Fresh off a recently announced acquisition of a regional provider, Encompass Health (NYSE: EHC) is doubling down on its organic growth to be a competitor in the tightening home health care space.
Encompass, an inpatient rehabilitation, home health and hospice care services provider based in Birmingham, Alabama, posted strong revenue growth for the first quarter, driven by inpatient rehabilitation and home health care services.
Encompass announced it was acquiring Camellia Health for $135 million in March, adding a portfolio of home health, hospice and private duty care locations in Mississippi, Alabama, Louisiana and Tennessee. For the rest of 2018, Encompass will focus on its organic growth and integrating its transactions into the business. The Camellia deal is anticipated to close on or before June 1, 2018, executives said during the company’s first quarter earnings call on Friday.
“Our primary focus will be on successfully integrating the Camellia,” said Doug Coltharp, executive vice president and CFO of Encompass.
Previously, executives have stated their desire to seek out new hospice acquisitions. With a major deal underway, Encompass will likely steer clear of bigger buys for the remainder of the year. Still, Encompass will keep an eye out for “smaller agencies, akin to what we’ve done in previous years,” Coltharp said.
“There’s plenty for them to do,” Matt Larew, analyst with William Blair, told Home Health Care News. “The approach of looking for more home health and hospice like Camellia, and even [an acquisition] a littler larger, makes a lot of sense versus competing for the larger assets, though that’s not to say they wouldn’t [do that].”
Coltharp also noted Encompass isn’t looking to compete with some of the types of major deals that have been announced at the end of 2017 and beginning of this year, including the acquisition of Kindred Healthcare’s (NYSE: KND) home health and hospice business by insurance giant Humana (NYSE: HUM). Humana also announced it is acquiring hospice provider Curo Health.
“Those are larger assets and they come with a full price tag,” Coltharp said. “With our company, doing an acquisition of that size, we’d have to mindful of the balance sheet and…mindful of our shareholders and the integration of that.”
Compared to industry peers LHC Group (Nasdaq: LHCG) and Amedisys (Nasdaq: AMED), Encompass may not pursue new Medicare Advantage opportunities, with CEO Mark Tarr stating the company isn’t currently interested in adding personal care services.
This focus on its core service lines—IRFs, home health and, now, hospice—rather than on managed care growth boils down to Encompass’ business model of expanding clinical collaboration across its two main businesses. As of March 31, 2018, roughly 60% of the company’s IRFs were located within overlap markets with its home health care operations, according to supplemental information.
“Encompass, [with] 80% of revenue being IRF-based, they are more focused on the clinical collaboration between IRF and home health,” Larew said.
Encompass reported net operating revenue of $1.046 billion in the first quarter of 2017, up 9.3% from $957.1 million in the first quarter of 2017. Adjusted EBITDA reached $223.3 million in the first three months of 2018, compared to $200.8 million in Q1 2017. The company also raised its full-year guidance.
Home health care admissions were up 9.9% in the first quarter compared to the same time period in 2017.
However, revenue per episode in the home health care segment was negatively impacted by an approximate $4 million reserve for a Zone Program Integrity Contractor (ZPIC) audit. Without the audit impact, revenue per episode would have increase 0.7% for the quarter. With the audit, it was negative 1.5%.
Encompass stock was up more than 6% as of mid-day trading Friday, hovering above $61 per share—its highest price year to date.
As the company’s stock climbed, analysts saw more room for “larger opportunities still in play” for the stock to rise even higher, based on the company’s clinical collaboration focus, Larew said.
Written by Amy Baxter