US Physical Therapy, Inc. (USPH) Q3 2023 Earnings Call Transcript

US Physical Therapy, Inc. (NYSE:USPH) Q3 2023 Earnings Conference Call November 8, 2023 10:30 AM ET

Company Participants

Christopher Reading – President, CEO & Director

Jake Martinez – SVP, Finance & Accounting

Carey Hendrickson – CFO

Eric Williams – COO, East

Conference Call Participants

Joanna Gajuk – Bank of America Merrill Lynch

Brian Tanquilut – Jefferies

Lawrence Solow – CJS Securities

Calvin Sternick – JPMorgan

Michael Petusky – Barrington Research

Operator

Good day. Welcome to the US Physical Therapy Third Quarter 2023 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. [Operator Instructions] Please be advised that today’s conference is being recorded [Operator Instructions].

I’d like to turn the call over to Chris Reading, President and CEO. Please go ahead, sir.

Christopher Reading

Thank you. Good morning, and welcome, everyone, to our US Physical Therapy third quarter 2023 earnings call. With me on the call this morning, include Carey Hendrickson, our CFO; Eric Williams and Graham Reeve, our Chief Operating Officers; Rick Binstein, our Executive Vice President and General Counsel; Jake Martinez, our Senior Vice President Accounting and Finance.

Before we being our discussion around our third quarter and year-to-date performance, we need to cover a brief disclosure. Jake, if you would please.

Jake Martinez

Thank you, Chris. This presentation contains forward-looking statements which involve certain risks and uncertainties. These forward-looking statements are based on the company’s current views and assumptions. The company’s actual results may vary materially from those anticipated. Please see the company’s filings with the Securities and Exchange Commission for more information.

Christopher Reading

Thanks, Jake. So my commentary this morning is going to be at a high level, and following that Carey will cover the majority of our very detailed release more completely. Let me start with where volume is. Overall, we’ve been [ph] number of really good things, which our team of clinicians, partners and support staff were able to deliver this quarter. And there are a few challenges which we’re continuing to work on as well.

First, and importantly, volumes have been very strong this year and remain so throughout the third quarter, including during our normally seasonally slower summer months. Visits per clinic per day came in at 29.7, which is an all time high for us for any third quarter in our company’s history. It serves as the best indication related to both the overall demand for our services and the way we’re viewed by patients and referral sources alike, in a market where there is an abundance of choice.

Truly our partners and our staff locally are providing care which is not just excellent, but which our patients and referral sources around the country are seeking out. My sincere thanks to all of you who are listening. That care you provide is not only changing lives for the better, but it is being recognized for driving the highest level of volume ever delivered by us at this time of the year.

For the quarter that throughput, coupled with the strong development work, we’ve continued to produce, helped drive volumes year-over-year by 10.8%. Part of those volumes have come through de novo and tuck-in acquisitions with 31 additional clinics so far through October, which as you know, depresses our volume per clinic average some, drags a little bit on results early on. We’ve added nine de novo clinics in the quarter, and five of those are added in September.

Keeping that strong de novo growth in mind is a bit of a near term drag through the nine months. Our PP operating income, in spite of this strong de novo openings, it’s grown 10.9% for the year. So looking back to the quarter revenue grew 9% which was impacted by the Medicare rate reductions we have absorbed this year, coupled with a slightly higher percentage of PTAs on-boarded over the past 18 months or so, due to the nationally tight staffing market.

So let me explain. If you call having PTAs touch a Medicare patient in the course of care results in a 15% reimbursement reduction. And while we have we are focusing on that, and in the middle, particularly in Q3, rolled out some new retraining because we have a slightly higher proportionality of PTAs compared to where we’ve historically run that’s increased the Medicare rate reduction ever so slightly.

So our challenge at present is to offset the hole in the bucket that Medicare has created with additional better paying business and at higher negotiated rates. This is an area where we expect to see continued improvement as we work and achieve additional successes in our contract negotiations. And in some longer term initiatives around further diversifying away from Medicare.

Additionally, we’ve added to our leadership on a revenue cycle area. We are optimistic, we will identify some opportunities to further enhance our already strong collections effort to further bolster our net rate and time. We have renegotiated a very significant number of contracts in a very positive way. As we explained last night, to a couple of different analysts who follow the company, from the time of negotiation until the time that those contracts, there’s new rates getting implemented. Oftentimes, there’s a several month delay, but we are making progress, I think good progress. I’m happy with the percent rate increases. Just need to see them pick up and gain traction as they are implemented.

On the injury prevention side of our service offering, we let the market know at the beginning of this year that we expected growth to be a little bit more muted, with pauses and some limited drops from a few of our customers who are expecting their business to be negatively impacted by the heavy inflationary environment coupled with the fear of a coming recession. The good news is that our geriatrics [ph] team has been able to replace their lost business with new business that will again provide us with growth when moving forward into the 2024 year, while our progressive partnership has added a great deal of new business as well, while suffering a loss of one plant in the auto industry, which as you know that industries has been hit particularly hard this year on a variety of fronts.

