The Centers for Medicare & Medicaid Services (CMS) has created a less rosy payment environment for MA plans over recent years, and that has forced some plans to exit certain markets.

But early projections suggest that, while MA penetration may slow in coming years, it has not yet tapered off in a significant way.

UnitedHealth Group (NYSE: UNH) and Humana Inc. (NYSE: HUM) are the two largest MA administrators, and also own two of the largest home health agencies in LHC Group and CenterWell Home Health, respectively. UnitedHealth Group is also nearing a deal to acquire Amedisys (Nasdaq: AMED), another one of the largest home health providers.

Other home health providers have seen their bottom lines impacted by MA penetration over the years. Broadly, MA plans generally pay below traditional Medicare for home health services, oftentimes by a large margin.

“CMS projects total MA enrollment will grow to 35.7 million lives in 2025 (vs. ~34.3 million lives as of September 2024) with MA penetration of Medicare expected to rise to 51%,” an analyst note the investment firm Stephens read. “This implies expected low- to-mid single digit MA market growth relative to current enrollment. Importantly, the MA market should still likely grow as fast (or faster) than the overall Medicare market even as products and footprints are adjusted to reflect ongoing MA margin pressures.”

Humana, Centene’s (NYSE: CNC) WellCare, Aetna and BlueCross BlueShield have all announced that they will exit certain markets in 2025 in light of the MA rate environment.

On Friday, though, CMS announced that key parts of the MA program will “remain stable” in the upcoming year.

“CMS announced that average premiums, benefits and plan choices for Medicare Advantage (MA) and the Medicare Part D prescription drug program will remain stable in 2025,” the agency wrote in a press release Friday. “Average premiums are projected to decline in both the MA and Part D programs from 2024 to 2025. Enhancements adopted in the 2025 MA and Part D Final Rule, as well as payment policy updates in the 2025 MA and Part D Rate Announcement, support this stability and increase enrollee protections and access to care for people with Medicare.”

CMS also said that supplemental benefits will remain stable, but particularly called out dental, hearing and vision benefits.

“Benefit options will remain stable, including MA supplemental benefit offerings such as hearing, dental, and vision,” CMS continued. “The amount of rebate dollars, which can be used for supplemental benefits, will remain stable, with a slight increase, from 2024 to 2025. Enrollment in MA is projected to be 35.7 million in 2025, an increase from 2024, with MA enrollment representing approximately 51% of all people enrolled in Medicare.”

For context, only 31% of Medicare beneficiaries were enrolled in MA a decade ago, according to KFF.
A slew of health systems and home health providers have also recently severed ties with certain MA plans. In most cases, those decisions were made over lack of payment, too much administrative burden, or both.

The post Medicare Advantage Penetration Expected To Continue In 2025 appeared first on Home Health Care News.

But that doesn’t tell the whole story. What Addus is really in on is home health care alongside personal care, which it can offer across Illinois, New Mexico and Tennessee.

Addus believes layering home health care on top of home- and community-based services (HCBS) will be key to its long-term overall growth, but also to its value-based care success. That’s a sentiment its leaders have repeated over the last few years.

But on Tuesday, at the Stephens Annual Investment Conference, they delved deeper into how that strategy is working.

“We really believe we’re at the beginning of being able to sit down and talk to some of the payers that are excited about value-based care, showing them what personal care along with home health can do,” Addus CEO Dirk Allison said. “We’re starting to get that data. That’s really what you’ll see in 2024, a focus on bringing in home health, a focus on our unit growth and a focus on some internal things on personal care.”

The Frisco, Texas-based Addus provides personal care, home health care and hospice care to over 49,000 consumers via 221 locations across 22 states.

It has had the personal care-home health thesis for a while. But now it’s more than just a thesis, given the data the company has collected over the last couple of years.

“We’ve now had up to two years of data that is showing we’re making significant reductions in this high-cost population group that we take care of, in both emergency room visits and readmissions to the hospital,” Allison said. “So, we’re pretty excited about that. And that’s why when we look at home health, we don’t want to get caught up in the fact that the next year or two may be a little tough. We think long term, and it’s a really good part of the business that we need to have at Addus.”

The value-based arrangements Addus does have in place are all different. But, for the most part, they are focused on inpatient utilization, rehospitalizations, emergency room visits and gap closures.

Addus now has evidence that it can reduce inpatient costs by about 15%, for instance.

Its leaders believe those value-based arrangements are best set up when personal care is the foundation. Personal care aides are in the home earlier and more often than home health aides are, for instance.

“Unlike a lot of people in the industry, we’re focused primarily first with the personal care component,” Addus COO Brad Bickham said. “Because, if you think about it, our personal care aides are in the home earlier than home health, earlier than hospice, they’re in the home longer than any of those providers. Our typical client may be seen three or four times a week with an aide in the home for two to eight hours a day. They’re able to see a lot of changes in condition with those clients.”

Addus has also invested in technology that will embed those caregiver observations into a system that will lead to risk scoring.

Once that risk scoring is there, it will be easier to intervene on those high-need clients that have a greater chance of being admitted to the hospital.

“We’ve had a lot of success with that,” Bickham said. “The plans, I think, are very bullish on what we’re doing, how they’re seeing the savings. We’ve had a lot of interest in expanding that. And I think what we’ve been really working on is kind of how we scale this. Along with the IT system, there’s also the clinical piece of it, which requires some education for the aides.”

The post ‘Plans Are Very Bullish’ On Addus’ Value-Based Care Proposals, Leaders Say appeared first on Home Health Care News.

June is upon us. The year is nearly halfway gone, and since the turn of the calendar, there have been a lot of learnings on where the home health industry currently sits — and where it may be headed.

But everything will be reset in the next month when the Centers for Medicare & Medicaid Services (CMS) drops its CY2024 proposed payment rule.

