Good morning, everyone. Welcome to Enhabit Home Health and Hospice's Fourth Quarter 2023 Earnings Conference Call. Today's conference call is being recorded. If you have any objections, you may disconnect at this time. I will now turn the call over to Crissy Carlisle, Enhabit's Chief Financial Officer.

Thank you, operator, and good morning, everyone. Thank you for joining Enhabit Home Health and Hospice's fourth quarter 2023 earnings conference call. With me on the call today is Barb Jacobsmeyer, President and Chief Executive Officer. Before we begin, if you do not already have a copy, the fourth quarter earnings release, supplemental information and related Form 8-K filed with the SEC are available on our website at investors.ehab.com. On Page 2 of the supplemental information, you will find the safe harbor statements which are also set forth on the last page of the earnings release. During the call, we will make forward-looking statements which are subject to risks and uncertainties, many of which are beyond our control. Certain risks and uncertainties that could cause actual results to differ materially from our projections, estimates and expectations are discussed in our SEC filings, including our annual report on Form 10-K, which are available on our website. We encourage you to read them. You are cautioned not to place undue reliance on the estimates, projections, guidance and other forward-looking information presented, which are based on current estimates of future events and speak only as of today. We do not undertake a duty to update these forward-looking statements. Our supplemental information and discussion on this call will include certain non-GAAP financial measures. For such measures, reconciliation to the most directly comparable GAAP measure is available at the end of the supplemental information and the earnings release. With that, I'll turn the call over to Barb.

