Addus HomeCare Corporation (NASDAQ:ADUS) Q3 2022 Earnings Conference Call November 1, 2022 9:00 AM ET
Dru Anderson – Investor Relations
Dirk Allison – Chairman and Chief Executive Officer
Brian Poff – Chief Financial Officer
Brad Bickham – President and Chief Operating Officer
Conference Call Participants
Joanna Gajuk – Bank of America
Scott Fidel – Stephens
Madeline Mollman – William Blair
Ben Hendrix – RBC Capital Markets
Mitra Ramgopal – Sidoti
Good day. And welcome to the Addus HomeCare’s Third Quarter 2022 Earnings Conference Call. [Operator Instructions]
I would now like to hand the conference over to Dru Anderson. Please go ahead.
Thank you. Good morning, and welcome to the Addus HomeCare Corporation third quarter 2021 earnings conference call. Today’s call is being recorded.
To the extent any non-GAAP financial measure is discussed in today's call, you will also find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP by going to the company's website and reviewing yesterday's news release. This conference call may also contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, among others, regarding Addus' expected quarterly and annual financial performance for 2021 or beyond.
For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing discussions of forecasts, estimates, targets, plans, beliefs, expectations and the like are intended to identify forward-looking statements. You are hereby cautioned that these statements may be affected by important factors, among others, set forth in Addus' filings with the Securities and Exchange Commission and in its third quarter 2022 news release.
Consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements. The company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.
At this time I would now like to turn the call over to the company's Chairman and Chief Executive Officer, Mr. Dirk Allison. Please go ahead, sir.
Thank you, Dru. Good morning, and welcome to our 2022 third quarter earnings call.
With me today are Brian Poff, our Chief Financial Officer; Brad Bickham, our President and Chief Operating Officer.
As we do on each of these earning calls, I will begin with a few overall comments, and then Brian will discuss the third quarter results in more detail. Following our comments, the three of us would be happy to respond to any questions.
To begin, I want to highlight a few items from our third quarter performance. First, even with the continuing labor challenges we are seeing in parts of our industry, our team grew revenue 11% to $240.5 million for the third quarter of 2022 as compared to $216.7 million for the third quarter of 2021. This resulted in adjusted earnings per share of $0.94.
As we saw in our second quarter of this year, we had strong cash flow from operations in our third quarter totaling $18.3 million. This reduced our net leverage position to less than one times adjusted EBITDA.
We are proud of our conservative balance sheet and believe our disciplined approach has put us in a strong position to take advantage of future acquisition opportunities that may occur in spite of the current economic environment.
I am very pleased with not only our third quarter performance, but also with our results year-to-date, especially in light of the COVID spike we experienced during the first two months of the year and to a lesser extent at the beginning of the third quarter. Our team has continued to perform and provide excellent patient care despite these reoccurring challenges.
As we discussed last quarter, the labor environment remains a challenge. However, as we started to see in the second quarter, we did experience improved hiring in our Personal Care segment with hours per business day for the third quarter of 2022 increasing approximately 3% as compared to our hours per business day in the second quarter of this year. Hours per business day in the third quarter of 2022 were up approximately 14% over our hours per business day in the third quarter of 2021. We are seeing this improved hiring trend in October with hours per business day running ahead of our third quarter of 2022 performance.
As previously mentioned, we are investing in technology that will help us to further improve our sourcing, hiring and onboarding process to increase our personal care hiring numbers to meet the robust demand of our services.
While hiring in our Clinical segment is more challenging than in our personal care segment, we are seeing improvement over the last few months with an increased ability to hire new clinicians as well as a modest reduction in our clinical turnover numbers. Overall, we feel the trend in both hiring and turnover is moving in a positive direction in all segments of our business, which should help us serve more consumers and patients.
During our third quarter, the funding we receive from the American Rescue Plan Act or ARPA has allowed us to begin to increase caregiver wages, pay sign-on and retention bonuses, or provide one-time bonuses to current caregivers depending on the state program. This has been helpful with our recruitment efforts over the past quarter and should help our hiring and retention efforts as we have a significant portion of these dollars still to be utilized.
