half of the year before we anniversary those, and just because of the volatility in contract labor sign-on and shift bonuses. The other variable that I would point to that’s changing that equation a little bit, and really should be just a one-time adjustment in 2023, is that normalization in the length of stay and the EPOB that I referenced previously. If you think just about that EPOB adjustment going from where we were this year with the 3.38 to 3.40, if in fact we go all the way there, even though you’re getting good leverage on total SWB, with it growing about 1.5% on a year-over-year basis, 1.5% to 2% based on the improvement in contract labor and sign-on shift bonuses, you’re increasing your FTE count by about 8%.
And so, that’s causing some deleverage in there. So, you’ve got kind of both puts and takes with regard to our 2023 assumptions around the composition of fixed costs. That shouldn’t get exactly to a breakdown of the percentage, but there is a little bit more that’s in flux this year.
Pito Chickering: So, I get it on EPOB, but specifically if I just think about OpEx and G&A, I mean on the OpEx side, I guess besides food costs, what in there is really variable, and same with G&A? Kind of what in there is actually variable versus fixed?
Doug Coltharp: So, first of all, I think you’re seeing really good leverage within G&A. About the only category that we don’t expect to lever in 2023 is that we are going to annualize some of the second half of the year staffing additions and the recruiting function. And so, you’ll see an increase that’s probably a little bit on the higher side in that category, but really not enough to move the needle. And that’s included in OOE within the hospitals. Corporate G&A, we should see some continuing leverage on. Within the kind of the operating segment P&L, obviously the most leverageable portion of that expense is occupancy costs. And then as you move further up the P&L, we get good leverage off of the administrative staff as well. And then you’re getting into a whole lot of variable costs, remembering again that almost 55% of every revenue dollar is consumed by labor.
Pito Chickering: Okay. And then, so quick follow up here on the new denials you saw in the fourth quarter. How should we think about sort of the system denials sort in ’23? You’re also changing your bad debt guidance of sort of 2% to 2.2%, but just how should we be able to think about denials start accelerating in €˜23?
Doug Coltharp: So, activity is definitely up across the board. We had enjoyed some cessation, some relief during – really starting with March of 2020. And then even as the switch got turned back on, it was kind of slow to ramp up. But basically, all of the MACs are engaged in some form of audits before. We continue to be frustrated by misinterpretations and misunderstandings of the Medicare guidelines in the claims denial process. We have had some success, including recent success in being able to educate certain of the MACs about the requirements and about how we were meeting those requirements, and those resulted in denied claims being reversed. But with many other MACs, it is a slow process and sometimes can even take years and multiple layers of appeal to reverse.
When we look at the appeals process, whether it’s the ALJ or the dab, one of the frustrating parts is kind of these blanket denials of claims, which of course indicates to us that they are not making a review of each claim upon its individual merits, which is required by law. So, that’s another element that we’re battling. We’ve put in what we think is the most realistic estimate of how we’ll see bad debt trending. I don’t know that there’s anything on the horizon that would suggest that it’ll spike above that, nor do we necessarily expect any kind of immediate improvement.
Pito Chickering: Great. Thanks so much.
Operator: And we’ll take our next question from Andrew Mok with UBS. Please go ahead.
Andrew Mok: Hi. Good morning. Wanted to follow up on guidance. By my estimate, 4Q EBITDA run rate annualizes above the high end of the guidance range, even after considering the de novo outperformance in Q4 and incremental startup losses for 2023. You called out normalization in length of stay and EPOB as potential headwinds, but it sounds like the assumptions embedded in the 2023 guidance are close to what you experienced in Q4. Length of stay finished the quarter at 12.5 days, and EPOB finished at 3.39. So, one, do I have that right with respect to assumptions for 2023? And are there any other specific headwinds that you would call out that bridge us back to the midpoint of the guide? Thanks.
Doug Coltharp: Yes. So, actually Q4 length of stay was 12.5. And as I mentioned earlier, each 0.05 movement in that metric can translate to $8 million to $10 million in EBITDA. Now, Q4 EPOB was 3.38, but the expectation that we’ve laid out there is 3.4, and every 0.05 increase in EPOB translates to about $6 million to $8 million in EBITDA. So, I think those two assumptions alone would kind of bridge you from your Q4 run rate once you’ve normalized for the de novo impact to something that looks like the midpoint of our guidance range.
Andrew Mok: Got it. Okay, that’s helpful. And then it sounds like the de novos drove $4 million of outperformance in Q4. One, can you help us understand what drove that outperformance? And is there any reason to think that that outperformance would continue into 2023? It seems like a faster de novo ramp would have a positive follow-through for 2023 as well. Thanks.
Doug Coltharp: I think that’s a very good point, and really, we didn’t factor that into 2023, simply because it’s not something that we have a lot of a lot of visibility into. As I mentioned in my prepared comments, when we set the expectation for Q4 that the de novos would break even, it was because we had experience really just on the front end of our Q3 earnings call, we’d seen some administrative delays that pushed the opening dates on a number of our de novos out further, which meant that the time that they were really starting to ramp up had been delayed. And we saw some pretty significant disruptions to our Cape Coral and our Naples hospitals from Hurricane Ian, and we had expected those would linger and impact Q4 as well.
Naples and Cape Coral rebounded remarkably quickly, a real credit to our teams down there in Q4 and contributed nicely. And the hospitals that we had assumed that had other delayed administrative delays that would kind of lag a little bit in in Q4, also contributed above our expectations.
Mark Tarr: I think also you’re seeing a bit of mentioned this market density and where we’ve built de novos, where we have a strong number of other hospitals, we have other resources there, staffing expertise. You’re starting to see where staff can move from one hospital to the next. So, you’re starting de novos up with at least a portion of the senior team at the de novo hospital is a seasoned, experienced and Compass Health staff member. So, they can work their way up their learning curve very quickly. And I think that is exactly what we saw at Naples and Cape Coral, where both of those hospitals had existing CEOs from other hospitals transfer in to do those startups. So, I do want to throw out my compliments to that group too, in terms of working through the hurricanes and working through the startup process.