“I think, in general, the broad consensus view is that CMS will pursue completing out the second phase of the behavioral adjustments,” Scott Fidel, managing director at Stephens Inc., told me last week. “There is also still substantial uncertainty around the clawback piece of this, and whether CMS will pursue that, and to what degree. That clearly could create more volatility.”

Anything having to do with the home health business – M&A, payer relationships, staffing, operations – will be affected by that proposal.

No source I’ve talked to has expressed optimism about CMS’ plans.

Now that it’s a month out, I’m breaking down what another backbreaker from CMS could mean for the industry’s future. That is the topic of this week’s exclusive, members-only HHCN+ Update.

Mergers, acquisitions and premonitions

The first quarter of the 2023 saw a historically low amount of M&A activity.

Without clarity on even a proposed payment rule, PE firms are staying away. Strategics may be more inclined to buy up smaller providers, but many of them have griped about asking prices and the amount of high-quality providers left to acquire.

The CY2023 final rule amounted to a 0.7% increase, or $125 million increase, compared to 2022 aggregate payments. But that was due to a phasing in of the negative, permanent adjustment CMS is seeking, totaling -7.85%. Half of that – a -3.925% adjustment – was implemented in 2023. 

Providers are expecting the second half of that to come in 2024.

Strategic buyers – such as the larger home health players – may be more inclined to make deals with more certainty. They have to deal with the same landscape as the smaller providers do. For providers with a desire to dive more into value-based care, layering on home health, hospice and home- and community-based care capabilities still makes sense, despite worse Medicare fee-for-service (FFS) payment rates. 

That’s one argument.

But Medicare FFS payment rates have traditionally been the sturdy leg that providers have relied upon to do business. While the Medicare Payment Advisory Commission (MedPAC) has historically viewed those rates as too high in a vacuum, providers argue that sufficient FFS rates are imperative for them to operate. 

Without that leg to stand on, taking on Medicare Advantage (MA) patients – which providers are reimbursed far less for – becomes even more burdensome.

This is a problem that all providers – large and small – are grappling with right now.

So, while strategics may be more likely to acquire after the proposed rule than PE firms – which need a clear return on investment – there’s not certainty there.

The best evidence of that is Amedisys Inc. (Nasdaq: AMED) combining with Option Care Health (Nasdaq: OPCH), a deal that valued the former at $3.6 billion. Industry experts have speculated that Amedisys was willing to combine at this time given the future uncertainty of both MA and FFS rates.

“I don’t think there was was much surprise at all to see Amedisys announce that they are merging with another company,” Fidel said. “I think there has been a lot of focus and speculation around whether Amedisys and other large standalone home health and hospice operators would be looking to merge, just given the recent trends that we’ve already seen.”

In other words, if the biggest and baddest home health providers are potentially looking for exits, that leaves even less buyers on the market – at least for now.

PE firms may not stay away completely in 2023 and 2024, but it’s likely they will take a wait-and-see approach until there’s further certainty on what they’re getting into. And, even then, they’re likely to be picky. With that said, it is important to note many PE groups still see massive long-term opportunity in the home health market.

Gone are the days of a ripe market for consolidation where buyers can’t get enough of mom-and-pop exits. For the time being, everyone is on their own in this fight against poor payment rates. 

“Home health, hospice and home care dealmaking really took a nosedive in Q3 of 2022,” Rebecca Springer, senior analyst at PitchBook, told HHCN last month. “I expected things to pick back up a little bit more than they have, and I’m a little bit surprised that we haven’t seen more activity in the home health space.”

Innovation, service lines and staffing

Inadequate payment from CMS and MA plans are the cause in this situation. The effects are likely to be wide ranging.

Firstly, a downward trend in the amount of home health agencies in the U.S. will likely continue, but perhaps for a different reason than industry experts previously thought.

Many providers built for FFS payment will simply have to go out of business without the chance to be acquired. The payment may be too low across the board, with the cost of transitioning into a slimmer business able to take on MA patients too high.

“To get Medicare Advantage right, you have to be prepared for a sea change in your cost structure and the way that you operate your business,” Frontpoint Health CEO Brent Korte told HHCN last month. “There’s only so much change any provider can make from a clinician expense perspective. It’s impossible to get the cost structure right unless they’re completely prepared to restructure their organization.”

There have already been documented cases of home health providers going out of business due to this sea change, including Hospice and Home Care of Juneau, the Illinois-based Trinity Health At Home, and Oahu Home Healthcare. 

That’s part of the effect, which could lead to reduced home health care access. Another part, though, is fewer quality and innovative existing providers.

Plenty of providers will be in this for the long haul. But with the current payment landscape, don’t expect them to be liberal with new investments – in service lines, in sign-on bonuses, in new care models.

“Our margin is what we use to fund innovation,” Michael Johnson, the head of home health and hospice at Bayada Home Health Care, told me in March. “We have to fund our own innovation. There’s no way to do that when you’re paid [subpar] rates.”

The excitement of venturing into palliative care, hospital at home or SNF at home wanes when there’s more cash-strapped providers in the space.

Further payment cuts certainly won’t help with the No. 1 threat in home health care, either, which is still staffing. Offering competitive wages – or innovative training and retention programs – will also be at least incrementally tougher. 

“Labor costs for nurses home health aides are up – in some places, you can’t even find folks,” former VNA Health Group President and CEO Dr. Steve Landers told CMS reps on a stakeholder call that frustrated providers in March. “And one of the reasons you can’t find them is because we’re competing with the hospitals. And the hospitals have differential treatment by CMS under wage index policy.”

Landers’ argument fell on deaf ears that day. Not long after, he announced he was headed out of home health care to take the helm at a senior living organization.

If cuts continue, it may be only a matter of time before other home health leaders follow him.

The post Home Health Industry Preparing For Potential CMS Clawbacks, Rate Cuts appeared first on Home Health Care News.

While they may seem like outliers from the perspective of most providers in the country, publicly traded home health companies are often a great indicator of where the industry is – and where it’s going.

