In the first quarter of 2018, Amedisys Inc. (Nasdaq: AMED) saw its margins swell to their highest level since 2015. And its home health services line improved, despite lower reimbursement rates for the space.
Baton Rouge-based Amedisys beat analyst expectations for the quarter, and leadership explained its margin increase as coming, in part, from greater efficiencies and higher growth in its home health sector after some struggles over the last several quarters.
With rising clinical star ratings and financial rewards coming in from value-based purchasing, as well as a new opportunity on the Medicare Advantage front, Amedisys executives are bullish on the year ahead. The company is poised to continue its growth and expansion across service lines.
‘More juice in the orange’
Like its industry peers, Amedisys is looking to acquire within the hot hospice sector, though high valuations have turned executives off from some of the larger deals in the space, with CEO Paul Kusserow calling the asset prices “unattractive.”
“I’ve been frustrated with the market,” Kusserow said during the company’s quarterly earnings call Tuesday. “[We’re] holding ourselves in check out there on things that fundamentally we don’t believe can pencil out in any environment, particularly if there are any downturns.”
Amedisys is currently in a position to potentially take on lots of M&A activity in 2018, with more than $120 million in cash on hand, according to the company’s documents.
Executives are looking for mid-size deals in the $20 million to $50 million range, according to Kusserow, who says this pipeline is strong. The hospice M&A strategy includes a three-prong approach—de novo operations; mid-size acquisitions; and potentially major deals.
Meanwhile, the company’s hospice sector continued to expand in Q1, marking the 12th consecutive quarter of double-digit growth, executives stated. Admissions for the sector rose 5% from 2017, while Medicare revenue increased 12% to $91.8 million.
However, even with a strong ability to acquire in this strong sector at the moment, market forces are requiring the company to be “disciplined” in its approach.
“We worked so hard to get here, to generate [that cash on hand], and we are excellent operators in all three business lines,” Kusserow said. “My response is to build and work on the cadence we have from an organizational perspective. We think there’s a lot more juice in the orange, and we won’t do a deal that knocks us off our game.”
M&A activity is strong across the sector, with competitors such as Encompass Health (NYSE: EHC) and Kindred Healthcare (NYSE: KND) doing deals to build out their service lines. At the same time, two of its biggest industry peers, LHC Group (Nasdaq: LHCG) and Almost Family, merged to become the sector’s second-largest provider. LHC Group CEO Keith Myers recently noted the company will aggressively pursue transactions in 2018.
Despite the need to keep up with its peers, it is not entirely unexpected that the company would hold back deploying capital on transactions, as it has had to overcome lower admissions growth in its home health business compared to the greater industry. However, the company’s turn-around initiatives appeared to be working during the first quarter of the year, with 4% admissions growth, just below the 2018 guidance of 5%.
“Last year, given the fact that they had to focus their attention on proving the home health growth, it is fine they weren’t deploying as much capital,” Matt Larew, analyst with William Blair, told Home Health Care News.
Instead of acquisitions, Amedisys will likely focus more on deploying capital on its organic growth with de novo hospice and continuing to improve its home health admissions, in Larew’s view.
“I think people could be disappointed if [Amedisys] rests on the quarter and doesn’t continue to deploy capital on the internal [growth] or find strategic tuck-ins, but they have been focused on righting the internal ship,” Larew said.
During the first quarter of the year, Amedisys did expand its home health care service line in Kentucky with the acquisition of Christian Care Communities.
$1 million value-based care payoff
On the regulatory front, Amedisys is looking forward to potentially getting involved in the Medicare Advantage space with its personal care services, which reached $17.9 million in revenue during the first quarter, compared to $13.5 million in 2017.
The Centers for Medicare & Medicaid Services (CMS) announced in April that non-skilled in-home supports could be added as supplemental benefits in 2019 Medicare Advantage plans. Upon the news, many home health care providers with personal care service lines are looking into expanding their managed care reach, including Amedisys.
“We are delighted CMS is looking at this and believe this can be an integral part of MA as they are expanding it,” Kusserow said. “We don’t know if there is enough meat on the bones for us to hang on and figure out how to monetize this, but we are hopeful.”
The company also has a presence in seven of the nine states involved in CMS’ home health value-based purchasing pilot, which rewards high-quality care and value-based achievements. Over the next several years, CMS will incrementally adjust payments to providers in these states. Amedisys received $250,000 in “bonus payments” from CMS for its work in VBP.
“As the percentage of payment in VBP grows from 3% to 8% by 2022, we will see meaningful revenue upside for our performance,” Kusserow said. “We encourage CMS to expand VBP nationwide.”
Investors are similarly bullish on the current home health regulatory environment and Amedisys’ position within the value-based purchasing model.
“We’re more optimistic on the prospects for the home health (HH) sector underpinned by regulatory visibility, return to predictable M&A and emerging bundling/value-based models,” a note from Baird Equity Research reads.
Stretching out those bonus payments for the full year, Amedisys stands to gain roughly $1 million from its clinical achievement in VBP.
“This is the first quarter in home health that they can receive those payments, which are based on 2016 payments,” Larew said. “For the full year, they are talking about $1 million, and that impact really grows for the next several years.”
Amedisys also saw improved clinical excellence at the start of the year, with higher star ratings during the latest update from the Centers for Medicare & Medicaid Services’ (CMS) Home Health Compare star ratings. The boost is consistent with recent star ratings improvements over the last several quarters, as Amedisys has continued to focus on cardiac health and COPD programs, which affect 80% of their patient population, Chief Clinical Officer Susan Sender said during the earnings call.
For the quarter, Amedisys reported overall net service revenue of $399.3 million, a $34.6 million, or 9%, increase from the same three-month period in 2017. Net income rose to $27.2 million, compared to $15.1 million in 2017.
Amedisys’ stock was up more than 8% as of mid-day trading on Tuesday, above $71 per share.
Written by Amy Baxter