From my perspective, the majority of the counts, well, we’ve done exemplary, exemplary work over the years, but maybe who have paused or dropped some service component temporarily. I expect many of those will come back once our economy is in more stable growth mode. Furthermore, we recently just added to our injury prevention core with a recently announced acquisition and includes both traditional injury prevention business, as well as a new service offering delivered via a well developed recently introduced software program and ergonomics, which fills the service gap that existed previously with our offering.

We’re excited about the team and we look very forward to helping them meet the needs of this growing and important market. Finally, our injury prevention teams have done a very nice job overall adjusting and responding to the tighter than usual labor market, which has allowed our quarter-over-quarter margin percentage to improve 80 basis points, from 21.9% in Q3 last year, to 22.7%, this most recent quarter.

Last week, myself and a few of our executive and development team members attended the annual private practice section meeting, which this year was held in Austin, Texas. This is for us the most important meeting every year.

On the development side of things these past 12 months, and when I say 12 months, I’m looking from November really current period to a year ago, been a very active period for us. We’ve purchased an additional 54 clinics over that period. In that same period, we’re on pace, where we’ve currently open 72 clinics, added 72 clinics overall. While many of our competitors are hamstrung a bit right now with extremely high debt levels, which can impact a lot of factors, including their ability to sometimes even close on deals, we’ve got a clean balance sheet and we are working hard to put money we raised at the end of our quarter two secondary offering for.

This past week was the busiest we’ve ever been at the private practice conference. We scheduled double the number of individual meetings and held two large offsite gatherings, which we believe will continue to help us to drive and differentiate our partner-centric model, a model which distributes cash to these newly acquired partners throughout the entirety of the partnership month in and month out with no on top debt burden from the acquisition itself. That and the back end, flexibility and guarantee regarding purchase methodology gives us another meaningful difference with our competitors which should further aid us as we work to significantly grow our partner centric company.

One final bit of commentary that now Carey and I want to speak to really directed toward our analysts and our shareholders, we’ve been fielding a lot of questions related to the impact of Ozempic like drugs on our physical therapy business. Taking a step further, there been a number of articles in The Wall Street Journal and other notable publications, relative to the massive, in some cases negative impact on multiple areas of the healthcare system through the expanded use of these drugs, which as you know how people lose weight among other uses.

So let me hopefully help create some perspective here. First, I truly believe physical therapy is going to continue to grow with or without these drugs. It’s estimated that currently only about 10% of people with musculoskeletal issues ultimately end up in a physical therapy office. That number is growing and changing.

That number will grow and change in time, because there are numerous studies that indicate that physical therapy done early for other much more costly and invasive treatments, or worse, with only palliative narcotic-only pain treatment, not only does it save the patient, as well as the payer system, significant dollars, but results in better overall health, and less downstream cost of medical care for that person for an extended period of time.

Presumably, because they get moving again, to get their health back related to the things that they enjoy doing, either work, or at home, with family, socially with friends, resulting in a healthier, happier person. That message will be hammered and marketed to groups like our Alliance for Physical Therapy, Quality and Innovation, which we refer to as a APTQI. And I believe with grassroots marketing, we’ll continue to expand the physical therapy first initiatives that we have across our space.

Secondly, and importantly, the vast majority of our business comes about the injuries caused by activity, not simply because somebody is obese. Unfortunately, the disease of obesity in people ultimately results in them not being able to do a lot of the things that they otherwise might enjoy. But for the limitations created by their weight. While obesity can result in hip and knee arthritis over time, and some of these ended up as strong replacements, the bigger majority of joint replacements come as a result of activity created injury, often to the meniscus, or the fiber cartilage in the joint, which eliminates the padding and then creates osteoarthritis over time.

These injuries occur in sports and daily activities, just like squatting and twisting, gardening, running various types of sports, which are done by people a bit more fit. We, as a general rule, don’t see hip replacements very often in our clinics. And really only talking about knee replacements as potential impact, I think the market is ignoring all the other possible activity based injuries, while often not severe come as a result of enjoying life in a physical way, hiking, gardening, running, and of course, our beloved pickle ball.

So many other things that people can participate in and enjoy if they’re not obese. So I believe that potential exists. These drugs are successful, long term don’t create unintended health issues, but it’d be more patients as a result, not less.

So that concludes my prepared comments this morning. Carey, go ahead and walk us through the financials in greater detail, and then we’ll open it up for questions.

Carey Hendrickson

Great, thank you, Chris. And good morning, everyone. In the third quarter, we had continued strength in patient volumes, strong growth in revenue, growth and our physical therapy and total operating income and year-over-year growth in both adjusted EBITDA and operating results per share.

