For Amedisys, Strong Headwinds Mean That Estimates and Stock Are Going Lower

The Home Health Services industry remains under pressure due to regulatory scrutiny and looming reimbursement cuts. As we have written in the past, Amedisys, Inc. (AMED) remains vulnerable on these issues, in addition to a contract change with major health insurer, Humana, hence we expect more investors to sell this stock as 2013 unfolds. Among the more telling signs that weak results are likely to continue, the company’s closest competitor, Gentiva Health Services (GTIV), delivered disappointing 4Q 2012 results earlier this month, and AMED is expected to report its 4Q earnings soon. While expectations for AMED’s financial outlook, along with the stock, came down after 3Q earnings were released, continued pressures indicate that 2013 estimates remain too high and the stock could behave the same way on 4Q results, which are likely to be sloppy in the least. Shares of AMED have recovered from their $9.51 low in late November in a buoyant market and on reduced expectations, however, realization that the $0.77 Consensus EPS estimate for 2013 may still be at risk could take the stock back down to the mid-$9s or lower. One analyst is still estimating that AMED can earn $0.98 this year, so that estimate reduction is surely coming. Meanwhile, the Consensus $0.77 EPS estimate is significantly down from 2012’s $1.03 estimate, highlighting the deterioration in this business, and most importantly, stocks with declining earnings and further uncertainty, as a rule, simply do not go up. In this note, we focus on the market issues facing home health companies, GTIV’s earnings, which are indicative of AMED’s headwinds, and specific issues related to AMED’s business that could impact results in 2013 and beyond. Expect shares of AMED to continue trading down into and through the company’s 4Q earnings results later this month.

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Earnings for AMED’s Closest Peer Shows Home Health Environment Remains Difficult. GTIV, a company that operates in the same segment as AMED, reported its 4Q 2012 results earlier this month, and the news was disappointing. Shares of Gentiva fell 7% after the company missed both top and bottom line expectations. Margins also fell short, and given that GTIV is thought to have more solid fundamentals compared to Amedisys, we believe AMED’s upcoming earnings will, at a minimum, suffer from similar issues. Key excerpts from GTIV’s earnings transcript are below, and again indicate the pressures on Home Health providers:

“Revenue per episode for the fourth was approximately $2,920 which was up slightly sequentially, but down approximately 4% from the prior year period due largely to the reduction in Medicare reimbursement rates. ”

“Home health revenues were negatively impacted during the part of the fourth quarter by an additional 1% decline in the 2013 Medicare reimbursement rates based on episodes that remained open at year end.”

“During the fourth quarter home health gross margins were 47.8% slightly lower than the 48.8% last quarter and 48.1% in the prior year driven primarily by the impact of Medicare rate cuts.”

“I do believe we are taking market share. I don’t believe that the home health industry right now is growing. As a matter of fact if you look at episodes in 2011 compared to 2010, episodes across the entire industry were down. And so I do believe we are having to take market share in order to hit those kind of gains.”

Broker-dealer Oppenheimer commented on GTIV’s 4Q results and summed up the lackluster performance and future prospects: “Overall, the operating metrics this quarter were rather disappointing. While cash flow was strong, it is not likely sustainable at these levels in ’13.” While both GTIV and AMED are working to reduce costs to stem the pressure on operating results, we note that GTIV mentioned on its quarterly call that higher benefit and labor expense is countering some of those efforts. We expect that AMED is likely to note similar difficulties on its 4Q earnings call.

Budget Sequestration To Impact AMED. The Budget Control Act of 2011 was signed into law by President Obama in August 2011, and mandated among other things, automatic spending limits (aka budget caps or budget “sequestration”) if the U.S. government could not balance its budget. Sequestration, under the Budget Control Act, proposed 2% government spending cuts across the board, and includes cutting reimbursement for Home Healthcare services. Needless to say, the budget was not balanced, and Sequestration was delayed from going into effect on January 1st, but many now expect it to become effective on March 1st. Over the past couple of years, Medicare reimbursement cuts have hurt AMED’s business. In fact, on its 3Q 2012 earnings call, AMED stated:

“Turning to margins. We generated a 43% gross margin for the quarter, a decrease of 240 basis points from last year and down 90 basis points sequentially. The decrease from last year was due to our home health operations, largely from the cut in our reimbursement rate, but also from a higher cost per visit.”

Like prior reimbursement cuts, we expect Sequestration to also negatively impact the company’s outlook on revenue, margin, and EPS. As a result, when the company issues its 2013 guidance, analysts may need to significantly lower their estimates. We note that despite a March 1st effective date for Sequestration, the reimbursement cuts could be retroactive to January 1st, hence an even bigger hit to the 2013 outlook.

Medicare Reimbursement Cuts To Exert Even More Pressure on AMED. In addition to the expected impact from Sequestration, in July 2013, the Centers for Medicare and Medicaid Services (CMS) is expected to release details around its 4-year reimbursement rate “rebasing,” as mandated by healthcare reform. The rule is expected by analysts to result in annual rate cuts from 2014-2017, hence EPS estimates and valuations will need to reflect any incremental rate reductions over the next 4 years. In 2011 and 2012, home healthcare providers absorbed reimbursement declines of 11.5%, and uncertainty over the magnitude of the new “rebasing” cuts will continue to keep pressure on stocks like AMED through the summer. Notably, Medicare reimbursement accounts for approximately 82% of AMED’s business. Given the enormous pressure on the U.S. government to reduce spending, we doubt that the CMS “rebasing” will end well for Home Healthcare providers. Until the industry gains clarity on this issue, the anticipation of a worse-than-expected reimbursement cut is likely to cause AMED shares to continue to decline. Should the cuts be significant, declining earnings for the next two years is a recipe for P/E multiple contraction on top of the lower earnings, hence, shares of AMED could have trouble finding a bottom in 1H 2013.

Restructured Humana Deal and Government Probes Add More Risk. In a prior article on AMED, we noted that the company’s recently restructured agreement with Humana (HUM) is likely to have the biggest impact on financial performance in 2013. HUM is estimated to be the company’s largest relationship in the managed care segment, and based on the new terms in which the company will now get reimbursed on a “per-visit” basis, rather than on an “episodic” basis (more billing opportunities), AMED expects that the new HUM contract will result in half of the revenues that it was previously receiving under this agreement. The company also mentioned that the new HUM agreement encompasses fewer markets than the prior agreement, so AMED is losing market share. The restructured HUM agreement began in early October, and makes an already difficulty operating environment that much tougher to navigate.

On the legal front, AMED has, and continues to be, the subject of several investigations with regard to billing practices by government agencies. Currently, there are open investigations on the company by CMS, the Office of the Inspector General (OIG), the Securities and Exchange Commission (SEC), and the Department of Justice (DoJ). The DoJ investigation is being conducted under the federal False Claims Act, and involves documents and information relating to AMED’s business operations, including reimbursement and billing claims submitted to Medicare for home health services, and other compliance activities. This inquiry began in 2010, and in April 2011 a second request for more information was received by the company for additional documentation. The company notes that it is cooperating with the DoJ, as well as other government agencies with regard to all of the ongoing inquiries into its business practices. While investigations such as these are not highly unusual in the Home Health business, these actions represent further risk to the AMED story and could result in fines to the company. AMED’s business is fraught with operational risks in terms of proper billing and compliance, and the company remains under the microscope. For instance, on its 3Q 2012 call, the company disclosed that it uncovered additional “apparent” improprieties at two of its hospice care centers concerning clinical documentation and patient eligibility. The review into this matter is ongoing between the company and the OIG.

In connection with AMED, PropThink has taken a short position.