Proposed Groupings Model Takes Toll on Home Health Stocks

Despite experiencing a “hot streak” in the first half of the year, home health care companies saw sharp dives in share values in July, due in large part to investors’ reactions to the Centers for Medicare & Medicaid Services’ (CMS) proposed home health groupings model (HHGM).

Three of the largest publicly traded home health care companies—Almost Family (Nasdaq: AFAM), Amedisys (Nasdaq: AMED) and LHC Group (Nasdaq: LHCG)—all encountered a dent in share price, creating a 19.57% drop in Stoneridge Partners’ Home Health Index in July compared to its performance in June. In comparison, the S&P 500 increased 1.93% during the month.

As part of CMS’ proposed rule for its 2018 prospective payment update, home health agencies can expect payments to be reduced by 0.4%, or $80 million. The groupings model was included in the proposal—to be implemented in 2019—and could have significant impact on reimbursements for the sector as well as create major shifts in operations for agencies, including shifting the payment period from a 60-day episode to a 30-day period and categorizing patient into six clinical groups.

Baton Rouge, Louisiana-based Amedisys took the biggest loss amongst its peers, seeing a 24.60% decrease in share price last month. Almost Family’s stock also took a hit; the Louisville, Kentucky-based agency saw stocks plummet 19.8% from June. Meanwhile, Lafayette, Louisiana-based LHC Group “fared the best,” only experiencing a 14.7% decline in share price last month.

Frisco, Texas-based Addus HomeCare (Nasdaq: ADUS) is not included in the index because only a small portion of its income comes from Medicare. Despite this, the agency was not spared last month, seeing its share price take a 8.74% hit.

Impact of the Groupings Model

The proposed groupings model could slash as much as $950 million in reimbursements to home health care in 2019 —a sobering fact fully realized among professionals in the industry.

“The public markets reacted poorly to the proposed rule,” said Richard Tinsley, CEO and president at Stonebridge Partners.

Keith Meyers, LHC Group chairman and CEO, acknowledged the groupings model in the company’s second-quarter earnings call, saying the proposal, in its current form, would only “do more harm than good” and drive patients towards more costly avenues of care.

Despite the shadow the proposal may cast on the industry, Tinsley acknowledged that it is not set in stone.

“I think everybody would agree that that’s not going to be the final rule, and [investors are] still bullish in the market,” said Tinsley. “It was just a mild correction and a mild reset.”

Frank Morgan, analyst with RBC Capital Markets, agreed.

“While there might have been some worry … that something might be in the works in terms of change for home health care, I think once this [rule] finally came out, there was an initial knee-jerk overreaction to this proposal,” said Morgan.

Tinsley believes that share prices will soon rebound. In fact, all four companies’ year-to-date performance has remained steady, according to Stonebridge’s data.

Amedisys, Almost Family, LHC Group and Addus all posted year-to-date stock increases of 11.1%, 12.1%, 26.7% and 8.7%, respectively.

Amedisys CEO Paul Kusserow appeared to have a similar sentiment about the ruling, stating during the company’s recent quarterly earnings call that the ruling “ain’t over until it’s over.”

As for Tinsley’s forecast for the latter half of 2017: “I think it’s going to continue to be strong.”

With the second quarter behind them, Morgan explained that investors can expect to see stocks continue to do well.

“I think that you can still have good, fundamental performance this year, and, as the market gets more comfortable that this proposed rule will end up getting changed, then I think you can see multiples expand again and you’ll see good performance,” said Morgan.

Written by Carlo Calma

Carlo Calma
Business Reporter at Aging Media Network
Carlo enjoys running and taking indoor cycling and rowing classes. He tempers his active lifestyle by indulging in Chicago's diverse food scene.