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Q3 was dominated by the presidential election campaign. Now that the Supreme Court has clarified the constitutionality of the Affordable Care Act, it’s up to the electorate to decide who will be next to lead the reform of our healthcare delivery system. Both candidates present clear choices, but no matter who is elected in November, the next administration will begin in January facing the “fiscal cliff” created by Congress’s inability to balance a budget. The expiration of the Bush tax cuts could take cash out of taxpayers’ hands and the imposition of budget sequestration could take cash out of healthcare providers’ hands just as the sputtering economy might be stabilizing. Both Republicans and Democrats professed support for homecare during their respective conventions, but each prescribes a starkly different path of reform than the other. Democrats promise to preserve and protect Medicare and Medicaid by restructuring public payment methodologies to encourage patient coordination and efficiency, especially for dual eligible beneficiaries. Republicans promise to preserve and protect Medicare and Medicaid by introducing greater private market methodologies like vouchers and premium supports and giving states more flexibility through block grants. The market has already begun to respond to the necessity for greater efficiency with many providers exploring partnership opportunities for patient coordination within and between points along the continuum of care. Reuters Health reported that the formation of the first Accountable Care Organizations has reduced costs for providers and payers and a recent survey by healthcare public affairs firm Jarrard Phillips Cate & Hancock says that “executives are gearing up for increased M&A activity” as leading providers look for ways to increase revenues while reducing costs. …and healthcare continues to lead the economic recovery with the Bureau of Labor Statistics reporting 12,000 new healthcare jobs being created in July and 17,000 new healthcare jobs being created in August. Medicare Economic pressure to increase efficiency in the Medicare certified home health industry predates the ACA, but the Supreme Court decision seems to endorse trends toward horizontal and vertical consolidation that are already well under way. Over 150 ACOs have already been formed to serve almost 2.5 Million patients in 40 states. CMS will now penalize hospital readmissions, creating another opportunity for home health providers to demonstrate the economic value they add through patient coordination. However, MedPAC is still considering whether to include acute providers in the post-acute bundle and other variables that could impact post-acute providers. A hospital-centric approach could de-emphasize post-acute providers, potentially undermining the coordination that bundling is designed to foster. Meanwhile, the 2013 CMS proposed rule portends expected rate cuts and adjustments to regulatory compliance with required face-to-face encounters and therapy assessments. Although technically not a rate cut, budget sequestration could result in another 2% reduction in cash flow. Program integrity is always festering as another home health agency made headlines for false claims of over $40 Million and the OIG estimates that as many as 25% of claims in CA, TX, FL, and MI may have statistical anomalies that could suggest illegitimate billing. Alternative sanctions such as payment suspension, civil monetary penalties, and the installation of temporary management could be introduced within the next year. As the fiscal cliff nears, there has been renewed interest in the Bowles-Simpson budget proposal or another Grand Bargain between Republicans and Democrats. For Medicare certified home health providers, this could mean more discussion of co-pays, deductibles, accelerated rate cuts, and greater influence of IPAB. There are conflicting signals in the market for home health providers: Home health is at the center of reform trends toward patient coordination but payment rates keep going down while costs for regulatory compliance keep going up. The need for consolidation is evident, but some providers are waiting until after the election to commit to a strategy. The difficulty of the immediate operating environment is reflected in public company valuations. Even the largest providers are struggling to maintain revenue growth as the number of competing agencies increases and the number of referral sources without their own home health agency decreases. However, while short-term stock market investors reflect the challenges of uncertainty in the market today, long-term private equity investors continue to make significant acquisitions betting on the efficiency of home health to continue to deliver market beating growth and margins. Hospice Hospice continues to enjoy enviable growth prospects as terminally ill patients and their families better understand how the service can improve their quality of life. Even though the National Hospice and Palliative Care Organization notes that the industry has grown by over 100% in the last 10 years, with over 5,000 providers now serving more than 1.5 million patients, many potential beneficiaries still never claim the benefit. Hospice is also at the vanguard of efficiency as end-of-life care rivals dual eligible beneficiaries as a source of disproportionate costs in relation to benefits and outcomes. As utilization of hospice services increases in response to the need for greater efficiency, the hospice industry will mature into a more integral role in the continuum of care and be subject to greater scrutiny and regulation. Hospice providers are evolving from merely being reactive to the dying process to being proactive in improving the quality of life. Providers are expanding beyond traditional cancer diagnoses and beyond medical care to palliative care and greater emotional support. Some providers are expanding into “pre-hospice” patient populations through the Patient for All Inclusive Care for the Elderly (PACE) Medicaid program. In order to measure the cost savings of higher hospice utilization, CMS is developing data benchmarks such as the Program for Evaluating Payment Patterns Electronic Report (PEPPER) and other