Whether they’re investing in new service lines or diversifying their revenue streams, the big providers on the block continue to change the home health industry at large.

Scott Fidel, an analyst at the private investment banking company Stephens, is part of a team that analyzes and evaluates those moves. He covers the post-acute space, as well as the managed care space.

Fidel sat down with Home Health Care News on the latest edition of HHCN+ Talks to discuss Medicare Advantage trends, financial stability, home-based care M&A and a lot more.

The transcription of that conversation is below.

HHCN: Before we get going, Scott, I do want to get your background and a background on your company.

Scott Fidel: I’ve been a sell-side equity research analyst covering the health care services sector on Wall Street for the past 24 years or so. I focused on health care services for pretty much my entire career on Wall Street. The way that we break down our coverage is we look at three primary subsectors.

First, and very relevant for this conversation, is the post-acute care space — including all of the home-based care areas. We cover most of the publicly traded home health companies. Then we also cover managed care. That’s a sector I’ve covered very closely for the past quarter century. In areas like Medicare Advantage, for example, we’ve been covering that space for a long time.

I actually was a health care lobbyist for a while even before working on Wall Street where I had been involved with the whole Balanced Budget Act of ’97, and the transition of Medicare+Choice — ultimately leading to Medicare Advantage. Then we also covered the health care facilities, companies, acute care hospitals and behavioral health companies as well.

In terms of Stephens, the firm is one of the largest privately-held independent investment banks in the US. The firm has offices in the U.S. and Europe. The firm was founded in 1933 and provides a range of services to our clients, including equity research, investment banking, capital markets and capital management.

Given your scope of research and coverage, how are home-based care companies specifically faring right now compared to everyone else?

Let’s put that in context since the pandemic. It’s really been a tale of two different stories for this sector. The stocks actually started out the pandemic as real pandemic winners when we had the whole work-from-home-type analog trade in the market and with the expectation that the space would be a significant beneficiary of that.

Then, as the pandemic sustained itself, and a lot of the pressure started to build and when the broader investment climate deteriorated, the stocks faced more challenges. When we look at the overall aggregate period of the last three years, the post-acute home health sector has actually underperformed on the market. In managed care and health care facilities, that underperformance has been more weighted towards the last 18 months or so.

Within the sector, though, there’s been variation in generally what we see and companies focused more on personal care and home-based care outperform given how much better the reimbursement environment has been there. Whereas companies that are more levered to Medicare home health reimbursement, in particular, have been relative underperformers.

Then we’ve had all the consolidation dynamics, too, at play.

One of the things I love that Stephens puts out are the underlying drivers that dictate success in home health care. There are a few things that you’re measuring on a monthly or quarterly basis that generally are good indicators of the long-term and short-term success of these companies. Can you go into that a little bit? What are you tracking in order to see if these companies are on the right track?

For personal care, we focus on hours served and billable hours. On reimbursement for home health, we focus on their organic growth trends. It ultimately comes down to this home-based care tracker that we cover and it looks at a whole range of functions. It looks at home health admissions trends, reimbursement trends that we see in Medicare, Medicare Advantage trends and what we’re seeing in the episodic and non-episodic trends.

With personal care, we look at particularly billable hours and then the rate trends.

We also cover hospice in this as well. We’d look at a number of the variables that drive the hospice sector including things like hospice admissions, length of stay — which has been a big area of focus as well from the pandemic. Ultimately, what we’re trying to do with this product is determine inflection trends across these bottom-up metrics. And, while looking at the broader subset of all the drivers of the industry, trying to glean which companies are outperforming in particular areas.

What’s interesting is we do see a wide range of success factors across different companies in the sector. We put this out in our home-based care dashboard product where we look at all the KPIs. That’s just one of a lot of products that we publish.

A few examples. It’s interesting if we look at just home health to start with and look at same-store admissions trends. Going into the fourth quarter, we actually saw Humana — who had acquired the Kindred at Home asset and is now the largest home-health operator — actually show some of the strongest same-store admissions trends in the fourth quarter.

We thought that was interesting because Humana is now rolling out their value-based care program across the contracting structures for home health. They’re still relatively early into that phase, but that’s likely going to continue here into 2023 and into 2024.

When we look at some of the revenue generation statistics in terms of maximizing revenue opportunity — the Pennant Group — which is the spinout from Ensign, has actually shown quite strong performance when we look at things like revenue per admission and revenue per day on the hospice side. That company has actually been effective at realizing the revenue opportunities, particularly as we transitioned into the PDGM model and away from the former Prospective Payment System for home health.

Then if we look at the personal care, I would say that some of the themes have been consistent across operators. If we look at the rate trends, generally, they’ve been pretty robust across all the companies that disclose these metrics. We tend to look at Addus.

Modivcare, as well, has become a meaningful player in that market. Amedisys has traditionally disclosed some of these metrics but now they’re actually divesting that asset.

On the hours side, in terms of the volumes, what we’ve seen is that it’s been constrained because of the challenges in hiring caregivers, but it does feel like we are on the cusp now of starting to see those volumes start to inflect more positive for these companies starting in the fourth quarter. We think that will likely continue into the first quarter and then continue to improve in 2023.

Are you surprised at all by Humana’s effectiveness with CenterWell this early? Is that something that you thought may take a little bit longer to get going, or just because of how established Kindred was, how established Humana is as a company, is that something that’s not as surprising?

It’s not too surprising for us just because of how deliberate Humana really was around the process of ultimately acquiring Kindred at Home, which is now a centerpiece of the CenterWell brand and broader clinical platform that Humana continues to build. Remember that Humana had a long-term investment in the platform and they really spent a couple of years deliberating on whether they would be able to successfully create value by acquiring the asset and rolling out the value-based care platform.

Now, clearly, the backdrop has gotten that much more challenging since they acquired the asset with the pressures that we’re seeing with add-on expenses – on wages, on reimbursement and on volumes. With Humana, we are seeing them committed to that rollout. Also, they’re going to be taking on a larger piece of the spend as part of this. It actually helps them enhance the revenue picture, too, in terms of the partners that they’re working with.