As for Illinois, our largest state of operations, on July 1, minimum wage increased by approximately $0.40 per hour for our Chicago area personal care workforce. This negatively impacted our gross margin in the state during the third quarter. However, we will receive a $0.70 per hour statewide rate increase, effective January 1, 2023. Once we receive the statewide rate increase, we will likewise adjust wages for our remaining Illinois employees, which we believe will help with caregiver recruitment while positively impacting our gross margin profile in Illinois.
Now, let me discuss our same-store revenue growth for the third quarter of 2022. For our Personal Care segment exclusive of the New York Consumer Directed Program or CDPAP and ARPA funds, our same-store revenue growth was 7% when compared to the third quarter of 2021, up from a same-store growth of 2.5% for our second quarter of this year's as we expected. We experienced increasing Personal Care admissions in August and September with this positive momentum continuing into October.
I also want to give a brief update on recent developments regarding our participation in the New York CDPAP program. As you know the state initiated a request for offer process in 2019. Ultimately, we were not selected as a winner in that process along with many other providers in the market. We subsequently appealed this decision as we believe the criteria used to select the winning providers lacked transparency. Recently, the state has rescinded the RFO and has allowed all providers of a certain size to continue indefinitely in the state Medicaid CDPAP program, which eliminates overhang of potential transfer of our existing state Medicaid CDPAP clients to other providers.
In order to qualify, providers simply need to respond with an Addus station, which we will submit before the November 29, 2022 deadline. Separately, the state-made reimbursement changes under the Medicaid CDPAP program that made an appropriate level of profitability challenging. As a result of both of these actions, we continue to serve our existing CDPAP clients under the state Medicaid program, but ceased taking any new referrals. While we now have clarity on the future of our existing clients, we are evaluating the current reimbursement environment under the state Medicaid CDPAP program to determine whether we will resume accepting inbound referrals for that program.
In the meantime, we and other providers are also lobbying extensively and are hopeful the state will make the necessary adjustments to return providers participating in the state Medicaid CDPAP program to a manageable margin and allow the resumption of services for those in need. As a reminder, we continue to operate as normal with our managed long-term care plan partners in the New York market.
Turning to our clinical care operations. While our home health segment same-store revenue was flat when compared to the prior year, we did see a 15.1% increase in same-store admissions over the third quarter of 2021. This quarter, we saw a shift in our mix of patients towards non-episodic care. Our operations team is working to improve this mix to a more historical level. We are also in discussions with our Medicare Advantage payers concerning adjustments to our contract rates.
In addition, Brad and his operation team are working on our staffing mix as we expand our presence in home health. We are excited about our home health operation, as it compliments our personal care services, particularly where we participate in value-based contracting models.
While our hospice same-store revenue was flat when compared to the third quarter in 2021, we did see an increase of 1.2% in our average daily census as compared to the third quarter of 2021 and a sequential increase of 1.5% as compared to our second quarter of this year. While we had similar admissions to what we saw in the second quarter of this year, starting in late August, we did experience a higher than normal discharge rate. During October, we started to see higher admissions volumes likes while our discharges started to return to a more normal level, which we believe should grow our ADC.
Our medium length of stay improved to [indiscernible] days in the third quarter as compared to 23 days for the second quarter of 2022, bringing our median length of stay back in line with pre-pandemic levels. Although part of this increase was due to the elevated discharge rate in the quarter. Our hospice ADC increased to 3,280 for the third quarter of 2022 as compared to an ADC of 2,629 for the third quarter of 2021 inclusive of the ADC attributable to our JourneyCare acquisition, which closed on February 1st of this year.
On October 1 of this year we closed our acquisition of Apple Home Healthcare, a Chicago based skilled home health provider. Apple Home Healthcare serves approximately 450 patients in the 11-county metro area in and around Chicago. This acquisition furthers our strategy of building out both home health and hospice services in markets where we have a strong personal care presence. With three clinical care acquisitions in 2022 in our largest personal care market of Chicago we have strengthened our ability to serve patients while allowing us to work more closely with MCOs including Medicare Advantage plan.
