Earnings Call Transcript
Option Care Health, Inc. (OPCH)
Earnings Call Transcript - OPCH Q4 2022
Operator, Operator
Hello, and thank you for standing by. Welcome to Option Care Health Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. I would now like to hand the conference over to your speaker for today, Mike Shapiro. Sir, you may begin.
Michael Shapiro, President
Good morning. Please note that today's discussion will include certain forward-looking statements that reflect our current assumptions and expectations, including those related to our future financial performance and industry and market conditions. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations. We encourage you to review the information in today's press release as well as in our Form 10-K filed with the SEC regarding the specific risks and uncertainties. We do not undertake any duty to update any forward-looking statements, except as required by law. During the call, we will use non-GAAP financial measures when talking about the company's performance and financial condition. You can find additional information on these non-GAAP measures in this morning's press release posted on the Investor Relations portion of our website. And with that, I'll turn the call over to John Rademacher, Chief Executive Officer.
John Rademacher, CEO
Thanks, Mike, and good morning, everyone. As we reported in this morning's press release, the Option Care Health team delivered another very solid quarter of results in the fourth quarter. Despite ongoing challenges on many fronts that we'll discuss on this morning's call, the team was relentlessly focused on delivering extraordinary care to the thousands of patients who rely on us every single day. And reflecting on 2022 as a whole, I am humbled by the dedication of the team and honored by the progress we've made over the last year to advance in our mission to help transform health care by providing unsurpassed care and superior clinical outcomes in the home or ambulatory setting. During 2022, we continued to expand our relationships with payers, providers and biopharma to offer the highest quality care at the most appropriate cost. And over this time period, we provided care to over 265,000 unique patients and their families. As always, Mike will provide a more granular overview of the results. But in Q4, we generated revenue growth of over 10%, with balanced growth coming from both our acute therapies that grew in the mid-single digits and double-digit chronic therapy growth. At the same time, we generated adjusted EBITDA growth of 8.7% and importantly, delivered an adjusted EBITDA margin of 9.2%, up sequentially 80 basis points from the third quarter, despite continued inflationary pressures. And not to steal my thunder, but our balance sheet has never been stronger. As we finished the year with $294 million in cash, and our net leverage ended the year at 2.3 times. Entering 2022, I don't believe that anyone anticipated the inflationary pressures that the broader economy would endure or, as we have communicated previously, the significant impact we felt across many of our inputs. Throughout the year, we faced emerging cost pressures head on and conservatively digested more than $40 million in year-over-year cost pressures in labor, medical supplies, oil-derived products and operating inputs. We focused on offsetting those pressures to the best extent possible through technology enhancements and driving operating efficiencies as we also collaborated with our payer partners to seek reasonable rate increases where appropriate. Our pursuit of operating efficiencies never ends, and the team drove considerable leverage in what we believe is the new cost basis going forward. We also continue to manage through a very difficult labor market. With the acquisition of a specialty pharmacy nursing network last April, combined with our Infinity Infusion Nursing network platform, we have established what we believe is the largest clinical infusion nursing network in the country. And while recruiting key clinical disciplines remains challenging, we are confident we are weathering the storm better than many, and we continue to maintain our reputation as an employer of choice and a dependable partner to our referral sources as we can provide them with adequate clinical staffing capacity, allowing us to serve their patients. During the year, we also opened 22 new ambulatory infusion centers, increasing our total count to nearly 150 sites and added 63 infusion chairs, which increases our total to over 575. With the expanded footprint and capitalizing on patient preference, we continue to see a greater percentage of our nursing visits in our infusion suites, now approaching 25%. We will continue our expansion in 2023 with plans to open over 20 additional sites in key markets. This will allow for greater operating efficiencies and continued high patient satisfaction scores. In summary, 2022 was a very productive year as we delivered $342.9 million in adjusted EBITDA for the full year, exceeding our original guidance of delivering $310 million to $330 million in adjusted EBITDA. As we look ahead to 2023, I remain confident in our ability to deliver mid to high-single digit top line growth, leverage bottom line growth and strong cash flow from operations through strong execution and deepening partnerships. We will continue to focus on providing meaningful solutions to our key stakeholders as the marketplace evolves and new models emerge. We will continue to work closely with the payers to offer consistent, high-quality care at an appropriate cost and explore value-based arrangements for their members requiring infusion services across the country. We will partner with discharge planners and prescribers to provide seamless transition of their patients on to service with us and collaborate broadly as members of their extended care team. We will deepen our relationships with our patients to provide them unsurpassed support as they recover from an acute event or help them manage their chronic conditions so they can live life to the fullest. And we will provide the strongest clinical platform and broadest population access to pharma as they conduct clinical trials in support of novel new therapies or strengthen the data capture and analytics that we will provide for patients that are receiving their medicines. And we will continue to invest in our people as we provide training development and opportunities for advancement to remain an employer of choice and the destination for passionate health care professionals. Also in this morning's release, we announced that we have received authorization from our Board of Directors to repurchase $250 million in shares as part of a multifaceted capital allocation strategy. Mike will provide more color on this program, however, I wanted to highlight this as proof positive of how far we have come since the merger in August of 2019 and acknowledge the discipline we have applied to unlock free cash flow, strengthen our balance sheet and vastly improve our leverage profile. And with that, I'll turn the call over to Mike to review the results further.
