Home-Care Mergers Loom for Amedisys, Gentiva on Cuts (Update3)
January 14, 2010, 4:35 PM EST(Adds closing share prices in the 14th paragraph.)
By Alex Nussbaum
Jan. 14 (Bloomberg) -- Amedisys Inc. and Gentiva Health Services Inc., the biggest home-nursing companies, plan a shopping spree for smaller rivals as funding cuts in the U.S. health-care overhaul trigger the industry’s biggest shakeout.
Congress may slash Medicare payments for home health-care providers by $55 billion over a decade to finance an expansion of health insurance. While thousands of mom-and-pop home-care companies may be wiped out, Atlanta-based Gentiva and Amedisys, of Baton Rouge, Louisiana, stand to gain a larger share of a market that had $35 billion in revenue last year, said Michael Wiederhorn, an Oppenheimer & Co. analyst in New York.
Amedisys, Gentiva, LHC Group Inc. and Almost Family Inc. control 12 percent of the nation’s 10,000 home-nursing agencies and may double that stake within five years, Wiederhorn said in a telephone interview. Consolidation may boost company earnings and reduce industry inefficiency, he said. It may also narrow choices for consumers in sparsely served rural areas.
The funding cuts will be “good for us as a growth company,” said Keith Myers, LHC’s chief executive officer, in a telephone interview. “There are companies that are willing to have conversations now that five years ago, if you told me this company was a candidate for consolidation, I would have said, ‘That guy will never sell.’”
Myers, whose company is based in Lafayette, Louisiana, said the largest home-nursing companies are stockpiling capital as they prepare for “the largest period of consolidation in the industry’s history.”
Best Growth Ever
Amedisys, the largest home-health provider, expects its “best year ever” for growth even if the funding cuts are dialed back, Chief Executive Officer William Borne said today in a presentation at the JPMorgan healthcare conference in San Francisco. The company’s scale gives it an advantage, as do innovations such as outfitting nurses and aides with laptop computers, he said.
“Our day-to-day competition are typically very unsophisticated, mom-and-pop operators that are ripe for consolidation,” Borne said at the conference.
“If we have large reimbursement changes, it will be a real ripe market not only including the small but the midsize and maybe some of the larger acquisitions.”
$17 Billion
Medicare, the government insurer for the elderly and disabled, paid providers $17 billion to treat 3.4 million home- bound patients last year, said William Dombi, a vice president at the National Association for Home Care and Hospice, the industry’s Washington trade group. Providers took in the same amount from private insurers and Medicaid, the government program for low-income patients, Dombi said by telephone.
The services’ nurses, aides and therapists visit patients’ homes and tend to wounds, rehabilitate broken limbs and help with personal care such as bathing and feeding.
A House measure passed in November reduces Medicare funding for home-health agencies by $55 billion over 10 years, starting this year. The Senate’s version, approved Christmas Eve, seeks $40 billion in savings and would phase them in more gradually.
Lawmakers from the two chambers are negotiating to merge the bills. Home-care companies expect to face at least the level of cuts in the Senate plan, Dombi said.
Undervalued Companies
Uncertainty over funding has left industry shares undervalued even after a rebound last year, said Mustafa Sagun, chief investment officer for equities at Principal Global Investors. The Des Moines, Iowa, asset manager held $54.1 million in stock in the top four providers as of Sept. 30.
Amedisys rose $3.14, or 6.1 percent, to $54.45 at 4 p.m. in Nasdaq Stock Market composite trading and has gained 16 percent from a year ago. Gentiva rose 29 cents, or 1.1 percent, to $27.44, up 8.5 percent from this time last year. LHC advanced 22 cents to $33.03, for a 12-month gain of 3.2 percent. Louisville, Kentucky-based Almost Family rose 46 cents, or 1.2 percent, to $40.53, bringing the 12-month increase to 4.2 percent.
With the U.S. population aging and patients seeking more care at home, the companies remain a good bet, Sagun said in a telephone interview. Amedisys shares sell for about 10 times projected earnings for 2010. They’ve averaged 15 times in the past, Sagun said.
“If consolidation happens, they’re going to find much higher earnings growth through the efficiencies in the companies they could bring in,” he said. “There will be some Medicare cuts coming to this group as with every Medicare group, but really they are not getting any credit for their ability to grow their earnings.”
500 Locations
Amedisys has 500 locations in the U.S., followed by Gentiva with 380, LHC with 250 and Almost Family with about 100, said K. Newton Juhng, an analyst with BB&T Capital Markets in New York. Small players and nonprofits dominate the “heavily fragmented” industry, Juhng said in a telephone interview.
Oversight lapses by Medicare and the states have opened the door to waste and abuse in the industry, said the Government Accountability Office, an arm of Congress, in a report in February. Exaggerated or falsified claims helped boost Medicare spending on home-based health care by 44 percent from 2002 to 2006, compared with a 17 percent rise in patients using the service, the agency found.
