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As the Home Health and Hospice World Turns: Part I

Sorry for borrowing (piece of)  a soap opera title for this post but it is rather appropriate given the news that occurred over the past 30 days.  Just this past week, I’ve been interviewed by two business newspapers and on the phone with an investment banking firm I consult with from time to time regarding Amedysis, Gentiva and Odyssey’s merger, the pending impacts of the PPACA on the home health and hospice industry, mergers in the industry in general and using a “catch-all”, what the “heck” is going on in the home health and hospice sectors.  With a chance to recoup over the long 4th of July weekend (and organize my notes from last week’s conversations), a post on what all the conversations were about seemed appropriate.

Amedysis: A month ago, on my company’s E-News site (http://apexhealthcareconsultants.info), I edited an article regarding the Senate Finance Committee’s inquiry into the Medicare billing practices of a handful of very large home health agencies (Amedysis, Gentiva, LHC Group etc.).  The inquiry is a result of an article that appeared earlier in the year in the Wall Street Journal, focused quite intently on Amedysis’ billing practices; principally as applicable to therapy visits.  The fall-out since the Wall Street Journal article and the Senate Finance Committee article is two-fold.  First, the class action suit (I’ll touch on it in a bit) and the hefty drop in Amedysis stock price.

In brief, the class-action suits (there are three)  focus primarily on the perspective of shareholders (the “class”) and alleges that the questionable Medicare billing practices (none of which at this point, CMS or the OIG has taken specific issue with) served to artificially increase the share price of Amedysis stock.  The allegation of abuse of the Medicare system, prior to any action taken by the federal regulatory system in the form of a fraudulent billing investigation or claims investigation, is a bit different in-so-much that it essentially accuses the company of manipulating its earnings as opposed to causing harm to any patients or group (class) of patients.    The “harm” for shareholders is the drop in price that would/did occur as a result of the alleged fraudulent billing practices.  To add a twist, the suits also allege Sarbanes-Oxley violations which require the corporate officers of publicly traded companies to abide by a code of ethics.  Amedysis settled an allegation of fraudulent Medicare billing practices in 2003 (for Medicare activity between 1994 and 1999) and as part of the settlement, expanded its corporate compliance activity/program.  Additionally, since 2003, Amedysis has had notable turnover of the key financial executives (CFOs primarily) with active rumor-mill chatter focusing on the cause related to overly-aggressive Medicare billing practices.  Medicare represents 87% of Amedysis annual revenues, by far the largest percentage for any home health provider in the industry.

As Paul Harvey (famous radio newsman now deceased) was famous for; “Now, for the rest of the story”.  There are a number of different and integral factors in play that are unique to Amedysis but also, symptoms of an industry, a payment system and a flawed health care reform law.

