Home health providers large and small have had to navigate workforce uncertainty, supply shortages, admissions declines and various other challenges over the past several months. All of those obstacles are tied to the coronavirus, which has turned the home health industry upside down in 2020.
Encompass Health Corp. (NYSE: EHC) faced the majority of that disruption in April and May, company leadership noted Tuesday during a conference call to discuss its second-quarter financial results. The Birmingham, Alabama-based provider is now nearing a full recovery, though it is still working to rebalance its operations in regard to the Patient-Driven Groupings Model (PDGM).
“The challenges presented by the ongoing COVID-19 pandemic have been and continue to be significant,” Encompass Health President and CEO Mark Tarr said during the call. “But … we believe we have implemented plans across our organization that will allow us to continue to succeed in the face of the ongoing challenges.”
Unlike other large home health players, Encompass Health has had to work through the public health emergency across multiple settings.
The company’s U.S. footprint currently includes 136 hospitals, 245 home health branches and 83 hospice locations across more than three dozen states. Encompass Health remains confident in the medium- and long-term outlook across those segments, Tarr said.
“[Coronavirus] challenges remain in the near term, but they will eventually abate,” he said. “And as the population ages, the demand for high-quality care we provide across our three service lines will increase.”
Overall, Encompass Health reported net operating revenues of about $1.07 billion in Q2 2020, a decrease of 5.4% compared to the same quarter a year prior. Home health net operating revenues checked in at $201.8 million for the quarter, down 9.4% compared to Q2 2019.
Hospice continued to be a bright spot despite COVID-19 disruption. Encompass Health reported net hospice operating revenues of about $47.8 million in Q2 2020, an increase of 24.5% compared to the previous year’s second quarter.
In a note shared with Home Health Care News, UBS analysts estimated that Encompass Health was able to overcome the majority of lost revenue from COVID-19 in both its in-patient rehabilitation facility (IRF) and home health business lines.
“We believe that EHC was able to overcome 73% of the lost COVID revenue vs. plan for its IRF segment,” the note stated. “Additionally, we peg the mitigation factor at 69.5% for its home health segment.”
Finding a balance
The initial impact of COVID-19 on Encompass Health’s operations came in the form of diminished patient volumes.
Volumes started to recover across the company’s service lines around mid-May, and that recovery has continued into July. Today, home health starts of care have rebounded to pre-pandemic levels.
“Volume disruptions caused by the pandemic vary by market,” Tarr said. “Most of our markets have seen a meaningful level of recovery.”
While home health volumes have stabilized, Encompass Health is still working through the secondary and tertiary shockwaves caused by springtime dips. For example, patients refusing visits exacerbated certain negative aspects of PDGM, such as Low Utilization Payment Adjustments (LUPAs).
Additionally, because admissions to acute care hospitals have generally declined, Encompass Health has seen its primary admission source shift away from “institutional” referrals and toward “community” referrals, which carry a lower reimbursement rate under PDGM.
A similar pattern has played out with “the early-late situation,” according to April Anthony, CEO of Encompass Health’s home health and hospice segment.
“As you saw the volumes decline significantly in that April timeframe, it created a sort of out-of-balance situation,” Anthony said during the call. “If you remember in home health, early episodes are only the first 30 days of care. And so as we saw admissions decline and patients continuing into the second 30-day periods, with some of those patients, in turn, recertifying, it obviously tilted the balance of patients to the late segment.”
Encompass Health is gaining ground in terms of normalizing those case-mix patterns, but it will have to maintain that progress for 60 to 90 days before it sees a complete rebalancing of its patient mix back to pre-coronavirus levels.
On the workforce front, the company also recently established a new normal for how it compensates its therapy staff.
Once COVID-19 cases peaked in spring, many hospitals opted to delay elective surgeries and procedures. As a result, home health providers across the country saw significant declines in volume within the physical therapy discipline.
At the same time, some long-term care facilities were letting home health nurses into their buildings — but not physical therapists.
“We found ourselves in a situation where we had a significant excess of therapist capacity relative to our needs,” Anthony said.
In early May, Encompass Health made a shift to its reimbursement structure for therapists, lowering each therapist’s base pay by 20%. The company simultaneously lowered therapists’ productivity expectations per pay period by 20%.
Therapists can “earn back” their extra work if demand in their region calls for those services. By lowering base pay by 20%, Encompass Health has been able to maintain 100% of its therapy staff and avoid furloughs, Anthony added.
“We have announced that we intend to maintain that with our physical therapy team for the foreseeable future and that we don’t intend to go back to the 100% pay,” she said. “That was probably the biggest single structure change we made.”
Overall, Encompass Health saw its admissions levels drop by 7.9% from Q2 2019 to the second quarter of this year.
‘A bit of a pickle’
Although its home health operations have had to work around a lot of COVID-19 “noise,” Encompass Health believes the transition to PDGM has gone smoothly, Anthony said.
The company implemented a number of mitigation strategies to offset the downsides of PDGM. They include pre-coding to ensure documentation accuracy and allowing all staff to operate at the top of their licenses.
But not all home health providers are in the same boat.
Going into 2020, many industry insiders predicted PDGM would be too burdensome for smaller, cash-strapped home health agencies, with some forced to exit the market. Since the start of the COVID-19 emergency, many smaller businesses have been able to stay afloat by taking advantage of CARES Act relief funding and Paycheck Protection Program (PPP) loans, delaying consolidation and M&A opportunities derived from PDGM.
Once those financial lifelines disappear, Encompass Health leadership believes M&A activity is likely to pick up.
“As we look out at some of our smaller competitors, we do feel like they have really been bolstered by some of the federal programs. PPP loans as well as the CARES Act funds for the smaller providers have really hidden the realities of PDGM,” Anthony said. “We believe that as those dollars begin to be fully expended and [small agencies] are left to their own accord that it won’t take them very long for them to realize they’re in a bit of a pickle relative to their financial situation.”
Encompass Health stock was up 3.34% at end of trading Tuesday.