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Amedisys Today: A Cautionary Tale

Rarely do I write about a specific company as my work doesn’t focus on individual companies per se, more on industries and the policy/economics of health care industry segments.  Occasionally, a company’s story typifies an industry flaw or trend or the same is illustrative of an endemic issue (Vitas for example).  Amedisys’ continued saga of decline is an exception where a company’s story is illustrative of a series of missteps and failures in vision and leadership.  The latter is a trend I see altogether too often.

Yesterday, Amedisys announced its third quarter results (4th quarter 2013). In summary, for the quarter net revenues declined by 13.7%, net loss increased to $2.2 million a decrease of 135% compared to the same period in 2012 and annualized negative changes (from year to year) in EBITDA (negative 49.7%) and net income of 83.8%.  Comparatively, two years ago their margin was 7% (not good but not deplorable), -26% last year and for 2013, -5.6%.  Their aggregated profit margin in “real-time” is -16%.  In spite of any rhetoric from management (new leadership at the helm after the ouster all too late in my opinion of founder Bill Borne) about hitting bottom, improving fundamentals, etc. the future picture is “crystal”.  In fact, analyst surprise over yesterday’s results is illustrative of a lack of generalized understanding about health policy, health care/provider risk concentration, and sustainable operations.  Suffice to say, no surprise looks on my face.

I have written before somewhat on Amedisys and referenced them as a story that others insist on paralleling (Vitas again comes to mind).  So as the title reference applies, below is the cautionary tale.

  • Concentration of Risk: All too many providers get caught-up in following the “shiny object” syndrome.  They mine the reimbursement trend of greatest reward, using the most advantageous coding, and layering their plates with as many patients possible that fit the highest payment profile.  Some do this by stretching the very definitions of medical necessity.  Others do so by overly zealous and questionable referral methods; some overtly fraudulent such as pay-for-referral or incentive-for-referral arrangements with other providers.  The flawed belief is that effective lobbying, smoother lawyers, and a public persona campaign that focuses on “good, ethical, high quality care” imagery will somehow ward off intrusions that could burst the bubble.  All of the aforementioned is the flaw in how health care reimbursement and policy really works. The handwriting was on the wall for Amedisys as its book of business was feverishly high with Medicare patients and patient profiles by margin, concentrated in therapy.  All the signs of a crumble were present and no diversification strategy was even in the works when the OIG stepped-in, Congress following and CMS on the backend re-writing reimbursement rules.  The hey day ended and today, with no ability to re-tool quick enough away from the only business model Amedisys knows but generate visits under Medicare, their financial house is exposed.  They were too big, too reliant on a single element of business and not properly diversified to mitigate the risk exposure that comes with mining government reimbursement programs.
  • Short vs. Long Term: To be certain, publicly traded companies are driven by ever-increasing earnings and thus can lose quickly, the perspective of sustainability of business.  Like in mining, veins tap out quickly and the quest is always to find another “motherload”.  Unfortunately in health care, more of the same even widely diversified by geography doesn’t create sustainability it simply magnifies the concentration of risk.  Creating a sustainable platform of survival and thus success is all about leveraging core competency beyond the simple “how much per eaches can I bill”.  Innovation and multi-level capabilities crossing all lines of business and depth of payer diversification is how long-term earnings are made.  I refer to this, as do others, as system thinking.  Integrating pieces and constantly rolling-forward new lines of innovation allows for a pipeline of other service/product lines to build sustainable growth and profit.
  • Failure to Understand Policy and Economic Implications: Health policy is rarely illogical though it often in final form, is misguided and bureaucratically over-cooked.  Medicare and Medicaid are unsustainable entitlement programs and government’s response to structural funding problems is to reduce “spending” not sustain it or increase it.  Any provider segment today that believes more money for anything is forthcoming truly has suspended reality.  This isn’t to say that in components, Medicare and Medicaid can’t be viable business segments.  It does mean that the world has been changing for quite some time and anyone who pays attention to basic, easily accessible information from source like MedPac can see the change ahead.  The days of disconnect between quality and volume are over.  Excessive margins are eroding from all elements of Medicare.  Payments are heavily scrutinized.  Providers that haven’t been preparing for this shift across many prior years are today, rueing the lack of foresight.  This is true for all provider segments.  Home health fell earliest.
  • The Fraud Peril Disconnect: I lost track years ago of how many providers/executives/boards I have talked to and counseled regarding “too much success”.  There is an inherent disconnect that occurs when profits are rising, volumes the same, and life is “good”.  Instead of asking key questions and doing a little independent analysis around “why so good”, the push goes on to ramp-up even a tad more.  The incentives rise, the fever brews and no one seems willing to ask the pressing question of, “why are we doing so good”?  Instead of analysis to create justification, I counsel the alternative; analysis that questions any justification.  The latter is a discipline that focuses on matching trends elsewhere and demands a clear line of service to billing.  When the trends in any organization are simply so much better than any other organization logic demands inquisition as to why.  If others start following, I get even more nervous.  Conversely, if an organization suddenly finds a swell that arose simply by following an established industry trend, I also get nervous.  Systemic fraud occurs mostly because organizations justify their own results with rhetoric rather than clear analysis.  Any focus on why and how things are truly occurring, particularly via an external, non-invested source will quickly detect where the break-downs lie and the risks run deep.  Unfortunately and all too often, the executive level reaction is the “three monkey reaction”; hear no evil, see no evil, speak no evil.

The cautionary tale?  Amedisys exemplifies all of the above.  Today, Vitas the same and I fear Gentiva is on their heels.  Each has too much reimbursement concentration of risk, a business model that solely exists to gather certain types of patients and a cavalier regard for health policy and economic trends.  Their models are unsustainable without complete overhaul and an overhaul is not in the cards as doing so would require a planned shrinkage and a death spiral for their share price.  Oddly enough, their share prices will still hit the death spiral, as did Amedisys but not because of the prior comment.  This spiral will occur as a result of not having read the cautionary tale sooner.

Next for Amedisys?  Non-existence as a public company is my forecast and continued acquisition of their shares on behalf of KKR is the harbinger.  I predict, as I have in other posts, that Vitas is on the same path as Amedisys and nothing to date has eroded this opinion; its only stronger.  Vitas has enormous risk concentration, a disregard in operating philosophy from the real reimbursement and policy climate operative today and a focus almost entirely on reinvigorating volume and thus earnings.  The latter is anathema to where they sit on the Feds radar.

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March 14, 2014 - Posted by | Home Health, Hospice, Policy and Politics - Federal | , , , , , , , ,

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