Why the Proposed Rule Could Hinder the Home Health Public Market’s Strategic Visions

At the very beginning of this year, I wrote an HHCN+ Report on the home health public market and how it sets the pace for the rest of the industry.

At the time, the public companies were all doing well, though things have certainly changed since then. Among my takeaways, I wrote about how larger providers were focused on building geographic density in 2022 and how new public players were shaking things up.

I also wrote about how, over time, the largest providers in home health care had gone from generally conservative entities to companies with greater aspirations and less risk-averse attitudes.

A prime example of that was Amedisys Inc. (Nasdaq: AMED).

Traditionally a conservative – though acquisitive – entity, it pushed the bill significantly last year during the COVID-19 pandemic and purchased a company in Contessa Health that was outside of its core services.

“Today’s announcement is a strategic and promised milestone for Amedisys’ strategic growth and differentiation, as we expand our capabilities to reflect growing market demands and evolving patient preference for higher-acuity in-home settings,” Amedisys’ then CEO and current chairman, Paul Kusserow, said at the time.

Contessa Health enables high-acuity care in the home. Amedisys purchased the company for $250 million, assuming it to be a near-term drag on its financial results, but expecting the investment would pay dividends in the future.

The deal was made in the first half of 2021, when Amedisys was trading at – or close to – five-year highs on the public market. Since then, it has lost over half of its total value on the market, but precipitous stock drops from then to now have been somewhat consistent across the board among other industry peers.

Either way, it showed an aggressiveness that wasn’t a part of the strategic vision for companies like it in the past.

“These companies are becoming far more sophisticated,” Mark Kulik, the managing director of M&A advisory firm The Braff Group, told me in January. “And we’re seeing each company using a strategy to step outside of what would be considered their traditional scope of services.”

It isn’t just about venturing into hospital at home, either.

Despite performing well when the staffing environment is stable with their core services, home health companies have been more willing to experiment with other services like palliative care and to step outside of their comfort zones to make future-facing moves.

“These companies are much more inventive, much more creative and responsive to the marketplace. And that’s just good leadership,” Kulik continued. “They’ve got their finger on the pulse of the marketplace and are responding to it. And this is how it manifests, with them adjusting, adapting and capturing different services that may be more appealing at large.”

Since the Amedisys-Contessa deal, there has been a ripple effect, whether it’s due to the deal directly, or just a reflection of the public-market companies’ evolution in thinking.

For instance, Enhabit Home Health & Hospice – the company on the verge of going public as a spinoff of Encompass Health (NYSE: EHC) – noted in a slide deck recently that one of its goals in the near future was to “explore adjacent verticals.”

Specifically, it stated its goal was to: “continue to evaluate these evolving alternatives and expand into adjacent service offerings both organically and through strategic acquisition.”

And even just last month, Amedisys had said that the Contessa Health deal was paying off from a strategic perspective even more than the Baton Rouge, Louisiana-based provider thought it would.

“What we’ve seen happen now is … some super large urban cities have these large health systems that want to provide the full continuum of care, and they want to leverage capabilities from hospital at home to end-of-life care in the home,” Amedisys CEO Chris Gerard said earlier this month.

Why it’s all in jeopardy

While it may have taken a decade for these sorts of companies to dip their toes into more risky waters, with some fully diving in, it could just take one proposed rule from the U.S. Centers for Medicare & Medicaid (CMS) to dismantle all of it.

Unless you’ve been living under a rock, you know that CMS proposed a harsh final rule for home health providers in 2023, which would include a 4.2% decrease to aggregate home health payments, or $810 million less than 2022.

Associations have called it a “declaration of war” against the home health industry, saying it has sent providers into a “tailspin.”

We wrote last week about how the rule could have an effect on home health M&A in general. The answer was that, for now, it could have a significant impact.

“It was not welcomed by anyone in the home care industry,” Les Levinson, co-chair of the transactional health care practice Robinson & Cole LLP, told HHCN last week. “You can’t ignore it, even though it’s only a proposed rule. The general feeling is that the number proposed probably won’t be the final number. But it’s a fair assessment to say that this will have an impact on buyers and sellers coming to market.”

Without a steady fee-for-service revenue stream, providers cannot branch out as much. It’s impossible to say whether Amedisys does the Contessa Health deal under this rate environment – if the proposed rule holds – and time will tell if Enhabit is able to stay on course with its exploration of adjacent verticals with “strategic acquisition.”

But Medicare fee-for-service is the lynchpin that allows providers to take on more Medicare Advantage (MA) cases, which yield lower rates, and spread their wings with creative, innovative and future-facing ventures.

The comment period will be crucial for providers to present data and coercive arguments on why a 4.2% rate decrease is unfair.

But if CMS sticks its feet in the ground and maintains a significant and negative adjustment to rates, the rule does have the ability to send providers back to the proverbial stone age, a time where they were much less experimental and far more conservative.