I want to welcome all the Apple Home Healthcare team to the Addus family. As for our ongoing development efforts, we are pleased with the level of activity in our pipeline as we look for acquisitions that meet our strategic criteria. Our deal flow over the last two quarters has consisted of a number of smaller acquisition opportunities across all three levels of care. We are now starting to see a number of larger assets being brought to market, and we expect to see more of these scale opportunities in the coming months.
We were excited by the CMS announcement yesterday of a slight 0.7% increase for 2023. While this increase is smaller than we would like to see, we are appreciative of the change by CMS moving away from the proposed decrease of 4.2%. We expect to be able to take advantage of more home healthcare acquisition opportunities. That should occur now that the final rule has been published as we remain well capitalized.
As for our value-based care efforts, we are seeing positive results from our various value-based care contracts. As a reminder, we currently have four value-based care contracts in three of our states. These contracts are focused on helping our patients avoid both unnecessary emergency room visits and hospital admissions as well as readmissions at various timeframes following a hospital discharge. We have recently received positive feedback from our value-based care partners as our personal care and home health teams have improved patient results.
In addition to our four current contracts, we are working on two new opportunities, which should start early in 2023. We are also in negotiations with a number of additional MCOs and ACOs for potential contracts around value-based care. As we have previously mentioned, our value-based efforts are relatively immaterial today but we expect them to grow to a more meaningful amount over the next few years. I am so proud of our team for the care they are providing to our elderly and disabled consumers and patients. The home remains one of the safest and most cost effective places to receive care and is also the place where most elderly individuals and their families prefer to be.
We believe the heightened awareness of the value of home-based care is favorable for our industry and will be a growth opportunity for our company. We understand and appreciate that our operations and growth are dependent on our dedicated caregivers who work so incredibly hard providing outstanding care and support to our consumers, patients and their families. I want to thank each of our team members and tell you how proud I am of the job you've done in the past and continue to do each day. It is important that we always focus on our mission, putting our consumers and patients first.
With that let me turn the call over to Brian.
Thank you, Dirk, and good morning everyone.
Addus had another solid financial and operating performance for the third quarter. Our top line growth reflects positive same store growth trends in all three segments compared to the third quarter last year particularly in personal care, which at 7% was above our normal expected range of 3% to 5%. While we are still facing a challenging labor market in our clinical services, our hiring and turnover trends in personal care continue to improve in the third quarter. Our home health business had a strong volume quarter boosted by the addition of two acquisitions we completed in 2021, Armada Home Health and Summit Home Health.
We are also pleased to see more stable trends for our hospice business with continued improvement in median length of stay. As Dirk noted, total net service revenues for the third quarter were $240.5 million. The revenue breakdown is as follows: Personal care revenues were $179.2 million or 74.5% of revenue; Hospice care revenues were $51.4 million or 21.4% of revenue, when compared to the third quarter last year hospice care revenues include the addition of the hospice division of Armada, which closed on August 1, 2021, and the acquired hospice operations of JourneyCare, which closed on February 1, 2022.
Home health revenues were $10 million or 4.1% of revenue. As noted, these results include operations of two acquisitions, the Home Health Division of Armada and Summit Home Health, which closed [indiscernible] 1, 2021. We have continued to actively pursue acquisition opportunities that complement our organic growth and acquisitions remain an important part of our growth strategy. With a recent addition of Apple Home Healthcare on October 1st and the JourneyCare acquisition in February we have added approximately $65 million of annualized revenue to date in 2022.
We continue to evaluate and pursue other acquisition opportunities and have a robust pipeline of potential transactions that meet our criteria. With the announcement of the final home health rule, we anticipate the overhang this has caused on the home health M&A landscape to dissipate and allow acceleration of this portion of our pipeline. We look forward to becoming more active on the acquisition front and remain well capitalized to take advantage of these opportunities as they arise.
Other financial results for the third quarter of 2022 include the followings. Our gross margin percentage was 31.3% compared with 30.9% for the third quarter of 2021 as overall we continue to benefit from a higher percentage of clinical services. However, this was partially offset by the negative impact of the July 1, 2022 minimum wage increase in Chicago, one of our largest markets.
