Q3 2023 US Physical Therapy Inc Earnings Call
Participants
Carey P. Hendrickson; CFO; U.S. Physical Therapy, Inc.
Christopher J. Reading; President, CEO & Director; U.S. Physical Therapy, Inc.
Eric Joseph Williams; COO - East; U.S. Physical Therapy, Inc.
Jake Martinez; SVP of Finance & Accounting; U.S. Physical Therapy, Inc.
Brian Gil Tanquilut; Senior Equity/Stock Analyst; Jefferies LLC, Research Division
Calvin Alexander Sternick; Analyst; JPMorgan Chase & Co, Research Division
Joanna Sylvia Gajuk; VP; BofA Securities, Research Division
Lawrence Scott Solow; MD of Research; CJS Securities, Inc.
Michael John Petusky; MD & Senior Investment Analyst; Barrington Research Associates, Inc., Research Division
Presentation
Operator
(Operator Instructions) Good day, and thank you for standing by. Welcome to the U.S. 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 would now like to turn the call over to Chris Reading, President and CEO. Please go ahead, sir.
Christopher J. Reading
Thank you. Good morning, and welcome, everyone, to our U.S. Physical Therapy Third Quarter 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; and Jake Martinez our Senior Vice President, Accounting and Finance. Before we begin 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 J. 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, there have been a number of really good things with a team of clinicians, partners and support staff were able to deliver this quarter. And there are a few challenges, which we continue 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. This serves as the best indication related to both the overall demand for our services and the way we are viewed by patients and referral sources alike in the 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 are 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 that we have continued to produce help 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 9 de novo clinics in the quarter, and 5 of those were added in September. Keeping that strong de novo growth in mind is a bit of a near-term drag through the 9 months of PP operating income in spite of the strong de novo openings has 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 onboarded over the past 18 months or so due to the nationally tight staffing market. So let me explain. If you recall, having PPAs touch a Medicare patient in the course of care results in a 15% reimbursement reduction. And while we are focusing on that in the middle, particularly in Q3, rolled out some new retraining because we have a slightly higher proportionality of PPAs 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 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 some longer-term initiatives around further diversifying away from Medicare. Additionally, we've added to our leadership on a revenue cycle area, and we are optimistic we will identify some opportunities to further enhance our already strong collections effort and further bolster our net rate in 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, those new rates get 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. We just need to see them pick up and gain traction as they are implemented.
On the injury prevention side of our service offering, letting 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 the coming recession. Good news is that our Briotix team has been able to replace our 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 industry has been hit particularly hard this year on a variety of fronts. From that perspective, the majority of the accounts where we've done exemplary work over the years, but maybe who have paused to drop some service component temporarily. I expect many of those will come back once our economy is in a more stable growth mode.
Furthermore, we have recently just added to our injury prevention core with the 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 that 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 (inaudible) 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 of the 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. It's been a very active period for us. We've purchased an additional 54 clinics over that period. And in that same period, we're on pace, but we've currently opened 72 clinics added 72 clinics overall. Well, many of our competitors are hand-strung 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 2 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 2 large off-site gatherings, which we believe will continue to help us to drive and differentiate our partner-centric model, the model which distributes cash to these newly acquired partners throughout the entirety of their 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 I know, 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 have 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 health care system through the expanded use of these drugs, which as you know, help 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 the 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 hope back related to the things that they enjoyed doing either work or at home or family, socially with friends resulting in a healthier, happier person. That message will be hammered and marketed through groups like our alliance for physical therapy. Quality and innovation, which we refer to as 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 cost by activity, not simply because somebody is obese. Unfortunately, the disease of obesity and 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 way. And while obesity can result in hip and knee arthritis over time, and some of these end up as joint replacements, the bigger majority of joint replacements come as a result of activity created injury up into the meniscus or the fibrocartilage joint, which eliminates the padding and then creates osteoarthritis over time. These injuries occurred in sports and daily activities, just like squatting and pushing, gardening, running various types of sports, which are done by people a bit more fit.
And since we, as a general rule, don't see hip replacements very often in our clinics. You really are talking about knee replacements as a potential impact. I think the market is ignoring all of 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, a beloved pickleball, so many other things that people can participate in and enjoy the not obese. So I believe that potential exists -- these drugs are successful, the long-term don't create unintended health issues, but there being 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 P. 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 in 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, which is 3 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 the $17 million we 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 of '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 our third quarter and is 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 3 of those months were higher than the same month in the previous year.
Our net rate was $12.37 in the third quarter of '23, which was lower than last year's $104.1 per visit, but it was sequentially an increase from the second quarter of 2023, which had a net rate of $102.03. The decline in net rate as compared to the prior year was due to the reductions in Medicare rates, which represent about 1/3 of our payer 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 earnings calls, we've either renegotiated or terminated the subset of our Medicare Advantage contracts that reimburses 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 we're making other necessary adjustments to address our net rate as well.
