Ann Hynes: Can you just give an update on the behavioral hospitals that had some issues in Q2, how they are progressing — I’m sorry, progressing back to normal emission trends. And also maybe to that same effect, I know in Q2, you hired a bunch of nurses that take a while to train and a while to ramp up. Can you talk about how that’s going? And when you think that group of nurses will be able to take on a full patient load that we’ll be able to see in the admission trends?
Steve Filton: Thanks, Ann. So you alluded to the two items that we probably discussed at the greatest length in Q2 that was affecting behavioral volumes in Q2. One was a handful of residential treatment facilities that were challenged with very kind of specific and nuanced issues with either regulators or referral sources, et cetera, that were working their way through. And then secondly, on a broader kind of more macro basis, so significant amount of new nursing graduates into the system, having to orient them, get them trained, et cetera. In both cases, we talked about the fact that the sort of recovery from those things would take the better part of the year. But by the end of the year and early into 2024, we thought both those issues would be largely behind us.
I think that’s true. The first issue is a much more sort of identifiable issue, those facilities will sort of return to their normal trajectory. The staffing issue is obviously an ongoing one. We’re constantly hiring new nurses and having to train them, et cetera. Again, I think it became an issue in Q2 in the spring when a lot of new nursing graduates were coming out of school where those numbers sort of crept up and we’re having sort of a measurable impact in the business. I think the encouraging thing from our perspective is that overall, our hiring rates as well as our turnover — hiring rates are going up and our turnover rates are coming down, albeit in both cases incrementally. Which should allow us to, in our minds, get back to kind of what we think is a more normative and expected level of volume growth in behavioral, which is probably not terribly higher than the 1% we’re running now, but maybe in the 3% or 4%.
And in terms of our model and our ability to generate incremental earnings and incremental margin growth, that small increase in occupancy should make a big difference.
Ann Hynes: All right. And I’m not sure if you said this, but can you just provide the contract on premium labor as a percentage of total labor for nursing and acute care?
Steve Filton: Yes. So it was $69 million in Q3, which is about a 10% to 15% increase over what we’ve been running last few quarters.
Operator: Our next question comes from Kevin Fischbeck of Bank of America.
Kevin Fischbeck: Great. You may have just — I don’t know I just missed, but you made a comment earlier about how lack of labor is restricting volume growth. But then on the RTC side, it sounds like you got redetermination potentially restricting volume growth, which seems that odd. I guess you’re saying that the occupancy difficulty is on the acute side and that it’s not really a lack of labor on the RTC side or else you’d just be able to refill that redetermination headwind, right?
Steve Filton: Yes. I just think they’re discrete issues, Kevin. I think again, Medicaid redeterminations, I think, again, in just certain geographies are creating, we believe, relatively temporarily a bolus of patients who lack coverage, who didn’t lack coverage, let’s say, a quarter ago or 2 quarters ago. And so where — we seem to be turning more patients away in Q3 for lack of financial resources than we have had in the past. But again, we think that’s sort of a temporary issue. The staffing issue tends to be more of an issue in the acute behavioral business just because we rely more on RMs in that patient care model. And so yes, I mean, the staffing constraint and the deflection issue in behavioral tends to be more skewed to the acute behavioral business than the residential business.
Kevin Fischbeck: Okay. That’s helpful. And then I guess on the professional fees, I just want to — I think you said the number went from 6% of revenue to 7.6% of revenue. Was that an acute care revenue number? Or is that a total revenue number? And then is there any reason to think that this cost pressure is fundamentally different than any other cost pressure? Like right now, you’re going back and getting better rates to match the inflation spikes you’ve seen over the last few years. Is this cost pressure just one more cost pressure that you would have to price in over the next few years and maybe it takes 3 years to recapture the 1.6% headwind to margins, but you should — you would expect to catch that eventually? Or is there anything structurally different about this cost versus others?
Steve Filton: Yes. So two things. Number one, in terms of the first question, yes, I should have been clear this is the physician expenses really, as we’ve been discussing, it is really ER coverage, anesthesiology coverage and by definition, is an acute care issue, and those percentages were meant to be percentages of acute care revenue. Your second question about sort of isn’t just like any other expense. I mean, again, as I was mentioning, I think in a previous response, I think what really drove this sort of immediate pressure and position expense and the timing of it was the passage of the No Surprise Billing Act. And what I think we all collectively learned was that these physician coverage businesses had relied on their profitability in large part for their billings to out-of-network patients.
I’m not sure collectively, we have a full understanding of that. So when that ability was reduced dramatically by the No Surprise Billing Act, those businesses to the degree that they were run by third parties or even to the degree that hospitals were insourcing, became much less profitable, and we had to absorb those costs. I mean in our case, in almost all cases, we were just having to pay third parties more. But I think once that gets reset, I’m not sure there be pressure continues. I mean, to me, that’s a onetime reset. I think that’s what you’re seeing play through our numbers in 2023, et cetera. I do think there’s also an element, I mean, there is, I think, a finite — there’s a shortage of these kinds of doctors much like there was a shortage of nurses that we felt during the pandemic, and that exacerbated the dynamic a little bit.
But again, I think that expense rose by 35% or 40% for us in 2023. I can’t think of another expense that rose by anywhere near that amount. And so again, I think we have a view that this is a largely kind of onetime notion. That’s not to say that there won’t be pressure on physician expense next year that, as I said earlier, it couldn’t increase by 10% or 15%. And something above the rate of inflation. But I just don’t think we think that this is something that we’re going to have to face 35% or 40% increases multiple years in a row.
Kevin Fischbeck: But I’m sorry, maybe I’m just — it seems to me like you’re not saying this 1.6% acute care margin pressure is going to reverse over time as you just price — surgeries, everything higher to reflect you now have an increased cost in here. You’re saying this is a new baseline and we should kind of think differently about the long-term margin in acute because these pressures won’t continue to get worse, but they’re here to stay.
Steve Filton: Yes, I don’t think anybody is suggesting that physician expenses are likely to decline anytime soon. I don’t think that’s anything we have suggested. Like I said, we said earlier, when people talk about what’s it likely to be in 2024, I said a 10% or 15% increase is not an unreasonable way to think about it.