We are scheduled to receive a statewide reimbursement increase in Illinois effective January 1, 2023 which will offset the minimum wage increase. As expected we also experience the negative impact in the third quarter of the final phase in of Medicare sequestration effective July 1st. However, we expect our gross margin in the fourth quarter of 2022 to benefit from the October 1, 2022 hospice rate adjustment, which should contribute approximately 50 basis points based on current volumes.
G&A expense was 22.5% of revenue, slightly higher than 21.4% of revenue a year ago, primarily due to a larger percentage of clinical services with a higher G&A profile as well as higher acquisition and stock compensation expenses. Adjust to G&A expense was 20.6% for the third quarter of 2022, an increase over the prior year of 19.5% but a decrease sequentially from 21.3% in the second quarter. The company's adjusted EBITDA increased to $25.7 million compared to $24.9 million a year ago.
Adjusted EBITDA margin in the third quarter was 10.7% compared with 11.5% for the third quarter of 2021. Adjusted net income per diluted share was $0.94 compared with $0.91 for the third quarter of 2021. The adjusted per share results for the third quarter of 2022 exclude the following: acquisition and de novo expenses of $0.08 restructure and other non-recurring costs of $0.01, and stock based compensation expense of $0.14. The adjusted per share results for the third quarter of 2021 exclude the following: acquisition and de novo expenses of $0.08 and stock based compensation expense of $0.11.
Our tax rate for the third quarter of 2022 was 23.7% slightly lower than expectation and primarily due to higher work opportunity tax credits as we see our personal care hiring numbers continue to improve. For calendar 2022 we expect our effective tax rate to remain in the 25% to 26% range. DSOs were 46.2 days at the end of the third quarter of 2022, relatively flat compared with 45.9 days at the end of the second quarter of 2022. We have experienced strong cash collections and expect to see this trend continue especially under key markets where the states currently have budget surpluses and a focused approach to payments. Our DSO for the Illinois Department on Aging for the third quarter were 35.4 days compared with 43 days at the end of the second quarter this year, and are at an all-time low in Addus' history.
While continuing to be a strong supporter of our services in the state, we also appreciate the consistent payment trends we have experienced in Illinois over the past few years. Our third quarter net cash provided by operations was $18.3 million, including a net $4.4 million in ARPA funding, and was in line with our normal expectation. Exclusive of ARPA funding our cash provided by operations total $63.8 million year-to-date, ahead of our normal conversion rate primarily as a result of our strong cash collections.
As a result, we have been able to pay down a net $93 million in our revolver over the past two quarters with a reduction of $33 million during the third quarter of 2022. As of September 30th, 2022, the company had cash of $105.6 million with capacity and availability under our revolver of $375.5 million and $200.5 million respectively. In this economic environment, we are well positioned with a capital structure that continues to support our growth initiatives and acquisition strategy as our net leverage ratio is just under one times. As a result, we anticipate the ability to be active in the M&A markets to further our geographic concentration and enhance our service offerings and look forward to the opportunities that lie ahead.
This concludes our prepared comments this morning, and thank you for being with us.
I'll now ask the operator to please open the line for your questions.
[Operator Instructions] The first question today comes from Joanna Gajuk with Bank of America. Please go ahead.
Good morning. Thanks so much for taking the question. So I guess first on the strong pricing in personal care. So can you help us break it into pieces how much was the ARPA funding in Q3 and how much it benefited the pricing if at all? And also in terms of other examples of rate increases that you have experienced in terms of trying to quantify the magnitude of these increases? And I guess, and then trying to just understand going forward how to think about pricing into next year. Obviously we know about the July or certainly January 1 increasing Illinois, but any other states you would be pointing out to us to understand the outlook for pricing into next year?
Hey, Joanna, this is Brad. I think I can provide a little color on that. Just to quantify the ARPA funding doesn't factor into our revenue per hour or pricing, all of that as we kind of discussed previously, most of that flows through the balance sheet. So as Dirk kind of discussed in his comments typically that comes through and is basically a pass through to caregivers for retention bonuses, sign-on bonuses, enhanced wages, so it doesn't actually impact our revenue per hour.
