Home Health Stocks Rebound After HHGM Takes Backseat

In the wake of the final 2018 payment rule for home health being released, public companies have seen their stocks skyrocket.

The Centers for Medicare & Medicaid Services (CMS) released its prospective payment system (PPS) 2018 update final rule on Wednesday without the inclusion of the home health groupings model (HHGM)—a proposed model that would have significantly changed the home health payment system and cut as much as $950 million from the system in 2019. That looming cut, along with other significant proposed changes within HHGM, sent stocks of public home health care providers plunging when it was first proposed in July.

At end-of-day tradingThursday, most share prices had recovered to near their July levels, with one company seeing over a 25% jump by mid-day. Investors are reacting to the good news—and betting HHGM could continue to be kicked down regulation road, or even changed in the future.

“[The stocks] had already come back a little bit from July, and seemed to get over the shock and get used to the idea that the groupings model may become reality,” Rich Tinsley, president and CEO of Stoneridge Partners, told Home Health Care News. “The upside that you now see is that it may not be reality—it could be something less dramatic than what was proposed.”

On Thursday, public home health care companies saw huge gains: Almost Family (Nasdaq: AFAM) jumped nearly 27%; Amedisys (Nasdaq: AMED) rose more than 14%; LHC Group (Nasdaq: LHCG) was up more than 10%. Kindred Healthcare (NYSE: KND)  Encompass Home Health—of HealthSouth Corporation (NYSE: HLS)—also rose nearly 7%.

“The ones that are pure-play [home health providers] were upped the most,” Frank Morgan, analyst with RBC Capital Markets, told HHCN of the stock reaction on Thursday. “Even the companies that had some exposure [to home health], like HealthSouth with Encompass, was up more than 6.5%, and Kindred was up about 7%. It’s good news, a big relief.”

M&A Reactions

Executives of major providers in the space were generally cheerful about the decision, as well.

“As an industry, we worked very hard to make sure that CMS, OMB and all our elected officials were aware of the pitfalls of this rule, and we were pleased that this withdrawal appears to be an indication that our voices were heard and that our concerns for the impact this rule would have on seniors across America was acknowledged,” April Anthony, CEO of Encompass Home Health—the home health care branch of HealthSouth Corporation (NYSE: HLS)—told HHCN.

Anthony was a vocal opponent of HHGM, calling it a “significant threat” to the industry even before it was proposed. In the company’s most recent earnings call with investors, executives at HealthSouth—soon to be known as Encompass Health—stated the company would continue moving forward with acquisitions in the home health and hospice space, though there had been some slowdown in the pipeline as a result of the HHGM proposal.

However, while there was some talk of a slowdown of M&A in home health as a result of the HHGM proposal, deals were still happening throughout the year—they just may not have been public. However, without HHGM likely to come soon in its current form, M&A could pick back up.

“Some of the publicly traded transactions have slowed,” Tinsley said. “I expect that to increase in quarter four [of 2017] and quarter one [of 2018]. There are still a ton of transactions going on. From a size perspective, we have not seen a decrease.”

At the same time, home health valuations are also at record highs, Tinsley said.

Looking ahead, acquisitions are likely to pick up steam, and one CMS number also reported in the final rule may support the idea that more activity is going on in the space. In its estimates, CMS noted the number of home health agencies that would be affected by the payment rule was 11,056—a 6% decrease from the 11,781 agencies reported in 2014, some industry publications have reported.

The Medicare Payment Advisory Commission (MedPAC) has reported different estimates for the number of home health care agencies serving Medicare beneficiaries (12,400 agencies in 2014 and 12,300 in 2015), though its figures show consistent declines after more than 40 years of growth in the industry.

The decline could signal that there are significant buying opportunities in the market, with some smaller operators bowing out of the industry, particularly when coming up against the major regulatory headwinds and as quality ratings become increasingly important.

“The thesis is that consolidation continues,” Morgan said. “Where quality measures are important, having scale and infrastructure to basically make sure all the agencies are in positions for really high star ratings are the winners. And [for] the smaller guys, it will be harder.”

Not Out of the Woods

While things are looking up for the industry, CMS could bring HHGM back at a later date. As the agency stated in the final rule, it is considering many of the more than 1,300 public comments that were left on the Federal Register, including the industry’s desire to be more engaged in the process of developing a new and modernized payment system.

“Throughout the process we acknowledged that we would be in support of changes that moved payments from volume to value and we’re open to pursue such changes in collaboration with CMS,” Anthony said. “We are prepared to begin this effort immediately and have already reached out to CMS representatives to inform them of our willingness to engage in that process as soon as they are ready to do so.”

Major health care players are eager to jump into collaboration with CMS, and are supportive of the decision to withhold the model from the 2018 final rule.

“We commend CMS for considering the unanimous voice of patient advocates, the home health provider community and bipartisan Congressional leaders to not finalize HHGM, and to continue an open dialogue with stakeholders to get system design right,” Benjamin A. Breier, Kindred’s president and CEO, told Home Health Care News in an emailed statement. “Kindred looks forward to an ongoing close engagement and collaboration with CMS and Congress to develop a reformed model that strikes the right balance in promoting high quality home health care in a fiscally responsible manner.”

Written by Amy Baxter