Scott Fidel: Understood. I want to ask you just about balance sheet capacity here, just given how you did end up with leverage down below the long-term target range. Obviously, a high-interest rate environment, so that’s not necessarily a terrible thing. But does seem like you still have a lot of capacity incrementally here. And just how you’re thinking about that for 2024 and whether that would influence thinking about potentially ramping up capital returns such as the buyback more or further accelerating some of your growth investments? Or are you just comfortable keeping leverage below target here just given the cost of capital environment?
Doug Coltharp: Yes. So, Scott, if you go back to 2022, we were running just about $600 million in total CapEx, and we were essentially a breakeven from a cash flow perspective. As a matter of fact, I think we Beyond funding almost all of that plus the dividend with internally generated funds, I think our debt increased modestly, maybe $25 million or $50 million. As we came into 2023, with a CapEx budget that was in aggregate, pretty similar. And with an assumption that the dividend would be relatively constant. Based on our initial guidance, we were assuming that we would once again be essentially breakeven in 2023. And we didn’t necessarily at that time, I think that it would be prudent given that we were starting the year with a 3.4 times net leverage to start deploying capital towards other potential utilizations life further shareholder distributions.
Well, through the course of 2023, we underspent a bit mostly based on timing with regard to CapEx. And we overperformed with regard to EBITDA and adjusted cash flow. So that number brought the leverage down, but it created more capacity for us earlier than we had anticipated to start really thinking about some of these additional uses of capital allocation and shareholder distributions is the one that comes immediately to mind once we get beyond funding our discretionary CapEx. So, it is certainly something that the board is going to be considering through the course of this year. We frankly got in a position to be able to have that consideration sooner than we had anticipated.
Scott Fidel: Okay. Great. So, we’ll certainly keep an eye out for that. And then just a follow-up question just around modeling for seasonality. Anything you’d want to call out just from either EBITDA or cash flow from the sort of the quarterly modeling progression that’s — that would be different than normal patterns? Or should we think about it sort of consistent with typical patterns?
Doug Coltharp: It really feels like after a period of some normalization being required that we’ve kind of gotten back into our regular seasonal pattern in terms of volume flows. And so, the biggest difference year-over-year is going to be the timing and the impact of the de novos.
Operator: Our next question will come from Parker Snure with Raymond James.
Parker Snure : Good morning. This is Parker on for John Ransom. I just want to shift over to the 2024 guidance. So, if I look at the guidance or if I just look at your fourth quarter 2023 EBITDA, you did $255 million of EBITDA. If I normalize that for the bad debt charge, that’s $271. If you annualize that, you get $1.80 billion maybe there’s some added de novo costs in there. So maybe let’s say, $1.65 billion is kind of the run rate. But your guidance is $1.35 billion. So Maybe just talk about why would there be a difference there? Is there a reason where their certain items in the fourth quarter that were kind of more onetime in nature? And why wouldn’t the fourth quarter run rate be a good kind of jumping off point as we look into 2024?
Doug Coltharp: Yes. So first, you back out of that $9 million in workers’ comp and GPL prior period reserve adjustments, then you normalize for a favorable group medical expense then as you suggested, the de novos for 2023 contributed $1 million in EBITDA in Q4, the assumption for all of 2024 and is that you’re going to have $15 million to $18 million, some portion of that attributable to Q4. So, you’ve got a swing there. And then again, our core assumption is that you’ve got 4% to 5% labor inflation, which is going to delever to some extent against the pricing. On top of that, you’ve got more nuanced items. We continue to believe that EPOB will normalize towards 3.48 we’re pretty close there right now at 3.38 for fiscal year 2023 in aggregate.
It’s a highly sensitive ratio. So even if you just moved up from 3.38 to 3.34, which is of an impact, that’s about a $14 million to $50 million impact on year-over-year EBITDA. So, it’s — I think it’s a combination of all those things. And we’re here, we’re a month into 2024. And so, what we have demonstrated consistently is, particularly with regard to guidance is we call balls and strikes very consistently. So, the guidance that we’re providing right now is according to the philosophy that we have consistently applied the businesses out there and if the environment is better, we’ll deliver better results. But we think that this is a reasonable set of assumptions starting the year.
Parker Snure: Okay. Yes. That’s fair. And if I can just squeeze in one more, just related to the bad debt charge. I know you guys said you changed some of your reserving practices as you move into next year. Is there any chance that there could be another one of these kind of one-off reserve charges? Or is it kind of the expectation that this was a one-off and that shouldn’t recur?
Doug Coltharp: It’s really the latter. We didn’t necessarily change our reserve methodology, right? Because the reserve methodology that’s in place right now is really looking specifically at TPE, which had been suspended for a while and came back on, but the activity there is a lot lower than it ever was under the widespread probes that stopped in 2018. The write-off that we took this quarter, the $16 million EBITDA impact related to those older claims that originated, 97% of them were prior to 2018. And it related specifically to the fact that when we started appealing these things up to the DAB level — I mean to the Federal District Courts, we didn’t have any experience on which to base a specific reserve methodology. We’re a year into it right now.
And unfortunately, what we found is that the claims denials that were essentially rubber stamped as the ALJ ramped up its number of judges in an attempt to clear the backlog is dictated by the federal court ruling that they were getting rubber stamped at the higher levels as well. So, it’s frustrating. We look back at that backlog of claims, which has now been largely resolved. The balance is still out there on our balance sheet is essentially fully reserved. We look back at those claims and say we did the right things, we admitted the right patients and we treated them effectively and yet we’re going to take these write-offs and move on.
Operator: We have a follow-up question from Kevin Fischbeck with Bank of America.
Joanna Sylvia Gajuk: This is Joanna. So, I guess a little bit a different topic, but I guess the proposed regulation cycle, also keeping up on us, so kind of your expectations for 2025 proposed rule, what you expect there when it comes to rate update or anything else? And I guess, specifically, the Home Health Trush for policy change that I guess was Slack prior to ’24 cycles. So, do we expect this to show up in ’25? Or would you expect this to kind of die down? Because I guess when you think about it, you would be here at like why should be seems just do this because I guess the hospitals have the same transit policy? So why would that be different? But any thoughts in terms of expectations for that?
Mark Tarr: Joanna, this is Mark. Let me take the latter point. We’ve not heard any feedback relative to the Home Health transfer role anymore from CMS other than what was discussed last year as they did the RFI. I think — at that time, the industry made a pretty good case why the home transfer rule is a little bit different when you think about IRFs and the primary point being that home health or an IRF patient is not a substitution of care. And it’s actually a normal progression of care for rehabilitation patient. And I think it was also pointed out that the average length of stay for IRF patients across CMG has been remarkably consistent. In other words, they’ve not seen it from a perspective that there was a financial mode to reduce average length of stay.
