While Growing Home Health Business, Addus Has Hit Managed Care, M&A Difficulties

Addus HomeCare Corporation (Nasdaq: ADUS) wants to continue to grow its personal care and home health segments, the former being its largest segment and the latter being its smallest.  

That has been its plan for some time now, but the surrounding factors around those goals continue to change.

For instance, after the CY2023 payment rule was finalized for 2023 last fall, Addus believed there would be more opportunity to acquire in home health care.


But what its leaders have been met with, instead, is a trend that is hindering M&A in home health care overall. That is the valuation gap between prospective buyers and sellers.

Buyers see an industry facing reimbursement cuts this year and potentially in future ones, all while debt is more expensive. Sellers, on the other hand, are pointing to past valuations and past performance.

“I think the real question lies in what sellers and purchasers are thinking,” Addus Chairman and CEO Dirk Allison said on the company’s fourth-quarter earnings call Tuesday. “I don’t know that all sellers today have come to the place where they have factored in that there might be future limitations on the rate increases, and so their expectations for price might still be a little high.”


Allison acknowledged that there’s still a lot to sort through, and that the severity of future years’ rate cuts – or the certainty of them – is still up in the air.

“I think from us, as purchasers, … we’re trying to be very careful and strategic as to what we pay for deals until we truly understand the ruling,” he added.

Addus’ home health segment’s same-store revenue grew 8.3% year over year, though that was primarily due to the company prioritizing episodic cases and declining non-episodic referrals.

On that note, similar to Enhabit Inc. and other home-based care companies, Addus has a managed care team that is working on better home health contracts with health plans.

“If they want to have adequate coverage for their beneficiaries, they need to do something about the rates,” Addus President and COO Brad Bickham also said on the call. “The way we’re approaching this is, let’s try to get some near-term wins. Let’s get those non-episodic rates adjusted to where we’re in a position where we can start taking on those referrals, and they can become profitable for us. And then, at the same time, let’s look at the longer-term solution, which is that we need to move towards an episodic-type rate that is more comparable to Medicare fee for service.”

But as a service line, home health care only makes up about 5% of Addus’ revenue. It accounted for about $13 million in revenue in the fourth quarter.

Addus’ interest in home health care, however, isn’t just about growth in a vacuum.

“We remain excited about home health operation as it complements our personal care services, particularly where we participate in value-based contracting models,” Allison said.

Overall revenue in the quarter was $247 million, a 10% year-over-year increase. For the full 2022, Addus brought in $951 million, also a 10% increase compared to 2021.

Personal care services revenue was over $183 million, a nearly 5% year-over-year increase. The increase was mostly tied to positive rate adjustments in the markets Addus serves, however.

“Over the past three years, a majority of our same-store growth in [personal care services] came from rate increases from our states,” Allison said. “With the disruption caused by the pandemic, hourly growth has been more difficult.”

Enhanced federal Medicaid matching rates that states had been receiving amid the public health emergency will begin phasing out at the end of March. But Allison believes that the states it serves are in “much stronger financial position than before the pandemic.”

“That was the struggle that all the industry had for the last two, two and a half years,” Allison said. “And now that we’re able to hire more individuals, they’re coming back on service, we’re able to then put them to work [to see this] hourly growth, and then put on top of that just normalized rate impact. We believe that 2023 will be a nice year for us.”

Hiring numbers

The labor environment continues to improve, Addus leaders suggested. But every segment is not equal when it comes to hiring.

During the fourth quarter, hires per business day increased by 10% year over year. That trend has continued upward into January and February of 2023 as well, according to the company.

“A part of our improved hiring results have been due to the recent investment we made in a candidate tracking system, which allows us to better engage with potential employees, as well as shorten the time between application and hire,” Allison said. “We are continuing to roll out this system to all of our sites, a process that should be completed in 2023.”

Hiring in home health care and hospice has lagged behind personal care, however.

And while hiring did pick up in the clinical settings in the back half of 2022, that was more evident in hospice, Allison said.

“There are some geographic areas where both clinical hiring and wage pressures continue,” he said. “But the overall hiring environment has certainly improved, and we expect this trend to continue in 2023.”

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