But on the rate front, I think we've actually been very well supported by most of our states. I think particularly Illinois is probably the best example our largest market. We got our rate increase at the end of last year. We'll get another rate increase coming up January 1st of 2023 this year. I think in the current period recently New Mexico, which is our second largest market, we received a rate increase that affected Q3 and was helpful to offset some new sick wage enhancements that they put in place in the state, so that's kind of an offset.
Again, so, historically as we've discussed we've done very well in getting reimbursement offsets for kind of increases in costs either be minimum wage sick time or the like. So I think that's kind of the overall landscape that we've seen over the last year and expect to going into 2023.
Okay, that's helpful. So in terms of other states looking at the increases, any states we should be watching?
Yes. I think in 2023, the primary is again is going to be Illinois, is going to be the largest material impact, that'll be effective January 1st. I think some of the smaller states have been helpful. New Mexico has also been very supportive as well, so we get rate increases from our two largest markets. Obviously, it's meaningful and does help us on our revenue per hour.
Great. Thank you. And I guess just thinking about I know you keep guidance, but when you think about heading into next year, can you give us your sense of the biggest tailwinds or headwinds, so we understand the Illinois rate increase but also any other color you can give us in terms of volumes or I guess wage inflation that you would assume for next year? Thank you.
Brad, do you want to take that?
Yes. So when you're looking at kind of wage inflation, we've seen that a little bit of moderation of late as far as particularly on the clinical side I think is helpful. So that's encouraging. You will still see some increases related to the CBA, Illinois as an example where when we get the $0.70 increase, Jan 1 will be increasing wages down in the southern in the areas outside of Chicago. So you'll see a little bit of pressure there, but when you think about on the personal care side in particular, on the wage front, so many of our employees are subject to CBAs, so those rates are set in their in place, so we don't see early inflation there. We may see some inflation, very pressures in some of our smaller markets, but again, I think a lot of those have been kind of addressed really in the Q3 and really this year. So I don't anticipate any significant increases in 2023.
Any other year-over-year headwinds, tailwinds you should think about, when it comes to next year?
No. I mean, I think the mature ones we've talked about. So I think with the hospice rate increase coming in play, obviously we have clarity on the home health rule now that'll impact for next year. Sequestration is fully baked in now. So those are kind of the more material moving pieces for us going into 2023.
All right. Thank you. I'll hop back to the queue. Thanks.
The next question comes from Brian Tanquilut with Jefferies. Please go ahead.
Hi, good morning. You've got Taji on for Brian. Thank you for taking my question. So just circling back to your value-based programs and your efforts around that; just wondering maybe if you can talk about how you're envisioning Medicare Advantage and how that'll play into your efforts moving down the road? Thank you.
Well our value-based care program is something we started a little over a year ago, really focusing on our ability to try to help with the cost of care for certain of the patients we have under personal care or home health in our New Mexico market. And that's with three managed Medicaid programs that we deal with out there. But what we're learning is we do have the ability to affect positively the readmit rates from hospitalization, the initial hospitalization rates and emergency room visits. And so the whole goal of those pilots out there or one of the goals besides really being able to give good care under these contracts was the ability to take the information we learned over a period of a year or more and be able to move that into other areas of the country where we have particularly personal care and home health.
And as we move around the country in some of our strong markets, that's where you're going to see our ability to interface with Medicare Advantage payer. So we're excited about that process. We're doing some contract in Illinois. We're looking at other markets where we can add that. Now, long-term we believe Medicare Advantage is a really large opportunity for our industry as value-based care and particularly for Addus where we stand. But we're not quite there where you're seeing meaningful relationships when our company has grown to the size it is, it takes a lot of moving on a revenue line to really be material for our company. But we do believe over the next two or three years as per our plans that we should see that become a much more material part of our business.
Thank you. The next question comes from Scott Fidel with Stephens. Please go ahead.
Hi thanks and good morning. Was first question, Dirk, we're just hoping maybe you could flesh out a little bit more the updated commentary on the deal pipeline particularly when you talked about some of the bigger deals you're looking at now. I know you've talked – you guys have talked about home health and personal care being the focus area for deals. So just interested in how those bigger deals may break out between those two segments and then multiples that you're willing to pay at this point for home health and personal care clearly got some visibility on the home health rates, but obviously still flat – it's flat, right, not up; and CMS also still talking about maybe continuing to put the behavioral adjustment in the rest of it into 2024 and beyond. So just interested in how you guys sort of factoring that into your valuation expectations for home health deals?