In addition, we added 19 clinics during the third quarter through acquisitions and de novos, with just three closures. We’ve now added 72 new clinics since the third quarter of last year through acquisitions and de novos, which is 14 closures which is a net addition of 58 clinics over the past year. We reported adjusted EBITDA for the third quarter of $18.6 million, which was an increase of $1.6 million over $17 million reported in the third quarter of 2022. Our operating results was $0.62 per share in the third quarter of 2023, which was a $0.04 increase over the $0.58 we reported in the third quarter of last year.

Our total company revenues increased 7.5% in the third quarter growing from $139.6 million in the third quarter of ’22 to $150 million in the third quarter of 2023. And our total company gross profit increased $1.1 million from $26.8 million in the third quarter ’22 to $27.9 million in the third quarter of ’23.

As Chris noted in his remarks, our average visits per clinic per day in the third quarter were 29.7, which is the highest volume in the company’s history for the third quarter, and it’s a 3.1% increase of our average visits per day of 28.8 in the third quarter of last year. July was at 29.9 visits per day, August was a little lower as expected based on normal seasonality at 29.6. And then September came back up to 29.9. All three of those months were higher than the same month in the previous year.

Our net rate was $102.37 in the third quarter of ’23, which was lower than last year’s $104.01 per visit, but it was sequentially an increase in the second quarter of 2023, which had a net rate of $102.03. The decline of net rate as compared to the prior year was due to the reductions in Medicare rates, which represent about one-third of our care mix as Chris noted in his remarks. All other payer categories, including commercial and workers comp increased over the prior year.

As we’ve talked about, on the last couple of earning calls, we’ve either renegotiated or terminated this subset of our Medicare Advantage contracts that reimburse us at a rate that’s less than what it costs us to serve our patients. And we’ll continue to focus on renegotiations of commercial workers comp and Medicare Advantage contracts, and are making other methods necessary adjustments to address our net rates as well. Our physical therapy revenues were $128.1 million in the third quarter of ’23, which was an increase of $10.7 million or 9.1%, from the third quarter of 2022 due to the addition of 58 net new clinics since last year, and our record high third quarter average rate of visits per clinic per day, partially offset by the decrease in net rate.

Our physical therapy operating costs were $105 million, which was an increase of 9.9% over last year. That’s also due to the addition of 58 net new clinics since the third quarter of last year. On a per visit basis, our total operating costs were $84.49 in the third quarter, which is a decrease of just less than 1% compared to $85.14 per visit in the third quarter of the prior year. Our salaries and related cost provision also decreased about 1% in third quarter 2023 versus the prior year from $60.99 in the third quarter of ’22, down to $60.35 in the third quarter of ’23. This is the fourth quarter in a row that we’ve reported year-over-year decreases in both total physical therapy operating costs for visits and salaries related cost per visit.

The increase in total operating cost per visit on a sequential basis for the second quarter from $80.61 to $84.49 is a normal seasonal occurrence. Salary on a per visit basis are higher in the third quarter than the second quarter due to covering the vacations of our employees during the summer months. And then other significant costs like rent and depreciation that don’t vary by the number of visits, are spread over a lesser number of visits.

Physical therapy margin was 18% in the third quarter of ’23 as compared to 18.7% in the third quarter of 2022, with the change due to the decrease in our net rate versus the prior year. Even with the decline in our net rate versus last year, our PT gross profit increased 5.4% over the third quarter the prior year. And it is increased 10.9% over the first nine months of this year versus the prior year.

Our IIP revenues and expenses were both approximately $700,000 less than last year. So we ended up with $4.4 million of IIP income in both years. Our IIP margin increased from 21.9% in the third quarter of last year to 22.7% in the third quarter of this year. Our balance sheet remains in an excellent position. We have $147 million of debt in our — excuse me $145 million of debt on our term loan with a five year swap agreement in place. The places the rate on our debt at 4.65%. And we expect it to remain at that 4.65% going forward. As you know this a very favorable rate in today’s market and below the current Fed funds rate.

In the third quarter of 2023 alone, the swap agreement saved us $100,000 in interest expense with cumulative savings of $2.3 million over the first nine months of 2023. Our interest expense was $2.1 million in the third quarter of 2023. In addition to the term loan, we also have $175 million revolving credit facility that has nothing drawn on it during the third quarter. And we have approximately $120 million or so of excess cash over and above what we need for working capital ready for deployment into growth initiatives.

In the release we noted that we expect our full year 2023 adjusted EBITDA to be within our originally stated guidance of $75 million to $80 million, most likely in the low to mid area of such range. We expect to have continued strong volumes in the fourth quarter as we’ve had all year. Where we fall within the range, it’s going to depend ultimately on the strength of our volumes in the fourth quarter, and how much sequential growth rate we’re able to achieve. And our net rate from the third quarter to the fourth quarter.

Our operations team has produced solid results in the first nine months of 2023. And we’ll all work to continue to produce the best results possible for all of our stakeholders as we finish out this year. And with that, I’ll turn the call back to Chris.