Thanks, Crissy. Good morning, and thanks for joining us. Our persistent focus on our company strategies drove our positive fourth quarter results. Payer innovation success, including the execution of another new national contract, our continued success with our people strategy, and our strong performance in quality outcomes are just a few of the positive highlights for the end of 2023 and the start of 2024. I cannot thank our employees enough for the high-quality care they provide to our patients every day. Our strongest factor in negotiating with payers and conveners and in creating strong referral relationships remains our 30-day hospital readmission rate, which is 20.5% better than the national average. This quality is a solution to the challenge of rising health care costs and helps payers manage their MLRs, contributing to controlling emergency room visits, hospitalizations, and readmissions leading to higher patient and family satisfaction and control of health care expenses. Significant expenses are also incurred at the end of people's lives. High-quality hospice care, particularly consistent and attentive clinician visits during the last days of life, is crucial in preventing revocations and unnecessary hospitalizations due to the benefit it provides our patients and their families. We take pride in the fact that our team provides hospice visits in the last phase of life 53.2% better than the national average. We expect our home health and hospice quality to continue driving our future growth, as well as employee retention. Now let’s discuss some of our key 2024 focus areas and how the fourth quarter set us up for success. With our traditional Medicare mix of home health revenue now aligned with peers, we expect the continued decline in our traditional Medicare volumes to slow to a rate consistent with the industry in 2024. Episodic admissions are beginning to stabilize as our sequential episodic admissions were down only 0.8% in the fourth quarter compared to the third quarter. With our strong quality metrics and our increased list of payers we can accept, we expect an increase in referrals as we improve our status as a preferred provider. Our payer innovation team continues to succeed in demonstrating our value proposition to Medicare Advantage payers and has set us up for success with these payers in 2024. We had another strong quarter negotiating a total of 11 new agreements, with 8 of those negotiated at episodic rates. Specifically, we are extremely excited to announce a new national agreement that became effective January 1, 2024. This new national agreement is an advanced episodic model that allows us to prioritize access to home care for patients discharged from institutional settings. In other words, it aligns our incentives with the payers' need for member access to skilled home care for a successful transition to home following an institutional admission. This contract allows us to further increase our focus on moving volumes away from lower-paying agreements that do not recognize the value of our high-quality outcomes. Since the inception of the payer innovation team in the summer of 2022, we have successfully negotiated 59 new agreements, of which over two-thirds are episodic rates. Our home health business development and branch operations teams continue to succeed in moving volume to our payer innovation agreements. In the fourth quarter, approximately 25% of our non-episodic visits were in new payer innovation contracts, which is a remarkable increase from just 5% in Q1 2023. We are confident in our ability to make continued improvements in Medicare Advantage pricing and to shift our Medicare Advantage admissions to these enhanced contracts. With the advanced episodic model added to our payer contracts, we will update how we report our payer groups in 2024, separating traditional Medicare from all other episodic contracts. Our rollout of Medalogix Pulse to all of our branches was completed by the end of Q3. Our visits per episode in Q4 remained flat year-over-year at 14.3% and decreased sequentially from Q3 to 14.9%. We continue to work with our leaders on how to best utilize this tool for clinical resource management based on our patient’s acuity and complexity. Regarding hospice, moving to the case management model has helped us recruit and retain our hospice staff, resulting in the elimination of all contract nursing and alleviating staffing capacity constraints. The sales team can now concentrate on further development of referral sources. We continually analyze our hospice business to increase efficiency in the referral-to-admission process and improve our ability to respond quickly to our referral sources. Recently, we reallocated certain hospice resources to form centralized admission departments focused solely on these efforts. We complement our organic growth strategy with our de novo strategy, allowing us to enter new markets with low capital costs. The primary investment is in staffing as we hire clinical teams to build the patient census necessary for our licensing survey. We added one home health and one hospice de novo location in Q4, bringing our total for 2023 to eight. Two additional locations are complete with the necessary preparatory steps and are awaiting regulatory approval. We expect to finalize these two from 2023 and open another ten de novo locations in 2024. Our operational and sales teams are focused on ramping up referral and admissions growth in the de novo locations opened in 2023. Continued progress with our people strategy remains a priority, and we believe we're winning the battle for labor. During the fourth quarter, our full-time nursing candidate pool increased by 21.5% year-over-year, resulting in the addition of 119 net new full-time nurses. Given our strong nursing hires in 2023, we eliminated all hospice nursing contract labor by the end of Q3 and our home health nursing contract labor by the year-end. Our focus in 2024 will be on employee engagement so we can continue to improve retention, particularly regarding clinician satisfaction with their schedules. Given our success with nursing hires, we are now able to redirect some talent acquisition resources toward recruiting additional therapists, as our improved nursing workforce allows us to expand and add therapy team members. Before I hand it over to Crissy, I want to remind everyone that the purpose of today's call is to discuss our financial and operational results and outlook. The Board, with the assistance of our advisers, is comprehensively assessing strategic alternatives and discussions with interested parties are ongoing. We are in the later stages of our strategic review but do not intend to disclose developments unless and until we determine that further disclosure is appropriate or necessary. We will not be commenting beyond that, and we ask you to focus your questions on our business and our results. In summary, our success in our payer strategy, ongoing payer innovation contracting, people strategy, hospice growth strategies, and our de novos are examples of our continuing investment for the future to meet the growing need for home health and hospice services. I will now turn it over to Crissy to further discuss the quarter's results and 2024 guidance.