Yes. I'll talk about kind of what we're looking at and the size of the deals and the segments and Brian, I'll let you talk about what we're willing to pay. I think from our standpoint, some of the bigger deals we have started to see are in the home health market. Now, honestly a couple we were working on got delayed as it was awaiting for the final rule and when you're looking at a 4% reduction, that's obviously a material factor that most sellers are going to want to make sure they understand before they consider whether they're going to go through with the process.
I think now that the rule is out, it's basically flat as you said, I think that will encourage some folks to go ahead with the process. And we think it's very important as we look at these deals – larger deals included that we build on our markets; personal care, home health particularly while we will continue to look in the hospice market for small deals in markets where we currently have hospice operations you should see most of our focus over the next 12 to 24 months to be around either a larger personal care, fill-in personal care or we'd like to see a larger hospice – home health deal that we can put on top of our personal care.
You want to talk about them multiples we're seeing and what we're paying?
Yes. Scott, I think in our pipeline, I think we've talked about it previously. I think this year particularly off of the last couple; I think multiples have definitely come more back into a reasonable line from our perspective. So I think with the home health rule coming out, I think our expectation is that, that doesn't necessarily enhance multiples. I think those stay pretty consistent and obviously down from what we've seen in the last couple of years. Although we think there could be activity, I think it alleviates kind of at least trying to model in a 4% cut, but a flat rate with kind of that potential still out there, still needs to be considered and I think probably keeps those multiples still fairly tempered.
Personal care, I think nothing is really changed in that market. So I think our view there is still those are sub-ten things of larger size or more strategic coverage for us. I think in the past we've paid 7.5 to 8 times but for smaller deals it's been as low as 4 to 5 times, and I think that's still consistent with our thinking today.
And Scott, let me just mention, an add-on to what Brian said. If we're looking at a home health deal that's very strategic to our company in a person care markets where we can add value-based care and other services we're – we're going to be – we're going to still be willing to do those deals even with the potential of reduction out there because as we saw this year sometimes those reductions don't come through. So while we always try to be somewhat conservative in our approach towards deals if it's a strategic deal, we're going to be interested in trying to get that to the close.
Okay, great. And then just my follow-up question, just wanted to go back over to Medicare Advantage and just talk about sort of the opportunity just on selling the personal care services in MA. Obviously it's been sort of big opportunity theoretically for several years, and we've seen more MA plans theoretically, offering these benefits, but I know that the number of authorized hours has remained relatively paltry, which is really sort of mitigated or minimized that opportunity. Maybe can you talk about what you are seeing for 2023? It did look like in the landscape data that a lot more plans again, offering the benefits, but it's harder to tease out what the authorized hours are looking like. So how are you looking at the MA opportunity for 2023? Thanks.
Yes, Scott, this is Brad. It is very similar to 2022. Truthfully you are seeing more plans offer those hours, but again they're more kind of respite type benefits. So hours are significantly lower than what our typical Medicaid PCS client would receive. So I don't see any material changes in the landscape for 2023. I think the big opportunity again, is when we start looking down the road and start pushing the value-based care model to the MA plans where it's more of a self-funded benefit. And I think they will be a little more aggressive on the number of hours that they could provide and also provide us with some potential upside benefit based on those value-based contracts down the road.
But again, 2023, I don't see a material change in the kind of the current landscape of what those plans are offering.
Okay. And part of that honestly, is on us. We need to take the results that we're getting from these pilots and we need to develop an opportunity – develop a program to move in with these Medicare Advantage plans and show them, as Brad said, how it can be a self-funding plan. So that's what we're working on for 2023.
Okay, thank you.
The next question comes from [indiscernible] with Stifel. Please go ahead.
Hey, good morning. My first question is could you remind us what should – should you start admission the New York City [indiscernible] program, what kind of impact would that have on the personal care volume side?