Michael Shapiro, President
Thanks, John. I'd like to start by providing some commentary on the fourth quarter results and close out with some additional thoughts on our initial 2023 financial guidance, as articulated in this morning's press release. Revenue, as John mentioned, was quite strong in the fourth quarter with balanced growth across our acute and chronic therapy portfolios. Note that as previewed on our Q3 call, in late December, we divested certain respiratory therapy assets that were acquired through the BioScrip merger in 2019. Consequently, the fourth quarter included respiratory therapy revenue for effectively the entire quarter. Gross margin of 22.5% reflects our mix of chronic and acute revenue as chronic therapies comprised a bit over 70% of fourth quarter revenue, as well as the impact of inflationary cost pressures in our direct categories. Spending grew 8.5%, but dropped as a percent of revenue to 14.4%, as we continue to drive spending leverage to offset inflationary cost pressures. Adjusted EBITDA of $94.3 million represented 9.2% of revenue, and while 20 basis points below prior year, as we've discussed, we've absorbed roughly $12 million to $15 million in quarterly cost pressure on a year-over-year basis. Additionally, we're encouraged by the 80 basis point sequential improvement in adjusted EBITDA margin over the third quarter. I want to take a minute to provide a bit more color on the respiratory therapy asset sale that we completed in late December. Other income on our reported income statement includes a pre-tax gains on the net asset sale of $10.3 million, which we have also backed out of our adjusted EBITDA reconciliation included in the press release. So the gain which we reported in other income did not benefit our adjusted EBITDA calculation and was excluded from operating results altogether. As John mentioned, we finished the year with $294 million of cash on the balance sheet and our net debt of approximately $800 million represented a multiple of 2.3 times. So our capital structure has never been in better shape and positions us well to continue investing for the future and deploying capital for our shareholders. To that end, we also announced this morning that our Board of Directors has authorized the repurchase of up to $250 million of common stock. Given our cash flow generation and capital structure, we continue to believe that deploying capital through our M&A strategy will create value for our shareholders going forward. However, as we evolve and continue to generate strong cash flow, we believe that share repurchases can provide additional optionality to complement our disciplined M&A strategy as we deploy capital for our shareholders. We are not in a position at this time to provide a specific time horizon or repurchase guidance and would anticipate modest repurchases at first. Again, we expect M&A to continue to be the primary area of focus for capital deployment. Shifting to 2023 preliminary expectations, we expect to generate revenue for the full year of $4.15 billion to $4.375 billion. Our revenue composition is quite dynamic and this year will be no different. Our revenue guidance suggests top line growth of approximately 5% to 11%, and that includes approximately 2 points of year-over-year headwind due to two specific therapies for ALS and high-risk pregnancy in which we anticipate rapid decline, along with the revenue loss from the respiratory therapy asset sale. Despite those headwinds, our top line expectations affirm the strength of our diversified revenue base in our national platform. Adjusted EBITDA guidance of $370 million to $390 million implies growth of approximately 8% to 14%, and includes an estimated $15 million to $20 million of year-over-year inflationary pressure, as we'll annualize the cost pressures that emerged in 2022 and that we do not anticipate subsiding anytime soon. Our cash flow from operations guidance of at least $240 million reflects our expectation of being a federal income taxpayer for all of 2023, and our cash flow guidance reflects the year-over-year increase in federal income tax payments, which we estimated approximately $30 million. Despite the change in taxpayer status, we still anticipate strong cash flow generation for the year. So overall, we're quite encouraged by the momentum from the fourth quarter and expect 2023 to be another productive year for the Option Care Health team. And with that, we're happy to take your questions.
