A couple of weeks ago, I wrote a post covering the Home Health PPS Final Rule for 2014. As I was writing that post, I simultaneously reviewed the Gentiva/Harden deal plus the recent quarterly earnings of Amedisys and Almost Family (plus their acquisition of SunCrest HealthCare). The earnings reports plus the analytics from these two recent transactions paint and interesting picture of where the Home Health industry is headed.
Starting with Gentiva/Harden, and analogous to the Almost Family/SunCrest deal, the transactions are not due to growth or really expansion; rather each is about creating defensive scale. Gentiva/Harden is a bit of an oddity in so much that Harden has a brick and mortar component via ownership of a small portfolio of skilled nursing facilities in Texas. This element however, is not a complimentary piece for Gentiva and as such, my prediction is these facilities will divest from Gentiva post a final roll-up period. The SNF piece is not what they do nor does it really provide a significant source of additional volume or revenue, net of the risk and asset holding cost. Harden grew out from the facility ownership side and thus, the SNF component was in their “wheelhouse”. The same is not true with Gentiva. Regardless of the rhetoric from Gentiva regarding keeping all management, integrating all components, etc., transactions of this scale don’t work that way – they never do. The outlet pieces and the home health book of business is what Gentiva is after.
The same is true in the Almost Family/SunCrest deal with one exception – it’s a home health – home health deal. Almost Family is looking for outlets and the home health book of business to create scale and volume insulation. To a certain extent, both transactions are also about “book of business” diversification; more so in the Harden deal. Almost Family and Gentiva have a risk concentration in their home health revenue models known as Medicare. As my post on the Home Health Final Rule covered, Medicare is a payment source that is shrinking via overall outlay and directed payments per episode. The belief among Gentiva and Almost Family is that mass, ideally scalable via more outlets and more efficient infrastructure will insulate the revenue and thus, earnings impact. In short, even if the margin per each case falls, if more cases are attainable and the incremental expense in doing so is proportionately less than the incremental revenue gain (ideally by a factor of greater than 20%), then it makes sense to increase volume. That’s the theory at least.
Looking at where Gentiva and Almost Family started in terms of earnings reports prior to or concurrent with the referenced transactions, each had their share of performance issues. Almost Family posted an earnings surprise (per share) positive (11% up over consensus) but delving into the numbers shows a continuing performance problem. Additionally, the net impact of additional Medicare cuts foreshadows more negativity in the upcoming quarters, even in spite of the SunCrest deal. It will take Almost Family all of 2014 to absorb and re-define the benefits or difficulties of the SunCrest deal, In the meantime, their risk concentration in skilled nursing and Medicare remains high. Their savior in the interim is a steady growth outlook for their non-Medicare personal care business. Volume growth remains attainable but in order for a continued bright earnings outlook, the growth in personal care, a less revenue rich source than skilled home care, must be equal to or greater than the revenue reductions forthcoming under Medicare. My view is that in the interim, pending absorption of SunCrest, net income and revenues will flatten or trend slightly down.
Gentiva is moving on a parallel trend to Almost Family, with one exception – Odyssey. Gentiva owns the nation-wide hospice provider Odyssey and as such, a twist that separates or bifurcates its strategy from Almost Family exists. On the home health side, Gentiva is seeking outlet growth and looking to expand its presence in the non-Medicare, personal care world as well as the Medicaid waiver world commonly known as Home and Community Based Services (HCBS). The Harden acquisition is the jump for Gentiva into this niche. Prior to Harden, Gentiva was a non to bit player in the non-Medicare, personal and community care environment.
For the nine-months ending September 30, Gentiva lost $197 million. Not surprising, the company announced, post the Harden disclosure, a consolidation and restructuring plan called One Gentiva. The intent is to tighten operations, reduce redundancy, and coordinate revenue opportunities more closely between its home health operations and its hospice operations (Odyssey). The Odyssey segment revenue contribution shrunk by 7.5%, year over year. Hospice clearly is a struggling segment as the overhang of the Vitas suit plus the changes in certification requirements and coding have effectively narrowed or literally closed, resources commonly used by providers like Odyssey to capture patients and attract new business. The One Gentiva initiative will no doubt, further shrink the Odyssey/hospice component, both in terms of outlet numbers and operational infrastructure components in an attempt to mitigate further revenue and earnings erosion to Gentiva consolidated.
Placing all of the above into context and adding a quick peek at Amedisys, the home health industry is clearly struggling and trying to rebalance. Amedisys, once the biggest player in the home health industry, continues to reel post a series of federal investigations and fraud allegations. Their recent settlement ($150 million) with the Department of Justice regarding Medicare improper billing allegations added another nail in a coffin that continues to emerge. Continued losses, closure of outlets, and further Medicare reductions foretell a near future of non-existence. My prediction is that Amedisys will soon be restructured to a private company via a private equity transaction. The future for them is bleak and the industry outlook for Medicare home health providers of which Amedisys dominated, is fraught with revenue decline and earnings suppression.
The focus on the near future for companies like Almost Family and Gentiva is about survival. Can the strategy of creating greater scale and volume in a declining revenue environment continue to produce positive earnings? If the theory that when the margin per each drops, doing more per “eachs” with a controlled incremental expense element lower than the incremental revenue produced through greater volume is accurate, then at some point earnings improve. Unfortunately, I have never seen this theory play-out in a home health or health care environment. By its operational nature, home health is fairly inefficient in terms of staffing productivity and volume efficiency. Within a volatile landscape, the inefficiencies increase as more variables are operative that can quickly, change referral patterns and volume fortunes. Revenue always erodes faster than expense particularly since the bulk of the expense is staff that can’t be quickly recruited, trained and then fallowed when volumes decline or stagnate.
The other side of the strategy, diversification away from the Medicare risk concentration via increased volume in the personal care, Medicaid world offers some hope but it is not a silver lining. True, dual-eligibles (Medicare/Medicaid) provide greater revenue capture opportunity but not without assuming another element of governmental payer risk – Medicaid. Medicaid has its share of problems and in the HCBS world, the providers therein paint a picture of cuts as demonic as in the straight Medicare world. In virtually every state, Medicaid has a “spend-less” charge not a “spend-more” profile, even with Obamacare. Medicaid expansion under the ACA drops cash into state coffers but only to address the increased enrollment of folks who are under 65 and uninsured. This group is not a big user of HCBS or home health. The 65 plus group that dominates the HCBS world and is the personal care side of the industry does not benefit via Obamacare and thus, states continue to seek ways to limit the financial impact to state funded Medicaid via HCBS. As more states move to a Managed Medicaid model, the impact of shrinking or constraining Medicaid cash outlays for HCBS and personal care is just now emerging. In short, I just can’t buy the notion that diversification toward a Medicaid component is a salvation or a counter-balance to revenue reductions on the Medicare skilled side. The impact in my opinion, is nominal in the near-term and perhaps equally or greater negative over the next two to three years.