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Q3 started with some pretty good news, but the combatants in Washington threaten to undermine promising fundamentals if they can’t facilitate a financially and politically stable environment. In spite of the sluggish economy and political gridlock, the healthcare industry continued to grow by over 20,000 jobs per month, one third of which were in the homecare sector. Martha Ross, an economist at the Brookings Institution, said that “Healthcare is a strong and growing industry compared to others.” Also, the Obama administration delayed some key provisions of the ACA, most notably the employer mandate and certain data collection and reporting requirements which are now scheduled to go into effect January 1, 2015. Just when things were starting to pick up, the federal shutdown gave decision makers pause as policymakers discuss and experiment with alternative value based models of care delivery. The fact that ACOs now serve about 14 percent of the nation’s population indicates that coordination through consolidation is well under way, but exactly how the market will react is still far from certain. Medicare As Congress negotiates different approaches to the budget, home health providers have received mixed messages. They’re necessary and important for efficiency, but rates are being reduced and costs are being increased. Sequestration remains in effect and rebasing threatens the viability of many agencies. NAHC contends that CMS is relying on faulty data and Val Halamandaris calls rebasing “the straw that breaks the camel’s back.” Billy Tauzin of the Partnership for Quality Home Healthcare said “any further cuts to Medicare home health will endanger seniors’ and disabled persons’ access to the clinically advanced and cost effective home-based care that is medically necessary for homebound patients.” Additionally, co-pays, deductibles, means testing, raising the eligibility age, and introducing a catastrophic cap are all being considered by policymakers. So why would anyone want to buy a Medicare certified home health agency? Patient coordination & bundled services are strategic reasons and comparatively decent margins & strong growth prospects are financial reasons. We’re continuing to see financial buyers seeking large platform investments and strategic buyers looking for add-ons that expand and enhance operations. Hospice Hospice continues to grow in both numbers of patients and providers and legislation was introduced in the Senate (again) to establish a benefit to discuss end of life options. Much like home health agencies before them, hospice providers’ costs are increasing as they become subject to greater scrutiny from MACs, RACs & ZPICs, must endure more frequent surveys and ADRs, and provide greater documentation for PEPPER and the Hospice Quality Monitoring Program. Administratively, providers will be required to submit a much more detailed cost report and may have to adjust to a new tiered or U-shaped payment model. The ACA wiped out most planned rate increases, but margins are still relatively good and growth prospects couldn’t be better. Although hospice providers are starting to see the margin erosion already experienced by other providers, their still-respectable margins combined with supercharged growth prospects have attracted buyers from all points on the continuum of care. …and since most hospice providers are thinking about growth strategies rather than exit strategies, the rare seller can command a premium price at any size. Medicaid Although sequestration doesn’t apply to the Medicaid program, growth promised by the ACA has been stymied by the weak economy and partisan politics. An AARP article entitled “Home and Community Based Services: The Right Place and the Right Time” encouraged the Commission on Long Term Care to rebalance Medicaid spending toward HCBS but Reuters reported that only about half of the states have agreed to expand Medicaid. Thus, the Department of Health and Human Services has downsized its estimate of new enrollees from over 20 million to under 10 million, which could hamper growth in some states. A Rand study concluded that states opting out of Medicaid expansion will spend over $1 billion more on uncompensated care than states implementing Medicaid expansion. States searching for alternatives to Medicaid expansion have considered premium supports for beneficiaries, but the director of North Carolina’s Medicaid program, Tony Keck noted that the private option “covers the same number of people with the same benefits, but is more expensive.” Political uncertainty is limiting progress on the dual eligible problem, but since reducing costs through patient coordination will undoubtedly be a part of the solution, we expect further consolidation as the economy improves. Private Duty Providers of nonmedical homecare were pleased by the delayed implementation of the ACA employer mandate, but displeased by the elimination of the companionship exemption from paying minimum wage and overtime to caregivers: Both changes become effective January 2015. The New York Times portrayed the latter story as a “redress of long standing injustice” without any coverage of the provider perspective while the National Council on Independent Living pointed out that higher costs would threaten access to care – especially for those who need it most. Also, limiting access to community based care for disabled persons could be a violation of the ADA and/or the Olmstead decision. With the employer mandate and elimination of the companionship exemption threatening to substantially increase costs, providers need a strong economy to help stimulate revenue growth. Although viable candidates are somewhat scarce, we continue to hear from new buyers searching for both platform investments (which could be as small as $5 Million) and strategic add-ons in the private duty space. Conclusions Both sides in Congress have valid concerns, but governing by crisis is counterproductive. The need to provide care to a growing and aging population at a lower cost remains the fundamental force driving consolidation in the healthcare services industry. However, decision makers need a stable regulatory environment for planning and execution of strategies that can yield greater efficiency. Home and community based services of all types are central to every patient centered and performance based model of care being considered, but political uncertainty is curtailing the economic recovery and sidelining many buyers and sellers from the market. We believe a “grand bargain” is needed to provide enough certainty for market forces to resume. Until then, we’re only seeing the most strategic transactions being consummated. If you’d like to discuss how all of this affects you, feel free to contact us any time. We’ll be making a presentation at the NAHC Annual Meeting in Washington DC on November 2. |
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