Medicare's (Stay) Home Savings Plan

Medicare physicians aren't the only ones relieved by Congress bringing down the curtain on 17 years of recurring debates, with a $214 billion doc fix that avoided a 21% cut in reimbursement and offered some payment relief to the home health care industry. The home health care perk was modest — a 1% reimbursement increase in 2018. While the increase was tiny, it was a whole lot better than the 14% cut, previously planned to be phased in between 2014 and 2017, that was written into the Affordable Care Act. The result means more clarity for the home health care industry's future reimbursement levels and for its status as the lowest-cost setting for delivering care, as Medicare shifts its fee-for-service pay structure to value-based payment models. That combination has helped lift IBD's Medical-Outpatient/Home Care industry group to a No. 10 ranking on Friday, among IBD's 197 industry groups. The group, which has been in a more or less steady climb since June 2012, steepened its rally in October. The stocks within the group are a diverse lot. They include providers of outpatient surgery (AmSurg (AMSG) and dialysis services (DaVita HealthCare Partners (DVA) and Fresenius Medical Care (FMS); rehabilitation centers, including HealthSouth (HLS) for post-acute patients and U.S. Physical Therapy for orthopedic ailments; outsourcers of physicians to hospitals, including Mednax (MD); and home care providers Almost Family (AFAM), Amedisys (AMED) and LHC Group (LHCG). The common thread: All provide services outside the traditional settings of hospitals or physicians' clinics. The delivery of care in more cost-efficient settings has long been the central value proposition offered by these companies. Acquisitions have been key to the segment's growth. And the stocks have grabbed increasing investor attention as consolidation intensifies, driven by Medicare's shift to a reimbursement model that pays based on results. Incentives To Lower Costs In January, Department of Health and Human Services Secretary Sylvia Burwell announced that, by 2018, Medicare aims to have 50% of payments tied to both value and performance metrics. As explained by Piper Jaffray analyst Kevin Ellich in a recent report, the Bundled Payments for Care Improvement Initiative generally works by giving providers an incentive to save money for Medicare. "Medicare takes an approximate 2%-3% cut off of the top of the care cost," Ellich wrote. "If the provider beats the target price, then it is eligible for a reconciliation payment, but if it falls short, a repayment to Medicare may be required." Among Ellich's list of companies that stand to benefit: Fresenius, Amedisys and LHC Group. He noted that the potential impact is hard to quantify and the gains will take time to materialize. While investors may be buying into value-based pricing, Washington has yet to prove that it can figure out how to measure and pay for quality. A few of its baby steps toward value-based payment have provided cause for skepticism. For most providers, the finalized Medicare rates were good news, raising reimbursements rates 1.25% instead of the feared 1% cut. But DaVita said this month that Medicare Advantage rates for 2016 will cut $50 million, or 2%, from operating income. The change reflected a tweak in Medicare's risk-adjustment model, which levels the playing field for managed-care providers who wind up with an especially sick covered group. DaVita said it will take a hit because its investments in wellness and prevention have yielded positive results. Rising Home Care Spending Another potential benefit of Medicare's payment shift: Home health care providers could see increased admissions of post-acute patients, Ellich told IBD. "Where now those patients may be in skilled-nursing facilities or inpatient rehab (hospitals), I think you could see shifts in the site of care" to in-home care, reducing time spent in the costlier settings by a day or two, Ellich said. In a 2014 report, Robert Mechanic of the Heller School of Social Policy and Management at Brandeis University called post-acute care "the next frontier in controlling Medicare spending." He noted that spending for patients hospitalized with myocardial infarction, congestive heart failure, or hip fracture grew 1.5% to 2.0% per year from 1994 to 2009. Annual spending on post-acute care for those patients simultaneously jumped 4.5% to 8.5%. Jefferies & Co. analyst Brian Tanquilut agrees that a focus on savings and better outcomes in post-acute care favors home health care providers. The cost of caring for a patient at home is about $150 a day vs. $650 in a skilled-nursing facility and $1,100 in inpatient rehab. One of the key value-based metrics is hospital readmissions. The aim of avoiding patients' health from backsliding following their discharge, requiring them to be readmitted, has turned home health care from an afterthought to a central concept. Downsizing Post-Acute Care As a result of that focus, "there is a consolidation in the post-acute space," Tanquilut said. He notes that HealthSouth bought Encompass Home Health and Hospice for about $750 million in November and Kindred Healthcare (KND) bought Gentiva Health Services for $1.8 billion last October. Tanquilut expects more consolidation, with Almost Family, Amedisys and LHC as possible targets, while one or more might be a suitor. Among possible bidders could be HealthSouth, Kindred and Brookdale Senior Living (BKD), he said. HealthSouth operates inpatient rehabilitation hospitals in 28 states. It has been benefiting from the greater need for intensive rehabilitation as an aging population suffers more strokes, needs more knee replacements, and the like. HealthSouth's linkup with home health care makes sense, Tanquilut says. The combination allows it to oversee the later steps of rehab in a low-cost setting to ensure it delivers sustainable value. Meanwhile, transferring less-needy patients out of acute care earlier opens high-demand beds for incoming patients. The result is in an "increase in the acuity level" and, therefore, in higher revenue paid by incoming, more needy inpatients. For AmSurg, the surgical center opportunity appears to be more greatly linked to acquisitions than to organic growth, which was only 1% on a same-facility basis in the fourth quarter. It has 246 centers, with over half devoted to gastroenterology and the rest split between ophthalmology and orthopedics. AmSurg's big strategic move last year was its $2.35 billion acquisition of Sheridan Healthcare, a provider to hospitals of outsourced anesthesia, emergency medicine and radiology physician services. Since then, the Sheridan unit has scooped up three physician practices, and Tanquilut expects plenty of such buys to follow. For small practices "with three, four or five physicians, it's getting harder by the day" to manage health care IT and regulatory requirements," he said. When AmSurg Corp. last reported earnings in February it stood as the largest operator of ambulatory surgical centers in the U.S. It's now being knocked off that perch. In March, Tenet Healthcare (THC) said it would merge its outpatient surgery properties with those of privately held United Surgical Partners International in a joint venture to claim the top spot. In this case, imitation was the sincerest form of flattery: Tenet, the third-largest hospital operator, understood that ambulatory surgical centers, or ASCs, increasingly have become the preferred setting for generally low-risk, less-invasive procedures — both from the perspective of patients and insurers. The new Tenet venture, which the hospital operator can buy outright over five years, and AmSurg's network are the biggest outpatient surgery players, but still hold just 5% and 4%, respectively, of the fragmented $24 billion market, according to a Tenet investor presentation. The message: Independent operators still account for 63% of the outpatient surgery market, leaving plenty of opportunity for growth via acquisition. AmSurg says it has earmarked up to $200 million for that purpose this year.