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Most of the media attention in Q2 was focused on the Supreme Court decision regarding the Patient Protection and Affordable Care Act (ACA). Hundreds of separate provisions of the law hung in the balance while the Court considered whether the Individual Mandate and the Expansion of Medicaid are constitutional. Meanwhile, the Republican presidential candidates debated the similarity between the healthcare policies implemented by Governor Romney in Massachusetts and the ACA introduced by President Obama. As the quarter came to a close, the Supreme Court announced their decision: The Individual Mandate is constitutional because it’s a tax and the states can decline to expand their Medicaid programs without jeopardizing their current funding. The decision was surprising because pundits in the media thought they had considered every possible scenario and the conventional wisdom seemed confident the law would be upheld until it became confident the law would be overturned. Nobody could have predicted that the Individual Mandate would be constitutional (but not because of the Commerce Clause) by virtue of it being a tax (but not for the purposes of the Anti-Injunction Act). The Medicaid ruling made sense to a lot of people, but the logic behind the Individual Mandate ruling was more confusing. Was Justice Roberts apolitical and scholarly or cleverly partisan? The clearest result of the ruling is to hand the decision about the future of our healthcare system back to the electorate. If Obama is reelected, the current entitlement system will remain in place and the reforms of the ACA will be put to the test. Otherwise, any number of alternatives could be considered. Out of the media spotlight, the realities of underfunded entitlement programs continue to mount and pressures to deliver quality outcomes via efficient models continue to build. In June the CBO reminded us of the unsustainability of the current model by noting that, if we don’t change, Medicare will become insolvent by 2024. Former US Comptroller General David Walker remarked that the ACA “focused more on expanding coverage and not enough on controlling costs” and several voices have called for new models to improve patient coordination and reduce waste and inefficiency. MedPAC criticized the fee-for-service model as an obstruction to patient coordination and CMS has proposed bundling services into Accountable Care Organizations and incentivizing providers with pay-for-performance to reduce hospitalizations, re-hospitalizations, and duplication of services. A Rand study highlighted Consumer Directed Health Plans and a Forbes study recommended Value Based Pricing as alternatives to traditional fee-for-service models. No matter which alternatives might be considered, former Director of OMB Peter Orszag predicts that “providers will be bearing much more risk for care than today.” Medicare Medicare Home Health providers weren’t waiting for the Supreme Court decision to start preparing for the implementation of the ACA. Even if the law were overturned, experimentation with new models of delivery is well under way. Over 50 Accountable Care Organizations in 18 states have already been formed to serve over 1 million beneficiaries and there are more than another 150 applications being processed. With efficiency through patient coordination as the foundation of reform, home health providers are well positioned to capitalize on the changing environment. A PriceWaterhouseCoopers study warned that the ACA will spawn a “new era of megapayers” such as CMS, states, and large employers. Healthcare Advisory Partners has warned that the conditions exist to allow “mega-providers” to form, but opportunities still exist for smaller providers who can add value by increasing efficiency and reducing costs for their partners. As long as patient choice is preserved, smaller providers will have the opportunity to distinguish themselves as worthy alternatives who can deliver superior care with superior efficiency. Program integrity continues to be the factor which most undermines the potential importance of home health to the evolution of the healthcare delivery system. Deputy Attorney General James Cole announced that a $375 Million fraud indictment of a doctor working with home health agencies in Texas was the “single largest fraud amount orchestrated by one doctor in the history of Medicare Fraud Strike Force operations.” The Strike Force indicted another 107 individuals for $450 Million in Medicare fraud in Miami, Baton Rouge, Houston, Detroit, and Los Angeles and the OIG has instructed CMS to widen sanctions against potentially fraudulent providers before terminating them from the program. Such sanctions could include civil monetary penalties, suspension of payments, and/or the appointment of temporary management! As always, this is good news for the majority of providers who deliver legitimate care, but innocent agencies can be swept up and destroyed by RAC audits that could be unnecessarily attracted by sloppy practices. Although the Supreme Court has ruled that the ACA is constitutional, that doesn’t guarantee that it will remain the law of the land. The House of Representatives voted to approve Paul Ryan’s budget proposal to replace Medicare with vouchers and Medicaid with block grants (of course the Senate and President didn’t agree) and MedPAC recommended exploring alternatives to fee-for service payment models as well as potentially