Operator, Operator
Thank you. Our first question comes from the line of David MacDonald with Truist. Your line is open.
David MacDonald, Analyst
Hey, guys. Just a couple of quick questions. Mike, I apologize, my line cut out there for a minute. But just on the inflationary pressures, can you repeat what you guys are assuming for 2023? And then once we get past 1Q and have kind of annualized some of that $10 million to $12 million, can you give us a sense of, on a percentage basis, how we should think about? What you guys are seeing on labor and just kind of overall cost trend?
Michael Shapiro, President
You bet, Dave. Good morning. Yeah. So what we laid out is, as we mentioned, the inflationary pressures really started to emerge in Q2. So our guidance assumes that there's a buy-up of around $12 million of year-over-year inflationary mostly in the first half of the year, affecting Q1 since those inflationary pressures really didn't emerge until going into Q2. So we fully expect that $12 million to $15 million buy-up on inflationary pressures primarily in the earlier part of the year. From an inflationary pressure, look, I mean, I think our presumption is that clinical labor, as we've been very clear, is going to continue to be tight, I think, John in his prepared remarks was spot on in that, we believe we're performing better than most. But our guidance also reflects that we're going to continue to be competitive for clinical labor throughout 2023 and beyond.
David MacDonald, Analyst
And then I guess a couple of other quick questions. In terms of the year-over-year cash flow, did you say the impact of moving in terms of the taxes is about $30 million? And then is there anything else from just a working capital standpoint that we should be thinking about in terms of '23 relative to '22?
Michael Shapiro, President
Not really related to working capital. Again, we did lay out in our press release, we do expect interest expense. We do have $300 million of floating exposure. So our guidance assumes probably in the neighborhood of $10 million of higher cash interest as well. So between cash interest and the federal tax payments, that we estimate to be a total impact of around $40 million year-over-year.
David MacDonald, Analyst
You mentioned being better positioned on the cost side compared to others. Does that indicate you may have more opportunities in your M&A pipeline? Additionally, do you have any general insights on potential adjacencies or opportunities that could complement your business?
John Rademacher, CEO
Good morning, Dave. It's John. As we look ahead, we feel well positioned regarding your comment about the M&A pipeline, which continues to grow. We have always emphasized a disciplined approach to M&A, seeking opportunities that provide a competitive edge or enhance our existing infrastructure. We will persist in this direction, and we believe that initiatives like Rochester Home Infusion will remain a focus. Overall, we are excited about the advancements in our nursing network and the integration of our specialty pharmacy nursing network with infinity infusion as we move them onto the same platform. We appreciate the team's hard work in this area. This integration gives us a solid foundation for clinical resources, especially in nursing, while also looking to expand further. We are committed to seeking adjacencies as we explore the post-acute space more broadly. As highlighted earlier, our ambulatory infusion suites significantly enhance our operational efficiency and improve patient satisfaction scores. We will continue pursuing this direction. We are pleased with our strong balance sheet, which offers us flexibility to explore M&A opportunities that will add value for our shareholders, and we will maintain this trajectory moving forward.
David MacDonald, Analyst
Thanks, guys. Just last question on the ambulatory infusion suites. If you just kind of do the math around the higher assumed percentage on chronic that's growing more quickly, any reason to not think that, that percentage should continue to grind 100 basis points or so higher per year? And then secondly, just any thoughts around suites that potentially have a few more chairs. Can you talk about the potential leverageability of that or not?
Michael Shapiro, President
We're very optimistic about our infusion suite strategy and are currently focused on investments. The team has refined our approach to ensure maximum coverage and convenience. Typically, these suites include three to four chairs, but we have designed them with the flexibility to add more if necessary. When we initiated this strategy, we were at a high-teens percentage, and as John noted, we're now approaching a quarter of our nursing events taking place in these suites within a couple of years. These suites are primarily aimed at our chronic patient groups, and considering the growth of those therapies, we expect the proportion of our nursing events to continue to increase. This growth will enhance patient access and satisfaction, and it also helps us mitigate some of the inflation-related challenges we face.