Christopher Reading

Carey, thank you. Great job. Operator, let’s go ahead and open it up for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We’ll take our first question from Joanna Gajuk with Bank of America.

Joanna Gajuk

Good morning.

Christopher Reading

Good morning, Joanna.

Joanna Gajuk

Thank you so much for — hey good morning. Thanks so much for taking the question. So a couple of questions, I guess here. I guess on the last comment, from Carey around the outlook for this year that you slightly lowered it. Are we talking about kind of being towards the middle or lower? And so you kind of took off the higher end from the table. So I guess what are the main drivers for this lowered guidance, sounds like Q3, roughly in line. So I guess Q4 seems like there’s some indicators that’s pointing to a slower or lower number for Q4. Is that the way to think about this?

Carey Hendrickson

Yes, Joanna. So I mean, I’d say it’s within the expectations that we’ve had for — I mean, it’s probably a little bit lower than we expected. We need a little more net rate growth to get us to the higher end of the range than we’ve had. If we get more growth, we’ll position ourselves close that middle, likely. But you mentioned that it looks like the fourth quarter would be less than the third quarter given the guidance that we provided. And that’s not an unusual pattern. I mean, if you look back the last few years, in 2019, we went from $17 million of EBITDA down to about $15.6 million in the fourth quarter. Same thing in third quarter of ’21. We went from that $19.9 million in the fourth quarter ’21, to about $17 million.

Last year went up a little bit. But that was because we had some large acquisitions we made. We made four large acquisitions in the fourth quarter, was actually two really larger and two other acquisitions in the fourth quarter of last year. And so that bumped our fourth quarter up a little bit. But it’s a normal pattern for us that it’s somewhat impacted by the holidays, which can happen, which bring down our volume some in late December, particularly.

And then also in our IIP business, there’s some seasonal decline, because some of the big manufacturers, auto in particular, closed down their plants in the last part of December, because of the holiday. So they’re just shutting down the plants. When that happens, we don’t have people on site that can bill. So last year in our IIP business, if you look back at it, our IIP income went down about a $1 million or so from the third quarter to fourth quarter. I don’t expect it to go down that much this year. But it will likely come down some in the fourth quarter because of that phenomenon.

Chris, anything you would add?

Christopher Reading

No, I think you’ve covered it Carey. Joanna, the business is solid. This kind of follows our normal seasonal pattern. And we’re just trying to be clear about where we think we’re going to finish.

Joanna Gajuk

Right, no, makes sense. And I guess just to follow up on that comment around the net rate vote, it sounds like that’s where maybe things are a little bit softer. So I guess the question is, because you have been talking about, the negotiating contracts with commercial and some of the MA contracts improvement in our workers comps come out. When will we see that the benefit right to that net rate?

Carey Hendrickson

Yeah, well, we have seen benefits from it. I mean, if you — our commercial rates, and our workers comp rates are both up about 1.5% on a year-to-date basis. We’d like that to be more but we — some of the negotiations have taken place during the year and it takes a while for them to take effect. And so we’re hoping to see more of them in the fourth quarter and certainly in the 2024. The rate for our personal injury and self pay, which is our other, that’s about 6% of our revenue, that’s up about 2.5% year-to-date. Medicaid even is up about 1% year-to-date.

The only payer categories, that’s down is Medicare. And that’s because the things we’ve noted, the higher ratio of PTAs to PTs. That increased a bit over the last 18 months or so. And we’ve had to do that in some cases, because the market is tough from a hiring standpoint, but also, we’ve had such heavy volume. So we’ve needed to hire, what we can hire to cover the volume.

And then the heavy volumes have also caused a little bit of a downtick in build units for our Medicare. And then Medicare Advantage that’s growing as a percent of our total Medicare visits. There’s a big push out there for Medicare Advantage, for Medicare patients to move to Medicare Advantage, and that pays us less than traditional Medicare. So some of those things have factored in our Medicare rate this year. Like I said, everything else is up. Medicare has been down about 3.5% to 4%, year-to-date.

Christopher Reading

So I would say, Joanna, when you look at the contracts, we’ve re-done, a lot of them have been double digit increases. Some of those are spread over two or three years, been pleased with the percent change. To your point, we need to see that show up in the P&L. And we’re working to make that happen.

Joanna Gajuk

All right. And if I may, a last question on the Medicare rate. So I guess we would get the final Physician Fee Schedule, the therapy rate there, down 2% or so. There’s a potential work in progress on the relief for disposition fee schedule. And I know this latter bit could differ depending on your geographic mix and whatnot. So can you talk about what this reg means to you in terms of the net rate update? If there’s no relief and if there is a relief, what it will be?

And I guess anything else in direct that whether it could be impact for rehab therapy? Thank you.

Christopher Reading

Carey, you want me to take care or you want to take it?

Carey Hendrickson

You go ahead and I’ll fill in.

