Encompass Executives Predict Frothy Acquisition Market in 2018

After a year of turbulent home health regulatory pressures, Encompass Health (NYSE: EHC) is prepared to make a play for acquisitions in the home health and hospice sectors.

However, Encompass isn’t the only company eyeing new opportunities in 2018, and the added competition could heat up the market, executives stated during the company’s end-of-year earnings call with investors Tuesday.

“Many of the providers in the public states in home health care are signaling a return to an appetite for acquisitions, stronger than in the past,” April Anthony, CEO of Encompass at Home—the home health care business of Encompass Health—said during the call. “That will create a frothier market.”

The added excitement in the home health care market is due to the defeat of a major proposal last year that threatened to upend the payment system and cut nearly $1 billion in payments from the industry. The Home Health Groupings Model (HHGM) was not finalized, but home health payment reform was approved in Congress’ annual budget, which was finalized at the beginning of February. The new payment model will be finalized throughout 2018 with stakeholder input.

With more security around regulations, acquisitions could ramp up, particularly as some players held off on buying as the proposal made its way through the rule making process.

“It was more that last year was depressed,” Frank Morgan, an analyst with RBC Capital Markets, told Home Health Care News. “A lot of strategic buyers put on the brakes until the HHGM ‘grouper model’ issue that shocked everyone in the fall what it hit. It put the brakes on M&A and stopped everything until there was better visibility.”

Fortunately, there is likely to be plenty of supply for the increased buying appetite in 2018.

“There is plenty of opportunities on the home health side with 12,000-plus providers across the nation,” Anthony said. “[There’s] always plenty of supply with the exception of CON (certificate of need) states. Generally, last year’s slowdown was a combination of [being] buyer and seller driven. …Last year was an anomaly for us at the purchasing level, and we will see a return to normality this year.”

As Encompass feels more confident with the regulatory environment, the provider is also looking to increase its exposure to Medicare Advantage (MA) plans, like other major home health care providers. So far, Encompass has one contract with an MA provider in Houston, executives stated. Across the industry, the rate of integration with home health care was slower than originally predicted.

“It’s moving more slowly than perhaps we had anticipated a couple years ago,” Doug Coltharp, executive vice president and chief financial officer, said. “We are an active participant on both businesses in ACOs and MCMs out there.”

Encompass’ approach to acquisitions, mostly done through joint-venture deals with health systems and hospitals, are likely to position the company to take on more risk through MA in the future, executives said. Overall, the company will continue to look for acquisitions in markets that overlap with its inpatient rehabilitation facility (IRF) business, including home health and hospice assets.

Encompass has allocated $50 million to $100 million to acquisitions for 2018, executives said.**

Market peers 

Consolidation in the home health care space moved at a rapid pace last year, with three of the biggest public companies in the industry announcing major mergers.

Lousville-based Almost Family (Nasdaq: AFAM) and Lafayette, Louisiana-based LHC Group (Nasdaq: LHCG) announced their merger in November 2017, while Humana (NYSE: HUM) declared it would acquire Kindred Healthcare’s (NYSE: KND) home health business, Kindred at Home, just a month later.

Encompass executives see the mergers, particularly of Kindred by Humana, as positive for the industry overall, despite having some overlap patients with Humana.

“We think Humana’s entry into the home care space is a positive indication for the industry at large, that payers are seeing the value of home health care,” Anthony said. “We get such a small amount of our payments from Humana, we’re not particularly worried about the long term relative to Humana referrals. There’s no near-term concern whatsoever, and in the long term [there’s] a tailwind recognition across multiple payers that home health care is where to be investing rather than [seeing it as] a commodity.”

In addition, as these companies work through their mergers, they may make fewer acquisitions, and provide opportunities for others to buy.

“Three of the larger players in the space are undergoing significant transformation in 2018—the acquisition of [Kindred] by Humana and the merger of equals between AFAM and LHCG,” Coltharp stated Tuesday. “[That] can be a lot to work through and potentially limit the appetite [for acquisitions].”

For the fourth quarter 2017, Encompass reported net operating revenues of $1.02 billion, up 7.3% from the same quarter in 2016. Home health net operating revenue topped $187 million, up from over $165 million in 2016. Hospice net operating revenue rose to $21.6 million, up from $17.1 million in the fourth quarter of 2016.

The market seemed to react positively to the company’s earnings, with its stock price up nearly 2% by end of day trading Tuesday, hitting above $54.

Written by Amy Baxter

**Editor’s note: This article has been updated from a previous version that stated Encompass Health has allocated $100 million to $150 million for acquisitions.