Good morning, everyone, and welcome to Encompass Health's Second Quarter 2020 Earnings Conference Call. At this time, I would like to inform all participants that their lines will be in a listen-only mode. After the speaker's remarks, there will be a question-and-answer period. 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, Encompass Health's Chief Investor Relations Officer. Please go ahead.

Thank you, operator, and good morning, everyone. Thank you for joining Encompass Health's second quarter 2020 earnings call. With me on the call today are Mark Tarr, President and Chief Executive Officer; Doug Coltharp, Chief Financial Officer; Barb Jacobsmeyer, President, Inpatient Rehabilitation Hospitals; Patrick Darby, General Counsel and Corporate Secretary; and April Anthony, Chief Executive Officer of Encompass Home Health and Hospice. Before we begin, if you do not already have a copy, the second quarter earnings release, supplemental information, and related Form 8-K filed with the SEC are available on our website. On Page 2 of the supplemental information, you will find the Safe Harbor statements, which are also set forth in greater detail 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, like the magnitude and impact of the COVID-19 pandemic, could cause our actual results to differ materially from our projections, estimates, and expectations, which are discussed in the company's SEC filings, including the earnings release and related Form 8-K, the Form 10-K for the year ended December 31, 2019, and the Form 10-Q for the quarter ended March 31, 2020, and June 30, 2020, when filed. 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, reconciliations to the most directly comparable GAAP measure are available at the end of the supplemental information at the end of the earnings release and as part of the Form 8-K filed yesterday with the SEC, all of which are available on our website. Before I turn it over to Mark, I would like to remind everyone that we will adhere to the one question and one follow-up question rule to allow everyone to submit a question. If you have additional questions, please feel free to put yourself back in the queue. With that, I'll turn the call over to Mark.