Christopher Reading

That’s fine. So right now, I hate to say it, but sometimes these tables that are published, don’t correspond with the actual realities, for the companies. And so the expected reduction for us is 3.5% in 2014 all factors considered. There are a couple of other things that we’re in the final role, extends our ability to oversee physical therapy assistance in certain type of licensed facilities and do that on a remote basis, other than physically present on site.

It’s less beneficial. That’s a continuation of something that was done during COVID, that’s beneficial. Then there’d been some mildly beneficial things around remote therapeutic monitoring, which are net positive. They’re not specially dollar wise impactful, but make more sense and will make it easier to capture those charges. On average, think of this as somewhere between 3.4% and a 3.5% reduction.

Now you asked what it would be if it gets mitigated? I don’t know the answer to that. We’ve had success in getting it mitigated through Congress every year since that original 9%, 9.5% cut was proposed, leading into COVID. I don’t know what it’ll be if it gets adjusted, we’ll have to see.

Carey Hendrickson

And just as a reminder, Joanna, that’s one-third of our business, Medicare is, so that’s on a overall rate that will have a lesser impact than the 3.5% if it were — if it ended up at that rate. And I think we have momentum, as I’ve talked about in all of our other rate categories, going into ’24.

Joanna Gajuk

Great. Thank you so much.

Operator

We’ll take our next question from Brian Tanquilut with Jefferies.

Christopher Reading

Hey, Brian.

Brian Tanquilut

Good morning, guys. Chris, maybe I’ll follow up with one of your comments that you just made about remote. Obviously, an area or part of your business we haven’t talked a lot about since COVID. So just curious how we should be thinking about your strategy on integrating remote to your workflow and the investments that you need to make to really take advantage of that, especially as we stare down this Medicare rate cut.

Christopher Reading

Yeah, so remote therapeutic monitoring codes that was introduced this year. We’ve rolled it out. It’s been a little bit painful for a lot of companies, just because the companies who have the infrastructure that we’ve all used to be able to perform these additional codes, oftentimes are set aside and set alone on the infrastructure that exists in our Billing and EMR systems. And so that is and has been very recently addressed. I think, by the beginning of the year, we’ll be positioned where all of our Medicare patients will be enrolled, auto enrolled on our Raintree system, which is covers about 90% of our company. That integration is completed. We believe that will be done and effectively out by the first of the year.

So that we’ll have a much greater percentage of our company that is able to efficiently address remote therapeutic issues. Then beyond that, from a digital perspective, I think there been a lot of companies that have come out, that have had some really nice additions. We’re not there yet on a fully digital basis. But we continue to work directionally to evaluate that opportunity and make decisions. As we move forward we expect at some point to have the visual offering working on some of the high priority things at the moment. But that’s certainly on the list.

Brian Tanquilut

Got it. And then Chris, maybe since we’re talking about workflow, as I think about your IIP business, are you seeing anything that’s changing in that world, as some virtual offerings emerge in the market?

Christopher Reading

On the prevention side, not so much. We see continued adoption among and across companies. Of course, companies go through ebb and flow. Uber is a great example, company that at the beginning of COVID, we had a very large contractor rollout with them. And that got paused. And then over the next couple of years, it rolled out and became substantially bigger than we originally envisioned. Then as an example, it kind of paused again, not completely. We still do a lot of work there. They are one of our bigger customers, but then their outlook affected what — how they viewed the coming year, the year that we’re in right now.

And actually, we’re hopeful that we can continue to expand that relationship, as things again, normalize. So I don’t see on the prevention side, a lot of major technological changes. Again, we’ve added recently software deployment for ergonomics, which companies that want to control and to roll out their own ergonomics program, can now do on a guided basis with our software. That’s a new offering for us.

This is really still an embedded model where people need to be on-site, and evaluating individuals. Certainly, we can use technology and video monitoring and certain aspects of evaluative techniques we can now use, with cell phones and other forward camera devices to take measurements and do things. And I think that’ll continue to evolve. We’re using some of that now. But nothing that we see as disruptive to the core business.

Brian Tanquilut

Got it, and then maybe Carey or Graham, as I think about just tying it back to the core business, how much productivity opportunity do you think there’s left in terms of driving the visits per clinic rate or per clinic, yeah, percentage per day?

Christopher Reading

Let me address part of that. And then I’ll let Eric or Graham address the other part of what we really think of as productivity. But on the visits per clinic per day, there aren’t any real constraints that we generally bump into that. It’s a factor of additional staffing, oftentimes when we’re if we’re currently staffed where we need to be. So in order to grow, we’ve got to hire some increment on a part time basis for additional staff. Generally speaking, our facilities can handle it.

It’s grown this year about as we expected it to grow, all things considered. I think it’s been pretty good. I guess you guys refer to that as productivity out. I think of productivity really as the amount of people that our clinicians can see. And Eric, you might want to speak to that part.