Thanks, Barb. Consolidated net revenue was $260.6 million for the fourth quarter, down $2.6 million or 1% year-over-year. Adjusted EBITDA was $25.2 million, down $5.1 million or 16.8% year-over-year. We estimate the continued shift to more non-episodic payers in home health decreased revenue and adjusted EBITDA by approximately $8 million year-over-year, net of the impact from improved pricing of payer innovation contracts. In our home health segment, total admissions growth of 3.9% year-over-year was driven by 34.2% growth in non-episodic admissions. Our non-episodic visits grew to approximately 33% of our total home health visits in the quarter. While we are making significant progress demonstrating our value proposition to payers as we negotiate new agreements with improved rates and are successfully shifting Medicare Advantage volumes into our payer innovation agreements, the revenue and adjusted EBITDA impact from this volume shift has not been enough to overcome the financial impact from the erosion of Medicare fee-for-service volumes. Our home health team successfully managed cost of services, resulting in cost per visit flat year-over-year, as the reduction in nursing contract labor offset the impact of merit market increases. For the full year 2023 compared to 2022, cost per visit increased approximately 2%. That’s less than the 3% average merit market increase for the year, thus demonstrating our ability to control costs through productivity and optimization of staff. In our hospice segment, revenue increased by $3.7 million or 7.8% year-over-year, primarily due to an increase in revenue per day resulting from changes in our estimated recoverability of net service revenue in the fourth quarter of 2022 and an increased Medicare reimbursement rate that went into effect on October 1, 2023. Admissions decreased 1.5% year-over-year, while average daily census decreased 4.3% year-over-year. Sequentially, our average daily census increased 1.3% over the third quarter. Adjusted EBITDA increased by $6.1 million year-over-year, primarily due to the increase in revenue per day and a reduction in general administrative costs for the segment. Cost per day improved sequentially to $76 after stabilizing at $77 for the prior three quarters, as the elimination of nursing contract labor and an increased census helped gain leverage against the fixed costs associated with the case management staffing model. General and administrative expenses decreased by $2.1 million year-over-year, primarily due to changes in back-office staffing needs as a result of implementing the case management staffing model. Our home office general and administrative expenses increased by $4.3 million year-over-year to 10.3% of consolidated revenue, primarily due to a declining revenue base, investments in information technology and talent acquisitions, and annual merit increases. Our stand-alone company costs in 2023 approximated $23 million, which is less than the original estimate of $26 million to $28 million at the spend date. At this time, we have transitioned all services from Encompass Health, except for our PeopleSoft Financials and HR systems, and we expect to complete the transition of those services by the end of Q1 2024. Let's transition now to the balance sheet. Information on our debt and liquidity metrics is included on Page 17 of the supplemental slides. We ended 2023 with a leverage ratio of 5.4x, well within our covenant maximum of 6.75x. We have available liquidity of approximately $61 million, including approximately $27 million of cash on hand. We believe this is adequate to support our operations, including our de novo strategy. We generated approximately $59 million of free cash flow during 2023, which equates to a free cash flow conversion rate of approximately 60%. Let's now turn to 2024. Our 2024 guidance and related guidance considerations can be found on Pages 19 and 20 of the supplemental slides that accompanied our earnings release. Our 2024 guidance range for net service revenue is $1,076 billion to $1.102 billion with adjusted EBITDA in a range of $98 million to $110 million. Within our home health segment, and as Barb mentioned in her remarks, we are focused on achieving growth through the stabilization of Medicare as a percent of total home health revenue, continued progress with our payer innovation strategy, and increased utilization of our clinical resources. We expect our Medicare pricing to increase approximately 1.2% in 2024 based on the home health final rule, and we expect our Medicare Advantage pricing to improve based on the success of our payer innovation team, including a full year of impact from the national agreement that became effective May 1, 2023, and the additional benefit of the new national agreement that became effective January 1 of this year. Regarding volumes, we expect the success we've had with our payer innovation team and our recruitment and retention of clinical staff to drive volume growth. With our traditional Medicare mix of home health revenue now in line with our peers, we expect the continued decline in our traditional Medicare volumes to slow to a more industry-like rate in 2024. A new episodic payer innovation contract will provide an avenue of growth to offset some of the continued erosion of traditional Medicare. For our hospice segment, we are focused on growing census, which will also allow us to gain operating leverage against the fixed cost structure associated with the management staffing model. For pricing, we expect our reimbursement rate to increase approximately 2.9% for the first three quarters of the year based on the hospice final rule effective October 1, 2023. For volumes, we are clinically staffed to grow, and we are working with our talent acquisition team to further build our business development team for growth. On the cost side of the equation, we face two primary headwinds in 2024: wage inflation and increased costs associated with durable medical equipment. A 3% average merit market increase will result in an approximate $10 million net headwind for our company year-over-year. This represents the impact of wage inflation above the net reimbursement rate increases we received from Medicare in both segments. In our home health segment, we believe we can partially offset wage inflation through productivity and optimization improvements and currently believe our cost per visit will increase between 2% and 3% year-over-year. In our hospice segment, we estimate our cost per day will increase by 2% to 4%. This increase is primarily due to service issues we encountered with our durable medical equipment provider in the fourth quarter of 2023. To avoid disruption to our patients and to ensure they receive the equipment they need, we made alternative arrangements in the affected markets. We estimate these new arrangements will result in an approximate $2 million of additional costs associated with durable medical equipment year-over-year. We expect patient volumes to increase without the need to hire a significant number of additional staff, resulting in operating leverage against the fixed costs associated with our case management staffing model. We expect our home office costs to stay relatively flat as a percentage of consolidated revenue, as merit increases and increased incentive compensation year-over-year are partially offset by the implementation of cost structure and other savings in 2023. As we've noted previously, our greatest challenge in forecasting relates to the shift of Medicare eligibles into Medicare Advantage and forecasting not only the mix of traditional Medicare admissions versus Medicare Advantage admissions but also forecasting the shift of Medicare Advantage admissions into our payer innovation contracts. With this in mind, the difference between the low and high ends of our guidance range primarily depends upon our payer mix. We expect to generate $36 million to $62 million of free cash flow in 2024, as shown on Page 21 of the supplemental slides that accompanied our earnings release. Free cash flow in 2024 will be impacted by our return to cash income tax payments, which represents a $12 million to $14 million swing in uses of free cash flow year-over-year. In addition, free cash flow generation will be dependent on the timing of working capital, specifically accounts receivable. With that, I'll ask the operator to open the lines for Q&A.