Our Physical Therapy revenue were $128.1 million in the third quarter of '23, which is 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 a 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 costs per visit also decreased about 1% in the third quarter of 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 cost per visit and salaries-related costs per visit.
The increase in total operating costs per visit on a sequential basis from the second quarter from $80.61 to $84.49 as a normal seasonal occurrence. Salaries 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 rents 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 of the prior year, and it has increased 10.9% over the first 9 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 -- well, excuse me, $145 million of debt on our term loan with a 5-year swap agreement in place that 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 is 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 $800,000 in interest expense with cumulative savings of $2.3 million over the first 9 months of 2023. Our interest expense was $2.1 million in the third quarter of 2023. In addition to the term loan, we also had $175 million revolving credit facility that had 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 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 in our net rate from the third quarter to the fourth quarter.
Our operations team has produced solid results in the first 9 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 J. 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 Sylvia Gajuk
A couple of questions, I guess, here. I guess on the last comment, Carey around the outlook for this year that you slightly lowered it, I'll be talking about kind of being towards the middle or lower. And so you kind of took off the higher end from sale. So I guess, what are the main drivers for this lower guidance sounds like Q3 roughly in line. So I guess, Q4 seems like there's some indicators that point in to a slower or lower number for Q4. Is that the way to think about this?
Carey P. 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 and if we get more growth, we'll position ourselves to closer to that middle likely. But you mentioned that it looks like the fourth quarter would be less in 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 19.9% to the fourth quarter '21, about $17 million. Last year, it went up a little bit, but that was because we had some large acquisitions we made. We made 4 large acquisitions in the fourth quarter, actually 2 really large -- 2 other acquisitions in the fourth quarter of last year. And so that bumps 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 volumes 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 holidays. So they're just shutting down the plant. And 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 $1 million or so from the third quarter to the 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 J. Reading
No, I think you've covered it, Carey. Joanna, the business is solid. It's 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 Sylvia Gajuk
No, makes sense. And I guess just to follow up on that comment around the net rate growth. It sounds like that's where maybe things are a little bit softer. So I guess the question is because you've been talking about negotiating contracts with commercial and exiting some of the MA contracts, improvement in workers' comp (inaudible). When will we see the benefit to that net rate?
Carey P. Hendrickson
Yes. Well, we have seen benefit 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 little while for them to take effect. And so we're hoping to see more of that in the fourth quarter and certainly into 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 category that's down is Medicare, and that's because of the things we've noted more the higher ratio of PTAs to PTs, that's 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 volumes. 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 are 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 J. Reading
So I would say, Joanna, when you look at the contracts, we've redone a lot of them have been double-digit increases and some of those are spread over 2 or 3 years. We've 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 Sylvia Gajuk
All right. And if I may, last question on this Medicare rate. So I guess we get the final physician fee schedule, the therapy rates there, down 2% or so. There's potential work in Congress on the relief refer to this physician fee schedule. So -- and I know this (inaudible) could differ depending on your geographic mix and whatnot. So can you talk about what this (inaudible) means to you in terms of the net rate update, if there's no relief? And if there is a relief where there would be? And I guess, anything else in direct that what could be impactful for rehab therapy.
Christopher J. Reading
Carey, you want to take it or do you want to take it?
Carey P. Hendrickson
Yes, you go ahead and fill in if needed.
Christopher J. Reading
That's fine. So right now, I hate to say it, but sometimes these tables that are published don't correspond what the actual realities for the company. And so the expected reduction for us is 3.5% in 2024, all factors considered. There are a couple of other things that we're in the final rule 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. And so that's beneficial. That's a continuation of something that was done during COVID, that's beneficial. And then there have been some mildly beneficial things around remote therapeutic monitoring, which are net positive there, not especially dollar-wise impactful, but make more sense and will make it easier to capture those charges. But on average, I 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 yet. We've had success in getting it mitigated through Congress every year since the original 9%, 9.5% cut was proposed leading into COVID. I don't know what it will be. If it gets adjusted, we'll have to see.
Carey P. Hendrickson
And just as a reminder, Joanna, that's 1/3 of our business, Medicare is. So that's on our overall rate that will have a lesser impact than the 3.5%. It ended up at that rate. And I think we've had momentum, as I've talked about in all of our other rate categories going into 2024.
Operator
We'll take our next question from Brian Tanquilut with Jefferies.
Brian Gil Tanquilut
Chris, maybe I'll follow up to one of your comments that you just made about remote. Obviously, on the area or part of your business that 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 with Medicare rate cut?
