LHC Group Not Distressed by PDGM, Pleased with Almost Family Integration

Leaders with LHC Group (Nasdaq: LHCG) struck an optimistic tone following the release of second quarter 2018 financial results.

The integration of Almost Family is proceeding smoothly, joint venture and acquisition activity is favorable, and forthcoming regulatory changes should not cause major disruptions, they said Thursday during an earnings call.

On April 1, LHC Group closed on its merger with Almost Family, becoming the second-largest home health provider in the nation. Based in Lafayette, Louisiana, the combined company operates about 575 home health locations and 109 hospice locations.

The new, larger LHC Group posted second-quarter 2018 net service revenue of $502 million. Given the merger with Almost Family, this was a year-over-year increase of 95%.

The company’s organic growth in home health revenue was 9%.

The $502 million in revenue was “a bit light” of expectations, William Blair analyst Matt Larew stated in a note on the earnings. However, LHC’s adjusted earnings per share of $0.84 beat expectations. Larew described the earnings report overall as a “positive update.”

New joint ventures

In conjunction with the quarterly earnings, LHC Group announced the finalization of two joint venture agreements. LHC Group has long pursued hospital and health system joint ventures, with about 310 home health, hospice and personal care JV locations under LHC Group management.

The company is purchasing a majority ownership of St. Mary’s Hospice of northern Nevada, which serves the Reno market. The move should result in about $4.9 million in annualized revenue, according to the company.

The second JV is with Capital Region Home Health, which is affiliated with University of Missouri Health Care in Jefferson City. This transaction should result in annualized revenue of about $1.6 million.

Going forward, the deal pipeline is “robust,” and includes freestanding opportunities as well as further joint ventures with hospitals and health systems, CFO Josh Proffitt said.

The JV possibilities run the gamut from individual hospitals with $2 million to $10 million in annual home health and hospice revenue to systems that have between $15 million and $50 million in revenue, he said.

Expansion could also come through the existing joint venture with LifePoint Health, noted CEO Keith Myers (pictured above). In 2016, LHC Group struck this JV to share ownership and governance of LifePoint’s 20 home health and 10 hospice locations, as well as all future acquisitions.

Brentwood, Tennessee-based LifePoint encompasses hospitals, physician practices, post-acute facilities and other operations across 22 states. In late July, it was acquired by Apollo Global Management for about $5.6 billion and is set to merge with Apollo-owned RCCH HealthCare Partners. Also based in Brentwood, RCCH operates 16 regional health systems in 12 states. On a pro forma basis, the combined company would have had 2017 revenues of more than $8 billion.

“LifePoint’s footprint will likely expand even more, and we anticipate for that to result in great opportunities to expand our very strong growth-oriented partnership,” Myers said.

Prepping for PDGM

Myers noted that he had spent the day prior to the earnings call meeting with federal government officials in Baltimore and Washington, D.C. Based on these meetings, Myers is confident that home health providers’ input will lead to improvements in the Patient-Driven Grouping Model (PDGM), a proposed Medicare home health payment framework slated to take effect in 2020.

The switch to PDGM was mandated by the Bipartisan Budget Act of 2018, which passed in February.

In April, the Centers for Medicare & Medicaid Services (CMS) released details of the model, which includes a switch from 60-day to 30-day payment periods, as well as changes related to therapy billing. Congress mandated that PDGM be budget neutral, meaning that it should not decrease reimbursements to providers. Congress also mandated that the reform start on Jan. 1, 2020.

Like other home health industry leaders, Myers singled out budget neutrality as a plus while noting several questions and concerns with PDGM. LHC Group is preparing formal comments that it will submit to CMS before the agency issues the final rule on PDGM, which is expected in November.

“I’m encouraged with the tone and dialogue we’re having with CMS and HHS,” Myers said. “I think they genuinely are listening to us at a level that wasn’t there 10 years ago and maybe not five years ago. We really have a seat at the table.”

A legislative remedy would be “Plan B” if the final rule is not satisfactory, he said.