efforts to maintain program integrity. CMS is still analyzing payment reform recommendations from MedPAC, OIG, GAO and others, but the hospice industry appears to be avoiding most of the worst rate cutting that is occurring throughout the Medicare program. In fact, the 2013 proposed rule will probably yield an almost 1% rate increase (not including sequestration), but a revival of the Bowles-Simpson proposal could slap a co-pay as high as $2,000/patient on beneficiaries. With a relatively stable regulatory environment, significant growth prospects and comparatively generous margins, hospice providers continue to be very much in demand by buyers. We are seeing many more buyers than sellers, resulting in premium valuations even for small or underperforming agencies. Medicaid The Supreme Court decision may have prevented the feds from expanding Medicaid by fiat, but it did not change the economic necessity of expanding access to chronic assistance with the activities of daily living in order to reduce more expensive acute medical care. Matt Solo of the National Association of Medicaid Directors voiced “legitimate budget concerns” of states, for many of which Medicaid is their number 1 or 2 budgetary expense. At least seven states with Republican governors have vowed to forgo federal money to prevent expanding their Medicaid programs and some have used the court’s decision as an opportunity to try to shrink their current program enrollment. HHS Secretary Sebelius has warned that “the court’s decision did not affect other provisions of the law” such as maintenance-of-effort requirements and other state responsibilities. According to the Center for Budget and Policy Priorities, now that states can choose whether or not to expand Medicaid under the ACA, many states are determining that “the net costs of expanding state Medicaid programs may be lower than expected,” especially since new enrollees are usually not the most expensive beneficiaries. Some of the biggest state critics may change their thinking after the political dust is settled and states will have to work with CMS to increase patient coordination and reduce costs, especially for dual eligible beneficiaries. Buyers are continuing to seek opportunities for consolidation that emphasize economies of scale to prepare for the expected increase in beneficiary population, particularly in states that will be leveraging ACA mandated federal financial support. Private Duty As the economy gains traction and private duty homecare providers resume their growth trends, costs are increasing – especially for regulatory compliance. The Supreme Court decision did not undermine the employer mandate to provide health insurance for employees and many states are requiring caregivers to become certified and private duty homecare agencies to become licensed. Providers seem to be getting some help on the Companionship Exemption issue as Congress pushed back against the DOL by introducing specific legislation to protect the exemption and included language in the House Appropriations Bill preventing implementation of any rule changes. In California, the Democratic Governor vetoed a “Domestic Worker’s Bill of Rights” and legislation that would have required caregivers to become certified and private duty homecare agencies to become licensed. Now that private duty homecare has become more important in the continuum of care, increased regulation is to be expected. Additionally, media scrutiny can project a positive or negative image that influences both policy makers and consumers. CNN reported on the Companionship Exemption debate and the New York Times reported on a Northwestern University study about caregiver selection, training, and supervision: Neither story portrayed the private duty homecare industry in a very positive light. With so much attention focused on the efficiency that all types of homecare providers contribute to the larger healthcare delivery system, now is the time for the private duty homecare industry to establish a reputation for integrity so policy makers and consumers can have enough confidence in providers to support future growth. Economic efficiency demands that chronic assistance with the activities of daily living be utilized to reduce acute medical care. Private duty homecare satisfies the private demand as Medicaid satisfies the public demand for increased chronic care. The financial crisis and recession temporarily suppressed demand for private services, but the need for efficient and cost effective care has allowed the healthcare industry to lead hiring and growth as the economy recovers. Private duty providers are growing again and franchise operators are piling in to chase the many entrepreneurs who want to serve this lucrative segment. Established traditional providers who have regained some of their former market share are exploring acquisition opportunities within the private duty industry and beyond. However, we haven’t seen the floodgates open just yet as potential sellers are still concerned about perceptions of low prices and potential buyers are surprised by the actuality of higher prices, especially for Medicare certified acquisition candidates. Conclusions The electorate will determine whether defined-contribution reforms will be favored over defined-benefit entitlements. However, no matter who wins the election, greater efficiency is an economic necessity that will continue to drive growth in the homecare industry. Until further notice, the ACA is the law of the land. Providers must navigate an environment that offers significant opportunities for growth in exchange for assuming more risk and potential reward for outcomes. Conditions support consolidation because spreading costs over greater revenue allows operators to absorb the margin erosion associated with more complex regulatory compliance. There are good reasons to buy and good reasons to sell, but there is just enough uncertainty for many operators to delay making any major decisions until after the election. If you’d like to discuss how all of this affects you, feel free to contact us any time. We are always happy to discuss market conditions, valuations, and the process we undertake to effect a successful transaction. |
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