Lenders See Positives in Proposed RAP Phase Out

Industry experts predict that a potential phase out of home health Requests for Anticipated Payments (RAPs) will likely put several small to mid-size providers out of business. But not everybody is lamenting the Centers for Medicare & Medicaid Services (CMS) proposal.

Amedisys Inc. (Nasdaq: AMED) and other large home health providers, for example, have spun a possible RAP rejection as an opportunity to expand market share either by acquisition or simply by accepting patients and employees from struggling agencies.

“If these are mom-and-pops and small agencies, what are they going to do if they miss payroll?” Amedisys President and CEO Paul Kusserow said during his company’s Q2 2019 earnings call. “They’re going to have to hand off their patients and find a place for their employees. So that, for us, would be an ideal situation because we wouldn’t have to do an acquisition.”


Lenders have likewise touted the proposal as a positive.

At least two big benefits stand out right away, Morris Estes, managing director of Capital One Healthcare, told Home Health Care News.

“[For] one, we think this could possibly resolve the complexities of providing asset-based financing on home health Medicare accounts receivable,” he said. “Currently it’s challenging for most lenders to lend on accounts receivable generated by upfront payments as the service has not been fully completed.”


Additionally, a phase out of RAPs could also spur consolidation of smaller operators, leading to new financing opportunities with larger providers that end up acting as consolidators, Estes noted.

CMS floated its RAP plan in July, immediately triggering concern from various home health stakeholders.

Current policies allow home health agencies to receive about 60% of their anticipated Medicare payment for an episode of care upfront through a RAP. CMS’s proposal — which flagged a “marked increase in RAP fraud schemes” as its main driver — would cut that to 20% for existing agencies in 2020, then eliminate that practice entirely the following year.

“Larger home health providers should be able to absorb the impact to cash flow,” Estes said. “Smaller providers will likely bear the brunt of the change in payment methodology as their cash collections will slow.”

Borrowing breakdown

Providers may be able to survive a change in home health pre-payments by having credit lined up going into 2020, some argue. But that’s easier said than done.

“When you look at the folks that don’t have … the borrowing resources to sustain this — which is a lot of the industry — I think there’s going to be a tremendous amount of shake out,” Kusserow said, again during the Q2 earnings call.

Capital One Healthcare’s corporate finance group works with a variety of health care companies across a range of sub-sectors, including long-term care, pharmaceuticals, medical devices, hospitals and outpatient services, among other areas.

Earlier in August, the group announced it had maintained its position as the No. 1 lead arranger of health care leveraged loans by deal count for transactions up to $1 billion for the first half of 2019, according to league tables produced with data from Thomson Reuter LPC.

Because the home health businesses impacted by a RAP phase out would likely be smaller in scale — maybe between $1 million or $2 million in revenue — they’ll likely have to turn to local bankers or similar lenders for financing help, according to Estes.

“That’s a little smaller than what most lenders are willing to finance,” he said. “Maybe a local bank would do something based on hard assets that the owner has. That’s a little tricker of a situation, I would say.”

Ultimately, owners worried about a possible RAP phase out may have to take more equity risk in their businesses and put more of their own personal resources behind their companies, Estes added.

In 2018, there were 11,869 Medicare-certified home health agencies throughout the United States, according to CMS. Due to that fragmentation, even the biggest of home health providers have single-digit market share.

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