Home health, hospice and personal care giant LHC Group, Inc. (Nasdaq: LHCG) missed its expected revenue mark in an otherwise strong third quarter of 2018. Despite the miss, analysts are encouraged by the Lafayette, Louisiana-based company’s organic growth outlook and its ability to withstand the looming overhaul to the home health payment system.
LHC Group CEO and Chairman Keith Myers discussed his company’s third-quarter financial results — along with its plans to refine and, if necessary, adapt to the Patient-Driven Groupings Model (PDGM) from the Centers for Medicare & Medicaid Services (CMS) — during a Thursday conference call with investors.
CMS announced it is moving forward with PDGM in its final home health payment rule for 2019, released end-of-day Wednesday. The agency’s finalized language for the payment overhaul — scheduled for 2020 — has relatively few changes compared to its original July proposal.
“A lot of ink has been spilled the last few months on the impact of PDGM on the home health industry,” said Myers, who also serves as chairman of the Partnership for Quality Home Healthcare. “We have been very active lobbying CMS and working with members of the U.S. Senate and House on specific legislation to modify CMS’ approach to prospective behavioral assumptions.”
LHC Group financial highlights
LHC Group’s net service revenue for the third quarter of 2018 totaled $507 million, an 88% spike compared to $269.7 million from the previous year’s third quarter. Independent financial services firm Stephens had previously estimated LHC Group’s quarterly revenue to come in at $516.1 million.
The substantial year-over-year increase is largely attributable to the merger with Almost Family, which closed in April.
LHC Group gained about $114 million and $816 million in revenues through its 2017 and 2018 acquisitions, respectively, according to the company.
Total growth in LHC Group home health admissions rose about 94% during the third quarter of 2018 compared to Q3 of 2017, with organic growth rising 9.7%. Hospice admissions rose by more than 32% for the quarter, with organic growth climbing by about 5%.
The bulk of LHC Group’s third quarter revenue came from its home health services segment, which brought in about $360 million in revenue. The company’s hospice services segment and home- and community-based services line earned about $53 million and $52.8 million, respectively.
On the Almost Family front, integration has been going smoothly, with plans to move from the stabilization phase into the transformative phase, according to LHC Group leadership.
Synergies form the merger are proceeding at a better-than-anticipated pace.
“The smooth integration, in turn, enhances our strong organic growth, adds in new layers of additional growth, similar to what we’ve accomplished with our joint ventures, by bringing up quality to our standards and increasing margins,” Myers said. “It enables us to keep our eye on the ball for new growth opportunities through market expansion, extension of our co- and tri-located service offerings, joint ventures and tuck-in acquisitions.”
Prior to the Almost Family closure, LHC group had anticipated a total of $25 million in pre-tax synergies as a result of the merger, with $8 million to $12 million realized in 2018.
“Organic growth in home health and hospice both accelerated, which is encouraging, and the [Almost Family] synergies are on track,” Stephens analyst Dana Hambly observed in a note issued Thursday.
LHC Group shares were expected to be weak due to the revenue miss and lingering concerns over Almost Family integration risks, according to the note, which stated that the final home health payment rule may also present near-term volatility.
However, LHCG was up 0.57% in late-day trading on Thursday, at $91.95/share.
PDGM likely to present ‘many consolidation opportunities’
The final payment rule for 2019 included a 2.2% increase to Medicare payment rates for home health agencies, an increase that CMS estimates to be about $420 million.
Among its changes on tap for 2020, PDGM would mean a new 30-day unit of payment for home health agencies, as well as changes to how they are reimbursed for therapy services. Additionally, PDGM also comes with a revised case-mix adjustment of 432 categories, exactly double the number of categories that CMS initially proposed.
“Even though they have proceeded with this rule against a united front in the industry, the efforts will continue and are important to the industry as a whole, as well as the ability of providers throughout the country to adjust to a new payment model,” Myers said. “The most important fact about PDGM is that it has been required to be budget neutral by the Bipartisan Budget Act of 2018.”
In general, the biggest issue home health providers — including LHC Group — have with CMS’ payment overhaul is its inclusion of certain behavioral adjustments related to coding and Low Utilization Payment Adjustment (LUPA) claims. Combined, the behavioral adjust aspect of PDGM is equivalent to a 6.42% downward rate adjustment.
In an attempt to eliminate or modify the behavioral adjustment aspect, industry stakeholders have teamed up with multiple members of Congress. So far, three PDGM-related pieces of legislation have been introduced in the U.S. Senate and House.
LHC Group is not overly concerned about PDGM, Myers told investors, citing the company’s proven adaptability, efficient operating model and solid workflow processes.
“We expect LHC Group, based on our size, scale, capabilities, balance sheet and experience as a leading provider in the industry, [to] once again thrive in an environment of change,” he said.
To some extent, LHC Group actually sees PDGM upside, especially when it comes to new merger-and-acquisition opportunities that may arise from smaller agencies not having the operational wherewithal or resources to adjust to the new payment framework.
“We believe the changes this new model will bring will open up many consolidation opportunities in the industry,” Myers said. “We plan to take full advantage of those opportunities — once again.”
Over the past couple of years, LHC Group has “passed on” at least 80 potential deals worth roughly $1.5 billion in revenue.
It is in discussions related to 15 to 20 transactions at any given time.
‘Netflix’ of the U.S. health care system
LHC Group leadership is confident about the company’s future because of macro-level forces as well, namely the continuing shift of more health care moving into home settings.
That’s a shift not likely to slow down or reverse course, Myers said.
“Facility-based admissions are down, and reducing admissions is a major focus across the country. This is well-known,” he said. “This trend of more care being delivered in the home is expected to accelerate as more care moves to risk, otherwise it would be like saying: ‘Next year, we think people will be ready to switch back from Netflix to their local Blockbuster store.'”
LHC Group currently has three pending new model arrangements being actively discussed with payers, including a home health bundle arrangement.
Written by Robert Holly