Quantity, by virtue of an aggressive growth strategy at PACS Group (NYSE: PACS), has not impacted quality at its facilities, executives said. In fact the opposite has been true, and the resulting quality gains are also one of the reasons for the company’s strong second quarter.

The company’s model is based on successfully turning around distressed facilities in carefully chosen regional markets — a strategy that also takes into consideration factors such as availability of workers, quality of leadership and a chance to increase reimbursement rates through quality improvements.

“Our teams continue to make operational improvements in our newly acquired facilities, which resulted in a 29% year-over-year increase in cost of services,” CFO Derek Apt said during the company’s quarterly earnings call.

PACS’ financial outlook remains strong, executives said. The company updated its full-year guidance, expecting annual revenue to range between $3.85 billion and $3.95 billion, representing a 25% increase over 2023 revenue. Adjusted EBITDA is projected to be between $370 million to $380 million for 2024, driven by improved operational efficiencies and continued revenue growth.

A key factor in PACS’ revenue growth is its strategy to capture higher acuity residents using the Patient Driven Payment Model (PDPM), the executives said. The company’s average Medicare revenue per patient day increased to $952 in Q2, up from $870 in the same quarter of 2023. This increase reflects the company’s successful focus on higher acuity patients, which is critical for maximizing reimbursement under PDPM.

Overall, revenue per patient day for Q2 was $459 per patient day.

During the second quarter, PACS completed the acquisition of 28 additional facility operations and entered into four new states. It also closed on a joint venture investment (JV) which purchased the real estate of 37 facilities, executives shared.

In Q2, the company achieved $981.8 million in revenue, marking a substantial 29.1% increase compared to the same period last year. Year-to-date revenue for the first six months reached $1.9 billion, reflecting a 30.5% year-over-year growth. This revenue surge is partly attributed to the addition of 3,947 operating beds over the past year, which represents a 24.8% increase in patient days.

Adjusted EBITDA for the second quarter reached $99.7 million, while Adjusted EBITDAR totaled $165.6 million. For the first half of 2024, Adjusted EBITDA stood at $188.2 million and Adjusted EBITDAR at $318.0 million.

Strategy for occupancy growth and quality improvement

Executives also shared that PACS remained on the path of maintaining occupancy growth, successfully transitioning facilities with very low occupancy to those with occupancy well above the industry average.

Chairman and CEO Jason Murray detailed PACS impressive occupancy levels. The company reported a 91% total facility occupancy rate during the second quarter, significantly surpassing the industry average of 76%. This strong performance is underpinned by a 1.4% and 1% increase in occupancy for ramping and mature facilities, respectively, compared to the prior year. Newly acquired facilities ended the quarter with an 84.2% occupancy rate, up 8.9% from the previous quarter.

This strong occupancy is coupled with quality achievements, with 75% of the company’s skilled nursing facilities now rated 4 stars or 5 stars by the Centers for Medicare & Medicaid Services (CMS).

PACS executives also said that the rate increases were attributed to improved state-level reimbursements and the company’s active participation in supplemental Medicaid payments and quality improvement programs.

Sharing an example of PACS’ turnaround capabilities, Murray shared the story of a recently acquired distressed facility in California. Initially, the facility struggled with a low occupancy rate of less than 60% and lacked the clinical capacity to manage higher-acuity patients. Since its acquisition by PACS in Q1 2024, the facility saw substantial improvements due to aggressive investment in staff recruitment, training, and additional resources, he said. And by Q2 2024, the facility had increased its daily census to over 95% and expanded its skilled mix significantly. The turnaround was so successful that the facility was approached by a local hospital to become a preferred partner for high-acuity patients.

Murray emphasized that these clinical improvements are crucial to PACS’ financial performance.

The company also saw a year-over-year increase in revenue per patient day, driven by higher Medicare and Medicaid rates.

“In addition to maintaining 90% plus occupancy in our ramping and mature facilities, we also saw revenue per patient day increases,” Murray said.

PACS’ average daily Medicare rates increased by 9.5% for the second quarter of 2024 compared to the second quarter of 2023 and 10.3% for the six months ended June 30, 2024 compared to the same period last year, he said. Meanwhile, the company’s average Medicaid rates over the same period increased 3.5% to 4.3% over the same period, due to the state reimbursement increases and participation in supplemental Medicaid payments and quality improvement programs, he added.

Executives said the company will continue to expand its footprint with a strong acquisition pipeline and continued operational improvements.

Currently, PACS operates 248 healthcare facilities across 13 states, with ownership of 87 real estate assets and options on 31 additional properties. The company remains focused on expanding its real estate and operational footprint through both leasing and acquisition strategies.

Leaders in training key to success of new acquisitions

Maintaining a strong roster of leaders is also an important element in keeping true to its goals of successful growth and maintaining quality, which allows the company to benefit from the government’s quality incentive program across its facilities in various states.

PACS’ rigorous Administrator-in-Training (AIT) program, which has successfully onboarded 200 AITs since its inception, with 157 of these leaders currently still employed, is key to the company’s success, executives said. Currently, there are 31 AITs in the program, they noted.

In addition to training new leaders, the PACS leadership model allows local leaders to make operational decisions as close to the patients and employees as possible, leaders said.

Accessibility to workers and future leaders also underpins the company’s acquisition strategy, said Apt.

“[Leadership] is an area that we emphasize internally, and we talk about often, because we believe this is an area where we have a significant advantage to go and grow,” Apt said. “And as we evaluate talent in these facilities, each deal is a little bit different.”

One thing is constant: the quality of leadership

“In this [recent most] deal, we’ve met with a number of the administrators. They’re local to the area … a number of them have great relationships with the hospitals,” Apt said.

Certainly, there is an adjustment period for the leader of any acquired facilities to PACS’ decentralized model, which is why the leadership team is thoroughly vetted and a key deciding factor behind completing a deal, he said.

“We maintain a higher number of administrators that are already in place [and] that just continues to allow the bench to be deeper as we evaluate other deals that we’re looking at into the future,” Apt explained.

The company’s approach to enhancing operational performance also includes significant investments in newly acquired facilities. These investments focus on improving clinical outcomes and operational efficiencies.

PACS executives also discussed the company’s back-office support, including clinical compliance and business support teams, as playing a crucial role in maintaining high standards of care while fostering a culture that attracts top talent. The integration of technology and data-driven resources further enhances decision-making and operational efficiency, they said.

“So we look forward to the second half of 2024, the improvements that we have planned and the 28 new facilities we’ve already added. In Q3, the quality of our people helps ensure we stay in a strong business position moving forward,” said Murray.