‘Disciplined Acquirer’ Encompass Health Won’t Be Afraid to Spend Big for Right Deal

Encompass Health Corporation (NYSE: EHC) is drawing early positives from its deployment of predictive analytics technology. In fact, it’s so bullish on early returns that the Birmingham, Alabama-based company plans to ramp up deployment and usage across the majority of home health locations in 2020.

Apart from tech tools, Encompass Health also foresees plenty of M&A in its near future, including $50 million to $100 million in acquisition opportunities in the next year. While a chunk of that will likely be linked to smaller providers pressured out of the market by the Patient-Driven Groupings Model (PDGM), Encompass Health also has its eyes on bigger PE-backed deals that may arise.

Encompass Health leadership touched on those hot topics and more during its Q4 and end-of-year earnings call Friday. The call also included an update on the company’s PDGM strategy, now that the industry is more than one month into the payment overhaul.

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“We currently estimate the implementation of this new reimbursement model will result in a 2% to 3% net Medicare pricing decrease for us in 2020,” President and CEO Mark Tarr said during the call.

In addition to its facility-based operations, Encompass Health is one of the biggest home health and hospice providers in the country. It has 133 hospital locations, 245 home health locations and 83 hospice locations in 37 states and Puerto Rico.

In Q4 2019, Encompass Health’s overall net operating revenues grew close to $1.2 billion, up 8.1% from the same period in 2018, according to the company’s financial results. For the year, revenue grew 7.7% from 2018, to just over $4.6 billion.

Revenue was driven in part by volume growth in home health and hospice.

Home health net operating revenues were $236.9 million in Q4 2019, up 10% from the same quarter a year ago. The home health and hospice segment’s overall revenue checked in at $287.7 million in Q4, up 14.9% from 2018.

Deploying predictive analytics

Encompass Health is one of many providers that has invested in predictive analytics tools. In June, it invested in Nashville, Tennessee-based Medalogix, a company whose data toolbox includes a tool designed to optimize visit utilization for home health providers.

Encompass Health plans to deploy the Medalogix Care module to all of its home health locations in the first half of 2020, according to company leadership.

“It’s a scientific approach that helps guide — not replace — clinical judgment and developing the right care plan for each patient,” Tarr said.

While Medalogix gives Encompass Health and other home health providers an edge during the transition process to PDGM, CFO Doug Coltharp said it’s something his company would have turned to even without major reimbursement changes.

“It’s difficult to separate the two, but we sometimes get hung up referring to the implementation of the Medalogix Care tool [as if] it’s going to be used to design better care plans for our patients as a mitigation to the PDGM pricing impact, but it’s really not,” Coltharp said. “It’s something that we would be doing anyway, because it’s going to generate better outcomes for our patients.”

Instead, the company views the tool as a way to make its practices more efficient and productive.

The rollout of Medalogix Care for Encompass Health stood at more than 70% as of the end of January, according to Home Health & Hospice CEO April Anthony. Encompass Health expects to be more than 80% deployed by the end of the first quarter.

Opportunistic growth

Encompass is still focused on expanding its footprint moving into 2020. The past year included an addition of 27 home health locations, the majority of which came from the $217.5 million Alacare Home Health & Hospice deal.

The company expects to spend $50 million to $100 million to grow its home health and hospice lines in 2020, which is in line with years past.

“[There’s] a little bit more uncertainty because we anticipate that at least a portion of that $50 million to $100 million dollars in the anticipated spend will be a direct result of the RAP phaseout that is embedded in PDGM,” Coltharp said. “The worst capital and cash implications are going to [come down] on some smaller competitors, but we don’t know the timing with which that will hit them, and it’s going to be a market by market situation.”

In addition to those acquisitions of smaller competitors, the company is looking to start some new businesses from scratch, specifically in the Florida area. Despite already having a presence in Florida, Encompass is aggressively researching and taking steps to find land and open up shop in more areas of the state — particularly in Tampa.

Between acquiring smaller providers unable to deal with PDGM, building out new businesses and readying itself for larger acquisition possibilities to arise, significant growth is expected. Additionally, if growth doesn’t come in thee form of direct acquisition, it may also come simply by gaining patient volume in key markets.

“We may pursue larger scale acquisitions opportunistically, as we have done so in the past few years,” Coltharp said.

Regardless, the company will be a “disciplined acquirer,” no matter how many appealing opportunities arise, Anthony said.

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