Under HHGM Threat, Encompass Acquires With Caution

As home health care deals have cooled off in the wake of the home health groupings model (HHGM) proposal, at least one major provider is continuing to meet its acquisitions goals—albeit, cautiously.

That was one message from the third quarter earnings call with investors with HealthSouth (NYSE: HLS), soon to be known as Encompass Health. Encompass is one of the nation’s largest home health care providers, and its inpatient rehab facility (IRF) business, HealthSouth, is the largest IRF provider.

During the third quarter of 2017, Encompass had deployed roughly $26 million in acquisition spending on home health and hospice, executives said during the earnings call Friday. The figure was a little more than half of the low-end of the company’s acquisition goal of $50 to $100 million in spending in 2017.


The slower acquisition spending has been industrywide through the second and third quarter of 2017, compared to the first three months of the year and the same quarters last year. The HHGM proposal, which threatens to cut as much as $950 million in home health payments in 2019 alone and disrupt the payment model, has seemingly weighed on M&A activity.

With so much uncertainty surrounding HHGM, home health care companies are slower to buy.

“To [spend] capital in advance of a major methodology change that could in fact be a significant reimbursement cut, with the potential for an overshooting of that target because of the volume impact as well, I think would be foolhardy,” Sheryl Skolnick, analyst with Mizuho Securities, told Home Health Care News. “I hope that it is the case, that HealthSouth and other buyers would be very disciplined in apporaching acquisitions of home health agencies in the very uncertain environment.”


However, with four more acquisitions closing on October 1 and others being finalized by the end of the year, Encompass expects it will meet the low end of its spending goal range for 2017, executives stated.

For the third quarter 2017, Encompass reported net operating revenues of $181.2 million in its home health segment, 11.9% higher than the third quarter 2016. Hospice revenues jumped 49.6% in the third quarter 2017 compared to last year, reaching $19.6 million.

Indeed, Encompass CEO April Anthony stated that the company is continuing to acquire.

“We continue to see [acquisition] activity in the market. We continue to see multiples remain pretty consistent,” she told investors Friday. “[HHGM] may cause you to sort of walk away from a few deals that maybe would have been more intriguing before this overhang was there. And so far I would say it’s been a pretty minimal impact on the market.”

At the same time, Encompass is taking a wait-and-see approach to HHGM and advocating against it. Anthony previously spoke out against HHGM, calling it a “significant threat” to the industry.

“We are working all avenues,” she said Friday. “We’ve had meetings with CMS and OMB, and as you try to read the tea leaves on this, we never want to get away from legislative options as well. There are a lot of folks on the Hill who think this is a bad proposal as well. So we are working all avenues to make sure we have all our bases covered.”

Anthony’s statements came the same day that a proposal to withdraw HHGM reached the House Ways and Means Committee. OMB is expected to make a decision on the final payment rule by November 1.

Across the industry, other major home health care players have either slowed down their acquisitions or looked elsewhere for new revenue lines.

“The pace of acquisition of standard Medicare agencies has been slow,” Skolnick said. “Amedisys (Nasdaq: AMED) has been focusing on the personal care side. The publicly traded buyers are being quite disicpined and not rushing into transactions.”

For the third quarter, HealthSouth reported net operating revenues of $995.6 million, up 7.4% from the same quarter in 2016. Also during the quarter, Encompass announced its new Post-Acute Innovation Center in collaboration with Cerner Corporation to develop analytical tools to better manage care.

HealthSouth also reported some minimal impact from Hurricanes Harvey, Irma and Maria.

The company’s stock price rose more than 4% on Friday following the earnings call, hovering above $46 per share.

Written by Amy Baxter

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