Yes, we haven't fully kind of baked that in or measured, there is a tremendous opportunity from the standpoint that we get a lot of calls. But I think it's all contingent on or the rates sufficient for us to be able to make a gross margin that makes sense. And that's what we're still evaluating. We've gotten some recent increases related to the $2 increase in minimum wage for the Personal Care in New York, which is very encouraging, it funds that. But what we're still lacking is a little more clarity on what the kind of historic kind of cost-based rates are. We're still waiting for some clarification from the state there. So once we have an opportunity to assess that, we'll be able to provide more information regarding the volume potential there.
Yes, one thing to piggyback on that, just looking back, where our program was, before the RFO started, if you wanted to maybe use that as a way to potentially frame it. Although again, a lot of things have changed since then, we've reduced revenue in that program, but I think, $20 million to $25 million on an annual basis kind of over the last couple years as we've not taken new clients. So we were running that much higher, I guess, three years ago before kind of all this process started. So I don't know if that's helpful or not.
Yes, that's helpful. My follow-up question is, and I heard earlier comments about you assessing kind of larger personal care investment and larger home health deals out there. Are you still targeting the $100 million revenue acquired per year target? And also secondarily, if you think about the risk of that two, $2.1 billion overpayment on 2020 to 2021, it sounds like you are still willing to pursue this. But how would you build that risk if any of your underwriting process? Thanks.
Yes, I could start and let the guys kind of weigh on the risk component. I think $100 million in acquired revenue for us, I think, we still think that's definitely achievable and attainable. I think we were on pace for that this year until the proposed rule came out with some of the things in our pipeline. So I think we still feel with where we are and as what capitalized as we are acquiring a $100 million in acquired revenue each year is definitely there's an opportunity for that. So I think that's still a good proxy for us.
But I'll let Dirk weigh in on kind of just how we're thinking about the potential risk of the additional adjustments down the road.
Yes, I mean, it's certainly something that we have to look at on particularly a chunkier home health asset. So it's something that would go into our pricing model and might impact, of course, kind of the multiple of EBITDA that we're willing to pay.
Got you. Thank you.
The next question comes from Matt Larew with William Blair. Please go ahead.
Hi, this is Madeline Mollman on for Matt Larew. Going off of the M&A questions just because you have made paying down debt kind of a priority, and I know you said your leverage level was below one. How do you consider that when you're looking at deals? Is there a specific leverage level that you would be willing to go up to if you found the right deal? And then sort of building on that, has the way you look for assets changed as the macro environment has evolved? For example, is profitability more of a priority versus something like JourneyCare, which was a non-profit conversion? Just want to see like if the macro environment has changed your approach to M&A at all?
Yes, this is Brian. I think just thinking about it from a leverage perspective, I think, we've obviously had a focused effort on paying down debt just and with raising interest rates over the year and just in the absence of not having deals that we've been completing. But definitely would prefer to use those proceeds and that revolver in the M&A arena. So I think if we have more opportunities coming up as we would anticipate, hopefully will be able to put some more of that back to work paying down in the interim.
So I think from a leverage perspective, I think, we've said historically, we're very comfortable, 2.5, even to 3 times kind of on an ongoing basis. We would be willing to stretch higher than that 3.5 plus for the right strategic deal if we saw a way to pay that back down through cash flow.
I think we've taken an approach over the past several years of maintaining conservative leverage which is different than some, I think, definitely has paid benefits for us this year being in that position and given us, I think, a good opportunity to be active in the market still.
So just thinking about it that way, I think, that's how we anticipate moving into 2023. But as far as the macro environment, I think, for us when we target deals, again, we're looking at where is the right geography, concentration of services, how does it fit into the three segments that we have today, but primarily focused, as Dirk said earlier on home health and personal care.
I think JourneyCare was a little bit different. I think way we look at deals is really we understand from the gross margin line what reimbursement is, what the wage structure is, what some of those costs are. So for us it's really paying more attention there and the market that they are in and the environment in that particular market going forward what does that look like from a reimbursement support, depending on the segment in the future.
But we have a lot of control on SG&A. So I think Journey was a little unique experience where we knew we could make some of those changes to get it to a normal level of what we consider to be profitability in our hospice segment. And we had full clarity and control over that process.
So I don't think really anything from the macro environment has typically changed our strategy on where we're looking, and how we're trying to source, and look at deals.
