The Centers for Medicare and Medicaid Services (CMS) publicized a regulatory proposal on Thursday that cuts reimbursement payments for in-home health service providers by 3.5% annually over the next four years, a worst-case scenario for providers like Amedisys Inc (AMED) and Gentiva Health Services (GTIV) as many on the Street expected flat rates for next year. Worse, Amedisys will likely see deeper impacts as case-mix and wage factors are particularly damaging for for-profit organizations. The proposed cuts come after a 2% reduction to reimbursement rates related to sequestration, and Wall Street analysts are lowering expectations for these home health providers in the wake of the proposed rule. After the market basket increase and further adjustments, the cut is 1.5% on average for the industry next year. AMED gapped down almost 30% at the open before rebounding in late-morning trading to $11.74, a decline of 11% from Thursday’s close.
In mid-March, PropThink outlined why Amedisys — with a bloated P/E multiple, deteriorating core businesses, and pressure from regulatory bodies — offered an opportunity to play the CMS’ crackdown on high-margin and sometimes fraudulent home health providers; see the article here. The excerpt below from the proposal is a glimpse at what has prompted the agency’s interest in cost-reduction within the home health industry:
“When examining data from all 10,327 Medicare cost reports from FY 2011, we found that a number of the cost reports had missing or questionable data and extreme values. These cost reports were often missing necessary information for calculating episode costs, reported significantly different data than data from prior cost reports for the same provider, or were markedly different than cost reports from the majority of HHAs during the same time period.”
Essentially, rates will fall by almost 14% over the next four years. The CMS actually wanted to reduce rates on an annual basis by more than the Affordable Care Act allowed for:
“Phasing-in the -13.63 percent reduction over 4 years in equal increments would result in an annual reduction of 3.60 percent. Since the Affordable Care Act states that the reduction may be no more than 3.5 percent, we propose to reduce payments in each year from CY 2014 to CY 2017 by 3.5 percent.”
To top it all off, Amedisys has disclosed that it faces investigations from the CMS, the Office of the Inspector General, the SEC, and the Department of Justice. The DoJ investigation involves “reimbursement and billing claims submitted to Medicare for home health services, and related compliance activities.” It’s an ugly mix of headwinds, and we continue to believe that the pressures on Amedisys are more than this embattled company can come back from in the near-term. Based on revised EPS estimates from Wall Street, AMED continues to trade at a sharp premium to peers — a forward P/E of 23.6 based on $0.50 FY EPS, or 43x based on one bearish EPS estimate updated on Friday — despite shares falling by over 80% in the last three years. GTIV, on the other hand, carries a forward P/E of just 11. EPS estimates for publicly traded home health companies, Amedisys included, have dipped incrementally over the last six months, indicative of the Street’s souring opinion of the industry in general.