We really think that tracking Humana in terms of how they’re performing on this rollout of the value-based care initiative in home health is going to be really insightful for the rest of the industry because, clearly, right behind them we have UnitedHealth and Optum. Now having acquired LHCG, we’re going to be very interested in whether Optum and United roll out a similar model for LHCG or take a bit of a different track.

That’s the conversation that we’re having about UnitedHealth and another company that we cover as well. Clearly, the focus on value-based contracting and on Medicare Advantage contracting is a huge area of focus right now and critical for home-based companies.

What will another rate cut mean for these companies given that it had made them underperform recently? It’s obviously something that’s baked into how people are viewing these companies right now, but at the same time, it’d be yet another cut. Obviously, that’s going to be a challenge for them. How do you feel about how that’s going to affect them, short and long-term?

It’s the biggest single overhang in the public investor community right now around the home health companies and it’s frustrating because CMS clearly utilizes a meaningful level of lag data in terms of how they conduct their analyses. The real-world inflation has clearly accelerated. We do understand that CMS, even more recently in some of the stakeholder interactions, hasn’t seemed to reflect that they are fully recognizing or sympathetic to the idea that this will be a major challenge and affect access to care.

We can see, in the volume trends that these companies report, that it is really constraining the ability to hire more skilled nurses. This is something with CMS that can often be a bit frustrating — and with payers in general — is where they’ll speak to certain policy objectives that are core to their view on advancing the health care system, and making for a more efficient and productive health care system. But then they do things with reimbursement that don’t seem to be aligned with that.

To boil it down: while there is a lot going on across all three of these subsectors, what CMS does with the 2024 home health rates is most likely going to be the single largest determinant of investor sentiment, and then also of investment in general. It’s important, putting aside just the publicly traded stocks, how things like the M&A environment will be dictated.

For example, just yesterday I spent the day hosting investor meetings with the Addus management team. They have been a successful, consistent operator. They operate in all three of these markets. Home health for them is relatively smaller. It’s only around 5% of their revenue. With that said, it is an area they wanted to deploy capital to grow that business through acquisitions, but clearly, they’re going to be very disciplined right now and prudent around engaging in deals focused on home health until we have that clarity on the reimbursement. And again, how that influences the valuation dynamics too where the publicly traded companies have been under the microscope for a while.

A lot of these stocks have been substantially pressured. The valuation multiples have come down quite meaningfully since their peaks during the earlier part of the pandemic, but on the sellers’ side, I think a lot of these sellers are still holding on to some of the memories of where deals were getting done and that’s creating friction in the market right now. That’s going to have to work itself out.

Hospice is another good example of that where we had a tremendously active deal environment for a number of years. Really, hospice was the tip of the spear in terms of M&A activity with strategics and with private equity, too. Valuation multiples have gotten very rich, but hospice fundamentals themselves have been more pressured over the last 12 to 18 months with a variety of headwinds from the pandemic.

That’s affecting margins, and that’s affecting EBITDA for these companies, and that’s another area where it feels like the pace of activity has frankly slowed quite significantly from where we were 12, 18, 24 months ago.

Because of those Medicare fee-for-service conditions, how important do you think it is for these companies to be successful in their negotiating with Medicare Advantage payers moving forward to offset some of those cuts to make sure that the financials are stable as they take on more beneficiaries in MA?

It’s central to the story and to the strategies. It’s absolutely critical. Separate from even if the Medicare fee-for-service reimbursement environment hadn’t suddenly gotten so stunted, the long-term structural trend in Medicare is still towards a significant long-term movement into Medicare Advantage. The numbers are simple right now, right? We’ve just pretty much eclipsed 50% or half of the overall Medicare market being in Medicare Advantage.

When I started covering the managed care stocks after the Balanced Budget Act of ’97, we had dipped into the low-teens percentage. I’ve watched this go from 12%, 15% to 50% in, let’s call it, a little bit over 20 years. And the Medicare Advantage space is still growing 7% to 9% annually, and Medicare fee-for-service is barely growing. Now, when you add on the variance and the margin profiles, the economics where you look at many of these Medicare home health companies, maybe they’re reporting 12%, 13%, 14% adjusted EBITDA margins.

Inside of that, you have Medicare fee-for-service business with margins substantially higher. MedPAC tries to argue that the margins are in the low 20s. I’m sure the industry would push back on that, but they’re clearly higher than the consolidated average. Medicare Advantage is barely profitable for a lot of these companies with single-digit margins to begin with. Ultimately, the economics need to balance out between Medicare fee-for-service and Medicare Advantage. It’s as simple as that.

I have these conversations on both sides of the negotiating table. I cover the home health companies and I cover all the managed care companies too. I do find it very interesting that the managed care companies across the board, when they talk about their key long-term mega themes in health care, obviously value-based care is an enormous one, but the shift to the home is a theme that all these companies emphasize over and over again in their investor presentations to investors and in their discussions with the market and with analysts. Yet we always hear from home health companies about how terrible the reimbursement is in home health.

I think, ultimately, there’s going to have to be some shaking out and some achievement of more of a balance here. It does feel to me right now like the economics are inordinately skewed toward MA, relative to home health in this particular area. Remember, the other challenge that we’re going to have to remember is out there. And that is that the Medicare Advantage companies themselves are going to be facing a tougher reimbursement climate.

In the last couple of years, CMS has given the MA companies unusually strong reimbursement updates and it’s still been really tough for home health companies to get proper reimbursement. Now the MA companies are looking at much tighter reimbursement, a new risk model that’s being implemented that is going to create a lot of complexity, and at the same time, the home health companies have to even negotiate more furiously for higher reimbursements. That’s a story we’re going to be tracking, but it’s uncertain exactly what the end result is going to be as we look out to 2024 and beyond.