Thank you, Crissy, and good morning everyone. The challenges presented by the ongoing COVID-19 pandemic have been and continue to be significant. But thanks to the amazing efforts of our talented and devoted team members throughout the organization, we believe we have implemented plans across our organization that will allow us to continue to succeed in the face of the ongoing challenges. Now let's first talk about our volumes. Our patient volumes in both business segments have substantially rebounded from the low point experienced in April. At the end of June, inpatient rehabilitation census had rebounded to 95% of pre-pandemic levels. And home health starts of care had rebounded to pre-pandemic levels. These positive volume trends have continued in July. Volume disruptions caused by the pandemic vary by market. Most of our markets have seen a meaningful level of recovery. Factors that have impacted our volumes include the number of COVID-19 cases in a community, the status of operations at acute care hospitals, the number of exposed or positive staff in quarantine, delays in obtaining COVID-19 test results for patients and employees, and capacity limitations created by semi-private rooms in some of our hospitals. While COVID patients do not comprise a large percentage of our patients, many of our hospitals, home health agencies, and hospice agencies treat patients recovering from the virus. These patients, many of whom have spent time on ventilators, have endured extended stays at an acute care hospital. They are extremely weak and require intense rehabilitation to regain both their strength and cognitive abilities. Unfortunately, some facilities in the post-acute space have faced significant challenges with COVID-19. In contrast, our rehabilitation hospitals and home health agencies have been able to help recovering patients return to their independence and pre-COVID lives. The resurgence of the pandemic in some markets that had previously reopened, such as Florida, Texas, and Arizona, may temporarily inhibit further volume growth. However, these resurging markets are also where we are seeing Medicare Advantage plans once again relax preauthorization requirements. When the preauthorization requirements were relaxed in May, we experienced a higher conversion rate of these patients. Let's move now to pricing, where the COVID-19 pandemic is impacting each of our segments differently. Net revenue per discharge is being positively impacted in our inpatient rehabilitation segment by a higher acuity patient mix resulting from the pandemic and the suspension of sequestrations that began May 1. The acuity of our patients increased in the second quarter of 2020 due to the deferral of elective procedures and patient anxiety causing only the most acute patients to seek medical treatment. While revenue per episode in our home health business is also benefiting from the suspension of sequestration, the COVID-19 pandemic is exacerbating the expected negative effects of implementing PDGM. LUPAs remain higher than we'd like but they have significantly improved as of the end of the second quarter. Some patients, families, and senior living facilities remain cautious about allowing our clinicians into their homes and buildings, but the treatment refusals have decreased. To further reduce patient anxiety, we have improved communication with patients and families regarding our infection control procedures and adapted our visits to ensure proper social distancing during periods where hands-on treatment is not required. In addition, as acute care hospitals declined and visitation restrictions were implemented, our admissions source mix shifted from institutional to more community-based, which carries a lower reimbursement under PDGM. Additionally, the declines in admissions, coupled with the need to maintain proper COVID risk monitoring of patients in later stages of their care plan resulted in the patient mix shifting from early payment periods to late payment periods, which also carry a lower reimbursement level. The COVID-19 pandemic-related impact on patient volumes, staff productivity, and medical supplies also is increasing our operating expenses. The safety of our patients and employees is of paramount importance to us, making the availability of personal protective equipment a priority for our supply chain management teams. Increased PPE utilization and increased unit cost has been a significant challenge for the healthcare industry. PPE costs have increased eight times on average. In our inpatient rehabilitation segment, utilization of PPE has increased approximately 12 times for masks and four times for gowns. This type of PPE was not widely used historically in our home health and hospice segment, so these costs are predominantly new for that segment. We've taken a number of actions to address ongoing PPE issues, including identifying and contracting with secondary supply sources, as well as securing additional warehouse space and logistical support from our primary distributors to have larger levels of inventory on hand. We are confident we now have adequate inventories of PPE and we have secured supply sources to meet our immediate foreseeable needs. While these challenges remain in the near-term, they will eventually abate. And as the population ages, the demand for high-quality care we provide across our three service lines will increase. Throughout this pandemic, we've continued to expand our national footprint. We've opened three new hospitals in 2020, including two added in the second quarter in two states that are new for us, Iowa and South Dakota. We expect to open a new 40-bed hospital in Toledo, Ohio, in the fourth quarter. In addition, we expect to add at least 120 beds to existing hospitals in 2020, with 53 of these beds already operational. Recall that at our Investor Day earlier this year, we discussed a growth target of six to ten de novos per year starting in 2021. For 2021, we've already announced plans to build eight new hospitals and we have announced five new hospitals planned for 2022. Specifically at our Investor Day, we announced we had identified 15 high-potential de novo markets in Florida. As of today, our expected 2021 and 2022 hospital openings include five new Encompass Health IRFs in Florida. We are not done in Florida or in other under-bedded markets across the country; you can expect more announcements in the coming months. All of this demonstrates our commitment to and confidence in our future. We also continue to seek opportunities to expand our national presence in home health and hospice. While we continue to believe PDGM will result in consolidation of the home health industry, current M&A activity is minimal, as even small agencies are focused solely on their response to the COVID-19 pandemic and are being supported by the PPP and CARES Act funds. Thus far in 2020, we've opened or acquired two new home health locations and one new hospice location. We remain diligent in assessing opportunities and keeping our ear to the ground in local markets. We believe depressed volumes, the inability to easily flex costs, and the expanding of all government support may bring small agencies to the forefront soon. We are hopeful that there will also be opportunities of scale that will choose to come to market later this year or early next year. Now, no healthcare earnings call would be complete without a regulatory update. In the second quarter, CMS released a fiscal year 2021 proposed rule for inpatient rehabilitation facilities and a calendar year 2021 proposed rule for home health agencies. Both rules were largely in line with our expectations and contain minimal changes to the 2020 rules. The IRF proposed rule includes a net market basket update of 2.5%. The home health proposed rule includes a net market basket update of 2.7%. For home health, it is also important to note that CMS acknowledged in the proposal that it had insufficient information to determine if the negative 4.36 behavioral adjustment was an accurate assumption for 2020. CMS indicated they will revisit it in future years. Also on the regulatory front, CMS announced plans to extend the RCD program into North Carolina and Florida effective August 31, 2020. We and many in the industry believe that the timing of such a rollout is ill-advised given the amount of added interaction the RCD process requires with physicians in already taxed environments like Florida. However, we have proven our ability to meet the standards in Texas, Ohio, and Illinois, and we are equally confident we can do so in Florida and North Carolina if necessary. In summary, our business fundamentals aren't changing, and we believe the pandemic has created an even stronger awareness of the level we provide in our hospitals and the value of our home care service lines. While our operating environment continues to change rapidly along with the COVID-19 pandemic and each market's response to it, we remain confident in the prospects of both of our business segments based on the increasing demand for the services we provide to an aging population. This confidence is further supported by our strong financial foundation and substantial investments we have made in our businesses. We have a proven track record of working through difficult situations, and I believe in our ability to overcome current and future challenges. With that, I'll turn it over to Doug.

