Higher-Acuity Care, Rate Stability and New M&A Priorities: Key Takeaways from the Q2 Earnings Season

The home health industry is at a pivotal moment, with operators weighing exciting new opportunities while simultaneously working through emerging challenges related to the COVID-19 virus.

Amedisys Inc. (Nasdaq: AMED), LHC Group Inc. (Nasdaq: LHCG), Aveanna Healthcare Holdings Inc. (Nasdaq: AVAH) and other publicly traded providers discussed many of the industry’s biggest developments during their second-quarter earnings calls over the past few weeks. Home Health Care News listened into all of the updates, and there were four storylines that stood out to me most:

— Home health providers are making tangible moves to elevate their care capabilities. Financially, such moves increase the potential of their addressable markets. They give providers a strategic advantage in value-based purchasing arrangements.

— Home-based care providers with diversified lines of business are beginning to recalibrate their growth plans. In recent years, providers have prioritized building out their hospice segments. Due to current operational challenges, limited M&A opportunities and steep acquisition costs in hospice, however, many are now focusing on home health assets.

— After prolonged periods of uncertainty or stagnating reimbursement rates in Medicare and Medicaid, the payment landscape is starting to improve. That’s particularly true in Medicaid, with companies like Aveanna, ModivCare Inc. (Nasdaq: MODV) and Addus HomeCare Corporation (Nasdaq: ADUS) all flagging important reimbursement wins during their Q2 2021 calls.

— Despite these and other positives, the threat of the COVID-19 pandemic remains very real. Providers are once again seeing volume decreases, with some also experiencing a corresponding increase in staff-quarantine numbers.

I take a closer look at these four threads as part of my latest HHCN+ Update.

A race to the top

Prior to the pandemic, home health providers managed to divert some higher-acuity patients away from costlier facility-based settings. They did so, though, through already-established capabilities.

During the COVID-19 emergency, providers’ ability to care for higher-acuity patients was put to the test. Patients that otherwise would have gone to skilled nursing facilities (SNFs) were instead being referred to home health operators, while hospital partners were discharging patients to home faster and more frequently.

Home health providers could have shied away from the increase in more complex cases, or they could have attempted to care for sicker patients with the programs and skill sets they already had. Instead, providers have leaned into higher-acuity care, with Amedisys and LHC Group being two of the best examples.

On June 30, the Baton Rouge, Louisiana-based Amedisys announced that it was acquiring Contessa Health, a company that specializes in shifting higher-acuity care into the home, for $250 million. In the most basic view possible, as CEO and Chairman Paul Kusserow explained, this move was entirely about delivering “more care to a broader spectrum of people in their homes.”

“The leader in its space, Contessa is a risk-bearing, tech-enabled, hospital-at-home and SNF-at-home platform, one that Amedisys will continue to invest in for future growth,” Kusserow said during his company’s Q2 call. “In Contessa’s current lines of business, but also for new growth into the new areas of care in the home, such as palliative care, primary care, and expanding their technology base to allow for even more and new cross-functional risk arrangements across the home health spectrum.”

Just a few days later, the Lafayette, Louisiana-based LHC Group unveiled a new strategic partnership with SCP Health, citing “providing higher-acuity care in the home” as the arrangement’s main driver.

SCP Health, a national provider of acute unscheduled care services, serves over 400 facilities across its 30-state footprint. The company treats upwards of 12,000 emergency-medicine patients daily.

“This innovative, clinician-led, proprietary model will elevate in-home care and deliver higher-acuity care in the home by harnessing the combined talent and experience of partner physicians with our nurses, therapists and physician extenders, as well as our industry-leading in-home patient care, proprietary data analytics capabilities, clinical modeling and technologies,” LHC Group President Joshua Proffitt said during a Q2 call.

It’s important to note that Amedisys and LHC Group aren’t pigeonholing their recent moves as hospital-at-home or SNF-at-home plays. Acquiring Contessa and teaming up with SPC Health is, more broadly, about elevating home health care overall.

Doing so has financial upside as well.

Acquiring Contessa, for example, brings “significant expansion” of Amedisys’ total addressable market of in-home care services, increasing it from $44 billion to $73 billion.

Pipeline priorities

Hospice has typically dominated the home health, hospice and personal care services M&A market.

In 2020, there were at least 79 hospice-related transactions, according to data from M&A advisory firm Mertz Taggart. The same year had just 53 home health-related transactions.

Yet during the first half of 2021, the tide appears to have turned toward home health dealmaking. A couple recently executed home health deals include Alivia Care Inc.’s acquisition of Better Life Home Health as well as the agreement Amedisys struck with Visiting Nurse Association to expand in Nebraska and Iowa.

Frisco, Texas-based Addus is among the companies that have worked to beef up their hospice lines. But its leadership team has confirmed a focus on home health and personal care moving forward.

