Encompass Health Looks to Improve Clinical Collaboration Rate, Expects $45M PDGM Headwind

For most home health providers in the U.S., adapting to the Patient-Driven Groupings Model (PDGM) remains priority No. 1 for the rest of 2019.

That’s certainly true for Birmingham, Alabama-based Encompass Health Corp. (NYSE: EHC), though the national operator of both in-patient rehabilitation hospitals (IRFs) and home health agencies is also actively looking to improve upon its in-house clinical collaboration rate.

“A key part of our strategy is to integrate our service lines … in what we call our overlap markets, where we have both one of our [IRFs] as well as a home health agency, typically within a 30-mile radius,” President and CEO Mark Tarr said Wednesday during a presentation at the 2019 Baird Global Healthcare Conference. “That gives us a chance to integrate that care and make that transition from an IRF to a home health agency in a very collaborative manner.”

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Encompass Health — which recently landed Alacare Home Health & Hospice as part of a $217.5 million deal — has 132 hospitals and 245 home health locations as part of its footprint.

Hospice has also recently become an important service line for the company, which maintains 82 hospice branches across the country. That portfolio makes Encompass Health a top-10 hospice provider in terms of size.

Taking all those pieces into account, Encompass Health maintained a clinical collaboration rate of about 35% in the second quarter of 2019, according to Tarr.

In the near term, the company’s goal is to boost that figure to about 40%, he said, noting that its long-term aim is to reach somewhere between 60% and 65%.

Overall, Encompass Health has 83 overlap markets.

“As we continue to assess acquisition opportunities on our home health side of the business, we look first as a priority to create additional overlap markets where we can pair [IRFs and home health agencies] together,” Tarr said.

Currently, about 60% of Encompass Health’s IRF discharges go home with home health care services.

A proven track record

When it comes to PDGM, Encompass Health is expecting an “EBITDA headwind” of roughly $45 million before 2020 even begins, Executive Vice President and CFO Doug Coltharp said Wednesday, also speaking at the Baird conference.

Nonetheless, leadership is confident in the company’s ability to eventually overcome initial disruptions — and recent history suggests they have good reason to feel that way.

Indeed, Encompass Health has brought in adjusted EBITDA growth on a year-over-year basis for 41 of the past 42 quarters.

That’s no easy accomplishment, considering the fact the company has dealt with sequestration, the Medicare price rollback and implemented coverage criteria for IRF admissions during that time.

“In each of these cases, we’ve found a way to adjust our operators, adjust our patient mix and correspond according to these changes and mitigate to where we came out in a very good fashion,” Tarr said.

PDGM will be partially offset by admissions growth expected to be somewhere in the high single-digits, according to Encompass Health estimates. Additionally, the overhaul will also be somewhat mitigated by the company’s plans to add beds to its IRF capacity, by a full year of Alacare contributions and by growing its hospice business at projected 20% clip.

Encompass Health still views one of PDGM’s biggest red flags as its assumption-based behavioral adjustment, which jumped from 6.42% to slightly more than 8% following July’s proposed payment rule from the Centers for Medicare & Medicaid Services (CMS).

While detrimental, that jump has a silver lining, according to Coltharp, who said lawmakers on Capitol Hill will be more likely to support the existing PDGM-refinement legislation moving forward.

“The [lawmakers] supporting this legislation had written directly to CMS, requesting that they reconsider the implementation of this behavioral adjustment, specifically citing fears about beneficiaries’ access to care based on that potential unintended consequences,” he said. “When CMS then responded by essentially coming out 45 days later with a proposed rule that actually not only kept the behavior adjustment in but increased it, it was ruled by many of those members of Congress as a real thumb in the eye.”

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