Thanks Mark, and good morning, everyone. I'm going to summarize some of the key metrics and trends for the quarter, and then we'll move into the Q&A. Mark stated volumes rebounded across all three service lines as the quarter progressed. In the IRF segment, discharges declined 10.7% for the second quarter of 2020, compared to the second quarter of 2019. We experienced a steep drop at the outset of the pandemic but rallied to increase 1.3% for the month of June. The recovery of discharge volume was bolstered by strong growth in Medicare Advantage, which increased 66% in Q2, climbing to 20.1% of our payer mix compared to 11.1% in the same period last year. This shift in our payer mix impacted our year-to-date clinical collaboration rate. The all-payer clinical collaboration rate for the first half of 2020 of 33.9% climbed 150 basis points compared to the first half of 2019. This decline was attributable to the accelerated growth in our Medicare Advantage discharges on which we have a lower clinical collaboration rate than on Medicare fee-for-service. Going a layer deeper reveals that our Medicare fee-for-service clinical collaboration rate for the first half of 2020 increased 110 basis points over the first half of 2019 to 43.9%, and our Medicare Advantage clinical collaboration rate increased 390 basis points over the first half of 2019 to 16.7%. We believe our clinical collaboration protocols continue to enhance our value proposition and serve as a competitive advantage. Home health volumes followed a similar trajectory to the IRF segment, with admissions declining 7.9% in the second quarter compared to the prior year period but rising to an increase of 8.4% in June after having dropped 23.5% in April. As a reminder, the anniversary of the Alacare acquisition was July 1st. Initial decline in hospice admissions was much less severe and recovered very quickly. The effects of lower volumes were partially offset by better-than-expected pricing for both our IRF and home health service lines. IRF revenue per discharge increased 6.2% in the second quarter, driven by higher acuity and the suspension of sequestration beginning May 1st. Home health revenue per episode decreased 1.3% as the negative impact of PDGM, the effects of which have been exacerbated by the pandemic, were partially offset by the sequestration suspension and the increase in episode starts late in the quarter. Our operating expenses in both segments were elevated by our response to the pandemic. Labor productivity was adversely impacted by revised clinical protocols and operating procedures required for infectious disease management. Along with all other healthcare providers, we incurred higher costs related to the increased utilization and pricing of PPE and cleaning supplies. In addition, we elected to reward our frontline employees with extra PTO, resulting in a $43 million incremental expense in the second quarter. Our labor productivity metrics improved over the course of the quarter as volumes rebounded. We expect a continuing impact from the pandemic for at least the balance of this year. Similarly, we assume that utilization and pricing of PPE and cleaning supplies will remain elevated. Putting this all together, our consolidated adjusted EBITDA for the second quarter of $162.2 million declined 35.7% from the prior year period. Accepting the $43 million extra PTO benefit, the decline would have been 18.6% with the trend line improving throughout the quarter. As a further reminder, we returned 100% of the CARES Act relief funds we received from HHS, so our adjusted EBITDA does not include any benefit related to those distributions. Our free cash flow generation for the first half of 2020 remained strong as the decline in adjusted EBITDA was largely offset by a decrease in working capital and a reduction in cash taxes. Adjusted free cash flow for the first six months was $242.8 million. We took additional steps to bolster our liquidity in Q2. We amended our $1 billion revolving credit facility to provide financial covenant relief through the end of 2021 to accommodate the effects of the pandemic and issued $600 million of new senior notes as ad-ons split equally between our 2028 and 2030 maturities. A portion of the proceeds from these notes offerings were used to repay the outstanding principal under our revolving credit facility. As a result of these actions and with our free cash flow generation, we ended the quarter with approximately $419 million of cash on hand and $964 million available under our revolving credit facility. Given the strength of our liquidity and cash flow and the confidence we have in our business model and strategy, we have continued to vigorously pursue our business development opportunities and to augment the returns we generate from our operating investments with a quarterly cash dividend on our common stock. And now operator, we’ll open the line for questions.

Thank you. The floor is now open for questions. And your first question is from Whit Mayo of UBS.

Good morning, Whit.

Good morning, Whit.

Hey, thanks. Good morning, guys. By my math, it looks like you were able to offset perhaps 70% of the revenue shortfall versus what I would guess you had in your original plan, give or take a few percent. Can you maybe elaborate and talk about some of the cost and productivity initiatives that you’ve implemented to align your clinical staff with the reduction in volume and just how sustainable you think that is as the volume begins to build back?

Whit, let me just make a couple of comments. Both operating segments looked at their provision of the clinical teams when you factor in the pandemic. You had a number of things that concerned you about staffing; One is the denial staff that we had quarantined at any given time, you had other staff when the pandemic first started that were concerned about new stations to begin with. And then you had the whole PPE issue that required a fair amount of education just in terms of how to wear it and just being able to treat patients in this different environment. So the home health sector looked at additional productivity opportunities and the structure of their compensation package, and I’ll ask April to give additional details on that. And then Barb and her team also looked at how to offset those vacancies that were created by the quarantined staff that needed to be out there, particularly as we started to see volumes come back. So with that, let me turn it over to April to talk about her productivity.