David MacDonald, Analyst
Okay. Thanks very much, guys.
Michael Shapiro, President
Thanks, Dave.
Operator, Operator
Thank you. Our next question comes from the line of Matt Larew with William Blair. Your line is open.
Matthew Larew, Analyst
Hey. Good morning. I wanted to follow-up on the contract labor utilization from last quarter related to some specific geographic market dynamics. Just how did that trend through the fourth quarter in terms of your contract rev utilization? How do you expect that to trend here in '23? And then as you think about growing the clinician base in '23, how do you expect that to balance between full-time and those on sort of the spin on Infinity platforms?
Michael Shapiro, President
Hey, Matt. It's Mike. Generally, as we've mentioned before, part of our labor strategy is to use contract labor. Compared to others in health care services, our dependence on contract labor is not as high. In some areas, it makes more sense for us to utilize contract relationships. Over time, our approach has been to expand our national platforms. We monitor our nursing numbers on a weekly basis, and our nursing positions have grown throughout 2022. The per diem aspect of most of this labor gives us flexibility and is a key factor in our recruiting efforts. In summary, we are optimistic about using our employee nurses, and we believe that usage will grow over time. The team is motivated now that we've integrated the Infinity organization to create a cohesive national platform. We expect that, as we continue to expand our nursing roles, they will mostly be on a per diem basis, while the team is also doing an excellent job of providing incentives for those per diems to increase our capacity. This means not only are we increasing the number of per diem nurses but we are also, over time, increasing the hours we are able to garner from those resources.
John Rademacher, CEO
Yeah. And the only thing I'd add to that, Matt, is, look, I mean, when we run our staffing models and take a look at it, where we have density of patient population, we will be recruiting full-time nurses. I mean, where we can leverage that effectively, we will. And that is a big part of our strategy from that. But now having the ability to augment that with the per diems with the nursing network moving forward and continuing to serve others in the marketplace, other market participants with that, it just gives us a significant amount of flexibility to utilize our own full-time nurses to the fullest. But then when we need additional capacity, our first default is to utilize that nursing network and the network of per diem resources that are available through that.
Matthew Larew, Analyst
Okay. You mentioned that the cost base is now set at a new normal within the range of $12 million to $15 million, largely affecting the first quarter. As you consider this new standard cost base, what specific areas are you seeing ongoing issues related to year-over-year inflation, and where do you anticipate potential improvements? Additionally, what will be your key focus areas for working on achieving leverage with this updated cost base?
Michael Shapiro, President
Yeah. I think the reality, the way we're thinking about it, Matt is, we don't see clinical labor costs going down. We don't see medical supplies and transportation costs and mileage reimbursement rates going down miraculously as some of those oil-derived supplies go up and price with oil miraculously, the prices don't drop as oil resets. And so look, our procurement team is the best in the industry, and they're laser-focused on squeezing basis points. But I think our expectation is that this is the new world order, and we don't expect those key inputs to go down. As always, and one of the things that I think is a benchmark of this team is how hard we fight to maintain quality, but also focus on efficiencies of running our pharmacies and infusion center networks. A lot of that comes through the technology that we deploy to make sure that we're as efficient as possible in the clean rooms. We're interacting with our patients as efficiently as possible and utilizing those finite clinical resources and minimizing waste. So I think it's a little bit of the all of the above. It really comes from the patient referral to administration of the therapy. We're constantly looking at every facet of our cost structure to figure out how we maintain superior quality in a more efficient manner.
John Rademacher, CEO
Yeah. And with that, Matt, the only other thing I would add is, look, we deploy enhancements to the technology on a regular basis as we do new releases of the different aspects of our platform. The team has done a tremendous amount of work to look for opportunities to take repetitive process automation into our infrastructure to take a look and say, how do we streamline those processes, where can we have our team members working at the highest level of their attitude or the highest level of their licensure? And wherever we can to take waste and cost out of the process through technology, deployment and automation with repetitive tasks that are lower in that process. Certainly, in the areas of revenue cycle management and some of the patient administration, there are areas in which we continue to push on there. And as Mike said, the technology that we've deployed within the four walls of the pharmacy allows us to become more efficient in the way that we are looking to compound dispensing and distribute the products to the patient. So all in all, look, we're going to push on every single lever. I think as we've talked about before, I mean, we fight for every basis point of cost improvement wherever we can. And we believe that there's still opportunity for us to innovate around our policy procedures and the technology to make certain that we are utilizing our team members as efficiently and effectively as possible.
