Encompass Health Corp. (NYSE: EHC) has lowered internal estimates on how the Patient-Driven Groupings Model (PDGM) will impact its home health operations, though the company remains firmly against assumption-based behavioral adjustments included in the payment overhaul.
CEO Mark Tarr — along with home health and hospice segment leader April Anthony as well as other execs — discussed PDGM and Encompass Health’s preparation plans during a Tuesday conference call highlighting second-quarter financial results.
Originally, Encompass Health estimated PDGM would account for a 3.8% hit to its home health business. It updated that number to a 2.8% hit in light of the 2020 home health proposed payment rule, released by the Centers for Medicare & Medicaid Services (CMS) on July 11.
PDGM’s behavioral adjustments are based on policymakers’ assumptions that home health agencies will always upcode to secure the highest Medicare reimbursement available while adding visits to prevent Low Utilization Payment Adjustment (LUPA) claims. Despite bipartisan support in Congress, CMS’s proposed payment rule for 2020 doubled down on those assumptions.
“We remain very concerned about the magnitude and nature of the unprecedented assumed behavioral adjustments contained in this rule, and [we’ll] continue to seek relief via discussions with CMS and through legislation,” Tarr said during the call. “We believe the support home health is receiving shows that the value of home care is widely appreciated by both parties as not only a low-cost setting, but also as the preferred setting of care for many of America’s seniors.”
When PDGM was first introduced, its behavioral adjustments were calculated to pose a potential 6.42% cut to home health agencies. That cut may now be as steep as 8.01%.
The Bipartisan Budget Act of 2018 mandated that PDGM maintain budget neutrality to minimize industry impact. Even so, some experts believe that as many as 30% of home health agencies could go out of business next year.
Broadly, PDGM is built upon 432 different payment groups, each with varying levels of reimbursement depending on timing, admission source and other patient characteristics. While CMS expects that home health providers will regularly upcode, agencies will still have to follow coding guidelines and defend the decisions they make during the audit process, Anthony said during the call.
“We do not believe that there is any free pass that regulators are going to give to say, ‘Disregard the coding rules and always upcode,’” she said. “It’s going to be in the audit process where you’re going to have to defend the choices you make.”
Home health volume up
Overall, Birmingham, Alabama-based Encompass Health recorded net operating revenues of about $1.14 billion during Q2 2019, a more than 6% increase over the roughly $1.07 billion the company posted in the same quarter last year.
Net operating revenues for the company’s home health and hospice segment increased by about 12% year-over-year, rising from about $233.1 million to $261.1 million. Gains were partly attributed to an 11.2% bump in home health and hospice admissions, with same-store admissions increasing by 8.3%.
“These solid results reflect the strength and sustainability of our business model, a business model that is backed by favorable demographic trends,” Tarr said.
Encompass Health is one of the nation’s largest providers of integrated health care services, offering both facility-based and home-based care in 37 states and Puerto Rico through its network of in-patient rehabilitation hospitals, plus home health and hospice agencies.
Nurturing clinical collaboration between its in-patient rehabilitation facilities (IRFs) and home health agencies has been a point of focus for Encompass Health over the past few years — with the company seeing steady improvement across its overlap markets. As of June 30, Encompass Health had 83 overlap markets; its clinical collaboration rate checked in at 34.9% in Q2 2019.
Broadly, coordination between Encompass Health’s IRFs and its home health team has resulted in lower discharges to skilled nursing facilities (SNFs), higher discharges to home and improved patient satisfaction, according to the company.
Executives expect to open at least three new de novo IRFs in 2019, they said. The company’s most recent home health acquisition came in South Carolina, a deal that followed its $217.5 million Alacare acquisition.
“Our in-patient rehabilitation hospital de novo pipeline remains robust, with both joint venture and wholly owned opportunities,” Tarr said. “We continue to be an industry leader in successfully navigating the frequently complex waters of state regulatory agencies to obtain certificates of need for new hospitals.”
Based on its results for the first half and its current expectations for the remainder of this year, Encompass Health updated its full-year 2019 guidance; adjusted EBITDA was raised to between $940 million to $960 million.
The “optical raise” represents an underlying lowering, as Alacare is now included in the base, an analyst note from Raymond James shared with Home Health Care News states.
“By our math, accounting for the 2Q beat and Alacare (with no revenue growth vs. $117M in 2018 and 10-15% margins) 2H EBITDA would be implied $3-6M lower at the midpoint,” the note reads. “ … Given the strong quarter and inclusion of Alacare, we would have thought a larger EBITDA increase would be likely, but we do admit a lesser PDGM headwind is a positive as it pertains to 2020 views.”
Brian Tanquilut — health care equity analyst for Jefferies — described Encompass Health’s Q2 2019 as “really solid,” but also noted that questions remain as to how the company will mitigate PDGM’s negative impact.
“The issue I’m seeing here is they’re uncomfortable mitigating the way CMS is expecting them to based on the behavioral change,” Tanquilut told HHCN, specifically referring to upcoding. “If you mitigate or change your behavior, you could be potentially tripping up some existing rules.”
While PDGM has its inherent challenges, it may also present expansion opportunities for Encompass Health.
In some markets, for example, PDGM is going to increase home health reimbursement by as much as 20%. In others, the overhaul will create a 20% drop in reimbursement, likely prompting some agencies to sell.
“We’re looking at markets where we think there’s going to be some geographic disruption across the industry, so we’re looking at opportunities for growth and expansion in those markets for our organization … ,” Anthony said. “We think we’ll fare better in those down markets than others will.”
Medicare Advantage growth
When it comes to Medicare Advantage (MA), many in the home health industry believe payers have yet to realize the value of home-based care.
Yet Encompass Health is making headway on that front as well.
The company’s Medicare Advantage business grew by about 20% in the second quarter in terms of visits, according to CFO Doug Coltharp.
But there’s room for future growth, as the company’s home health MA successes aren’t quite the same as its IRF business.
“Unfortunately, Medicare Advantage still hasn’t made the same progress with regard to reconciling payments toward the fee-for-service schedule in home health as they have in the IRF business,” Coltharp said during the call. “It becomes difficult for us to take what are sometimes limited clinical resources in our home health markets and get excited about devoting those to Medicare Advantage.”