As the Home Health and Hospice World Turns: Part II

In Part I, I wrote about my last week’s conversations, etc. regarding the home health industry, specifically Amedysis, the Senate Finance Committee inquiry, the industry impact via the PPACA and the likely consolidation and merger trends that are approaching.  Suffice to say, not all of last week’s news and conversations focused on the home health industry as over the last thirty days, much has happened in the hospice industry as well.  The difference between the two industries is that in hospice, the major news involved a significant merger and in home health, the major news involved the legal and compliance issues of the largest provider entity – Amedysis.

The hospice industry saw, via the merger between Gentiva and Odyssey, the creation of the largest home hospice company in the industry.  Gentiva, while also a provider of home health, clearly chose to direct more of its attention to the hospice industry, moving from a moderate player in the industry to the predominant player via the acquisition of Odyssey.  Odyssey, while not as large as Vitas (the former largest hospice provider), held substantial market share and presence and in many regions and distinct market areas, competed head to head with Vitas for patients.  For more information on the Gentiva/Odyssey transaction, see a related article in my company’s E-Newsletter at http://wp.me/pD9Ac-4Q .

Analyzing  this merger leads me to a series of assumptions about where the hospice industry is at present and where it is likely headed. 

1. Hospice is now clearly a mature market or in other words, a market that is unlikely to grow significantly over the near to intermediate term horizon.  Despite a fairly profound demographic shift occurring over the next twenty to thirty years (the maturation of the baby-boomers), there is no real indication even with this influx of older adults, that hospice as model of care, will gain in referral popularity.  While seniors utilize hospice more in total numbers than any other age cohort, as a percentage of the total cohort, utilization trends show little forward growth.  There are a number of reasons why;
   • Culturally, U.S. medicine and the U.S. population still values the process of cure or health restoration far greater than the concept of natural death.  As hospice is a downstream referral (the referral comes typically from non-palliative medicine trained physicians or via hospitals and/or long-term care providers), the hospice industry relies on the referral source to be; a) knowledgeable about the value of hospice and how it works for patients and their families, b) willing to forego potential incremental revenue for continued care by making the referral to a hospice, c) willing to engage the patient and the family in a difficult conversation regarding end-of-life and treatment futility.  As long as these dynamics remain in place to the extent they presently are, the growth of utilization will remain fairly stagnant.
   • Financially, the incentives for referrals to hospice don’t truly exist within the current U.S. system.  There are no barriers in-place to reduce the reward (payment) for continued acute, diagnostic or curative care (choose your own verbiage) and as a matter of fact, the reimbursement systems (private and public) pay incrementally more for more intense care than palliative care, even if arguably, the care is futile.  As only patients and their respective treating health professionals can conclude that continued curative care is futile or unreasonable, the process of garnering more money for more treatment remains intact as a perverse incentive.
   • While not for hospice people or physicians trained in palliative medicine, terminality remains an uncomfortable and even disputed condition for many physicians.  Patients and there families still wish to avoid discussions far too long and in some cases, avoid the discussion altogether.  While in-roads are perhaps being made in some medical centers and in certain communities, these in-roads are miniscule and not evident of a ground-swell movement toward open discussions regarding end-of-life decisions.
2. As with the home health industry, the movement in Washington is toward curtailing the growth of hospice spending.  The prevailing feeling in Washington policy arenas, supported by Medpac, is that the hospice reimbursement under Medicare is too generous and the benefit itself, easily manipulated and poorly defined.  While the PPACA did little to negatively impact the hospice benefit or payment, the recommendations directed to the Secretary of HHS in the language intones significant changes forthcoming.
   • Reimbursement under Medicare will change such that early days in the initial benefit period will be paid more as will days at the end of the patient’s stay (proximal to death).  Days during the interim, longer stays will be reimbursed with lower payments.  The point here is supposedly a recognition that patients with long stays have periods of stability necessitating far less care from the hospice.
   • More emphasis will be placed on denying stays for non-specific terminal conditions or denying portions of stays.  CMS has determined that too many longer stays are related to diagnoses such as terminal dementia, failure to thrive, etc.  In order for these stays to be covered, the onus will fall on the hospice to provide very detailed documentation supporting patient decline.
   • More emphasis will be placed on physicians to document terminal conditions and to prognosticate length of likely survival, especially at recertification periods.  More direct “hands-on” involvement of physicians will also be required (physically seeing the patient).
   • Certain types of stays and relationships between hospices and nursing homes will be closely monitored and reviewed.  CMS and Medpac have determined that hospice stays in nursing home environments on behalf of nursing home patients are considerably longer and possibly in many cases, in violation (the hospice) of the conditions of participation as hospices utilize nursing home residents as sources of revenue but often, fail to meet the care requirements (using the nursing home as the source of care and service) under the hospice federal code.  Additionally, CMS and Medpac have placed the target for reform squarely on the large for-profit hospices such as Vitas, Gentiva and Odyssey which have typically used nursing homes as major sources of referrals for hospice patients.
3. The PPACA, while not bending the cost curve or reducing the overall level of national expenditures on health care, does change in the interim, the overall health care economy.  Providers are re-positioning and re-grouping to combat what they perceive, and in some cases know, will be negative changes to how they presently do business.  Providers which rely heaviest on Medicare as the bulk of their overall revenues will move the fastest and the most aggressively to alter their current business practices, knowing that regardless of the overall status of the PPACA (repeal, restore Medicare cuts, etc.), the health care economy is entering a long period of fiscal constraint – payments will never be as high or as fluid as they once were.
4. Because of points 1, 2 and 3 above, the industry will head into a period of consolidation and even, contraction.  The Gentiva/Odyssey merger is a signal of the maturity of the industry and the trend toward tighter regulation of hospice stays under Medicare (the bulk of the hospice revenue) and less economic value per each stay.  Lower future revenues per stay, either via reimbursement cuts or regulatory constraints placed on the length of stay, means more overall stays are required to equal the same or greater revenues going forward.  As the growth curve of new “potential” referrals is flat, the only real source of new business or referrals for a provider is acquisition of existing market share (buying someone else’s referrals).  In order to maximize profitability in an environment where the market is mature and the total revenue per each case is flat to shrinking, providers will have to adopt one of the three strategies below.
   • Acquire other providers to build more referrals or volume.  While each patient stay will be economically less valuable, increasing the total number for a provider while maintaining expenses on a ratio basis, lower than revenue, will provide a method to achieving overall net income targets – critical for publicly traded provider organizations.
   • Shrink the organization to fit the new revenue and length of stay realities that are in place and forthcoming.  An organization that can right-size its operations to fit the new business paradigm will be smaller but potentially equally or perhaps, more profitable.  The risk here is that provider organizations that are acquiring market share may marginalize some markets such that a shrinking provider (by choice) loses desirable market share.
   • Expand non-Medicare business and add complementary businesses that may provide incrementally equal or more revenue than that which is lost under Medicare.  Arguably, this strategy may only work for regional or single market providers and those that have strong system ties (hospital owned, etc.).