Hi Whit. One of the things that we did was – as you can imagine, one of the areas that we saw the most significant decline in volume was in the physical therapy discipline as elective surgeries ended and as assisted living facilities started locking people out of the building. They would often let our nurses in but not our therapists. So we found ourselves in a situation where we had a significant excess of therapist capacity relative to our needs. In early May, we made a shift in our reimbursement structure for therapists, lowering each therapist's base pay by 20% and in turn lowering their productivity expectations for the pay period by the same 20% factor. That proved to be a really successful strategy for us, both in the near-term and I think ultimately in the long-term. We gave our employees the ability to earn back their extra work if they could actually complete it, if their region wasn't as heavily affected, by paying them over productivity points. As a result, if you look at the periods March and April compared to what happened since that May 2nd change, we've seen about a $20 per visit improvement in our cost per visit. In April and May, we were right in the thick of COVID and that was a high-cost period, but that structure allowed us to really lower our cost per visit, while also keeping 100% of our therapy staff. We didn't have to furlough anyone. With that approach, we were able to keep them benefit eligible and available, allowing them to use flex capacity to return to their full compensation. It's proven to be a good strategy. We have announced that we intend to maintain that with our physical therapy team for the foreseeable future and we don't intend to go back to the 100% pay. That was probably the biggest single structural change we've made.

We also made changes in the hospitals too relative to just staying on top of this every day. I’ll ask Barb just to give a couple of comments on that.

Right. As you're aware, we're pretty data-rich and have daily information that our leaders in the field look at as they manage their labor. Historically, when there's been any sort of volume impact, that's been handled by selection. But what we did was we started having daily calls with our operators in the field to look at what markets where the flexing wasn't going to help us hit our labor targets. In late March and early April, about half of our markets needed to implement a furlough to align their staffing with their volumes. Substantially all those furloughed employees are now back to work with our volume recovery. That daily information as it relates to labor productivity really helps our team flex appropriately, so that their staffing matches the needs for the hospital census each day.

So with those same investments that we've made in IT producing the management reports you’ve seen used in managing labor in the normal course of business were even more important during the pandemic, in terms of knowing where staffing was given the volume levels and providing our management teams at the local level with the opportunity to use that data that Barb alluded to, to make necessary adjustments.

And Whit, maybe to pull some others together to how you might think about the back half of the year. As you suggested in your question, we don't anticipate that we'll have another item like the $43 million PTO. Beyond that, we are very pleased with the improvements made in labor productivity in both business segments through the end of the second quarter and continuing into July. Even as we are now better positioned than we were at the outset of the pandemic to flex our labor costs with volume fluctuations, we do not anticipate returning to pre-COVID-19 labor productivity standards in the second half of the year. The incremental protocols and procedures that we've had to put in place to deal with an infectious population will remain in place. I also want to remind you that, from a margin perspective, we benefited significantly in the second quarter from higher pricing in the IRF segment than we had anticipated, much of it due to the acuity that Mark discussed. We just don't know what that patient mix is going to look like on a more stabilized basis.

Okay. Maybe just one quick follow-up, Doug, just to follow-up on your comment about the composition of the volume and the inability to roughly forecast that. I'd just be curious to see what changes you saw in the quarter. I'm going to presume stroke or if there was still down a good bit in patient rehab for home health and not sure how things are that different. I think April mentioned TT is down a good bit. So just any color around the trends that you saw in the composition of the volume picks.

We’re actually pretty pleased that in the higher acuity categories like stroke, and you would expect this, because those are by nature less discretionary in nature, our volumes held up really pretty well. It was across the ortho categories that we saw our largest decrease, and that's likely to persist into the second half. I'll let April comment on any changes that we saw on the patient mix within home health.

Yes. Whit, we definitely saw a strong pullback in therapy-related diagnoses, joint replacements in particular during the April and May timeframe and late March as well. But we began to see those really recover kind of late May, and June actually got up to a pretty similar level to our pre-COVID experience. I would say we've kind of popped out now at about 90% to 95% of the pre-COVID level, as we see different markets sort of come in and out of different stages of COVID. For example, Florida has remained the hotspot. And as a result, we have not seen a recovery of our volumes in Florida. Texas recovered, and now it's drawn back a little bit as it turned into a hotspot. Other markets are actually well above their pre-COVID level. Idaho was a significant market for us; it has been performing above its pre-COVID level. So it's really regionally focused. At this point, we see our balance of patients being back for the most part at a pre-COVID level as far as the mix, it’s still just a little bit behind in MS rehab.