Matthew Larew, Analyst
Okay. Thank you.
John Rademacher, CEO
Thanks, Matt.
Operator, Operator
Thank you. Our next question comes from the line of Lisa Gill with JPMorgan. Your line is open.
Lisa Gill, Analyst
Thanks very much. Good morning. I just want to go back to your comments around revenue for 2023. Mike, I appreciated the 2% headwind that you talked about. So continue to look at it on a same-store basis of 7% to 13% growth. I understand that chronic is growing faster. But are there any new drugs or new therapies that you're looking to when we think about that revenue driver for 2023? And then secondly, as we think about acute versus chronic, are you giving similar guidance to what we've seen historically, which is kind of single-digit growth for acute and double-digit growth for chronic? Is there any changes around that trajectory as we think about '23?
Michael Shapiro, President
Yeah, Lisa. Good morning. I'll start and maybe let John provide some color. The other thing in our revenue base, we're actually looking at about 1 point of ASP headwinds. We've seen some price compression in some of the antibiotics as well as the chronic inflammatories in infliximab categories, where, again, I think it underscores the fact that our revenue base is quite dynamic with dozens of therapy categories, dozens of ASPs and other dynamics. We don't break it out in too granular of a manner. But we did want to highlight that, look, there is a couple of therapies that are being disrupted through other therapies. And I didn't include it in my prepared remarks. But overall, we're probably going to see about a full point of ASP headwind. And again, as we talked about the longer-term trajectory of a high-single digit enterprise, we've never really banked on any ASP tailwinds or headwinds because, again, there's always a lot of moves. And so, we always try to anchor that just around high single-digit volume growth. Maybe I'll let John talk about some of the emerging therapies.
John Rademacher, CEO
Yes. We are actively collaborating with biopharma and have a strong pipeline of new products advancing through clinical trials. This includes treatments for short bowel syndrome and various neurological disorders. Additionally, we maintain solid relationships with the products we launch as they enter the market. Our objective is to have one to three new launches each year, and our team is working efficiently to achieve this. We must focus on regenerating our product portfolio as new products come in and others phase out. The team is optimistic about the connections we've established and our access to these products, whether they require limited distribution or not. You'll continue to see us launch between one and three new products as we progress through 2023.
Lisa Gill, Analyst
John, when we first discussed the competitive landscape a couple of years ago, we believed hospitals would attempt to reclaim some market share as COVID pushed people to options like Option Care. We've also heard that some of your competitors are facing staffing issues, while you appear to be in a stronger position. Can you clarify how to approach the current competitive marketplace and your strategies for 2023 and beyond? You've mentioned that you've been able to implement reasonable rate increases with managed care, and our discussions with managed care indicate they are pleased with Option Care's services in keeping patients out of more expensive settings. Any insights you can provide on how to view the competitive landscape moving forward would be greatly appreciated.
John Rademacher, CEO
Yeah. Look, I mean, Mike, I guess seemed to be paranoid and quite frankly, it is extremely competitive from that. And we know that we've got to win every single patient in that process. However, when you look at the platform that we've created, when you think of the consistency of the quality of care that we're able to deliver and our access to the clinical resources that are necessary to make that transition of care and then be able to serve those patients. We feel like we're in a really strong position to continue to deepen those partnerships with our referral sources and be a partner of choice as they're helping to decide how to transition patients on to care. Look, we're always going to have that tension with the hospital outpatient departments as they're trying to add value into their infrastructure, and they're looking at ways to maintain the relationships where they can. Our ability to have that flexibility and that ease of doing business with the clinical resources is a big part of where we win. The depth of the relationships and the investments that we make in embedding nurses into hospitals to help with that transition of care and do the training and education of the patients as they're getting ready to be discharged, again, helps support the overall desire of everyone on the care team to deliver the highest quality care at the most appropriate cost. So we feel like we're well positioned. Again, we talked before about our commercial team and their focus around reach and frequency of making certain that we have a clear understanding of segmentation in the marketplace that we're calling on the right call point that we're investing and developing those relationships. And so, look, I feel as good as you can feel with the position that we have. But again, we win patient-by-patient, we win market-by-market, we win hospital-by-hospital or prescriber-by-prescriber. And so, we don't take anything for granted on that, and we're going to continue to pursue what we think is above market growth, given the opportunities that we have and given the focus of our team in developing the relationships and providing real solutions to our key stakeholders.
