Encompass Bets It Can Win on CJR Bundles in 2017

Two years after HealthSouth Corporation (NYSE: HLS) acquired Encompass Home Health and Hospice for $750 million, the combination is paying off and moving into new territory.

The home health segment of HealthSouth posted adjusted earnings of $25.8 million in the third quarter of 2016, a 25% year-over-year increase. Moving forward—under a new CEO—HealthSouth will begin executing a plan to take on Medicare reimbursement risk as a “collaborator” in the Comprehensive Care for Joint Replacement (CJR) bundled payment initiative, executives said Friday on an earnings call.

Coordination Working

The plan in acquiring Encompass was to create a footprint in home health that overlapped with HealthSouth’s extensive network of inpatient rehabilitation hospitals. This would create a post-acute continuum in which HealthSouth entities could better manage care, leading to improved outcomes at a lower cost.

So far, it appears the strategy is working.

“An important component of this effort has been to place Encompass care transition coordinators, or CTCs, in our overlap market hospitals,” said outgoing HealthSouth CEO Jay Grinney on Tuesday’s call. “These highly skilled professionals collaborate with clinicians and case managers in our hospitals to assess patients who may require home health services, facilitate patient choice and prepare these patients for the care they will receive at home.”

HealthSouth compared acute care readmission rates at hospitals before and after CTCs were installed. The 30-day readmission rate declined by about 470 basis points with the addition of CTCs, and the 60-day rate declined about 410 basis points, Grinney said. In addition, the rate of admissions to skilled nursing facilities dropped from about 12% to about 8% per month.

HealthSouth is bullish on the implications here, as it is still in the early stages of putting CTCs in its hospitals. And if Encompass can grow in additional HealthSouth markets, as is planned, that would further bolster the strategy. Currently, there is an Encompass presence in 59% of the markets in which HealthSouth operates an inpatient rehab facility.

The collaboration between HealthSouth’s rehab and home health arms appears to be good for the bottom line as well. Home health admissions for the third quarter increased by 50.7%, including 15.3% in same-store growth. About 440 basis points of the growth in same-store admissions was attributable to clinical collaboration with HealthSouth rehab facilities, according to Executive Vice President and CFO Douglas Coltharp.

Collaborator In Waiting

With its clinical collaboration model starting to fire on all cylinders, HealthSouth is making moves to position itself as a leader in the evolving post-acute landscape. Specifically, it plans to take on Medicare risk-sharing by taking on a “collaborator” role in the CJR initiative.

Collaborators in CJR, which can include rehab facilities and home health agencies, can enter into agreements with acute care hospitals, under which they can receive both financial rewards and penalties based on how well they manage orthopedic patients during their 90-day episode of care.

HealthSouth intends to approach 20 to 25 acute care hospitals in 18 to 20 CJR markets, and have four to six collaborator agreements inked during the first half of 2017, Coltharp said. This scale will keep the financial risk “immaterial” for the company but will provide it with “very important” lessons as payment models move increasingly toward these types of episodic, value-based models.

HealthSouth also intends to create risk-sharing bundled payment models for Medicare Advantage plans, to begin piloting in 2017. This might take the form of replacing a current SNF stay with a brief IRF stay followed by home health, at a fixed rate, Coltharp explained.

As for what Encompass is doing to prevent readmissions and otherwise drive the results that are underlying the larger strategy, it comes down largely to being able to get a comprehensive view of the patient, said Encompass CEO April Anthony.

“You’ve got to really understand the dynamics in that home, the caregiver dynamics, the environmental dynamics,” Anthony said. “And that’s what home health really brings to the table is the ability to look at the total situation in a way that no one else has seen it before because of not being physically present in that home and then make sure that we build a care plan to address all of those issues.”

New CEO

Grinney will step down from the CEO role at the end of the year, to be replaced by current COO Mark Tarr, the company announced in conjunction with its quarterly earnings.

HealthSouth had been beset by an accounting fraud scandal at the time Grinney took the helm 12 years ago. He has since righted the ship and grown the company through acquisitions such as the Encompass deal, and several of the analysts on Friday’s call praised his leadership.

“[HealthSouth] is one of the best managed companies I’ve seen in a long time,” said Mizuho Securities analyst Sheryl R. Skolnick.

Grinney will remain in a consultant role through March 31, 2017.

Tarr has been with HealthSouth for 23 years, and he does not anticipate any major shifts in direction in the early days of his CEO tenure.

“I don’t see any quick major changes that would be necessary,” he told AL.com. “… Relative to what we are focused on now with regard to both our inpatient rehabilitation hospital platform and our home health platform through our Encompass partnership, I think that is the fundamental structure and focus that we’ll have going forward for the foreseeable future.”

The new operations chief will be Barb Jacobsmeyer, currently president of the company’s central region, who will be promoted to Executive Vice President of Operations.

HealthSouth shares were up 3.52% at market close on Friday.

Written by Tim Mullaney