Whit, in the hospital, one of the things that drove up the acuity was the continued growth of our stroke program. If you look at it in terms of percentage of discharge, we had 19.4% of our total cases as stroke, the highest we've seen going back three years. So that also helped drive the case mix index just to put this acuity in perspective for you. We've been running 1.37 on a case mix index now very consistently for the past two and a half to three years; we were at 1.44 this last quarter. So that's a pretty steep jump in acuity, and a lot of it’s driven by the increase in stroke and more complicated cases and in the hospitals that reduction in any of the lower acuity cases like the elective procedures with joint placements. So both of those were pretty major factors in pushing that acuity up.

The risk of piling on, because I know we’ve given you a very long-winded response to your question and your follow-up. The other thing we're keeping an eye on within the IRF segment is we did see an increase in our average length of stay in the second quarter. Some of that is dependent on the increase in acuity, as you would expect, we tend to see a longer length of stay with more acute patients. The other thing we’re seeing, and it's too early to call it a trend, is for those patients that came to us from either a skilled nursing facility or an assisted living facility and are getting ready for discharge back into that environment. Sometimes the testing requirements and the turnaround time on the testing required for patients before they can return to their homes is causing us to delay the discharge of the patient, which has a number of repercussions for us, in many cases that doesn't result in higher reimbursement but we continue to have the cost of servicing that patient to the additional time that they’re in our facility. It’s way too early to call a trend around that one, but that is something that adds to a little bit of the uncertainty we have regarding trends in the second half.

Thank you. Your next question is from Kevin Fischbeck of Bank of America.

Good morning, Kevin.

Just a little bit of another question on the payer mix here. So, you're talking about the MA mix being up in the quarter on the IRF side. But kind of as an offset, fee-for-service revenue coming down as a percentage, would you say that that's kind of a sign that you might be seeing some increase in the fee-for-service patients coming back in the back half of the year, that kind of a pent-up volume there?

We definitely saw that in June. For the quarter, our MA discharge grew 66%, and fee-for-service was down a little over 26%. However, and that has a lot to do with the suspension of the Medicare Advantage pre-authorization requirements beginning the second half of April and extending through May. Those pre-authorization requirements for most markets were reinstated towards the end of May. Yet we saw in aggregate a 1.3% discharge volume increase in the IRF segment for the month of June, and that happened on the basis of a significant rebound in fee-for-service. As we moved into July and more hotspots developed in markets like Florida and Texas, we've seen the pre-authorization suspension come back for MA plans, but we're now seeing much more moderation between the volume impacts on fee-for-service and Medicare Advantage. I think some of the increase in Medicare Advantage is fortunately because we've been riding this trend line even pre-COVID is here to stay and that's a good thing. We can expect to sell our value proposition to those plans, but there are still good growth opportunities in fee-for-service as well.

Got it. And then as a quick follow-up here. So, is there any talk of these player of changes kind of changing for the long-term? Or is this the type of thing that you think will be coming in and out as markets go in and out of being like a hotspot?

I think it's the latter.

Thank you. Your next question is from Matt Larew of William Blair.

Good morning, Matt.

Good morning, Matt.

Hi, good morning. Doug, on the first quarter call, you alluded to the potential for the 2020 – 2021 outlook not being materially different than when you entered the year. And that was caveated with all the uncertainty of the time. Obviously, a lot of that uncertainty has continued. But Mark, you also mentioned today the progress you've made towards IRF de novo goals for next year, as well as the progress to expand the bed count this year. So Doug, maybe again, there may be a number of caveats, but just some thoughts on the 2021 outlook at this point, given your long-term confidence obviously remains very strong.

Matt, I think it really depends on the status of the pandemic during the first half of 2021 and around the development of vaccines and therapeutics to be extended. I think the more optimistic timeframes we're seeing out there is the availability of development and availability of a vaccine by the end of the year. That's able to change the trajectory of the pandemic in the first half of next year. That’s going to put us back on a footing that would have resembled our original 2020 plan much sooner. I would certainly expect that not later than the second half of 2021, we're back to business as usual, and optimistically, it could be sooner than that. Our confidence in that being the case is evidenced in the steps that we've been continuing to make in the development pipeline.