Lisa Gill, Analyst
Great. Thank you so much.
John Rademacher, CEO
Yeah. Thanks, Lisa.
Operator, Operator
Thank you. Our next question comes from the line of Pito Chickering with Deutsche Bank. Your line is open.
Pito Chickering, Analyst
Hey. Good morning, guys. Thanks for taking the questions. Back to Lisa's revenue growth questions again. If you exclude respiratory therapy, what revenues have been growing for 2023?
Michael Shapiro, President
We haven't provided detailed breakdowns, but the revenue for that therapy line is around $20 million to $25 million. It's fairly limited.
Pito Chickering, Analyst
Okay. Fair enough. I might have missed it, but regarding your assumptions for chronic growth and acute growth in 2023 after accounting for ASP pressure, did you provide specific numbers that are better than your guidance?
Michael Shapiro, President
Yes. No, we don't break out specific guidance for the categories. Again, the way we have broadly characterized it Pito, is that obviously, the acute portfolio is a slower growing, more mature portfolio of therapies and the chronic is typically in that low double-digit category. Again, there are a couple of disruptions from some therapies that are being disrupted with other therapies. But I would say those general growth descriptors remain intact for '23.
Pito Chickering, Analyst
Okay. Perfect. And then for the ASP pressure in the 100 basis points, what's the EBITDA impact of that? Does that flow straight through, or is a lot of that variable? And what percent of your portfolio are those antibiotics? Is that the bulk of your acute portfolio?
Michael Shapiro, President
No. Look, intravenous antibiotics is a key therapy for us, it's one of our larger therapy categories, but it's not the majority of our acute revenue. And look, obviously, a lot of our revenue is comprised of billing for the therapeutic, which is an ASP or an AWP reference. That also has a correlation to our procurement. So as ASPs increase or decrease, there is a general correlation to our procurement costs. So I wouldn't necessarily assume that, that point of revenue drops dollar for dollar. Obviously, we make a margin on a drug revenue x percent of a smaller number is a smaller number, but there is some muting of the revenue impact through our procurement strategy.
Pito Chickering, Analyst
Okay. Great. And then last question, the target for one to three new limited drug distributions also the ones that age out. Is there any change in the ability to get sort of to land those deals? Is it becoming more competitive or is this more of a timing issue?
Michael Shapiro, President
No. I think, as John mentioned in his prepared remarks, one of the things we take pride in is our direct procurement relationships with biopharmaceutical companies. We have developed intricate relationships that support them both before and after approval, which is a key reason we've successfully built a portfolio of over 50 limited distribution therapies. I would describe our interactions with biopharmaceutical companies as strong, and we continue discussions regarding not only new therapies but also existing therapies seeking additional indications or broader use. Recently, we've seen progress in areas like myasthenia gravis, multiple sclerosis, and emerging chronic therapies for drug-resistant HIV, among others. We consistently launch one to three therapies each year. As you know, we like to consider these as singles and doubles rather than home runs. However, over time, we can work with them post-launch to support commercialization efforts. It's important to note that we don't commercialize every infused therapy; they must align with our strategic, clinical, and economic goals. We still anticipate commercializing one to three therapies each year.
Pito Chickering, Analyst
Great. Thanks so much guys.
Michael Shapiro, President
Thank you.
John Rademacher, CEO
Thanks, Pito.
Operator, Operator
Thank you. Our next question comes from the line of Jamie Perse with Goldman Sachs. Your line is open.
Jamie Perse, Analyst
Hey. Good morning, guys. Sorry to go back to the inflationary question. I want to make sure I understand the message there. I get that you've got another quarter or so where it's not in the base and so you've got to absorb the inflationary pressures that have started last 2Q. But from there, is the message that you expect the rate of growth of some of these cost inputs, labor, medical supplies, et cetera., to go back to normal or are you expecting continued elevated inflation in some of those line items?
