Like most in the health care sector, Encompass Health Corporation (NYSE: EHC) took a hit to its business in March as the COVID-19 outbreak intensified. Usually bullish on its near-term home health and hospice projections, the Birmingham, Alabama-based company is now more focused on getting back to a sense of normalcy.
Encompass Health leadership detailed its internal struggles with the COVID-19 virus during a Q1 earnings call Wednesday. Those struggles have included issues with acquiring personal protective equipment (PPE), handling relief money from the government and deciding whether to make staffing changes — all while dealing with the Patient-Driven Groupings Model (PDGM) at the same time.
Overall, net operating revenues for Encompass Health increased to $1.18 billion in the first quarter of 2020, a 5.2% jump compared to $1.12 billion in Q1 2019.
“We had a lot of momentum heading into 2020, and January and February were a strong start to the year,” Encompass Health CEO Mark Tarr said during the call. “In mid-March, we began experiencing a significant impact from the COVID-19 pandemic.”
In addition to its vast facility-based operations, Encompass Health is one of the biggest home health and hospice providers in the country. It has 134 hospital locations, 245 home health locations and 83 hospice locations in 37 states and Puerto Rico.
While there are current difficulties, Encompass Health’s home health and hospice segment is hoping for a rebound heading into May, April Anthony, the segment’s CEO, said on the call.
“In the last two weeks of April, we’ve seen a little bit of progress in our overall referral trend,” Anthony said. “That’s an encouraging sign. And the hope [is] that as elective procedures begin to come back online in a number of states, that we’ll slowly see the trickle increase to a steady flow of opportunity.”
Coronavirus in a post-PDGM world
At 2020’s outset, the main priority for the majority of home health providers was succeeding under a newly implemented payment system — and the urgency of the coronavirus hasn’t put PDGM on the back burner.
Instead, the crisis has compounded challenges related to the Medicare payment overhaul.
On its end, Encompass Health was confident in its ability to harness the changes to the new home health payment model early in 2020.The COVID-19 outbreak, however, threw a wrench into those plans.
“The effects of PDGM have been greatly exacerbated by the COVID-19 pandemic,” Encompass Health CFO Doug Coltharp said on the call.
For one, Encompass Health has paused its rollout of Medalogix Care, a predictive analytics tool that the company was using as a guide to appropriately inform therapy visit utilization under PDGM.
Nashville, Tennessee-based Medalogix is a popular player in home health predictive analytics. Both Encompass Health and Amedisys Inc. (Nasdaq: AMED) have made minority investments in the company.
Encompass Health has also seen a higher frequency of low utilization payment adjustment (LUPA) episodes during the public health emergency, according to leadership. The Partnership for Quality Home Healthcare recently flagged skyrocketing LUPAs as an industry-wide pain point in a letter to the U.S. Centers for Medicare & Medicaid Services (CMS).
The decline in Q1 visits — and corresponding LUPA spike — was mostly connected to the heightened anxiety from patients and their families during the COVID-19 outbreak.
“The largest impact within PDGM has been a substantial increase in LUPA episodes,” Coltharp said. “For Q1, our visits per episode declined to 16.3 versus 17.7 in the prior-year period.”
Reduced visits and increased LUPAs led to a dip in the company’s revenue per episode. That number is down to $2,909 in Q1 2020 compared to $3,057 in Q1 2019.
Despite COVID-19 challenges, Encompass Health’s home health and hospice segment improved its year-over-year net operating revenues in the first quarter. Revenues increased by 2.4%, from $219.5 million in 2019 to $224.8 million in 2020.
That revenue increase was primarily due to the 2019 acquisition of Alacare Home Health and Hospice, according to Coltharp. Alabama-based Alacare had over 50 home health and hospice locations when the deal went through.
Paying the price for PPE
Encompass Health has formed COVID-19 task forces to deal with ongoing issues surrounding the outbreak. While the task forces have multiple responsibilities, the primary one is supply-chain management — particularly PPE procurement.
“The increased utilization of PPE resulting from COVID-19 pandemic has created supply chain challenges for all health care providers,” Tarr said. “And we have not been immune to the challenges.”
Those challenges include: finding alternative suppliers, paying as much as 15 times more than usual for orders and having limited visibility when it comes to production schedules and shipment status.
While the company believes that production capacity is increasing domestically and internationally, they expect elevated prices to persist in the coming weeks.
Generally, the PPE situation has improved within home health operations, Anthony said.
“As proper PPE became more readily available, we could come in fully donned in PPE and the risk of both our caregiver and for the patient went down dramatically,” she said. “So we’ve seen some of those facilities open back up to us under those guidelines of full PPE.”
During Wednesday’s call, Encompass Health leadership expressed their appreciation for the federal efforts that have been made to help health care providers since a public health emergency was declared on March 13. Executives directly called out the CARES Act and how it pauses a planned 2% reduction of Medicare program payments.
As of Wednesday, the U.S. Department of Health and Human Services (HHS) had provided $237 million in relief to Encompass Health to cover expenses relating to the COVID-19 virus.
So far, Encompass Health has not yet used any of that money, though. It is currently holding the relief money in itemized and specialized accounts; it does not plan on using or dispersing any of it until further clarity is offered from HHS.
“These funds are subject to terms and conditions, including restrictions on permitted use,” Tarr said. “Without further clarification from HHS, we cannot reasonably estimate what portion — if any — of these funds we will be able to keep and use.”
This measured approach reflects the uncertainty that exists among health care providers when it comes to dealing with government-provided relief.
Providers do not want to spend money that they’ll later have to repay.
“If you think back to how similar types of government funding has been done in the past, [there’s a lot of] information relative to the definition of lost revenues and language around appropriate ways to use this [money] for expenses,” Tarr said. “We know it’s not free money, and we’re being very diligent in our review around these funds.”
Staffing and compensation challenges
In some of Encompass Health’s markets, elective surgeries have resumed, a good sign for the home health segment — and a trend leadership thinks will continue in the near future.
But a large reduction in visits has forced the company to consider tough staffing decisions.
“After a lengthy consideration to align staffing with current patient demand … we have implemented market-specific furloughs,” Tarr said. “In home health, we are considering changes to our compensation structure to create a greater level of variability in our cost structure to respond to significant declines in visit volume.”
The company is hoping that the volume will return to more normal levels quicker than initially anticipated, which would allow them to begin to bring furloughed staff back.
Historically, about 80% of the company’s home health visits had been performed by full-time staff, which made it difficult to react to such a sudden decrease in volume, Anthony said.
“We wanted to be very cautious, both to ensure that we had the staff available to support a surge if that were to come, but also to take care of our valued staff members along the way,” Anthony said.
In home health, the company has stopped short of transitioning to a per-visit pay system for its staff. Anthony noted that Encompass Health has benefited from its full-time staff structure over the years.
“That being said, as we move into the eighth week of this pandemic, I think we definitely recognize that we’re going to have to make some alterations,” she said.