Eric Williams

Yeah, Chris, I think you summarized really well. Our turnover’s at all time low. It hasn’t been this low in years. And so I think our partners have done a really, really good job of hanging out the staff. We’ve had incredible growth. When you take a look at the de novos that we opened up last year, and the 32 facilities, we’ve added this year, de novos and tuck ins, that has been challenging to fill those growth positions for us. And so to your point, I mean, there’s not a cap here. I mean, you look where we were two years ago. We hit the 30 mark for a couple of quarters this year. We got a record first quarter, second quarter and third quarter.

So we still continue to see growth opportunities in front of us. We’ve invested a lot of resources in recruiting. We have eight recruiters at work for us. We really leverage social media as well as our relationships with the various school programs. I think there’s 210 accredited PT schools out there. We have clinical affiliation agreements with 155 of them. So we’re continuing to play the short game and the long game as it relates to staffing. The long game being developing these relationships with the school. So as these kids come out and do their clinical rotations, which is part of the program, they’re more likely to end up working for us having done rotation.

So that’s a big investment for us. And then on top of that, just throwing more resources as it relates to reaching licensed staff out there. But the volume and demand is there. Staffing is what us and everyone else in the industry has got to solve for in order to continue to grow at the rate we’ve been growing.

Brian Tanquilut

Awesome, thank you, guys.

Christopher Reading

Thanks, Brian.

Operator

We’ll take our next question from Larry Solow with CJS Securities.

Christopher Reading

Good morning, Larry.

Lawrence Solow

Hey, good morning, Chris. Thanks. Thanks for all the color. Just a couple of thoughts. I know you’re not ready to give guidance for ’24. But just from a high level, as you think about sort of the components, pricing — price we will end up down this year, 1% is going to be a little bit more than that. And pretty well documented it’s a Medicare cut there. But it feels like you have some good momentum in the commercial side. As you mentioned, you’re on average getting, looks like mid-single digit annual increases on a lot of these negotiations.

So I suppose some of them haven’t actually hit your — hit the P&L yet. And I suppose there’s a lot more in the queue that you could start turning over. So it’s fair to say that just from a high level, you think pricing could actually all-in go up next year, even if the Medicare rate is not changed by Congress.

Christopher Reading

Maybe Carey, you want to address that one?

Carey Hendrickson

Sure. Sure. Yeah. So I would say — first of all, it’s early for us to look at that and give any color really related to ’24 yet, we’ll be ready for that certainly the next time that we have our earnings call for the end of the year. But I would say it’s going to — we’ll see where Medicare ends up. Right. So how much of a hurdle we have there. But we do, as I mentioned, have momentum in the other payer categories. And we have, as Chris noted earlier, put in place step increases.

So it may be that we have an increase of a total of 12% or 13%. And we have a step in over three years where it’s 5%, in year one, 4% in year two, and then another 3% in year three. We have those kinds of step increases that we’re building into our contracts that will have continued increases. So I think we will have continued momentum in both commercial and worker’s comp. And both of those and — so I think certainly I feel good about our ability to — as we sit here today, I feel great about our ability to offset the Medicare rate reduction going into 2024.

Christopher Reading

Yeah, Larry, the short answer is I mean, the final rule just came out Thursday, late Thursday afternoon last week. We’re still in the middle of our budgets and a lot of analysis. And we’re pushing really hard on these contracts. But we’re not at a point where we can give you a clear conclusion yet unfortunately for next year. Just too many moving parts and too short a period of time yeah, but we’re working hard at it.

Lawrence Solow

That’s fair. In terms of you mentioned a lot of good internal growth, especially last year, in this quarter on the de novo side of dimension nine and five in September lot. I know de novos don’t cost a significant amount to get on their feet. But is there I suppose some inefficiencies initially? And even with the acquired clinics that just by themselves, it’s in the acquisitions and the de novo ramp, you have some sort of built in a little bit of dry powder to improve margins just from those two points. Is that a fair statement?

Christopher Reading

Eric, do you want to take that?

Eric Williams

Chris, sorry about that. My phone blinked out a little bit. Go — can you –?

Christopher Reading

That’s okay. No, I got it, I got it. Yeah. Larry, on the de novo side, while they don’t cost a lot of money to get out of the ground, it’s not really the issue. They do bleed us a little bit, particularly in the first six months before they or until they break even some break even much quicker than that. But early on, certainly those ones we opened in September are going to be a drain from then.

Then on the acquired clinics, yeah, there is, you refer to as dry powder, there is usually some upside that occurs, oftentimes an rate reset at the point where we do the deal, we credential that deal in 60 days before closing, through date certain bases, and then we get a pickup in rate usually, not across every contract, certainly, but across some of the contracts. And then there are other things that take a little bit more time that may be may be a little slower to happen.

Program development and productivity or efficiency changes over time, those take a little bit longer. I’m more patient with those because we don’t — we want to make sure that relationship because the clinical levels are really strong and stay strong. And we’re able to do that. So there is upside in the acquired clinics. There is some short term downside in the de novo clinics.