Michael Shapiro, President
Good morning, Jamie. It's Mike. We don't anticipate a decrease in costs. We don't expect significant worsening in some categories. Many aspects of our cost structure have leveled off. However, we do foresee ongoing inflation across various categories, such as labor, buildings, facilities, and some medical supplies. We don't anticipate inflation rates returning to the high single-digits like in mid-2022. Our assumption is that while we will return to more normal rates, we will still face some modest inflation that we need to manage, which is reflected in our guidance. We're not expecting inflation rates of 7%, 8%, or 9% to persist in these areas. Even though costs may be plateauing or remaining stable, we still need to adjust for what we believe is the new cost environment on an annual basis.
Jamie Perse, Analyst
Okay. That's helpful. And then just on rate increases reimbursement increases, it seems like your tone has changed a little bit there. You're now trying to get reasonable rate increases where appropriate, where you were at. Can you give us a sense of what you think reasonable means and how broadly it is appropriate?
John Rademacher, CEO
Yes, let me begin by stating that we have always aimed for rate increases when suitable. The key message is that our ability to engage in productive discussions that lead to positive outcomes is improving in terms of success rates. It's evident from recent news that many are facing significant inflationary challenges, particularly related to clinical labor. Consequently, we can present data and insights to the payer community regarding these pressures, especially concerning nursing costs and clinical per diems. This message is being received differently compared to previous, low-inflation periods. While I wouldn't claim total success, our market access team is committed to ensuring we engage in these discussions to implement rate changes in the marketplace. As we've noted in earlier calls, we continually evaluate the balance among three components: the reimbursement received for the drug, the drug spread, and the compensation for clinical per diems and nursing rates. Each contract has its unique elements regarding how we derive value from these components. We approach this with careful consideration and a methodical strategy to ensure appropriateness. However, this isn't a consistent process across all contracts or payers due to varying dynamics. Our team is diligently working to navigate this and aims to obtain rate increases that we believe are justifiable, aligning with the additional costs we incur and the value we provide to both our members and patients through our administered programs.
Jamie Perse, Analyst
Okay. Thanks. And last quick one for me, just on SG&A. It was a little bit higher than, I think, street modeled for this quarter. Is there any seasonality in that? Is that sort of the right base to model for the next few quarters or just any help on if there's one-time items or any considerations on SG&A? Thank you.
Michael Shapiro, President
Yeah, nothing really of substance again, I think it did reflect some of the inflationary pressures that flow through the indirect. There is some kind of year end true-ups and things like health benefits, et cetera, where we typically see some adjustments at year end, but nothing really to see there. And again, I think more importantly, Jamie, we continue to see solid leverage in that line as a percent of revenue, which we would absolutely expect going into this year.
Jamie Perse, Analyst
Okay. Thank you.
Michael Shapiro, President
Thanks, Jamie.
Operator, Operator
Thank you. Our next question comes from the line of Joanna Gajuk with Bank of America. Your line is open.
Joanna Gajuk, Analyst
Good morning. Thanks for taking the questions. So a couple of follow-ups. So I guess on the last topic around the payer contract in your commentary, I know you're pushing for better rates. But also, can you kind of step back and talk about your large payers in terms of the contract renewals. Are there any coming up for renewals? When were these contracts last reviewed? And any kind of changes in kind of overall contracting with the commercial payers?
John Rademacher, CEO
Hey, Joanna. It's John. Yeah, I think as we've outlined before, look, all of our contracts are in a really good state. Most of our contracts are evergreen annual renewals through that process. And so we don't feel that there is any significant risk of any of those. Most of the major payer contracts that we have are in the middle of multi-year agreements that we have there. So we believe we're in a stable environment in 2023. However, as my previous comments, I mean, we are continuing to have active dialogue across all of the payer community around some of the increase in the input costs. Our labor and med supplies and other things to try to find ways to get some rate increase even in the interim period of those agreements.
Joanna Gajuk, Analyst
Okay. Thank you. And I guess on just your other smaller payers in terms of Medicare. Where do we stand with this legislative fix there? And would you expect kind of more traction when maybe some of these new drugs are getting approved like the drugs for Alzheimer's? Like, would you expect this to be an impetus for something like that on the Medicare side to improve the coverage for infusion therapies at home?
