By Robert
Holly | March 2, 2020 http://401kcalculator.org, Flickr
| CC BY-SA 2.0
At
Amedisys Inc. (Nasdaq: AMED), phones are ringing off the hook, with smaller
home health providers calling the Baton Rouge, Louisiana-based company to talk
about dealmaking opportunities.
LHC
Group Inc. (Nasdaq: LHCG) is experiencing much of the same, so much so that its
top executives anticipate “historic” consolidation over the next several
months.
Elsewhere
in the industry, Glenview, Illinois-based JourneyCare is ceasing its home
health operations, eliminating an estimated 100 positions as part of a “general
business reorganization.” Meanwhile, in Florida, at least four home health agencies have filed
for voluntary Chapter 11 bankruptcy protection since the start of this year.
The
Patient-Driven Groupings Model (PDGM) has only been in effect for two full
months, but it already appears to be making its mark on the home health market,
at least anecdotally. The shifts in the market have even caught the attention
of S&P Global Ratings, one of the world’s largest providers of independent
credit risk research.
“I
think there’s a pattern you see whenever an industry goes through this kind of
pressure,” David Kaplan, a director at S&P Global Ratings, told Home Health
Care News. “The weaker players kind of get squeezed out.”
S&P
Global Ratings — a part of S&P Global Inc. (NYSE: SPGI) — analyzed PDGM’s
likely impact on the home health market in a report released at the end of
February. Among its key takeaways, the report supports the somewhat disputed
notion that PDGM may ultimately push 30% of home health businesses out of the
$100 billion market.
“I
think the larger players will be able to survive the sort of working capital
needs and short-term administrative needs that PDGM requires,” Viral Patel, a
credit analyst at S&P Global Ratings, told HHCN. “And I think the bigger
guys will be able to invest in their tech, their systems and even in the
personnel to keep up to speed with needed requirements.”
In
addition to offering their take on PGDM-fueled consolidation, Kaplan and Patel
also dug into several indirect consequences that may arise from the Medicare
reimbursement overhaul.
Winners
and losers
Following
the initial rollout of the old Prospective Payment System (PPS), the home
health industry saw significant consolidation, with an estimated 25% of
agencies either closing or being absorbed by larger players. S&P Global
Ratings believes PDGM will bring similar change, especially when paired with an
elimination of Requests for Anticipated Payments (RAPs).
“Economies
of scale will provide meaningful cost advantages in the low-margin home health
industry, and we expect larger players to be opportunistic in increasing market
share and making the industry more efficient,” the February report states.
When it
comes to winners and losers under PDGM, S&P Global Ratings specifically
sees the large publicly traded companies as having an edge. Currently, publicly
traded companies with a strong home health presence include Amedisys and LHC
Group, along with Encompass Health Corp. (NYSE: EHC), Pennant Group Inc.
(Nasdaq: PNTG) and Humana Inc. (NYSE: HUM).
Typically,
publicly traded companies have conservative levels of leverage, while PE-backed
companies sometimes are a bit more restricted, according to Kaplan.
“[PE-backed
companies] tend to take on higher levels of leverage and have more interest
expense,” Kaplan said. “Because they have high levels of debt, they’re a little
more constrained in terms of the ability to sustain or bear significant
shortfalls. You can have a company that’s very large, but if they’re owned by
private equity and they have a lot of debt, that could undermine their
[scale].”
Patel
agreed, adding that he has already “received word” of attrition at the
smaller-agency level.
“I
think the public companies will have a little bit more capital to deploy for
business development,” Patel said.
Therapy
mix and referral sources will also likely separate winners from losers, the
S&P Global Ratings report states.
Of
course, not everybody shares the same opinion when it
comes to the doom and gloom for smaller agencies.
Compared
to when PPS came into play two decades ago, home health agencies are generally
far more prepared, thanks to nationwide training efforts spearheaded by industry
associations, consultants and technology partners. PDGM additionally came with
ample warning, with its origins in the thwarted Home Health Groupings Model
(HHGM).
Furthermore,
smaller agencies are often nimble, able to quickly pivot and respond to change.
“A lot
of the smaller agencies are able to make changes a lot quicker than some of the
larger ones,” Simione Healthcare Consultants Managing Principal William J.
Simione III said at the 2019 National Association for Home Care & Hospice
(NAHC) conference in Seattle. “They’ll be able to be nimble. They just need to
make sure they’re keeping their eye on the ball and that they’re looking at
data.”
If PDGM
does end up sending waves of smaller providers out of business, the U.S.
Centers for Medicare & Medicaid Services (CMS) may have to step in and
adjust the model.
“We
expect significant disruption in the industry including closures of smaller
agencies, consolidation driven by the largest providers and potential payment
model revisions from CMS, should the industry unexpectedly become unstable,”
the S&P Global Ratings report noted.
Opportunity
for SNFs
While
home health providers continue to adapt to PDGM, other post-acute care players
may look for a piece of the action. In particular, the overhaul may prompt more
skilled nursing facilities (SNFs) and even long-term acute care hospitals
(LTACHs) to explore the home health market.
“We
expect [that SNFs and LTACHs] could enter the home-health market, for the right
opportunity, as that would give them the ability to better manage their
discharged patients through the continuum of care (more control to avoid
readmissions), and enable them to establish a relationship with potential
future customers,” the S&P Global Ratings report stated.
The
opportunity to land a home health business for cheap is likely appealing to
SNFs and LTACHs, many of which currently do not have home health division of
their own.
“If
they were previously contemplating getting involved in the home health, now
would be a time where you can pick up maybe an opportunity in your market at a
relatively low cost, possibly even without any cost,” Kaplan said.
PDGM
will likely have a lesser impact on senior housing operators’ interest in
acquiring home health assets.
“They
might look for an inexpensive opportunity to acquire someone that’s large, but
the defensive side of it is not there,” Kaplan said. “They’re not getting their
patients from hospitals and don’t have to worry about how they’re perceived on
readmissions.”
Robert
Holly- When Robert's not covering the latest in home health care news,
you can likely find him rooting for the White Sox or roaming his neighborhood
streets playing Pokemon Go. Before joining HHCN, Robert covered
everything from big agribusiness to the hottest tech startups.
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