Draft legislation in the works primarily relates to clarifications regarding budget neutrality and the 30-day payment periods.

“We truly believe the intent [of budget neutrality] is to not adversely impact reimbursement to the extent that it would slow or interfere with momentum we have in moving patients downstream from more costly settings to home health,” Myers said. “But, as written, it could be interpreted as an aggregate cap on home health spending.”

Officials have assured him that capping Medicare home health reimbursements is not the intent, but the provider community wants that clarified, he emphasized.

Similarly, the legislation would clarify that 30-day episodes relate to payment but not certification. Changing the certification period from 60 days to 30 days would create administrative and cost burdens, as physicians would have to re-certify patients for home health more frequently.

If PDGM were to take effect today, as written, LHC Group has estimated that it would lead to about a 1.2% reduction in revenue. That would be offset by a mandated Medicare market basket increase in 2020, executives noted.

Other home health providers have suggested that PDGM’s negative impacts can be mitigated by changing referral patterns. For example, PDGM would reimburse at a higher rate for patients who receive home health services after a hospital stay, versus those that come from community-based settings.

LHC Group does not target patient groups based on the margin they generate, Myers said. His mentors warned him against this, saying that the government would inevitably identify these patient groups and re-balance payments accordingly.

So, the company does not have a lot of room to pivot from one group of patients to another, but it is also insulated from the risk of a sudden hit to reimbursements when payment changes do occur.

PDGM is not keeping Myers up at night, he said. Although it is “potentially disruptive,” he is confident in the company’s ability to roll with the punches.

“That’s what management is all about in this business,” he said. “You have to be ready for change and ready to adapt.”

AFAM integration

For 2018, LHC Group set a target of $8 million to $12 million in synergies from the Almost Family merger. The company is holding firm to the range, despite only realizing $2 million in synergies in Q2—a low number that “surprised” Larew.

Between $3 million and $4 million in synergies should be achieved in Q3, with an additional $4 million to $4.5 million in Q4, said Proffitt. To help support these figures, he noted that a “significant” number of back office team members were kept on to help with the transition, but were let go on June 29.

Related labor costs savings therefore already can be quantified for Q3.

Capital expenditures also have been higher than usual, due largely to technology investments related to the Almost Family merger. The run-rate for CapEx should fall back to about $3 million to $5 million for the remainder of the year, Proffitt said. The whole enterprise is on the Homecare Homebase platform, but all the locations are not yet on the same configuration of that product.

Organic revenue growth was flat in the Almost Family legacy locations for Q2, Baird analyst Matthew Gillmor pointed out in a note published after the earnings call. However, he was encouraged to hear a “clear strategy” articulated by LHC Group leadership to drive quality at these locations.

Part of that strategy has been adjusting Almost Family’s organizational structure related to its quality improvement teams, LHC Group President and COO Donald Stelly said on the call.

LHC management reaffirmed that the merger is on track to be 12% to 15% accretive this year.

Innovative payment models

Also in Q2, LHC Group hired Bruce Greenstein to become the company’s first chief innovation and technology officer. In this role, he will help drive growth through involvement in alternative payment models, with managed care partners, and via other value-based arrangements. The company’s innovations division, inherited from Almost Family, will be the hub for this activity.

Other large home health and hospice providers are also actively seeking deeper and more financially beneficial arrangements with Medicare Advantage plans and managed care organizations. The general concept is that by offering a full continuum of at-home care, these large providers can efficiently and effectively manage patient populations, keeping costs down and quality high.

Currently, LHC Group has a few value-based pilots in place, and sees these as a way to prove out the contributions that home health can make, leading to future growth.

“The receptiveness of the payers … is at a level we haven’t seen before,” Proffitt said.

LHCG shares were trading up 4.04% at market close on Thursday, at $93.58.

Written by Tim Mullaney

Tim Mullaney on Email
Tim Mullaney
If he’s not in the newsroom, Tim likes to be on the tennis court or traveling to a new destination. Recent highlights include Sri Lanka and Iceland.

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