Matt, the fact that our volumes rebounded as the initial phase of the pandemic flattened out the growth, we saw that come back. I mean, it is a testament to the resiliency of the services that we provide and the ongoing demand that's out there. So to the point of our future development and opportunities we see going forward, we're very confident in that and feel that this pandemic and the fluctuations have only proven our case as we move forward.

Matt, it’s not a question of do we get back to that kind of trajectory, it doesn’t matter when. The wildcard remains around the status of the pandemic entering the first half of 2021.

It makes sense. And then April, I wanted to follow-up on your comment about the mix of institutional versus community; maybe just get a sense for how that trended throughout the quarter for you and where you're at today? And then I think in the past, you've mentioned that elective procedures were about 20% of the home health business. I just want to get a sense for what that mix looks like in the second quarter and whether you've now started to see sort of a recovery on the elective side?

We've definitely seen a recovery on the elective side. I don't have that exact percentage that we presented in the Investor Day handy for the second quarter, but it obviously dropped down dramatically in the late March through mid-May timeframe and then began recovering as markets began to reopen and alternate surgery centers came back online. So we began to see that recover kind of in that mid-May timeframe. We also, as it relates to kind of the early vs. late situation, as you saw the volumes decline significantly in that April timeframe, that it created a sort of an out-of-balance situation. If you remember in home health, early episodes are only the first 30 days of care. As we saw admissions decline, with patients continuing into the second 30-day periods and some of those patients recertifying, it tilted the balance of patients to late segments. As we also saw admission decline, those were primarily institutional discharges that we were no longer getting during that April and mid-May timeframe. We began to see recovery in those things. If you remember, as you think about a 60-day episode period, again, recertification plays into that as well. We're going to have to get and stay at that new run rate for at least a 60 to 90-day period before we’ll actually see a complete rebalancing of our patient mix back to pre-COVID levels.

Thank you. Your next question is from Pito Chickering of Deutsche Bank.

Pito?

Good morning, Pito.

Good morning, guys. Thanks for taking my questions. Just want to say you did a pretty incredible job managing through this quarter.

Thank you.

People – going back to Whit’s question on home health. Historically, you run a much higher percentage of salary employees versus per-visit payment like many of your peers. With the success you've seen in the change of therapists' comp during the quarter, are there any other changes that you're considering for your non-therapists? And can you remind us of what percent of your visits are therapists versus nurses in 2Q? And does that change as we think about the back half of the year?

We're not looking at any further changes at this point in time. At the same time we made the change to the therapy, we did change our weekly productivity goals for our RN personnel from an average of about 28; we had some employees at 30, some at 27. We moved them all to the 30 point range for their productivity goals. We have seen some ability to elevate production for our salaried staff on the RN discipline, but we don't intend to make that same adjustment that we made to therapists to the nursing staff; one because of the available supply and demand dynamics, but also just because of relative base salaries between therapists and nursing are pretty materially different. We just don't feel like that strategy is something that 80% plan for the nurses would be a workable strategy for our RN staff. Relative to the ratios, I don't have those percentages right in front of me. I would tell you that as we moved into June, we began to see a return to the normal balance and split and remained just slightly, ever so slightly behind with therapy compared to others, but our therapy volume is back to that 94% of its pre-COVID level, as far as our therapy visit volume. So we're just about back to our normal balance.

Okay. And then for follow-up either for Mark or for Doug, obviously, the markets were extremely dynamic, that’s an understatement during 2Q. But we've heard that good operators have won market share and been able to deal with the volatility. As you guys have leveraged your IT system and your processes, do you think that the success of managing through COVID during 2Q has gained market share from your hospitals over the last few months? I think that will play out in the longer-term statistics. I’ll tell you, I am very proud of the way our teams have managed through this. I do think that it is superior to a lot of the providers in our marketplaces, and it has provided us an opportunity to show the outcomes and the quality that we provide. We are caring for a number of these COVID patients that other post-acute providers would not accept and getting great outcomes for them. To answer your question, I am going to be surprised if we don't see this as having longer-term opportunities to gain market share for us. It has certainly provided a reputation in the communities as an outstanding post-acute provider.

Yes. Just to add to what Mark said, I think we have embellished our reputation with two key constituencies based on how we've responded to the pandemic. Those are the acute care providers who are such an important referral source for us and the Medicare Advantage plans. There will certainly be some stickiness to both of those.

Thank you. Your next question is from Frank Morgan of RBC Capital.

Good morning, Frank.