  1. The issues regarding possible Medicare over-billing or at least, aggressive billing are not new for Amedysis.  Their growth has been remarkable and unique for an agency so fully immersed in a government revenue stream.  What is unique at this point in time is that the Senate Finance Committee inquiry, Wall Street Journal article and now the class-action suits come in advance of any customary federal regulatory actions.  I do suspect that CMS and the OIG will enter the fray in the near future.
  2. Medpac has reported to Congress repeatedly that the Medicare payments to home health agencies were “lavish”, producing double digit profit margins on average, for most Medicare home health encounters.  The PPACA (reform law) effectively cut Medicare payments to home health agencies and increased the documentation requirements for agencies to justify the necessity of continued visits.
  3. The feds have aggressively stepped-up their search via Recovery Audits and targeted billing inquiries for Medicare over-payments or more appropriate, Medicare fraud activity.  This activity is two years old and growing each year with additional force.  The writing is/was “on the wall”.
  4. To fully understand “what” is at the core of the Amedysis issue is to understand the age-old economic axiom that states, “what gets paid for (rewarded) gets done”.  Medicare provided a utilization incentive tied to a certain number of therapy visits ($2,200 for 10 visits).  Agencies thus targeted patients and developed care practices that maximized the opportunity to garner the incentive payments.  In a typical government move, CMS rescinded the incentive payment as it became obvious that agencies were “gobbling-up” the requisite visits and conforming patients to achieve the incentive.  A more meager incentive of a few hundred dollars is now provided at six visits, fourteen visits and twenty visits.  Oddly enough, companies today seem to provide far more “six visit” encounters than twenty visit encounters (profitability vs. cost for twenty visits as well as a likely evident decline in medical necessity by the twentieth visit).  Amedysis of course, is not alone in seeking to tie care provided to reimbursement nor is the home health industry alone in gaming the Medicare reimbursement system for additional dollars.  For-profit hospitals, nursing homes and hospice agencies (and non-profits) alike are skilled at “Medicare maximization”, effectively matching what Medicare will pay with certain types of referrals, matched against the costs incurred to care for certain types of patients.  This game goes on year-in and year-out with CMS constantly tweaking PPS categories to incent providers to take certain patient types (payment was too low) and to reduce the profitability of other patient types.  In short, what gets paid for gets done.
  5. The PPACA did nothing to reform the system and arguably, it made it worse by attempting to extract funds via reimbursement cuts from Medicare.  Of course, it is unlikely these cuts will be fully made or sustained as Congress has never shown the political will required to cut provider payments.  By not truly reforming how Medicare reimburses providers for care, the PPACA only served to layer on huge amounts of bureaucracy to an already antiquated reimbursement system.  In the end, nothing changed in terms of how Part A and Part B of Medicare pays providers; only the amounts “theoretically” changed.  As a system, Medicare pays more for more care and higher acuity care.  Providers will naturally gravitate their referral gathering efforts and marshall their care delivery systems toward the patient encounters that create the most “spread” (cost vs. payment).  As the overall universe of these “profitable” patients is somewhat fixed, the provider universe is forced to unnaturally stretch the definitional boundaries of patient types (upcoding in plain health care vernacular).  In other words, there are not enough truly “organically” existing patients that fit the best (most profitable) reimbursement categories but there enough that are perhaps, at the fringes.  Add the fringe patients with a bit of creative tweaking via assessment and documentation to those that organically exist (fit the exact patient type) and presto, sufficient current volume for all providers.  The difficulty for regulators and others who would charge that the fringe patients are not truly members of the organic group (those whose care requirements exactly match a certain reimbursement category or categories) is “proof”.  The provider and medical communities are far better versed in assessment techniques and documentation requirements and as such, little can be done to reign in this reimbursement “three-card Monty” game.  Until the reimbursement is reformed to reward better, more appropriate and efficient care versus “more” care, the over-reimbursement problem will remain, as it has for decades dating back to when providers ballooned certain costs to receive higher per diem rates from Medicare (under the cost-based reimbursement system).

What comes next in this paradigmatic shift in the home health world is merger/consolidation.  As the profitability of one element of Medicare business shifts, larger agencies will acquire smaller to medium-sized agencies in order to increase market-share, lever infrastructure, and to supplement lost incremental margins with volume.  Simply put, if the relative margin for one type of encounter shrinks, recouping that lost margin (or at the least the majority of it) becomes a function of incurring more encounters with smaller margins.  As long as the incremental costs of additional capacity to handle greater volume remains in a ratio, lower than the net revenue received from the greater number of “less profitable” encounters, it is possible to generate a similar level of organization-wide, net operating income.  The fastest and arguably most efficient way to create incrementally more encounters is to acquire someone else’s encounters at a price-point that is sufficiently low enough to create virtually (virtually to mean within a short time-frame) instant margin via the increased volume/market-share.

In effect, smaller agencies with less volume to spread the reimbursement loss/risk become attractive targets in this environment.  A smaller agency’s value drops as its revenue/margins shrink and with limited geographic presence and referral markets to spread the lost revenue risk across, the entity price declines.  The decline in entity price is attractive for a large acquirer seeking solely market share and/or incremental volume.  In short, the acquirer is capable of paying less for the economic value of the entity (it has declined or will declined) which it really doesn’t want, save the referral market or incremental patient volume which it desires.  The value is purely found in the market share or referral base, not in the economic metrics or financial value of the entity.  For a larger provider, acquiring smaller agencies within areas that the larger provider presently doesn’t serve or undeserves is the goal.  The “merger” is almost protectionist; protecting profit margins or revenue streams that are shrinking by increasing volume  and thus (hopefully), more overall revenue, equalizing the lost revenue once gained per encounter during periods of higher reimbursement.

In the next post, Part II, I’ll review what is going on in the hospice industry and why the Gentiva/Odyssey transaction is significant in terms of a harbinger of activity yet to come.

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July 8, 2010 - Posted by | Home Health, Hospice | , , , , , , , , , , , , ,

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