“We continue to focus on acquisitions that meet our goal of creating multiple markets of scale, where we provide all three levels of home care,” Addus CEO Dirk Allison said on the company’s second-quarter earnings call. “For 2021, our focus has primarily been in the personal care and home health segments of our business.”

To some extent, home health gaining more M&A attention is a result of limited hospice opportunities. Many of the most attractive hospice assets have recently been acquired, while those that remain come with eye-popping price tags.

The subtle shift may also be linked to the COVID-19 pandemic.

Generally, home health providers reported a sharp, sudden decrease in patient volume early last year. Almost as quickly as they fell, numbers shot back up in a V-shaped recovery.

The hospice space has seen a more gradual, slower rebound, according to Amedisys President and COO Chris Gerard.

“Unlike home health that saw a very sharp impact and steep rebound from COVID in 2020, the COVID impact and rebound in hospice has been slower to develop,” Gerard said during the Q2 earnings call. “And [it] has impacted the business into 2021 in multiple ways.”

The Jan. 1, 2020, implementation of the Patient-Driven Groupings Model (PDGM) was obviously a speedbump to home health dealmaking, too. Now that the payment overhaul has been in effect for over a year and a half, prospective home health buyers feel much more confident.

Considering the relatively rosy reimbursement and regulatory outlook, I believe that this rebalancing of M&A activity will continue for home health care during the remainder of 2021 and throughout 2022.

And Aveanna has signaled that it will be among the most aggressive buyers.

“Home health and hospice continues to be a significant focus of our future growth and has been a point of emphasis for us as we work to expand our national home health presence,” Aveanna COO Jeff Shaner said during a second-quarter earnings call.

Reimbursement recognition

Home health providers have grown comfortable with PDGM. Many additionally appreciate the payment stability floated by the U.S. Centers for Medicare & Medicaid Services (CMS) in the proposed rule for 2022.

Specifically, CMS proposed to increase Medicare payments to home health agencies by 1.7% next year, which equates to a roughly $310 million bump.

And as home- and community-based services (HCBS) have gotten more attention during the public health emergency, some state Medicaid agencies and managed care plans have increased payment rates as well. Aveanna CEO Tony Strange addressed this topic during his company’s Q2 call.

“The result is that over 50% of the states that we service will increase the reimbursement rate and/or expand the covered benefit for the services that we provide,” Strange said. “To be specific, we have or will receive rate increases in 16 of our covered states in 2021.”

Addus executives similarly pointed out positive Medicaid trends.

“Our states have done a nice job in maintaining or in some cases increasing receivable payments to Addus, leading to a very nice cash flow for the quarter and a cash balance at June 30 of approximately $139 million,” Allison said on his company’s Q2 call.

A stable — or even positive reimbursement — landscape allows Medicare and Medicaid providers to invest more heavily in their workforce and care capabilities. Considering the worsening staffing crisis and enduring pandemic, having that ability has never been more crucial.

Medicaid is likely to see even more rate momentum in months to come, especially if Democrats are able to pass legislation allocating $400 billion to HCBS and America’s in-home caregiving economy.

New COVID-19 challenges

Across the U.S, new COVID-19 cases are appearing at rates not seen since winter, mostly due to the more contagious Delta variant. Every state has felt an impact from Delta, but spread has been particularly strong in states like Florida, Louisiana and Mississippi.

As of Thursday, hospitalizations nationwide exceeded every previous peak except last winter’s, according to New York Times data.

“While conditions related to the COVID-19 pandemic have improved in recent months in the United States as vaccinations have become more widely available, it continues to be impossible to predict the effect and ultimate impact of this pandemic on Addus,” Allison said. “As the situation continues to evolve, our team is continuing to monitor the [Delta variant] and the recent uptick in COVID cases.”

For some home health providers, Delta has translated to staffing challenges, with more in-home care professionals having to self-isolate or quarantine.

Others have seen patient volume dips, though not as severe as the initial 2020 plunge.

“At the lowest point last year, our volumes were off about 10%. … We’ve seen an improvement throughout the rest of 2020,” Strange said. “We’re seeing the volumes decline again now, related to the Delta variant and the experience there. But I think maybe unlike a year ago, where maybe some of our families kind of pulled back a little bit, I think our families have grown accustomed to living and taking care of children in the home with COVID.”

The big issues related to Delta are quickly becoming vaccination rates among the home health workforce and whether providers will implement mandatory policies.

So far, the home health industry has taken an “encouragement over mandates” approach to vaccinations. That has resulted in some of the weakest vaccination rates in health care, though figures vary greatly by provider and geography.

On Wednesday, CMS announced an emergency regulation requiring staff COVID-19 vaccinations within all nursing homes reimbursed by Medicare and Medicaid. That could cause a post-acute care domino effect that triggers staffing shortages in some settings or disruptions in referral relationships.

“COVID has changed how we do business, impacted us all and continues to threaten us with the surging Delta variant,” Amedisys’ Kusserow said. “It has been and still is all-hands-on-deck.”