Eric Williams

And Chris the one comment, I would add to that, the one comment I’d add on the de novo clinics is there’s none of those de novo clinics are flyers. It’s not building a network com, and those clinics were built because there were established referral relationships in the community. The biggest challenge in potential drag on those de novo clinics goes back to staffing. Typically, staff who might be relocating from an existing facility to help staff it. A lot of times, again, those clinics, we take advantage of the opportunity to open them, when we have the support, but sometimes very difficult to challenge right out of the gate. And that tends to be the biggest hurdle in terms of how fast they ramp.

Lawrence Solow

To follow up on how is the staffing, obviously, it’s been a couple of years of a tough stretch in staffing labor. Certainly labor pricing is much higher today. But does feel like at least you guys are having much more success in getting that. I don’t know about quality, but hopefully quantity of labor.

Christopher Reading

Go ahead Eric.

Eric Williams

Yes, no question. I mean, I think the recruiters are doing a great job. As I said earlier, our retention is at an all time low here over the course of the last five years. And I think we do a better job filling positions than most other organizations. But there’s no question. It’s a challenge. And Chris referenced this earlier in his opening comments as it relates to PTA usage. I mean, our facilities, our staff of licensed physical therapist and licensed physical therapist assistants.

And we’ve had to rely, especially with the growth spurt that we’ve had, on bringing PTAs on board in order to service the patient volume, as opposed to not servicing it. And again, with roughly 33% of our business being federally funded, every time that PTA touches a patient that has an impact. And you saw, if you see the breakdown on our rate, every category has gone up from the net revenue per visit perspective, with the exception of that federally funded bucket that includes Medicare and Medicare Advantage.

We got very aggressive this year in terms of turning Medicare Advantage programs that we felt did not pay us the appropriate amount of money below our actual cost of providing service. I think we’ve done a nice job there. We’re just going to continue to have to push in this category. And to Chris’s point regarding these de novos the rolling out of additional programs takes a little bit of time, and in particular, the workers compensation initiative, which has really been successful this year.

I mean, that’s an initiative that’s really just over a year old. We’ve grown rate for three consecutive quarters, and our third quarter ’23 was almost 4%, higher than our third quarter ’22 in terms of workers compensation rates. So these types of programs do have an impact, but they take a little while to roll out in new Nova clinics, as well as new acquired partners.

Lawrence Solow

Okay, I appreciate that. If I can just sneak one more in just on the acquisition. It sounds like in the Q on the PT, side, on the physical therapy side, it kind of sounds like you’re queuing opportunities remains strong and you want to put your capital to work. Can you just comment just on that the ergonomic software and sort of the IP acquisition, you made, a little bit different than your de novo acquisition, how you — any color on that, how you plan to leverage that?

Christopher Reading

Thanks. Yeah, so these are some people that I’ve known for a number of years. They’re really, really good folks. They’ve been working on the software, product, software sales product, software service product, a number of years. It’s really, really strong. Enable us we have — we employ ergonomists, we do virtual ergonomic programs, but some of our customers don’t want — they want to do it themselves.

And yet, they don’t have the tools really available to do that. And so we think that we can deploy this software not just to new customers who are new to us, but to existing customers, across our portfolio. And as well, with many, many, many more sales people than niche, the niche folks have had in their own company utilized our sales force to ramp that up. So that was part of the offering.

The other part of the offering was more in line with what we already do, which is just, you know, embedded people on the prevention side, but it’s a nice fit for us. It’s a new offering. We should be able and expect to be able to sell it to our existing client base, in many cases.

Eric Williams

Chris, my one additional comment on this would be, I mean, this was a niche that our bariatric team recognized. This was a client profile that we weren’t servicing today. These are folks who are going to be a little bit more cost conscious, that not just want to manage his own, want to manage these types of projects on their own ergonomics projects, but need to from a financial perspective, we do see a cross selling opportunity. But [indiscernible] was looking at going down the path of creating their own software, spending the time and money to do it, in order to chase this market segment that they weren’t servicing today.

So this ERGO Plus [ph] represented an opportunity for us to go in speak first with software that was already developed. And they were really under resourced, ERGO Plus in terms of their ability to market and sell that software. So we feel we have an opportunity here to dump gas on a fire. It’s a terrific product. We think this is a great market opportunity for us and really excited about this acquisition.

Lawrence Solow

Right. Appreciate the enthusiasm. Thanks for all the color.

Operator

We’ll go next to Calvin Sternick with JPMorgan.

Christopher Reading

Hey, Calvin. Good morning.

Calvin Sternick

Good morning. Thanks for squeezing in here. Just one quick one for me on IIP. I know that, some of their customers have pulled back on spending just given some the macro concerns. How are those conversations evolving? Are employers still hesitant? Are you seeing any signs of a shift in demand next year? And I know you talked about expecting net growth for 2024. Is the expectation at this stage that growth rates improve your every year but still below the 20%? Just any color you could give on sort of what the IIP revenue growth rate looks like next year would be helpful. Thanks.