This one may be a little bit difficult to answer; it's on home health care and trying to isolate PDGM from the effects of COVID. Obviously, that's a complicating factor. But I just – at a very high level, if you could do that, if you could exclude the impact of COVID, how would you characterize PDGM relative to what you had expected? And what is your sense of how other operators, maybe smaller operators are handling that out in the marketplace? Any thoughts around when we may actually see the M&A activity that a lot of us are hoping for? Thanks.

Sure. It is a very muddled picture a little bit, as you try to break down the PDGM implications and try to call out what's PDGM versus what is COVID-related. I would tell you that we've been on balance, despite some noise in the quarter with LUPA percentages being up in the early late being out of balance and the institutional versus communities, all being out of balance. We feel like in spite of those things, we're pretty encouraged with what we're seeing on a revenue-per-period basis. We feel like that's actually come in pretty close to our estimation, even with all of that noise in the quarter. We think as those things begin to settle out, as we get back to a normal ratio of institutional admissions, and see normal volume of new admissions, we see our LUPA percentages coming down, which has continued since they hit their peak in the 14% to 15% range in mid-April. All those things lead us to believe that when we get fully through this COVID period, our PDGM revenue will actually be at or above our initial expectations. We're really able to get back to some of our strategies. Many of the strategies that we had for mitigation of the remaining revenue implications with PDGM have been pretty hard to implement during this time. For example, realizing some of what Medicare believes would be the assumed behavior changes has been particularly difficult. One of those things, as an example, was the LUPA percentage. They believed we would lower LUPAs, but as you know, we've seen LUPAs expand dramatically during this COVID period. So it's noisy, but I feel like I'm pretty encouraged. I feel like things are going pretty well. As we look at some of our smaller competitors, we do feel like they have been really bolstered by some of the federal programs, the PPP loans, as well as the CARES Act funds for those smaller providers. Those dollars have really hidden the realities of PDGM for them. As those dollars begin to be fully extended, and they are left to their own accord, it won't take them long to realize that they're in a bit of a pickle relative to their financial situation. We’re hopeful that M&A opportunities, particularly in the mid and small end of the market, will return as we move into the fall. They will have extended all of those dollars and come to the reality of what PDGM will mean to them. So, we're hopeful that the late third and early fourth quarter, we’ll return to some normal level of M&A activity for the small to midsized transaction.

And just to clarify, you said that you expect to be at or above kind of what you'd initially thought of; is that predicated just on the decline in the LUPAs, or is there anything else that might be driving that? Is that kind of a requirement to get at or above what you had expected or is there any other factor there?

I'm not sure I'm fully following your question. We had a number of mitigation strategies that were going to help us offset some of our PDGM implications, managing productivity, optimizing the use of LPNs. All those things have been particularly difficult in a COVID market where employees are quarantined. There's just a lot of noise, not only in the revenue side but also in our cost mitigation side. There's been a lot of noise as the result of COVID. But as we get volumes back in place, we're seeing some of that noise begin to abate. We're able to get back to some of the strategies we were planning to implement in the early part of the year before COVID hit.

Thank you. Your next question is from Matthew Gillmor of Baird.

Hey, Matt.

Good morning, Matt.

Hey, thanks for the question. Hey, good morning, everybody. Mark had mentioned that the higher COVID cases in certain markets, Florida, Texas, and Arizona may inhibit growth. April provided some commentary on the home health side in terms of the impacts you're seeing. I was curious if Mark or Barb could give us a sense for what you're seeing in those markets with the rising COVID cases on the IRF side?

Let me take a stab at a broader answer and I’ll let Barb weigh in on some of the details. If you look at Texas, Texas has been extremely resilient. Despite the acute care being full of COVID cases in their ICUs, we've not seen much of an impact, if any, on our hospitals in Texas. The state of Florida is market-specific. If you start thinking about South Florida, which has certainly been identified as a hotspot, we've probably seen a little bit more of an impact there. It's a tough situation to look at an entire state and say, 'okay, it's a hot state,' so to speak. There are certainly some markets that have been impacted disproportionately more than others.

And I guess to go just a little bit into the weeds on that. Several things impact us when you have markets like Florida. First, when you look back, really towards the end of May, markets were starting to open, and elective surgeries were starting back up. They were allowing our clinical liaisons back into the hospitals. As some of the surges have occurred in some of these markets, those things have started to go back to the way they were in March and April. Elective surgeries are now back on hold. Our liaisons are now not allowed back in the hospital. Those impact us in each market. Other impacts are more at a hospital level. We don't have a lot of them, but we do have some hospitals that, because of community exposures, we have employees out on quarantine, and in a few of our hospitals, that has impacted the capacity at those hospitals. If we have nurses and therapists in large numbers out on quarantine, it creates a cap for how high our census can go. When looking at markets like Florida, those are some of the impacts that we're feeling this go-round.