Profit margins at for-profit home-health providers averaged 15 percent in 2006, higher than what Medicare paid nursing homes, hospital rehabilitation centers and outpatient dialysis programs, the GAO said.
Profit Margins, Fraud
Those margins, and the fraud concerns, make the industry an attractive target for lawmakers looking to finance the health overhaul, Juhng said.
There may be unintended consequences. If smaller companies can’t afford to operate, people in rural areas served by fewer providers may lose access to home care, Juhng said. More patients will end up in nursing homes and hospitals, where care is more expensive, he said.
Gentiva expects to offset whatever the cuts cost in profit margin by boosting revenue through acquisitions, or moving into markets abandoned by competitors, said CEO Tony Strange.
Gentiva held $125.3 million in cash and short-term investments as of Sept. 30, according to its latest quarterly earnings report. It also has access to a $50 million line of revolving credit and has been paying down debt in anticipation of the health-care debate’s aftermath, Strange said in an interview.
‘Dry Powder’
“As long as there’s this uncertainty related to reimbursement, I think most of the larger acquisitions are going to continue to sit on the sidelines,” the CEO said. The company plans to “keep that dry powder to the side so that when there is clarity, we can accelerate the growth of our acquisition strategy.”
Amedisys has access to $239 million from a credit line, along with $45 million in cash, and plans to “further consolidate this industry,” Chief Financial Officer Dale Redman said at the JPMorgan conference.
LHC and Amedisys have been more active buyers historically and have less debt, making purchases easier, said Oppenheimer’s Wiederhorn, who works in New York. Juhng, the BB&T analyst, said Gentiva and Amedisys seem best positioned. The two companies’ size should give them access to lower interest rates, cutting the cost of acquisitions and internal growth, he said.
Moving too fast also poses risks, said Sheryl Skolnick, a Pali Capital Inc. analyst in New York. After Congress decides on cuts, it may take years for Medicare to write rules determining which home-care services lose or gain the most, she said. Companies large and small also face the risk of increased scrutiny from fraud investigations, she said.
‘Fair Amount of Pain’
“The publicly traded companies may have the staying power, but between here and there could be a fair amount of pain,” Skolnick said in a telephone interview. “There’s no guarantee that earnings are going to be even stable, much less go up in a straight line, between today and the day where they could see themselves clear to making large numbers of acquisitions.”
For consumers, consolidation will mean fewer choices, said Dan Willson, owner of Paradigm Rehab and Nursing LP. The Tyler, Texas-based company provided skilled nursing, occupational therapy and home-health aides to about 1,500 patients last year in the eastern part of the state.
Willson Won’t Sell
Willson, a physical therapist, said he won’t sell. He enjoys the sense of empowerment patients get from in-home, one- on-one care, and with more than $5 million in revenue last year, Paradigm has the scale to survive, he said.
The cuts may force him to leave positions unfilled and pare benefits for his 85 employees. Medicare beneficiaries will see fewer therapists, less often, lengthening recoveries, he said. Home visits by specialists in neurology and orthopedics will be curtailed, forcing more patients to travel to hospitals.
“I love being part of leading a program where you can make a difference in people’s lives,” said Willson, who founded the company in 2005. “A lot of the larger outfits, while they do have more efficiencies in place, like any business, they serve a bottom line, and they also serve the stockholders first.”
Congress’s proposals would delay a rate increase for inflation and cap “outlier” payments to providers that say care was unusually expensive. The home-care association supports the latter measure, predicting it may save $7 billion a year in a particularly fraud-prone practice, Dombi said.
Medicare pays providers $2,700 per case on average, Dombi said. That may drop 14 percent under the proposals, he said.
Previous Shakeup
The home-nursing industry endured a similar shakeout a decade ago, spurred by Medicare cuts in the Balanced Budget Act of 1997, said Myers, the LHC chief. Providers plunged to about 6,800 from 10,000 in three years, leaving local agencies available for “pennies on the dollar,” he said.
The numbers reversed after Medicare changed its reimbursement rules and companies became more efficient, he said. LHC was once one of the mom-and-pops: Myers’s wife, a nurse named Ginger, started the agency out of the couple’s Palmetto, Louisiana, home in 1994.
With Congress mandating a decade of lower rates, many providers will get out for good this time, he said.
“This 10-year path kind of takes away all the hope that some miracle is going to happen,” Myers said. “A lot of them will want out rather than getting slowly squeezed away.”
--Editors: Robert Greene, Andrew Pollack
To contact the reporter on this story: Alex Nussbaum in New York anussbaum1@bloomberg.net.
To contact the editor responsible for this story: Reg Gale at Rgale5@bloomberg.net