It’s interesting to see, it could go two ways. Obviously, home health providers are hoping that those MA plans will react to that by saying, “Hey, let’s put more money and more focus on the home-based care side of things to control post-acute spend,” but they could also say, “Hey, we’re getting less. That means you’re getting less.” It’ll be interesting to see that dynamic play out.

Yes, absolutely. Ultimately, we need to remember that when you’re shifting a care consumption or utilization into the home, it drives substantial savings for Medicare Advantage plans, relative to being in a SNF or relative to being in an ERF or clearly, being in an acute care facility.

At some level, I do scratch my head sometimes around why MA plans are being so difficult on reimbursement to home health when in the overall scheme of things, that’s not a lot of money, relative to having patients end up staying in a facility.

This also comes down to how fragmented the home health industry is and the difficulties for a lot of home health agencies to really distinguish themselves with MA plans as not just being commoditized, right? Ultimately, value-based care is an area that could separate that dynamic. That is something that probably the more highly scaled companies are able to, on the home health side, participate in more because there is a significant investment in complexity, separate from the regulatory complexity that we’re dealing with that’s being pushed on the industry by CMS. That’s probably a theme that ultimately would drive more consolidation over time.

There’s a lot of debate right now, too, around how this consolidation will play out. Because we’ve got larger home health companies wanting to acquire smaller ones, but there’s this friction around multiples and around deal valuations right now. Then, obviously, you have the Medicare Advantage companies just taking out some of these largest players, too. Remember, they’ve got that leverage dynamic, too, with Medicare Advantage as well, whereas a Humana takes a Kindred as a subsidiary, and United takes on LHCG as a subsidiary — they’re going to want to ensure that the economic future for those subsidiaries is positive and emphasize that opportunity.

They have folks like us writing reports on them every quarter, evaluating them on that. It also raises the point of whether, at Humana or United, how much more interested are they going to be in raising reimbursements right now for these other operators out there when they need to focus on maximizing the value of these assets that they’ve recently acquired.

How was the event with Addus yesterday? Was there anything else that you gleaned from it that you maybe had not considered prior it?

I always enjoy catching up with the Addus management team. I think that they have a long track record of disciplined operation in the industry. They’ve been through the home-based markets in both easy and difficult times. They’re very prudent. Particularly, we see that with their balance sheet, for example, they’ve kept their debt leverage very low. That’s something that their stock has been rewarded for, relative to some of the other stocks with higher leverage, given the market’s focus on rising interest rates and liquidity, essentially.

With Addus, on the M&A side, I think they are eager and ready to do transactions. They’ve talked about wanting to focus a bit more on the personal care, which is their core market, and home health as compared to hospice, where Addus had been very active on the M&A front for a number of years in terms of building out that platform. They want to be very disciplined as well on the acquisition side. Separately, they do think that the reimbursement outlook will remain solid, actually looking at even 12 to 24 months for personal care because of the current positions of the state budgets, which have been favorable.

We’re going to be watching that area, frankly. Clearly, investors are going to be focused on whether or not the economy does flow. What that means for state budgets and what that means for reimbursements as well.

I do want to also mention redetermination. The return of that, which just kicked off four days ago, is a huge area of focus for investors, but it is less relevant — frankly — to personal care companies and to home-based companies in general because the clients and the patients that they serve tend to be polychronic dual-eligible-type patients who are just eligible for core Medicare or Medicaid services.

That doesn’t have to do with normal Medicaid eligibility based on income levels. We cover the managed Medicaid companies, for example, where this is a big area of focus but we’re not expecting that particular issue to be really much of a headwind at all for the personal care companies.

Do you think the home-based care companies on the public market reflect the rest of the industry?

I think that you already named a few of the attributes that are important, but it really sets the overall tone for thinking about both some of the investment considerations as it relates to things like sentiment and valuation, and then also how the market is thinking about evolution in the operating environment. Clearly, from the sentiment perspective, much of the market is going to be at least referencing what is happening with the stock prices and valuations of publicly traded companies.

It’s the most visible and constantly evolving valuation metric to reflect all the latest information in the market. When you think of investor sentiment, many of the large investors are talking to the publicly traded companies, and that’s dictating their overall sentiment in the industry. Then when we think about the operating environment. These companies do tend to have higher margins and more ability to generate free cash flow, which they can then use to invest to try to adapt to how the market is evolving. So whether it’s with Medicare Advantage, whether it’s with value-based care, investing in programs to do that.

I think a clear example of this would be Amedisys acquiring Contessa, which clearly has also had its challenges. I think Amedisys would be the first one to admit to that in terms of the ramp-up of that business. When you think about trying to create a new category within the space by moving more into those hospital- and SNF-at-home-type programs, you need a lot of capital to do that, though.

Frankly, Amedisys has spent a lot of capital, both on what they pay for it and the losses that they’ve invested in to build that business. A small company is not going to be able to do that, but ultimately if the market moves there and that becomes part of the core package of what these companies do, they’re going to have to adapt as well.

There were a lot of rumors about a few home-based care companies going public in 2020 and 2021. Since then, a lot of those rumors have subsided, probably because of those macroeconomic trends that are affecting the entire economy. Do you expect any more home-based care companies to be go public in the near-term future?

Good question. I think that in the near future, the market is still licking its wounds, frankly, from the IPO cycle of 2021. There were a lot of health care services businesses that hadn’t really proven profitability, and they have struggled mightily.

The main one that happened directly in this area was Aveanna, which has struggled, too, with some of these pressures — clearly with both their stock price and also with some of the changes in the fundamental environment. Clearly, the overall market environment is going to have to improve. Then, there’s the bottoms-up-type dynamics that we’ve just spent the last 35 minutes talking about.

If I had to assign a higher weight to a couple of those, I do think that on the home health side, clearly, the investor community getting more conviction on Medicare reimbursements, both for fee-for-service and for MA, is going to be key. Investors are going to want more clarity on that.

