Home health giant Amedisys Inc. (Nasdaq: AMED) achieved strong financial results in the second quarter of 2018 and is bullish on a variety of industry trends and shifts, including major changes related to Medicare payments and ongoing consolidation across the post-acute care continuum.
The company also announced that it has acquired Bring Care Home, which provides skilled and non-skilled home care in the North Shore, Merrimack Valley, and Greater Boston markets in Massachusetts.
Baton Rouge, Louisiana-based Amedisys operates about 420 locations in 34 states and the District of Columbia, offering home health, in-home personal care, hospice and other services.
In the second quarter of this year, the company grew adjusted net service revenue by more than 10% on a year-over-year basis, reaching $413.3 million. It hit an adjusted EBITDA margin of 12%, achieving a goal set by leadership in early 2015, when CEO Paul Kusserow came on board to lead a turnaround effort.
The Q2 financial results were driven by growth across all three major lines of business, and Kusserow credited strong operations and lower turnover in particular. For instance, on the operations front, home health cost per visit decreased from $80.61 in Q2 2017 to $80.07 in Q2 2018, due to improvements in areas such as staffing mix, productivity and scheduling initiatives, and medical supply procurement.
As the industry evolves in the months and years ahead, Amedisys leaders believe they are well-positioned to build on these recent successes.
“When there’s change, there’s always opportunity,” Kusserow said Wednesday, on the company’s Q2 2018 earnings call.
Payment landscape: ‘The world has changed’
Medicare Advantage is an increasingly important payer for home health. “Private episodic” and “per visit” payers, including MA and commercial insurance plans, accounted for 29.1% of Amedisys’ Q2 2018 revenues. That’s up from 27.9% the prior quarter.
However, MA rates typically are lower than Medicare fee-for-service. Kusserow has spoken in the past about Amedisys “changing the game” by striking more favorable terms with Medicare Advantage payers, and he reiterated that intention on Wednesday’s earnings call.
Amedisys leadership is in talks with the major MA payers, he said, and these discussions have changed in recent months, in light of certain developments. Notably, major MA payer Humana (NYSE: HUM) took a stake in Kindred at Home, the largest home health provider in the country. Also, the Centers for Medicare & Medicaid Services (CMS) announced that non-skilled in-home care will be an allowed MA benefit starting in 2019.
“The world has changed since Humana bought Kindred,” Kusserow said, adding that the deal has other MA players considering the role of home health care, and perceive that consumers prefer to receive care at home rather than other settings.
Amedisys currently has some “very small” initiatives with MA plans, he noted. Going forward, the company is focusing on its capabilities in care coordination, discharge planning and other areas, including shifting more, sicker patients to the home setting. Overall, this should make Amedisys a more attractive partner to managed care, offering a wrap-around service to help manage their beneficiary populations, keeping costs down and quality high.
The goal is to make a bigger splash with MA in the near term.
“We need to bring that to fruition in the next six months or so, [to demonstrate that] we can have a good deal and show that we are changing the game with payers,” Kusserow said.
On the Medicare fee-for-service side, Amedisys is gleaning financial upside from the value-based purchasing (VBP) initiative, and is supportive of the forthcoming new payment framework known as the Patient-Driven Groupings Model (PDGM).
The VBP program is mandatory in nine states—seven of which Amedisys operates in—and ties home health Medicare reimbursements to quality metrics, rewarding high-performing providers while penalizing poor performers. This is the first year that incentive payments are being made, and Amedisys received about $250,000 in Q2.
Kusserow would like to see the program rolled out to all 50 states. He believes Amedisys would perform well and that the approach would be good for the industry as a whole, incentivizing high quality care and helping cull substandard agencies from markets.
Amedisys has pushed CMS and Congress to expand VBP, but there is no indication that such a move is imminent, said David Kemmerly, general counsel and senior vice president of government affairs.
As for PDGM, Amedisys executives emphasized that the new payment model was expected, in light of a similar proposal that was floated last year but ultimately quashed. PDGM is superior to that prior version, given that it is mandated to be budget-neutral and not kick in until 2020, Kusserow said.
Like other major home health providers and industry groups, including Encompass Health (NYSE: EHC) and the National Association for Home Care & Hospice (NAHC), Amedisys is concerned with some proposed aspects of PDGM. These concerns include so-called behavioral adjustments and new thresholds for low-utilization payment adjustments (LUPAs).
While early analyses show that PDGM would result in about a 1.6% reduction in Amedisys’ Medicare payments, there are certain steps that could lessen that hit, such as beefing up referral streams from institutions such as hospitals. In addition, there is a mandated market basket increase of 1.5% slated for home health in 2020, Kusserow noted.
“Over the next 17 months, we’ll be extremely focused and diligent in moving to the new payment system with minimal disruption to the business,” he said.
M&A playbook
Amedisys entered the private duty home care sphere in April 2016, with an acquisition in Massachusetts. Since that time, the company has become the largest provider of in-home personal care in the Bay State, and has further expanded its footprint with the Bring Care Home acquisition.
Amedisys did not disclose the acquisition price, as the deal is being considered immaterial from an earnings standpoint, Vice President of Marketing and Communications Kendra Kimmons told Home Health Care News in an email.
The goal in adding private duty care was to build out a full continuum, in part to enhance Amedisys’ appeal as a partner to managed care organizations. The strategy appears to have been prescient.
“A lot more of our payer friends are asking about these types of services,” Kusserow said on the earnings call. “[They’re interested] in how to have personal care taking care of ADLs [activities of daily living], so that we can take care of high-cost, chronically ill people.”
Going forward, Amedisys is looking in particular at Pennsylvania, Florida, and Georgia as good markets for expanding personal care services, as well as Tennessee, where it has already started to build its platform. These are areas where personal care would meaningfully overlap with existing home health and hospice locations.
About six months ago, facing rising valuations in the M&A market, Amedisys decided to focus on off-market deals and hired a team to source these. This strategy has been successful, and there is currently a healthy pipeline for all business segments, according to Kusserow.
Finding good opportunities for acquisitions is especially important in the hospice arena, where valuations are at historic highs—with some multiples reaching 15 times EBITDA, Kusserow said. However, Amedisys is also prepared to build hospice businesses from scratch in markets where acquisitions are not available.
A few of these de novo build-outs are already in progress, said COO Chris Gerard. These typically take about nine months at a cost of around $40,000 per month, and break even around the 18-month mark, he said.
With leverage currently at 0.6x EBITDA, Amedisys has “meaningful dry powder … to pursue accretive acquisitions,” Jefferies analysts observed in a note issued Wednesday.
“That said, we would note that we admire management’s disciplined approach to valuation and would prefer to see them maintain their current deal pace over pursuing expensive or non-strategic deals,” they wrote.
Amedisys “clearly” needs to start deploying its capital, including through more acquisitions, Kusserow stated on the earnings call, suggesting that the company is entering a new phase.
Rather than managing costs extremely tightly, as the company has since he first came on board in 2015, now it’s time to re-invest to “take good care of our employees” and innovate, he said.
AMED shares were up more than 13% as of mid-day Wednesday, trading at $105.84.
Written by Tim Mullaney
Companies featured in this article:
Amedisys, Bring Care Home, Encompass Health, Humana, Kindred at Home