introducing deductibles and co-pays for beneficiaries. The election should give greater clarity to the direction voters want policymakers to pursue, but market forces will still dictate that all providers will be need to increase communication and coordination throughout the continuum of care while reducing costs and delivering positive outcomes. Now that the Supreme Court has ruled, providers are thinking about next year’s budget. Rate cuts are an inevitable part of CMS’s proposed rule for 2013, but CMS may be miscalculating new rates by underestimating provider expenses because they only consider “reimbursable costs,” not actual costs such as marketing, telehealth, and the extra costs of compliance with new regulations like face-to-face encounters, therapy assessments, and now the employer responsibility requirements of the ACA. A program integrity measure to require all vendors to have individual NPI numbers is projected to save CMS $1.6 Billion, but, just like with PECOS, providers will have to bear the incremental cost of compliance. Provider cash flow would be further eroded if “sequestration” is triggered by Congress failing to reconcile their budget. The bad news for providers is reduced rates and increased regulatory complexity, but the good news is a vastly expanding market and an elevated status due to the importance of home health in the coordination of care for improved efficiency. We see current conditions as very advantageous for larger providers (especially those who are related to significant referral sources) and potentially disadvantageous for smaller providers (especially those who don’t become indispensable to their referral sources). At the top of the market, we’re seeing strategic buyers and private equity groups aggressively seeking opportunities to consolidate operations and eliminate administrative costs: At the bottom of the market, we’re seeing facility based buyers and new entrants who are attracted to growth and margins that beat just about any other industry in the economy right now. Hospice Although hospice hasn’t experienced the same level of regulatory scrutiny to date, just about every measure implemented to improve the efficiency and program integrity of the home health program will probably eventually also be applied to hospice. The newly introduced Hospice Evaluation and Legitimate Payment (HELP) Act would require that hospices be surveyed every three years and would refine hospice face-to-face encounter rules. The HELP Act would also implement testing of new payment methodologies to more accurately reflect the nature and timing of actual hospice expenses. Operationally, hospice providers have been spared the worst of possible rate cuts while they adjust to proportional CAP calculations and other changes necessitated by the ACA. Hospice providers continue to enjoy exalted status in the M&A market as palliative care gains importance as a tool to improve efficiency. Many different types of providers have concluded that hospice services are complementary with their own. The fact that hospice margins remain relatively generous as service utilization expands dramatically has attracted buyers of all types and sizes to the hospice M&A market. The great demand of buyers simply can’t be satisfied by the modest numbers of providers currently in existence. Thus, prices will remain high until enough new providers are created to satisfy demand. Medicaid The Supreme Court decision prevents the federal government from withholding financial support for existing Medicaid programs if states refuse to adopt new programs. It’s logical that increasing chronic care and assistance with the activities of daily living will prevent more expensive acute care, but the issue has become highly politicized because states contribute significant funding to chronic care covered by Medicaid but the feds pay for acute care covered by Medicare. CMS estimates that the 15% of Medicaid beneficiaries who are dual eligible account for 40% of the program’s expenses. A recent Kaiser study found that most dual eligible patients interact separately with each program with none of the patient coordination that could reduce costs and improve outcomes. CMS has started to work with 25 states to explore options for integrating Medicare and Medicaid to improve patient coordination and reduce waste. System-wide pressures to deliver quality outcomes as efficiently as possible dictate that Medicaid will continue to expand. The Supreme Court decision gives states much more flexibility to influence the nature and extent of that expansion. The National Governor’s Association has started to emphasize delivery system reforms in addition to reducing provider payment rates to gird for the expected increase in beneficiary population size. California has initiated a patient coordination demonstration project for dual eligibles that could save over $1 Billion and Oregon has accepted $1.9 Billion in federal funding to experiment with Coordinated Care Organizations (not to be confused with Accountable Care Organizations). Thirty states have reduced provider rates or implemented program integrity measures: Twenty states have introduced managed care models or limited program enrollment. As Medicaid programs continue to grow, providers must adapt to changes intended to foster efficiency. Shifting beneficiaries from Long Term Care settings to Community settings is not only a great opportunity for payers to reduce costs, but also for homecare