Great. Thank you. And then, just speaking of the interest rate environment, can you talk a little bit about your interest rate exposure? Do you have any swaps or hedges or anything to offset rising interest rates?
We have not. So we have no swaps, hedges currently in place. Our effective rate today is just a little over 5%. But still if it goes up a little bit more, I think, we still have a little bit of exposure there.
Great. Thank you.
The next question comes from Ben Hendrix with RBC. Please go ahead.
Hey, thank you for taking the questions. Just a quick question on the CMS final rule. Clearly better than expected, but it looks like definitely the underlying methodology around the behavioral assumptions and budget neutrality seemed to kind of stay in place. Do you think that this better than expected rule, final rule takes any of the steam out of any legislative stay efforts for the end of the year? And I'll just start with that one.
Yes. Hi this is, Brad. I don't think it takes any steam out of the legislative efforts because the fact that they have left the potential for future cuts based on the methodology that they have put out in the final rule. It certainly was better than what we anticipated, but it still doesn't address the real big elephant in the room, which is how do you handle the behavioral adjustment. And I think that's something that, I think, there is still a lot of interest on Capitol Hill to address going forward.
So we'll work with our industry stakeholders and associations in pushing that legislative fix as well.
Great. And just as a follow-up, as the M&A market opens up a little bit now, are you still primarily focused on those core Illinois, New Mexico markets, or have you identified other markets kind of in the very near term to layer on more PC or I'm sorry, more home health and hospice assets to current PC platforms?
Yes, I mean certainly Illinois is probably the most attractive market just because of the size. In Illinois we've done a pretty good job of adding clinical services up in the northern part of the state, essentially the Chicago metro area. We've got some really big programs throughout the State of Illinois. So we'll be looking to expand or looking for the right opportunities on the clinical services, particularly home health down in the rest of the State of Illinois.
Other states you look at where we have good geographic presence, in Ohio, in Pennsylvania, in Michigan, those are all very attractive states. We can find something in. Tennessee where we also have good geographic coverage on the Personal Care side is another state that we would certainly be interested in. You have got some CMS [ph] that you have to navigate in a few.
[Operator Instructions] The next question comes from Mitra Ramgopal with Sidoti. Please go ahead.
Yes. Hi, good morning. Thanks for taking the questions. Just a couple for me. First I was just curious if you are seeing any incremental benefits from the strategy of providing all three services in a particular state in terms of driving better partnerships and increased volumes across your segments?
Yes, certainly. When we look at New Mexico, which is the most mature market where we have all three levels of service, we have seen a nice kind of benefit of having all three service lines with referrals from one service line to the other. With our value-based contracting that we have in there, we have seen the benefit of having clients referred to home health or hospice or even our house calls division. So certainly seeing the benefits of the strategy that we're focused on and adding clinical services in those personal care markets. And anticipates we're having kind of too early to really seeing big numbers. But Illinois, we certainly have seen already some cross referrals from the different service lines there. And I think a lot of opportunity to expand in that market.
Okay. No, that's great. And then just curious we were hearing talk about this could be a rough flu season, still some variants of COVID maybe having an impact. Just wondering if you are seeing that having any – being an issue for you and with the caregivers?
Well it's always we've been – so we've been through a lot of waves with COVID. Now there is talk that the flu season maybe a little worse than historically because, I think, people are out more maybe not wearing mask as much as they have in the past. We certainly continue to provide our employees with the necessary PPE to keep them safe. We encourage vaccinations but don't require them unless it's mandated by the state or local government or federal government in the case of the skilled lines. But that's something that, I think, it's just with us going forward.
And we've not seen any kind of upticks right now. I mean, the numbers that we've seen are actually have gone down. We had a little bit of a surge in early July, I think, that Dirk mentioned in his comments at the opening of the call. But I think it's kind of hard to just plan – this is kind of business as usual now, lack of a better term.
Yes, no, totally agree. Thanks for taking the question. That's it for me.
This concludes our question-and-answer session. I would like to turn the conference back over to Dirk Allison for any closing remarks.
Thank you, operator. I want to thank you all for your interest in Addus and for being part of our earnings call today. We hope you have a great week. Thank you.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.