Our first question comes from Brian Tanquilut with Jefferies.

Congrats on the quarter. I guess maybe Barb, my first question, you announced that national episodic contract, and it sounds like you're gaining traction with expanding or shifting the contracting strategy a little bit here. So just curious, number one, how are you thinking about the remaining opportunity there and what it would take to ramp that business up or that relationship up? And then maybe broadly speaking, how are you thinking about how the pressures on Medicare Advantage plans are translating to you guys? And how does that impact your ability to negotiate or renegotiate your biggest Medicare Advantage relationship?

Sure. Well, I think the ability to particularly ramp up with the new national agreement is strong. It's beneficial that we have always had care transition coordinators inside a facility, so they can really help us ramp up quickly in being able to accept this payer, particularly from these institutional settings. So I think there's a readiness, ability, and staff there to take advantage of that. I do think actually some of the challenges that the payers are facing often work to our benefit as we're sitting at the table, particularly because of our high-quality outcomes. I think if they're genuinely looking to control those high-cost areas like hospitalizations and emergency room visits, we can help with that. However, a provider has to have the high quality to succeed in this regard. So it really has given us, I think, an advantage at the negotiating table with these payers.

And then maybe, Crissy, for my follow-up on guidance, I'm curious about your assumptions regarding the payer mix shift. How should we consider the various factors involved in that shift, including wage inflation? You've mentioned cost per visit, but what insights can you share? Also, what does the recruitment pipeline look like for both nurses and therapists?

Yes. So I'll take kind of the guidance part of that and then turn it back to Barb for the recruitment and retention aspect of the question. When I think about 2024 and guidance and bridging 2023 to 2024, I'm really focused on the expected increase due to increased reimbursement rates in both segments, volume growth, efficiency improvements in our cost per visit, cost per day. Some of that will be partially offset by wage inflation and that new DME contract that I just talked about, as well as some of that payer mix shift. Again, Brian, we're not expecting what I historically referred to as the Enhabit cliff. Remember that we've now entered that zone where our Medicare fee-for-service and Medicare Advantage mix is very similar to our peers. Therefore, we expect a more industry-like shift. We're not claiming that Medicare won't continue to decline. They continue to choose Medicare Advantage plans, but we believe that we shouldn't have those same double-digit declines that you have seen from us because we have made that shift over 12 to 18 months. Whereas the peer group made it over 6 to 7 to 8 years. So we believe we have normalized ourselves into the peer group now. And thus, the $30 million impact from payer mix that we saw in 2023, we don't expect to recur at that same level given our volumes and the payer mix as well as the improved rates we’re receiving. Additionally, it’s important to note that we’re starting 2024 with two national contracts. We weren’t in that position at the beginning of 2023. We'll have the full benefit from the national agreement that became effective on May 1 of 2023 and, of course, the one that we announced last night which became effective on January 1.

