Senior living providers could have a golden chance to acquire home health agencies early next year. Although, the opportunity is not for the faint of heart.
On January 1, 2020, a new home health Medicare payment framework will take effect. Dubbed the patient-driven groupings model (PDGM), the system could overwhelm smaller home health agencies and prompt them to sell at an attractive price.
“If you want to go for it, you can buy things on the cheap probably in February or March of next year,” Paul Kusserow, CEO of Amedisys (Nasdaq: AMED), said at the National Investment Center for Seniors Housing & Care (NIC) conference in Chicago last week.
Baton Rouge, Louisiana-based Amedisys is one of the largest U.S. providers of Medicare-certified home health, private duty home care, palliative care and hospice care, accounting for about 4% of the total market.
Even senior living providers that have no intention of acquiring a home health business should be ready for market dislocations related to PDGM.
The new payment model will almost certainly accelerate consolidation in the home health industry, which in the last few years has seen major providers already gaining scale, including through landmark transactions involving players such as insurance giant Humana (NYSE: HUM).
All these changes will have consequences for senior living providers, whether they buy into the home health business or partner with existing home health companies.
The PDGM effect
Adding Medicare-certified home health is not an easy play for a senior living provider but some have ventured in.
With senior housing occupancy rates at historically low levels, providers have been experimenting with adding various types of ancillary services — including home health — as additional sources of revenue.
Furthermore, home health capabilities can help senior living providers address rising acuity in their buildings. And controlling more of the care continuum can make sense given that the health care payment system overall has shifted more to reward value over volume.
For example, some providers now offer their own Medicare Advantage health insurance plan, and are able to control costs by owning a network of senior living, skilled nursing, home health and pharmacy companies.
So, some senior living companies may be eager to pounce on acquisition opportunities next year after PDGM takes effect, and some agencies struggle to adapt to a variety of challenges. The PDGM model is comprehensive and complex, placing demands on home health providers to do more sophisticated coding or miss out on revenue.
PDGM also changes the advanced payment system that has been a mainstay in home health. Most critically, the new payment rule includes so-called “behavioral adjustments.” These could result in a net 8% reduction in Medicare payments to home health agencies next year.
And it won’t take long for the PDGM pain to be felt, as changes to the advanced payment system likely will result in cash flow disruptions in January through March.
Amedisys has estimated that about one-third of all home health agencies will end up underwater if PDGM takes effect in its current form. These generally will be small agencies that lack the technology, workforce, capital and other resources needed to survive and excel under the demands of PDGM.
“There will be a land rush on these mom and pops,” Kusserow said.
Amedisys has already engaged an investment bank and identified 2,000 potential acquisition targets. So, although the company is pushing hard on lawmakers and regulators to change aspects of the new model, Kusserow sees PDGM as a positive for Amedisys’ own business.
If they are not deterred by the complexities of PDGM, senior living providers likewise could benefit.
“There could be a very interesting opportunity to you to provide capital to make payroll,” Kusserow said. “There will two, two-and-a-half months without capital. Fund payroll, get a piece of the company and see what that looks like.”
The case for partnering
While pointing out that it could be a buyer’s market in 2020, Kusserow was not necessarily urging senior living providers to acquire a home health company. In fact, he counseled caution, considering that few companies have the expertise and resources to successfully manage the PDGM transition.
Another reason to be cautious: federal watchdogs have a seven-year lookback period on home health companies. So, they could review a business’ records, extrapolate that Medicare overpayments were made, and hold the new owner accountable for paying that money back.
Todd Kaestner, an executive with Brentwood, Tennessee-based Brookdale Senior Living (NYSE: BKD), echoed this warning and explained how it factored into acquisitions in the home health space.
“Our favorite acquisitions were small agencies without a lot of history,” said Kaestner, who is Brookdale’s Executive Vice President of Asset Management and Division President of Entry Fee.
Today, Brookdale is the largest senior living provider in the nation and also is a major home health provider, posting about $85 million in home health revenue during Q2 2019.
Kaestner had some other words of warning for senior living providers contemplating a home health acquisition. While having in-house home health allows Brookdale to coordinate care more effectively and prevent some move-outs, home health has never been a significant driver of move-ins, he noted.
Furthermore, the growth of managed care has put home health margins under pressure. Medicare Advantage plans typically do not reimburse as well as Medicare Part A, Kaestner and Kusserow said. And, operating a home health business with a diffuse, mobile workforce is very different than operating senior housing communities.
For all these reasons, it might be wiser for senior living providers to find a home health partner rather than acquire a home health business — and Kusserow for one is open to these opportunities.
Already, between 5% and 10% of Amedisys’ business takes place in senior living communities, he estimated.
“We think there’s real opportunity, and it’s an underserved area,” he said, of working even more with senior living partners. Amedisys does engage in joint ventures, and senior living providers should be able to arrange home health partnerships with some financial upside for both parties, he said.
Home health companies like the efficiencies of providing care in senior living, where there is a concentration of patients.
From the senior living perspective, a solid home health partnership should drive increased length of stay, improve resident satisfaction, and be a competitive differentiator.
“Those are the checkboxes,” Kusserow said.
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