John Rademacher, CEO
We are actively engaging in Washington, D.C., as part of the National Home Infusion Association and through our independent efforts to advance our agenda. We have bipartisan support, and it's about getting this prioritized. With the changes in Congress and Republican control, there is a realignment of committee leads, which affects the process. We will continue to emphasize this in our government relations efforts. It's challenging to predict outcomes given the many factors at play in Washington, including various agendas and issues like the debt ceiling. I remain cautiously optimistic because providing high-quality care at a reasonable cost in the right setting for seniors is important. It comes down to how payment will be structured. Regarding potential catalysts, such as new Alzheimer's treatments, we are looking for opportunities to highlight the value of home care. We will leverage these developments to shift the conversation and encourage more acceptance of this model. It's still too soon to predict the impact of new CMS decisions on novel therapies that have received FDA approval or those in development. We believe we have a strong solution, particularly with our existing infrastructure for infusion services at home, and we will maintain discussions with biopharma, innovators, and CMS about the benefits of home infusion in this care model.
Joanna Gajuk, Analyst
That makes sense. And one more follow-up on the discussion around cost efficiencies and how you continue to push forward to do more. Are there some more things I guess you're trying to accomplish to try to take the cost up? And in that context, is there any update, or is there going to be meaningful this expanded WellSky partnership that I guess you announced in December? So any color on that. Thank you.
Michael Shapiro, President
Yeah, Joanna. Look, our pursuit of efficiencies and cost outs never ends, whether there's inflation or not, and that's something that's just part of the culture and part of our focus. Again, the compass heading is always towards unsurpassed quality and the best clinical care in the industry, but doing it in a more efficient manner. And so, the team know this as part of the routine and it's something that never ends. John is a little closer to the WellSky partnership, I'll let him add any color.
John Rademacher, CEO
Yeah. Really excited about the partnership that we announced. And again, given the platform that they have and our ability to work with them around driving operating efficiencies internally is something that we're really excited about to continue to push that forward. The other thing that the WellSky team has focused a lot of energy and we were early adopters into it is around interoperability and using their platform to make certain that we're leveraging health information exchanges and leveraging the information to drive operating efficiencies for all of those transitions of care and giving deeper insights into the whole patient or the whole person through that process. And so, our team has been working in close partnership with the team at WellSky around continuing to push that forward. I'd highlight the work that we're doing with AlayaCare as well, as just being ways that we are working to take industry leaders from a technology platform and helping them understand the needs of our business and then utilizing their platforms to drive that operating effectiveness and operating efficiencies that we know are going to be required for us to continue to look for ways to offset inflationary pressures and continues to be offering the highest quality of care in the settings that we deliver our care in.
Joanna Gajuk, Analyst
Thank you. I have a follow-up question regarding the increase in interest expense. While your leverage ratio has improved, do you have any plans to pay down some of the floating rate debt, or are you comfortable with the current 2.3 times ratio without the need to reduce your debt further?
Michael Shapiro, President
Yeah, Joanna. Look, we feel great about the capital structure, and being at 2.3 times, considering a few years ago with the merger, we started this journey at 6.2 times, feeling great about it. Of the $1.1 billion of gross debt, $800 million of it is fixed or we fixed it through hedges. We do have $300 million of float. Three month LIBOR last year was at 50 bps, this year, it's 450 bps. So 400 basis points of increase on $300 million of floating rate debt. It's about $1 million a month. Look, we're obviously managing the capital structure closely, it provides us with considerable flexibility. And frankly, I think as we look forward from a value creation perspective, I don't know that paying off gross debt is a top priority. Again, as we said in our prepared remarks, clearly, M&A continues to be what we believe is the top priority. And I think not a testament to less confidence in our M&A opportunities, it really speaks to the testament of the strength of the balance sheet. We've just announced that we're adding a facet where we have optionality around share repurchase as well, which, candidly, I think, is probably more attractive deployment than paying down gross debt.
Joanna Gajuk, Analyst
Appreciate this. Thank you.
Michael Shapiro, President
Thanks, Joanna.
Operator, Operator
Thank you. I'm showing no further questions in the queue. I would now like to turn the call back to management for closing remarks.
Michael Shapiro, President
Yeah. Thank you very much for joining our call this morning, and we look forward to providing updates throughout the year as we continue to make progress against our goals. Thanks, everyone, and have a great day.
Operator, Operator
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.