And then on your question, Brian, regarding labor, it was encouraging to see Q4 tends to be a slower quarter in terms of labor since folks typically don’t look to switch jobs over the holidays. We were pleased to see year-over-year that our applicant pool was up over 21%. So that was promising to see. Moreover, we had another successful quarter with those full-time net new hires.

Our next question comes from the line of Jason Cassorla with Citigroup.

Great. I wanted to follow up on Brian's question. Do you have any additional insights or considerations as we think about the earnings cadence? You mentioned that fee-for-service volumes are returning to industry norms. Are you expecting that trend to continue as we transition from '23 to '24, or do you anticipate seeing significant fluctuations in that regard? Any further details on the earnings cadence would be appreciated to start.

Sure, Jason. So we expect what I would call a moderate adjusted EBITDA build throughout the year. I think when we attended your conference last spring, we talked about a steep ramp in 2023. We're not really expecting that in 2024. Again, it's more of a moderate adjusted EBITDA build throughout the year. Q1 and Q4 tend to have slightly higher volumes. One of the things that we're excited about in 2024 is that, given the success we've experienced with the recruitment and retention of our clinical staff, when you have more staff, you're able to manage through some of those summer anomalies around paid time off and vacations and so forth. Therefore, we expect to manage those labor needs in Q2 and Q3 around PTO through increased staff and productivity. Moreover, there will be a slight ramp from some of these new Medicare Advantage contracts, especially the one that came into effect January 1.

That's helpful. Considering the 59 agreements you signed, which correspond to 25% of your non-episodic visits, do you believe you are well-positioned to withstand taking volume from these lower-paying contracts without compromising the volume density in your markets? How should we view the balance between generating volume density and the reimbursement dynamics of your overall portfolio? Also, could you provide insight into what the hospice cost per day would have been without the DME issue, just to give us a better understanding?

Sure. Regarding volume and our signed contracts, I do believe there's an ability to grow the volume. A lot of particularly the regional contracts we signed have been based on feedback from the field on what would make a significant difference for them with their referral sources. Additionally, I think there's a fresh opportunity for us now. If you think back to last year at this time, we had a very short list to present to referral sources concerning which payers we could accept. For instance, what we hear from our referral sources is they need a partner who can assist with taking almost all of their patients, rather than just one or two specific ones. Therefore, I think we're entering referral sources today with a much longer list, which should assist us in growing all volumes, particularly focused on those in the payer innovation contract and fee-for-service Medicare.

On your question regarding the hospice cost per day, I think what you’re asking is about the 2024 number because this new DME contract really took effect in Q1 2024. I think it's fair to say, Jason, if it weren't for this durable medical equipment agreement that we had to sign, our cost per day guidance consideration would probably have been in the range of 0% to 2%, rather than the 2% to 4% we're seeing now.

Our next question comes from the line of Joanna Gajuk with Bank of America.

So I guess, first, a follow-up when it comes to the episodic. So you said you expect that sort of admissions to stabilize going forward since the mix is similar to peers. But still when I look at the payer mix in terms of the revenues, the mix you're shifting and growing the MA that you do not have. But then, so the Medicare revenue was down 14% for the year and, I guess, 16% in this quarter, year-over-year and down 7% sequentially. And when I look at the peers, they show either a much smaller decline or even some show growth year-over-year. So I guess the question is why is Enhabit losing market share?

Joanna, I don't think we're losing market share. Again, I think this is part of Medicare eligibles choosing to enroll in Medicare Advantage. If you go back in history, as you well know about this company, is historically we didn’t pursue Medicare Advantage. We made that shift over the last 12 to 18 months, whereas the peer groups have been adjusting over 6 to 8 years. As a result, their drop in traditional Medicare wasn't like the notable decline we experienced. So that’s what you're seeing when you compare us to peers. What we're indicating now is that we think we're starting on a path where we're not continuing to experience that sharp decline and it is stabilizing more like the industry.