Personal care — frankly — that’s been an area where it’s been a bit more stable. More recently, obviously, there are areas to monitor in terms of potential headwinds if the economy slows, but there’s a little bit less controversy right now around the reimbursement dynamics. Again, that’s always the rearview mirror. One thing we’ve always seen is the pendulum swing back and forth around reimbursement, for sure with payers, and particularly with CMS.

CMS tends to overshoot on reimbursement cuts and then will come back and ultimately put corrective reimbursement in. That creates a positive reimbursement cycle. Then the market, both the industry and investors, think that’s going to be sustainable forever and maybe the sentiment gets overinflated. Then, CMS comes and pulls the rug out from underneath everybody and we wash and repeat.

Ultimately, we think that’s going to happen again, most likely. Clearly, if margins get pressured and that data on a lag basis starts to catch up to CMS, we will start to see better reimbursements and that could reopen that opportunity for more active public investing of some of the companies that are still private in terms of opportunities to go public.

I do want to ask you before we go, a prediction that you might have about the home-based care industry at large?

In terms of the under-the-radar screen, I don’t know about that because we try to keep everything above the radar screen as much as possible. I would say that as we just talked about, the centrality of the focus will be on these reimbursement trends. On some of the policy dynamics, there have been some proposals to really invest more in the home-based care area that Biden had proposed, for example, that ultimately didn’t come through.

I’m going to bring it back to something that’s not so spicy, but I think that ultimately, it does come down to having the actual frontline personnel to actually deliver these services. When you look at really the crux of everything, reimbursement has been key, but the other issue has just been around the labor dynamics and it’s been around whether it’s skilled or unskilled.

If I had a prediction to give you there, it does feel like the environment — from the hiring perspective — probably will get better more quickly in the unskilled area. That does tend to be more directly correlated with the overall economic cycle and with the labor market. I would be surprised if we don’t see personal care companies, for example, start to be able to improve their hiring right as the unemployment rate starts to rise.

I think there will also be some level of correlative benefit for skilled workers as well. When the economy gets tougher, nurses that have been sitting out for a while may come back into the workforce, but we still also have the long-term structural constraints that we have around nurse staffing and clinical staffing shortages. That’s going to be an issue for a long, long time to come.

It’s been something that we’ve been focusing on really the whole time I’ve covered the space. I think 10 years from now if we did the same type of talk, we’d still be talking about some of the structural challenges that we’re facing in staffing. Especially as we even have more seniors to care for in the future.

The post The Underlying Trends That Matter Most For The Home Health Industry In 2023 appeared first on Home Health Care News.

Perhaps more important than anything, however, is its leaders’ belief that the company has turned the corner on hiring.

In the third quarter of this year, Addus’ hires per business day were up 3% compared to the second quarter, and up 14% year over year. This in stark contrast to what the company was experiencing earlier in 2022.

“We are seeing improved hiring trends in October, with hires per business day running ahead of our third quarter 2022 performance,” Addus CEO Dirk Allison said on the company’s third quarter earnings call Tuesday. “We are seeing improvement over the last few months with an increased ability to hire new clinicians, as well as a modest reduction in our clinical turnover numbers.”

The Frisco, Texas-based Addus is a provider of namely personal home, as well as home health and hospice services. It currently serves approximately 46,500 consumers through 207 locations across 22 states.

Net service revenue for Addus in the third quarter totaled $240.5 million, an 11% increase compared to the approximately $216.7 million it brought in over the same time period in 2021.

Addus continues to invest in technology that the company believes will help the company with sourcing, hiring and the onboarding process.

Allison also acknowledged that hiring was tougher within home health and hospice, but that trends were headed in the right direction for each segment of the business.

“During our third quarter, the funding we received from the American Rescue Plan Act has allowed us to begin to increase caregiver wages, pay sign-on and retention bonuses, or provide one-time bonuses to current caregivers, depending on the state program,” Allison said. “This has been helpful with our recruitment efforts over the past quarter, and should help our hiring and retention efforts as we have a significant portion of these dollars still to be utilized.”

Addus has been recently trying to bolster its home health footprint as it tries to build out home health, hospice and personal care capabilities in the markets it serves.

Therefore, the home health final payment rule – announced Monday – is also applicable to them.

“We were excited by the CMS announcement yesterday of a slight 0.7% increase for 2023,” Allison said. “While this increase is smaller than we would like to see, we are appreciative of the change by CMS, moving away from the proposed decrease of 4.2%.”

M&A plans

Throughout the call, Addus leaders remained lukewarm on the home health payment rule for 2023. While the largest cuts were avoided for now, stakeholders are still unhappy with looming behavioral adjustment cuts both in 2023 and past that.

Still, from Addus’ perspective, clarity allows them to move forward with more home health deals. Most recently, it announced that it had acquired the Chicago-based Apple Home Healthcare in early October.

“We expect to be able to take advantage of more home health care acquisition opportunities that should occur now that the final rule has been published, as we remain well capitalized,” Allison said.

While it has delivered on smaller deals across its segments year to date, the company could be on the brink of some larger deals.

“We are now starting to see a number of larger assets being brought to market and we expect to see more of these scale opportunities in the coming months,” Allison said.

Over the next 12 to 24 months, the focus will be mainly on larger home health and personal care deals. For hospice, the company will continue searching for smaller deals as they see fit in the markets where they already have hospice operations.

“Addus remains well positioned to leverage the growth opportunities ahead in home-based care, while being largely insulated from the most significant downside fundamental risks facing the sector in 2022-2023,” an analyst note from Stephens read. “More specifically, Addus’ home-based personal care business (~75% of 3Q revenue) should benefit from improving caregiver hiring trends and a strong Medicaid funding backdrop in the second half of 2022 and 2023.”

Value-based care and Medicare Advantage

Part of what Addus is excited about when it comes to home health care is its ability to complement personal care in markets where it has value-based contracts.

The company currently has four value-based contracts across three states.