One final point to note concerns the economy.  Absent from the above factors  I laid out influencing the hospice industry is the stagnant economy.  With recovery a daily discussion regarding likelihood and timing, current uncertainties persist that impact hospice providers rather dramatically.

1. The overall number of paying patients available to all providers within the health care economy has shrunk in recent years.  This shrinkage is primarily due to job losses and benefit losses.  Until employment rebounds and jobs with benefits become more plentiful, consumers for health care in the form of paying patients will remain down.
2. When fewer paying patients are in the queue, those patients that do have a payer source, even a less than optimal government payer source, are prized commodities.  Each provider wants a piece of the same paying patient.
3. Hospice is as I pointed out, a downstream referral.  When the upstream referral source, principally hospitals, lacks sufficient paying patients in the queue to replace current patients it “may” customarily refer downstream, it holds the paying patient longer, either delaying the referral and the portion of revenue that comes with a longer stay or avoiding the referral all-together.  Similarly, all downstream referral sources such as nursing homes compete aggressively for the referrals even though a referral of a terminal patient (or potentially terminal patient) is ordinarily, not a prize catch for most nursing homes.  This competition erodes the number of total possible referrals available to a hospice.
4. Each patient has an economic value to a provider.  When a patient with a higher economic value (a better payer source) are lacking, providers sort down to the next patient level.  This sorting process occurs as a result of too few patients with payment sources available to match the supply or capacity within the existing provider universe.  Some markets hit hardest by the downturn will evidence this reality in greater depth and unfortunately, with greater persistency.  For hospices (and all downstream providers) in these heaviest hit markets, referrals have trended down and will stay down until the supply of patients with payment sources increases and specifically, the supply of patients with better payment sources and today, deferred health care needs (e.g., elective surgeries such as joint replacements, etc.).