providers to grow. Federal support continues as the Community First Choice Option and now Money Follows the Person programs start to get traction and the HHS has given grants to Aging and Disability Resource Centers. …and the ACA calls for federal financial responsibility for the first few years of implementation. Some providers are still stuck between the promise of growth in the future and the reality of reduced rates and increased costs in the present. Consolidation is inevitable as smaller providers find it difficult to absorb costs while larger providers thirst for revenue. We’re seeing selective interest in Medicaid homecare providers from strategic and financial buyers, but geography and size are important considerations. Durable Medical Equipment HHS claims that Competitive Bidding saved 42% in its first year with no negative impact on the health or access of beneficiaries. Really??? Is HHS saying that 42% of its prior expenditures on DME/O2 products were wasteful or fraudulent? Has HHS not noticed the chorus of complaints about beneficiary access? Although the American Association for Homecare, 30 patient advocacy groups, and 145 members of Congress disagree, CMS is rolling Competitive Bidding out to 91 new MSAs and the entire country should be covered by 2016. As providers will need to deliver product for less, we’ve seen more interest from buyers who want to drive costs down through efficiencies of scale. As the current bid unfolds, we’ll have a better idea of what threshold providers will have to meet to remain competitive. Private Duty Although more impacted by economic conditions than regulatory conditions, private duty homecare providers were still monitoring the Supreme Court decision. Even though the Employer Mandate was not at issue, private duty providers may have been hoping for the Court to overturn the entire law, sparing them the expense of providing healthcare insurance for employees or pay a penalty. It wasn’t to be, but perhaps a positive unintended consequence of the Individual Mandate might be that awareness is raised for non-mandated Long Term Care policies as everyone is encouraged to take responsibility for their own potential care needs. Private Duty providers are equally concerned about the possible phase-out of the Companionship Exemption from minimum wage/overtime requirements as legislation was introduced to prevent a change. Much like the Employer Mandate, eliminating the Companionship Exemption would increase incremental costs, forcing providers to become more efficient. Although the economy still hasn’t completely recovered, many private duty providers have seen steady increases in volume as more affluent families see non-medical care as a very worthy expenditure. A HHS study found that consumers are willing to pay a premium if they believe they are getting value for their money, supporting our contention that private duty providers should try to compete on quality rather than price. This translates to company valuations as buyers are always more impressed by sellers who deliver quality without compromising margins. We’re seeing more buyers seeking acquisition opportunities, but relatively few sellers who have recovered sufficiently to be ready to divest. As the economy continues to improve, we expect an increase in demand for services combined with the need to be more cost efficient to increase activity in the market. Conclusions Every type of healthcare reform being implemented or considered is intended to increase economic efficiency. This is true at the macro-system level and the micro-provider level. The market-driven path to efficiency is consolidation: Operators making acquisitions to increase their revenue while decreasing their relative administrative costs. Irving Levin & Associates reported that M&A transactions in the healthcare services industry increased in Q1 of 2012 with managing editor Stephen Monroe saying that the “market is currently being driven by middle market deals.” The Nashville Care Council noted that market forces are keeping M&A activity “active but not frenetic.” The PWC study found that, in light of the patient coordination directives of the ACA, “incentives for collaboration are quickening the convergence of” different types of providers and “organizations that were previously sitting along the sidelines are going to have to get the ball rolling.” Georgetown University predicts that “the healthcare economy is expected to grow at twice the rate of the national economy” and Bill Bernstein, chairman of the healthcare practice at Manatt Phelps predicts that “It’s unlikely that the election would lead to a change in a lot of the fundamental provisions of the ACA” because “the genie’s out of the bottle.” Homecare providers of all types are at the center of the action because they are experts in the patient coordination that leads to greater efficiency. Some are waiting to see what happens with the election, but many others are moving to get ahead of the curve. We’re seeing many different types of buyers – private equity sponsored, facility based, and others who are interested in acquisitions to leverage homecare to make their own operations more efficient and profitable. As the economy continues to strengthen and the regulatory environment continues to become more certain, we expect demand for all types of homecare providers to continue to increase. 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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