“We have recently received positive feedback from our value-based care partners, as our personal care and home health teams have improved patient results,” Allison said. “In addition to our four current contracts, we are working on two new opportunities, which should start early in 2023.”

Though those contracts remain “relatively immaterial” today, Addus leaders are confident in them making a larger impact in the next few years.

The same goes for Medicare Advantage (MA) opportunities.

“Besides being able to provide good care under these contracts, [the goal was to] have the ability to take the information we learned over a period of a year or more, and be able to move that into other areas of the country where we have personal care and home health,” Allison said. “And as we move around the country in some of our strong markets, that’s where you’re going to see our ability to interface with Medicare Advantage payers.”

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Though CMS’ unveiling of the proposed payment rule is less than a week old, it has already been met with a flurry of strong criticism from home health industry stakeholders.

“The entire home health community is in a bit of a tailspin, given the release of the rule,” Joanne Cunningham, the CEO of the Partnership for Quality Home Healthcare, told Home Health Care News. “We are continuing to peel back the analysis and get a full understanding of all of the components of it, but it certainly has been a real stemwinder of a reaction from urban, rural, big and small home health agencies across the country.”

Indeed, many industry stakeholders have noted that the proposed payment rule will place pressure on providers and hinder their ability to deliver quality care in light of COVID-19 related disruption in recent years.

“The proposed rule is clearly going to make the exit out of the pandemic-related pressure that the industry has been experiencing after the last couple of years that much more challenging,” Scott Fidel, an analyst at the private investment banking company Stephens, told HHCN.

Across the industry, there’s been increased concerns that CMS would push for a recalibration of the Patient-Driven Groupings Model (PDGM), but the extent of the federal agency’s proposal was far worse than even some of the more pessimistic expectations, according to Fidel.

Additionally, many providers believe that it doesn’t reflect the operational and inflation pressures that the home health industry has been experiencing.

“It’s clear that CMS was conducting the analysis on their statutory guidance framework for budget neutrality, and were conducting the types of analysis they use to determine overall costs on the PDGM model,” Fidel said. “It just didn’t seem like there was a recognition of how much cost inflation has accelerated in 2022.”

In the U.S., the annual inflation rate checked in at 8.6% in May 2022. This is the largest annual increase since December 1981.

In general, CMS updates the home health rates by an inflation index every year, but Cunningham previously pointed out that the updates have not kept up with the increased costs of staffing, medical supplies and fuel.

Similar to Fidel, Cunningham also believes the conclusion that home health organizations have been overpaid is at the heart of the disagreement between CMS and providers.

“We have produced additional data analysis on how the system performed, in particular examining whether the system met the requirements to be budget neutral from one year to the next, which is a requirement in the home health statute,” she said. “Our data is demonstrating a whole different story, which is that home health was actually underpaid in 2020 by 2.5%.”

Cunningham also noted an “inherent conflict” of the proposed rule and its various components.

“On the one hand, CMS is proposing some sizable reductions, not just in 2023, but in years beyond,” she said. “On the other hand, [HHVBP] is set to expand to all 50 states starting in 2023. CMS is projecting that home health will deliver [millions] in savings [due to] avoided hospitalizations, readmissions and so forth. To me it’s a startling dichotomy that I find in tremendous conflict.”

In other words, CMS cannot impose this level of reduction and constriction on a system and then expect that providers will have the same capacity to deliver care services, according to Cunningham.

Along these lines, Fidel says investors are questioning the message CMS is getting across with its proposal.

“I’ve had really countless conversations with large investors in the industry since the rule came out,” he said. “The investment community has felt that health care policymakers, government payers and managed care payers have all been in alignment with the view that increasing access to home-based care and home health is a positive attribute for the health care system. … There’s a real struggle right now with the message that CMS is sending here.”

Looking ahead, home health stakeholders will be busy attempting to educate congressional policymakers and the Biden administration about the impact the proposal could have on access to care services.

“We will also make formal comments to CMS outlining our issues and concerns and also provide data to back it up,” Cunningham said. “We hope our comments are listened to and that CMS takes a good look at the fallout that could occur with respect to patient care and access to care.”

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Earlier in May, the Biden administration released $1.4 billion for Older American Act-enabled initiatives related to vaccine coordination, senior nutrition and more. Meanwhile, the U.S. Department of the Treasury has been overseeing the distribution of $350 billion to help state and local governments respond to the COVID-19 emergency and bring back jobs.

The added resources have already led to some states ramping up their Medicaid funding allotments, according to financial services firm Stephens.

“In the short term, the ARP sugar high is already kicking in,” Stephens analysts wrote in a Thursday note. “In Nevada, the budget subcommittee voted to roll back the previously approved 6% Medicaid rate cut while also approving a 2.5% Medicaid rate increase to acute hospitals.”

Nevada has been a particularly difficult state for Medicaid-reimbursed long-term care providers. In September 2020, for example, Addus HomeCare Corporation (Nasdaq: ADUS) even announced it was leaving the state, partly because of that 6% cut.

“With increases in cost, including minimum wage and mandatory sick time, the rate structure in Nevada no longer provides for the ability to pay workers a living wage, cover rising benefit costs and provide for the management oversight of service delivery to meet industry standards of practice,” Addus EVP and Chief Strategy Officer Darby Anderson told Home Health Care News at the time.

In California, Gov. Gavin Newsom, a Democrat, also released a May budget plan that includes more funding for doula benefits and expanded Medi-Cal coverage for undocumented immigrants, the Stephens analysts pointed out.

Supporting home- and community-based services (HCBS) providers has been a main focus of President Joe Biden and his staff since taking office. On top of the previously mentioned boosts, the ARP also included a 10% increase for the Federal Medical Assistance Percentages (FMAP) for Medicaid HCBS, active from the start of this April 1 through March 31, 2022.

The U.S. Centers for Medicare & Medicaid Services (CMS) released guidance on how states can use that 10% bump last week.

