Andrew Mok: Okay. That’s helpful. And then occupancy in the quarter ticked up to about 76.7%, which I think was a notable sequential and year-over-year increase. I know you have elevated bed additions coming online this year, but can you give us a sense for what full capacity looks like or maybe where your top decile hospitals sit on an occupancy basis?
Douglas Coltharp: Yes. So occupancy during the quarter was definitely favorably impacted by normal seasonality as well as the volume increase we saw and the fact that there were no counterweights in terms of the de novos opening in the quarter. Again, as we move forward, we would hope to see the overall occupancy rate continue to move up modestly over time. And really, the primary reason there, in addition to the fact the demand environment remains very positive, is that we are increasingly seeing a higher percentage of our overall beds in private rooms, which eliminates the capacity constraints that can be caused by gender compatibility and other issues requiring patient isolation. And again, the increase in private beds is coming from really 2 initiatives.
The first being that virtually all of our capacity additions, be they be bed additions to existing hospitals or de novos, are comprised of all private rooms. And then the second is when we are doing major remodels and renovations where we are able we are taking the opportunity to convert semi-private rooms to private rooms. In terms of targeting a specific theoretical occupancy peak, it’s hard to do that because we still have such a mixed bag within our overall physical plan. But generally speaking, in a facility that is all semiprivate, you start to hit capacity constraints north of 80%. When you’re in a facility that is all private room, you can run into the mid- to high 90s.
Operator: Our next question will come from Ann Hynes with Mizuho Securities.
Ann Hynes: So I just want to talk about guidance. You beat consensus estimates on the adjusted EBITDA side by close to 10%. So even by Encompass’ conservative history, just the 1% guidance rate seems conservative to me. So maybe can you tell us what the quarter actually was versus your internal expectations? And is there anything we should consider as we go out throughout the rest of 2024, why you wouldn’t be able to see this type of strong growth going forward?
Douglas Coltharp: Yes. Ann, I think you’ve really hit on the key point, which is, as a reminder, we issue annual guidance. We don’t provide quarterly guidance. And I know that creates a challenge for you and your peers because you need to provide quarterly estimates that are out there. When we were thinking about our own expectations for Q1 performance, we were specifically looking at the momentum that we had coming in from Q4, the normal seasonality. But then we acknowledge the fact that you had an extra day in the quarter due to leap year and that there would be some timing benefit that would be attributable to the Easter holiday falling on a Sunday, which is the last day of the quarter. That’s kind of a rare phenomenon. In the quarter, we also got the unanticipated benefit from the provider tax income.
So yes, the quarter was still ahead of our expectations, which is the primary reason that we are revising our guidance upward, but there should not be an assumption made that our expectation internally was consistent with the consensus estimate. As we look at the back end of the year, I think the primary considerations are one, that I’ve already reviewed, which is a year-over-year change in the impact from de novo preopening and ramp-up costs. And then really, it’s a pretty straightforward story where you fall in the range that we provided or whether we’re able to ultimately revised that range upward through the course of the year is going to be predominantly a function of 2 things. One is, does volume continue. We’ve — we’re up against challenging comps, but feel very good about the underlying demand out there.
And then what is ultimately the dynamic that exists over the final 3 quarters of the year between the pricing, which is relatively locked in and the rate of labor inflation that we experienced.
Ann Hynes: Great. And I guess my follow-up question really has to do with that rate. I mean, I know you’re getting a 3% increase from CMS, but it kind of seems lopsided given the labor environment over the past couple of years. Is there a delay in the way the calculation works that maybe over the next couple of years, you should see an acceleration of rates, given what’s happening in the — just in the labor environment?
Douglas Coltharp: So if you look at the rule making for all of the post-acute sectors, the only sector that has a forecast error adjustment, which means it’s looking backwards to say, did we miss a rate of underlying inflation in the providers’ cost structure that needs to be factored in the go-forward rate is SNFs. And that dates back to some legislation from the early 2000s, they went to have a good lobbying effort. I can’t really tell you anything more about that. For IRFs, there’s no catch-up. And so every year, the market basket update is based on forward looking. It’s the anticipated rate of inflation in the next year, not what you experienced in the previous year. So you would hope at some point, those become relatively consistent, but there isn’t a catch-up mechanism built into the IRF making — into the IRF rule making cycle.
Mark Tarr: And Ann, 1 of the other areas on that. You never really know when there’s going to be some other adjustment around productivity or something that’s unforeseen that CMS would apply that would pull the net rate increase downwards. So that’s what makes a bit of challenge.
Operator: Our next question will come from Scott Fidel with Stephens.
Scott Fidel: First question, just curious on your thinking right now around potential capital return, particularly as it relates to buyback when thinking about the strength and the performance of the business, leverage now being at the low end of the target, the cash on hand, et cetera. Just curious on your sort of thinking about potentially ramping up buyback activity.
Douglas Coltharp: Yes, certainly on the table, it’s going to be a topic of continuing Board discussion for all of the reasons that you cited. Even with the cyber-attack on Change Healthcare, our cash flow remained very strong in the quarter because we were able to implement those workarounds and because of the strength of the business and the flow-through from the adjusted EBITDA. All of the points that you noted are very important ones, which the net leverage is all the way down to 2.5x. There’s $130 million of cash on balance sheet. We’re generating enough internal cash flow to fund all of our discretionary CapEx plus the dividend. So it certainly opens up other options for capital deployment, and that’s very much on the agenda for our Board now.