Christopher Reading

Yeah, thanks. I guess on a macro basis, I would say yes, I expect the growth rate to pick up next year. I actually expect ’24 from the macroeconomic standpoint will not be great for the country. I think we still have some headwinds, but we’re making good progress with sales that will carry us through next year, I think. In terms of the exact percentage of growth as Carey mentioned before, that was our budget that we’re still working through that. We haven’t guided to that yet. It would be premature for me to peg that number at this point in time. We certainly haven’t used that 20% number. That was the number that we had coming out of ’21, was the last most recent number, maybe finishing ’22, I guess, before we guided to ’23.

So bottom line is we’re not there yet. We should be there sooner than later. And once we have that number, we will work that into our guidance and give you a little bit more transparency, then we’re able to right now.

Calvin Sternick

Great, and then maybe one more on workers comp, I know you just had a couple of quarters there where volumes have been increasing and payer mix improving. Just wondering how you’re thinking about that trend continuing into next year? Do you think the momentum in worker’s comp really is an opportunity for accelerate? Or you are thinking about it as basically, sort of steady progress year-over-year.

Christopher Reading

We are working on something, I can’t really talk about right now. I don’t — we’re working hard. Let me just say we’re working very hard on the comp side to do something that would be a difference maker for us. But we’ve got some more work to do. It’s certainly a focus, and we have the resources and the attention on it. And I expect to make continued progress.

Calvin Sternick

All right, great. Thanks.

Operator

[Operator Instructions] We’ll go next to Michael Petusky with Barrington Research.

Christopher Reading

Good morning.

Michael Petusky

Good morning. So Chris, on the meeting, you all attended private PT, we’ve sort of heard out there not in terms of PT specifically, but in terms of healthcare in general, a lot of the private owners have not gotten the memo. The valuations have come down in transactions and that expectations are sort of out of whack with reality of interest rates, etc. And I’m just curious, as Carey pointed out, you got a lot of opportunities from a balance sheet perspective, the revolver to do something. I guess, what was the vibe at the private meeting? I mean, do you think this — in the next 12 months, do you hope to be as active more active than the last 12 months? Thanks.

Christopher Reading

Let me just say we have more really strong discussions that are going on right now than we’ve ever had. And there’s a good mix, not just smaller practices, but some larger practices as well. I expect it to be a good year, a very good year. We had one deal that we still expect to get on. That was bigger in size for us. That got hung up around a divorce proceeding that got — slowed everything down. This would have been a fantastic year, if not for that.

I expect next year to be even better based upon the activity that we have right now. In terms of valuations, look, I think it depends on a lot of things. There are a lot fewer buyers in the market right now. Because individual private equity companies are really at kind of a limit. And so it’s a good time for us and we expect to make hay while the sun shines, as they say.

Michael Petusky

And sort of pivoting, but staying on the idea of making hay. How far along would you estimate in terms of your efforts at getting better pricing in commercial and worker’s comp? I mean, if this was a nine inning baseball game, are we in the third inning, seventh inning. Where would you sort of say in terms of your efforts to sort of renegotiate rates with your various customers are you?

Christopher Reading

Carey?

Carey Hendrickson

Yeah, I it’s hard to fit into that kind of measurement. But I would we’re — I’d say we’re about the fourth inning or so. We still have some work to do, but we’ve done a lot of good work, fourth and fifth inning is some somewhere in that range, but we haven’t necessarily seen all the impacts of that come into our net rate yet. But that’s where we are from a negotiation standpoint. That makes sense.

Michael Petusky

I got an honor of the Texas Rangers, that I’d throw the baseball analogy.

Christopher Reading

There you go.

Michael Petusky

Okay, so I guess in — I didn’t hear if you guys mentioned October patient volumes. Any insight into that? And sorry if I missed it if you mentioned it.

Christopher Reading

I don’t think we mentioned — go ahead Carey.

Carey Hendrickson

Yet we didn’t mention. But it’s — I’d say it’s it came in, it’s coming in strong. I mean, we don’t have the final numbers yet for exactly where it was. But based on we get weekly reports on the progress through the month. And it’s come in at our expectations and continuing to be strong, just like it has been all year long.

Michael Petusky

Very good. Thanks, guys. Appreciate it.

Christopher Reading

Thanks, Mike.

Operator

At this time, we have no additional questions standing by and like to turn the conference back over to management for any additional or closing comments.

Christopher Reading

Thank you. Well, thanks, guys. I know this was a little bit longer call than normal. Carey and I are standing by and happy to take additional questions offline. Thank you for your time this morning and hope you have a great rest of the week.

Carey Hendrickson

Thank you everyone.

Operator

Once again, ladies and gentlemen that does conclude today’s program. Thank you for your participation.