Christopher J. Reading
Yes. So remote therapeutic monitoring code that was introduced this year, we've rolled it out in a little bit painful, 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 from the infrastructure that exists and are billing in the 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 have a much greater percentage of our company that is able to efficiently address remote therapeutic issues. Then beyond there from a digital perspective, I think there have 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 digital offering, working on some other high-priority things at the moment, but that's certainly on the list.
Brian Gil Tanquilut
Got it. And then Chris, maybe since we're talking about virtual, 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 J. 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 contract to roll out with them, and that got passed and then over the next couple of years, it rolled out and became substantially bigger than we originally envisioned. And then as an example, it kind of paused again. Not completely. We still do a lot of work there. It's still one of our bigger customers. But again, 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. But this is really still an embedded model where people need to be on site in evaluating individuals. Certainly, we can use technology and in video monitoring and certain aspects of evaluative techniques, we can now use with cell phones and other forward camera devices, big measurements and do things. And I think that will continue to evolve. We're using some of that now, but nothing that we see as disruptive to the core business.
Brian Gil Tanquilut
Got it. And then maybe, Carey, or Glen, 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 per day per clinic -- yes, per clinic per day?
Christopher J. Reading
Well, 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 on that. It's a factor of additional staffing oftentimes when we're -- if we're currently staffed where we need to be. So if we -- 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. I think of productivity really has the amount of people that our clinicians can see. And Eric, you might want to speak to that part.
Eric Joseph Williams
Yes, Chris, I think you summarized it really well. Our turnover is at an 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 on the staff, but 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, if you look where we were 2 years ago, we hit the 30 mark for a couple of quarters this year. We had 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 had 8 recruiters that work for us. We really leveraged 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 schools. 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 rotations. So that's a big investment for us.
And then on top of that, just for 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 right we've been growing.
Operator
We'll take our next question from Larry Solow with CJS Securities.
Lawrence Scott Solow
Just a couple of follow-ups. 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 in price will end up down this year, 1% is maybe a little bit more than that and pretty well documented the Medicare out there. But it feels like you have some good momentum in the commercial side, you mentioned your on average getting at least looks like mid-single-digit annual increases on a lot of these positive negotiations. So I suppose some of them haven't actually hit your 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 fall in go up next year even with the -- even if the Medicare rate has not changed by Congress?
Christopher J. Reading
I mean, Carey, you want to address that one?
Carey P. Hendrickson
Sure, sure. Yes. So I would -- first of all, it's early for us to look at that and give any color related to 2024, 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 3 years where it's 5% in year 1, 4% in year 3, 2 and then another 3% in year 3.
We have those kinds of step increases that we're building into our contracts that we'll have continued increases. So I think we will have continued momentum in both commercial and workers' comp on both of those. And so I think, certainly, I feel good about our ability to -- as we sit here today, I feel good about our ability to offset the Medicare rate reduction going into 2024.
Christopher J. Reading
Yes, Larry, the short answer is we -- I mean, the plan 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 yet, but we're working hard at it.
Lawrence Scott Solow
No, that's fair. How about in terms of -- you mentioned a lot of good internal growth, especially last year. And this quarter on the de novo side, I think you mentioned 9 and 5 in September alone. I know de novo they don't call a significant amount to get on their feet. But is there simple some inefficiencies initially? And even with the acquired clinics that just by themselves between 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 things. Is that a fair statement?
Christopher J. Reading
Yes, Eric, do you want to take that?
Eric Joseph Williams
Chris, sorry about that. My phone blinked out a little bit -- can you.
Christopher J. Reading
It's okay. It's okay. No, I got it. I got it. Good. So on the -- yes, 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. You do lead us a little bit, particularly in the first 6 months before they -- or until they break even some breakeven much quicker than that. But early on, certainly, those ones we opened in September, going to be a drain from a bit. And then on the acquired clinics, yes, there is -- you referred to as dry powder, there is usually some upside that occurs oftentimes in rate reset at the point where we do the deal, we credential that deal in the 60 days before closing to a date certain basis. 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, but maybe a little slower to happen program development and productivity or efficiency changes over time. Those take a little bit longer and more patient with those because we don't want to make sure the relationship, particularly at the clinical level is 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 Joseph Williams
And Chris, the one thing I would add to that, the one comment I'd add on the de novo clinics is none of those de novo clinics are flyers. It's not build it and they will come. I mean those clinics were built because they were established referral relationships in the community. The biggest challenge and potential drag on those de novo clinics goes back to staff. Typically, it's staff, we 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 Scott Solow
And to follow up on that, how is the staffing -- obviously, it's been a couple of years of a tough stretch on staff and labor. Certainly, labor pricing is much higher today. But it does feel like at least you guys are having much more success in getting (inaudible) quality, but hopefully quantity (inaudible)
Christopher J. Reading
Go ahead, Eric.