Okay. And I guess another follow-up or maybe that's a new topic, but related to the situation with payer mix. When I look at the average revenue per visit for non-episodic visits compared to the revenue per visit for the episodic portion, which includes obviously Medicare and MA, but still that average is like 43% below. So like the non-episodic average is 43% below the average for the episodic volumes. So how should we interpret that metric? It sounds like maybe you're going to change some disclosures and we will be able to clearly see Medicare and then some other episodic separately. Is that the intention to provide us with more visibility? But I’m still surprised that the average is still down that much lower. So I guess how should we think about this going forward?

Yes. One thing to consider is that part of the numbers you're seeing comes from revenue reserves, and those can sometimes create noise, as you're well aware in any quarter and for the year as well, especially given the adjustments we made in Q4 of 2022 and throughout 2023 as we enhanced controls and updated our reserve methodology. Yes, moving forward, as Barb mentioned, and especially given the fact that we now have this national agreement which is an advanced episodic model, when we start reporting Q1 later this year, instead of merely getting episodic admissions and non-episodic admissions, we will begin to break out episodic data between traditional Medicare and everything else episodic. We believe that’s vital, primarily driven by this new national agreement.

And if I may squeeze in just one last question regarding that national agreement. Is there any way to help us quantify like incremental revenue or volumes from the contract? It sounds like some of these markets you already have been serving. So you kind of keep the volumes, but the rate is higher, but then it sounds like you also added more markets. So can you provide us with some size of that incremental?

Sure. We did not aggressively pursue that volume in the past. I would say when we look back at '23, it was about 5% of our admissions historically. To your point, we now have coverage throughout the country, which will undoubtedly give us better access to those members. One thing we’ve consistently said about our payer innovation contracting is that we seek rates that are significantly improved over historic contracts. This new contract aligns with that focus from the payer innovation team from a rate perspective.

Our next question comes from the line of A.J. Rice with UBS.

This is Enjia on for A.J. So in Q4, the company got to around 25% of visits as a percentage of total non-episodic visits in these payer innovation contracts. I mean, just run-rating that, there will be a degree of a tailwind for next year. Does the company expect the fast pace to continue in '24 as well? Just trying to size the momentum of getting more visits into these higher-paying contracts.

Yes, I think it's critical for us to provide information related to episodic fee-for-service, payer innovation, and non-episodic. As we have more success signing payers with episodic contracts, you may notice some moderation in this non-episodic movement, mainly because our addressable market is increasing as our episodic contracts expand. So, again, as Crissy pointed out, it will be important for us to provide more detail on these various groups in 2024.

Got it. I guess a follow-up on that would be in these MA episodic contracts versus the non-episodic contracts, how much of a rate increase would that create for the company in '24, I guess?

Historically, we have discussed a 0% to 10% rate differential to Medicare fee-for-service for our episodic MA contracts. We previously indicated a 25% to 30% discount for the non-episodic MA contracts compared to Medicare fee-for-service. However, with the introduction of the national advanced episodic model contracts, we can no longer differentiate between episodic and non-episodic in that same manner. Now it’s really just about what's included in this payer innovation contract. Currently, all our contracts feature discounts ranging from 0% to roughly 25% against Medicare fee-for-service.

Got it. Maybe one more just to clarify. On the hospice side, there seems to be an estimated recoverability of net service revenue in the quarter. Is that a one-time benefit? And how much of a revenue and EBITDA impact did that have?

Yes. It’s important to note that this more closely relates to Q4 of 2022. As you may recall, we made a significant adjustment to our revenue reserves in that quarter. Overall, it was about $12 million for the total company, with $7 million allocated to the hospice segment. That adjustment reflects the noise referred to in the slides regarding year-over-year changes for the segment. Hence, it’s more about the changes and recoverability made in Q4 2022 than anything that occurred in Q4 of 2023.

Our next question comes from the line of Ryan Langston with TD Cowen.

Just two quick ones for me, maybe I'll try the payer innovation question a little differently. Obviously, it's increased from what I think was 5% to 25% a year, which is quite remarkable. Perhaps more broadly, how do we think about that percentage as we move into '24 and '25, considering where your staggered contracts may be up for renewal and whether you can procure contracts outside normal renewal schedules? Additionally, can you provide a sense of the mix shift from fee-for-service to MA in early 2024 based on your experiences over the first two months this year?