The testing has been an influencer too, relative to quarantine staff and our ability to get the staff back in. It's taking longer to get the test results than what it was even 60 days ago. As we see that start to improve, I think it will improve some of the staffing challenges that both April and Barb have pointed out.

One thing that's going to help on the staffing front is that the CDC did come out with new recommendations of moving away from a test strategy to a time strategy of when an employee or patient could come off of transmission precautions. They're saying that some people can test positive for up to three months. That has been a good thing for us that they've moved to this time strategy. It allows us to bring some of these employees back sooner than what we were able to bring back before they changed their recommendation. We do think that will have a positive impact on getting employees back and removing some of these census caps.

Got it. And let me try one follow-up on it; are these influences and impacts you're calling out, is that enough to interrupt the momentum in the recovery you've seen in the IRF volumes? Or are they small enough where it doesn't impact the whole portfolio in the positive momentum you've seen?

I think the impact of that is more kind of, you've seen things. We had a great rebound and then things have kind of flattened a little bit. That's because market-by-market, we're feeling this. I don't think it's something that's going to impact us as a whole, but it does prevent us from getting to that next level right now because as one market recovers, we're seeing that occur in another market.

And Matt, it’s very temporary too. You may have two weeks that become a challenge in the marketplace, and then it kind of goes off your radar screen, the volumes come back, and some other market pops up on your radar screen. Overall from a portfolio standpoint, I don’t think it's going to impact us for the long term.

We have definitely plateaued here recently for volume gains in both the IRF segment and in home health. We expect that may be an issue that's with us for the next couple of months. On the IRF side, with a portfolio of 135-plus hospitals, unfortunately, we're playing a little bit of a game of Whac-A-Mole, which is as soon as we get staffing or other issues resolved in one particular market, it pops up in another market. It feels like, based on the course of the pandemic, that's going to be with us for a while. We don’t believe we’ll see a reduction in volumes like we did in April, but gaining that next foot up over the next couple of months may be a challenge.

Thank you. Your next question is from Brian Tanquilut of Jefferies.

Hi, Brian.

Hey, good morning guys. Good morning. I guess I'll go back to one of the earlier questions. I know I get the lack of visibility into some of the COVID stuff, but if we think about the de novos that you've already lined up, is there a sort of growth goal? I mean, you've already announced almost like 5% bed growth for next year and then another 3.5% for 2022. So is that sort of the right level to be thinking about kind of like the M&A department goal or is it the development in your goal, kind of like 5% to 6% bed adds? I guess to layer onto that, how should we be thinking about the track record of your de novo beds over the last two years in terms of getting it up to capacity, as we think about filling the beds that you're adding?

Well, I think as Mark stated during his comments, we remain committed to the goals that we put out at the Investor Day regarding the number of new IRFs to be opened on an annual basis. Certainly, we've got a very solid number with eight new hospitals lined up for 2021 and already commitments to five. This is pretty early on. We're going to add more to it for 2022. From a capacity addition perspective, we feel very good about that. The track record, one of the reasons that we're accelerating the development of these is because our track record on building census and achieving very favorable financials on de novos is really solid, not just for the last two years but really for the last ten years, which has been when we restarted this program.

Got you.

In terms of growth percentage, you need a base. We don't know what the base is right now.

Thank you. Your next question is from Kevin Fischbeck of Bank of America.

Good morning, Kevin.

Just a little bit of another question on the payer mix here. So, you're talking about the MA mix being up in the quarter on the IRF side. But kind of as an offset, fee-for-service revenue coming down as a percentage, would you say that that's kind of a sign that you might be seeing some increase in the fee-for-service patients coming back in the back half of the year?

We definitely saw that in June. So for the quarter, our MA discharge grew 66%, and fee-for-service was down a little over 26%. But then – and that has a lot to do with the suspension of the Medicare Advantage pre-authorization requirements beginning the second half of April and extending through May. Those pre-authorization requirements for most markets were reinstated towards the end of May. Yet we saw a 1.3% discharge volume increase in the IRF segment for the month of June, and so that happened on the basis of a significant rebound in fee-for-service. As we moved into July and more hotspots have developed in markets like Florida and Texas, we've seen the pre-authorization suspension come back in for MA plans, but we're now seeing much more moderation between the volume impacts on fee-for-service and Medicare Advantage. I think some of the increase in Medicare Advantage is fortunately here to stay, and that's a good thing. We can expect to sell our value proposition to those plans, but there are still good growth opportunities in fee-for-service as well.