Eric Joseph 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 5 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 are licensed physical therapists and licensed physical therapist assistants. And we've had to rely especially with the growth 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 the PTA touches a patient, it has an impact. And I think you saw that if you see the breakdown on our rate, every category has gone up from a 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 terming Medicare Advantage programs that we felt did not pay us the appropriate amount of money below our actually 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' point, regarding these de novos, the rolling out of additional programs takes a little bit of time, 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 3 consecutive quarters, and our third quarter '23 was almost 4% higher than our third quarter '22 in terms of workers' compensation, right? So these types of programs do have an impact, but they take a little while to roll out in new de novo clinics as well as newly acquired partners.
Lawrence Scott Solow
Okay. I appreciate all that color. If I could just sneak one more in. Just on the acquisition (inaudible) on the PT side on the physical therapy side, it sounds like your (inaudible) opportunities remains strong and you want to put your capital to work. Can you just comment just on the ergonomic software, the ergonomic software and the sort of IIP acquisition you made a little bit different than your normal acquisition, how you -- any color on that, how you're trying to leverage that.
Carey P. Hendrickson
Yes. So these are some people that I've known for a number of years, really, really good folks. They've been working on the software product, software sales product software service product, the number of years, it's really, really strong. It will enable us -- we have reemployed 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 salespeople than these folks have had in their own company, utilize our sales force to ramp that up.
And 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 embedded people on the prevention side. But it's a nice fit for us. It's a new offering, and we should be able and expect to be able to sell it to our existing client base in many cases.
Eric Joseph Williams
Yes, Chris, my one additional comment on this would be, I mean, this is a niche that our Briotix team recognized this is a client profile that we weren't servicing today. These are folks that are going to be a little bit more cost conscious that not just want to manage its 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 periodic 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 ErgoPlus represented an opportunity for us to go and seek first with software that was already developed, and they were really under resourced ErgoPlus in terms of their ability to market and sell that software. So we feel we have an opportunity here to dump gas in a fire. It's a terrific product. We think this is a great market opportunity for us and really excited about this acquisition.
Lawrence Scott Solow
Great. Appreciate the enthusiasm. Thanks for all the color.
Operator
We'll go next to Calvin Sternick with JPMorgan.
Calvin Alexander Sternick
Just one quick one for me on IIP. I know that some of your customers have pulled back on spending just given some of 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 the growth rate improved year-over-year, but still below the 20%. Just any color you could give on sort of what the IIP revenue growth rate looks like for next year would be helpful.
Christopher J. Reading
Yes. 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 a 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, but (inaudible) at, we're still working through that. We haven't guided to that yet, and it would be premature for me to peg that number at this point in time. We certainly haven't used the 20% number. I think 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'll work that in forward guidance and give you a little bit more transparency than we're able to right now.
Calvin Alexander Sternick
Great. And then maybe one more on workers' comp. I know you've had a couple of quarters there where volumes have been increasing and payer mix is improving. Just wondering how you're thinking about that trend continuing into next year? Do you think the momentum in workers' comp really -- is there an opportunity to accelerate? Or should we thinking about is basically sort of steady progress year-over-year?
Christopher J. Reading
We're 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.
Operator
(Operator Instructions) We'll go next to Mike Petusky with Barrington Research.
Michael John Petusky
So Chris, on the meeting you all attended private PT what we've sort of heard out there, not in terms of PT specifically, but in terms of health care in general, a lot of the private owners have not got the memo. The valuations have come down in transactions and that expectations are sort of out of whack with the reality of interest rates, et cetera. And I'm just curious, you guys as Carey pointed out, you've got a lot of opportunities from a balance sheet perspective, the revolver to do something. I guess, what was the buy at the private meeting? I mean, do you think this -- the next 12 months do you hope to be as active, more active than the last 12 months?
Christopher J. 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 done 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 kind of the limit many are. And so it's a good time for us, and we expect to make hay while the sunshine as they say.
Michael John Petusky
And it's 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 workers' comp? I mean if this is a 9-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 J. Reading
Carey?
Carey P. Hendrickson
Yes. It's hard to put it in that kind of measurement, but I would -- 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, somewhere in that rate. 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, if that makes sense.
Michael John Petusky
I got an honor the Texas Rangers as I throw the baseball analyst.
Carey P. Hendrickson
There you go.
Michael John Petusky
Sorry, Astros. 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 earlier.
Christopher J. Reading
I don't think we mentioned -- go ahead, Carey.
Carey P. Hendrickson
Yes, we didn't mention, but it's -- I'd say 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 from and continue to be strong just like it has been on year long.
Operator
At this time, we have no additional questions standing by. I'd like to turn the conference back over to management for any additional or closing comments.
Christopher J. 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 your week.
Carey P. Hendrickson
Thank you, everyone.
Operator
Once again, ladies and gentlemen, that does conclude today's program. Thank you for your participation. You may disconnect at this time.