Sure. Regarding the potential to ramp percentages further, we do believe there remains opportunities to transition non-episodic visits toward payer innovation contracts, particularly as we continue to secure episodic agreements. As you've mentioned, moving from 5% to 25% this year is commendable. However, the biggest uncertainty in predictions for 2024 is the success we see in negotiating episodic contracts broadly, particularly the national ones. As for your question regarding early 2024 and the volume mix shift, since we’ve only just entered the year, we’ll have firmer details when we report Q1. Keep in mind that many patients in Q1 likely began treatment in Q4 and may still fall under contracts that we would prefer to change.

Our next question comes from the line of Jason Cassorla with Citigroup.

I just wanted to hone in on capital deployment priorities, more specifically around your leverage. I guess how should we be thinking about the uses of your free cash flow for '24? Do you anticipate using the bulk of it for debt repayment on your revolver? Or are you just anticipating leverage would naturally kind of improve as EBITDA grows? Just any color around priorities and debt repayment?

Yes. So we are primarily focused on deleveraging. Our free cash flow will go towards $20 million of required amortization on our term loan A. We also have the de novo strategy, which should require approximately $2.5 million to $3.5 million as disclosed in our supplemental slides. Nevertheless, we believe that's ample to cover that. Any excess above that would likely go towards reducing our revolver balance. A good way to conceptualize this, Jason, is to assume a 50% free cash flow conversion with $20 million of mandated amortization on the term loan. Use that for de novo initiatives as well, and then aim for revolver paydown with any remaining cash.

Okay, great. If I could follow up with one more, just on the de novo side. The eight locations you opened up in '23, just curious how the ramp has progressed across those locations so far. Additionally, you've mentioned a focus on hospice build-out within the context of building your co-location strategy. In 2023, the de novos were split between home health and hospice. For the ten you are planning in '24, how should we perceive the locations? Will they be evenly split between home health and hospice, or what are your thoughts there?

Yes. The focus continues to lean slightly more towards hospice with our strategy being to open hospice wherever we have existing home health services. The de novos that we opened in 2022 and 2023 are performing well, with some operating at plan and others ahead of plan. For 2024, I think it’s appropriate to say that the investments we continue to make in the ten planned openings will be offset by earnings from those that we launched in 2022 and 2023.

Our next question comes from the line of Joanna Gajuk with Bank of America.

So I guess I have two. One is on the payer sources, Slide 31, where you have the fourth quarter hospice managed care at 6.5%. Can you explain why there is such a big number? Because it also mentions an increase in the non-Medicare patient revenue, but also again discusses this recoverability or estimated recoverability of the revenue. So can you help us understand what the 6.5% really represents?

Yes. It represents managed care within our hospice, including some of the bid contracts and other contracts that were active in 2023. You'll see that the 2022 column is blank; it’s zero. That’s because a significant portion of the revenue reserve for hospice that we adjusted in Q4 2022 went to that line item.

Okay. And my other question, I guess regarding regulations, what do you expect to see in the 2025 home health proposal that is anticipated in the coming months? I guess we still have a couple of months, but any initial thoughts around productivity adjustments and recruitment? And also, I guess, we will be getting a hospice proposal for 2025. So anything you anticipate seeing in that?

Sure. For home health, I anticipate they will pursue the remaining half of the adjustments they approved last year. We expect that will be part of the proposed rule. Regarding the temporary adjustments, that remains a big question mark. Historically, it hasn't been discussed or mentioned yet about how, if and when anything will manifest. So, I think we would certainly expect to see something about the permanent changes continuing; however, the temporary aspect is very uncertain. As for hospice, I don't expect any significant changes from the proposed rule.

There are no further questions at this time. I would now like to turn the call over to Crissy Carlisle for closing remarks.

Thank you, operator, and thanks to each of you for joining today's call. If you have additional questions, please email [email protected].

This concludes today's call. You may now disconnect.