Encompass Health Gaining Ground with ACOs, But Still Facing Assisted Living ‘Lockdowns’

Hundreds of thousands of dollars’ worth of monthly personal protective equipment (PPE) costs. Nationwide lockdowns of assisted living communities. Continued restrictions on elective surgeries in most markets.

These remain just a few of the major pain points that Encompass Health Corp. (NYSE: EHC) and its home health business face amid the COVID-19 pandemic. With 40 states reporting an increase in new COVID-19 cases as of Thursday, they’re pain points that will likely stick around for the foreseeable future, too.

But while the general operating environment remains difficult, “a proven track record of working through difficult situations” and progress on value-based care arrangements has Encompass Health’s leadership team feeling bullish on the Birmingham, Alabama-based company’s outlook heading into 2020’s final chapter.

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“Since 2009, we have successfully managed through an economic recession, regulatory changes, sequestration and Medicare payment freezes and cuts,” Encompass Health President and CEO Mark Tarr said Thursday during a third quarter earnings call. “Now we can add a global pandemic to that list.”

Encompass Health offers both facility-based and home-based care to patients across 136 hospitals, plus a combined 325 home health and hospice locations. 

“We remain confident in the prospects of both our business segments and our ability to overcome these challenges,” Tarr said. “It’s what we do. We adapt. We persevere. We continue to grow.”

Nationwide lockdowns

Despite this year’s headwinds, Encompass Health reported total net operating revenues of about $1.17 billion in Q3 2020, a 1.1% increase compared to the $1.16 billion the company brought in during the same period a year prior.

Its home health and hospice segment posted net operating revenues of about $274.5 million for the quarter, a 5.1% dip compared to the $289.3 million it brought in during Q3 2019. Hospice was on par with 2019 numbers, but a decline in admissions and a drop in revenue per episode contributed to Encompass Health’s home health business being down 6.5% on a year-over-year basis.

“Our most significant decline in volume has been in the physical therapy discipline, due to the decline in elective procedures and being shut out from assisted living facilities,” Tarr noted.

Encompass Health posted overall home health admissions of 40,765 in Q3 2020, down 3.3% compared to 42,174 in Q3 2019. Elective procedure admissions, in particular, were down 20%, with an even bigger decline in admissions from assisted living (AL) and independent living (IL) communities.

“Continued facility-access restrictions have negatively impacted the volume of patients admitted onto our service who reside in assisted or independent living facilities,” Tarr said. “These admissions are down approximately 40%, year over year.”

Historically, AL and IL admissions account for 15% to 20% of total home health and hospice volumes, according to April Anthony, who serves as CEO of the segment for Encompass Health.

“As things began to kind of ease up in the August, late July timeframe, we started to get a little bit greater access,” Anthony said during Thursday’s call. “But now as we move a little bit into a period of [COVID-19] spike, it definitely feels like we’re seeing certain markets, particularly in the Northeast, again go to lockdown. They’re saying, ‘We’ll let your nurse in, but not your therapist. We’ll let your nurse in for hospice, but won’t let your chaplains or social workers in.’”

To overcome those two hurdles, Encompass Health has restructured its compensation policies for therapists and identified new referral sources, including alternate surgery centers.

Gaining ground with ACOs, MA payers

While Encompass Health leadership spent a good portion of Thursday’s call talking about hardships and operational realities, they also touched on multiple positives for the company.

Work with accountable care organizations (ACOs) is among the bright spots, for example. Currently, Encompass Health partners with more than 100 Medicare Shared Savings Program ACOs around the country, with nine new ACO relationships emerging during the third quarter.

“A recent analysis of 2019 claims data revealed that we grew our share of ACO beneficiaries by 16% in 2019 versus 2018, whereas the rest of the home health industry remained flat year over year,” Tarr said.

Similar to its ACO progress, Encompass Health has been able to land more value-based payment arrangements with Medicare Advantage payers. The company added two new contracts in Q3, with ongoing discussions anticipated to yield additional contracts over the coming quarters.

“Although the pandemic has made some collaboration efforts more difficult and necessarily virtual in nature, we believe there is a strong interest in partnering with Encompass Health’s home health and hospice segment among ACOs and Medicare Advantage payers seeking value-based payment arrangements,” Tarr said.

Still, it’s tough to escape the shadow of COVID-19.

As Encompass Health wins new ACO and MA business, it also has to factor new costs like PPE into its decision-making. Average monthly PPE costs for its home health and hospice segment range from $96,000 for gloves to $147,000 for respirators.

Fixing PDGM

Looking ahead, Encompass Health has its near-term attention turned to the home health final payment rule for 2021, which also dropped on Thursday.

An analysis conducted by health economics and policy consulting firm Dobson DaVanzo & Associates previously found that the Patient-Driven Groupings Model (PDGM) contributed to a 21.6% drop in home health spending this year, mainly due to the model’s built-in behavioral adjustment.

Anthony said the final rule is unlikely to remedy that, a statement that quickly turned out to be true.

“I do think that we’re having some good conversations, … very data-driven conversations in Washington,” she said. “I don’t think we’re going to see recognition of the behavior change assumptions being flawed for this coming year’s rate.”

On a more long-term basis, Encompass Health is also watching the home health and hospice M&A market closely.

“After several months of unusually slow M&A activity in the home care sector, we are encouraged that the pipeline of acquisition opportunities is rebuilding, particularly for hospice,” Tarr said.

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