The agency offered further instruction on Thursday in a notice published in the Federal Register.

CMS specifically provided new details on the paperwork states Medicaid programs must submit to receive a funding boost for HCBS. That paperwork includes an initial spending plan and spending narrative, plus subsequent quarterly spending plans and spending narratives.

“To ensure maximum state flexibility and to reduce the reporting burden on states as much as possible, states will submit spending plans and narratives in their own preferred format,” the notice reads. “CMS will not require states to use a standardized template or form.”

In addition to the ARP, the Biden administration is working to advance its American Jobs Plan, a $2 trillion infrastructure proposal. That plan similarly seeks to use upwards of $400 billion to strengthen and expand HCBS.

It is estimated that over 800,000 seniors in need of home- and community-based care are currently on wait lists, according to the American Seniors Housing Association (ASHA), a national business association for senior housing stakeholders.

ASHA put out its own announcement on Thursday, urging the administration to consider senior housing as part of future HCBS plans.

As enhancements to improve the long-term care options for Medicaid eligible seniors advance in Congress, it is critical that senior living settings such as assisted living continue to be defined as [HCBS] settings,” ASHA wrote in a letter to Congress. “Assisted living is an important part of the HCBS settings continuum, but it tends to be misunderstood by policymakers, often confused with skilled nursing facilities (or nursing homes) given its congregate nature.”

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Under the new president’s “American Rescue Plan,” for instance, there would be $400 billion put forth to increase COVID-19 testing and the speed at which vaccines are distributed. That, along with $350 billion for state and local governments, would be generally helpful for home-based care providers.

At the same time, unemployment benefit add-ons and a federal minimum wage hike could potentially bring even more trouble to a historically tumultuous staffing environment. Many home-based care operators support paying their workers more, but most can’t afford to do so without a corresponding reimbursement increase.

At the beginning of the public health emergency, the $600 unemployment benefit add-on placed a massive burden on agencies trying to keep their staff at work during an especially trying time. Home health aides and caregivers saw an opportunity to avoid risk and stay home with their families — and maybe even make more money than usual while doing so.

The last spending bill, instituted a few weeks ago, has put a $300-per-week add-on in place. That is set to expire in March, but it could be replaced with the higher $400-per-week provision in Biden’s plan.

“It depends on how quickly Congress can get a bill drafted and then to the floor for a vote,” Scott Fidel, an analyst for the financial services firm Stephens Inc., told Home Health Care News in an email. “[But] we could envision these provisions relating to unemployment in Biden’s COVID plan targeted to kick in as the prior enhanced benefits are set to expire in March.”

After the initial $600-per-week add-on was in place, it took a while for many agencies to get enough workers back that had left. Another boost to unemployment benefits could jeopardize retention again.

“We’ve been trying to rebound ever since May,” Mitch Markowitz, the VP of business development at Family & Nursing Care, told HHCN in December. “And it’s been very, very slow incremental growth. That’s mostly because those caregivers, once they’re gone, they’re gone.”

Silver Spring, Maryland-based Family & Nursing Care is a private-pay home care company.

In spring, some caregivers opted for unemployment to earn money without exposing themselves or their families to the virus.

But the environment is far different now. Thanks to more widely available personal protective equipment (PPE), better screening protocols and early access to COVID-19 vaccines, there is less uncertainty surrounding the virus in the home-based care world.

“The Biden package could certainly create some incremental headwinds for home-based care staffing, as we saw in the summer months last year after the first iteration of the CARES Act implemented the $600-per-week unemployment assistance,” Fidel said. “However, we would not expect the staffing challenges to not be as significant as what we saw last year following the CARES Act.”

When it comes to vaccines, Biden’s team is hoping to inoculate 100 million Americans in the administration’s first 100 days.

The American Rescue Plan’s concerted effort to increase vaccine distribution and testing could further reduce uncertainty and concern.

“If the vaccine program is able to accelerate from its initial rocky implementation and the economy also continues to recover, we think workers will be more inclined to join the labor pool as compared to taking the unemployment benefits,” Fidel said.

Minimum wage hike

Another Biden proposal that could affect home care and home health agencies is a mandated $15-per-hour minimum wage.

According to the U.S. Bureau of Labor Statistics, the 2019 median pay for home health and personal care aides was $12.15 an hour.

In general, Biden’s transition team has emphasized the importance of helping direct-care workers earn higher wages. The administration’s health care plan, which is included on its official website, explicitly sites home care.

“The Biden Administration will partner with health care workers and accelerate the testing and deployment of innovative solutions that improve quality of care and increase wages for low-wage health care workers, like home care workers,” the plan reads.

The minimum wage increase, however, is one of the aspects of the plan that still has a long way to go until implementation.

“While the $15 minimum wage hike at the federal level would likely present additional wage and margin pressures for home-based care providers — especially in lower-wage personal care — this proposal will be a tougher sell from a bipartisan perspective and will still likely face a rocky legislative pathway for approval, even with the Democrats nominally in control of both the House and Senate,” Fidel said.

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But that doesn’t mean there isn’t any upside for them, industry insiders say.

Unveiled on Nov. 25, CMS’s new hospital-at-home waiver program gives approved acute care facilities more freedom to provide — and get paid for — medical services in the home setting at a time when in-patient capacity is severely limited.

A record-high 96,039 COVID-19 patients were hospitalized in the U.S. as of Monday night, according to data from the COVID Tracking Project.

“CMS believes that treatment for more than 60 different acute conditions, such as asthma, congestive heart failure, pneumonia and chronic obstructive pulmonary disease (COPD) care, can be treated appropriately and safely in home settings with proper monitoring and treatment protocols,” agency officials noted in their announcement.

At least seven confirmed hospital systems have received hospital-at-home waivers.

While home health agencies have experience caring for patients with these and other complex conditions, they are somewhat restricted from taking ownership of a CMS-approved hospital-at-home program of their own.

“A program does not have to be physically administrated within a hospital, but a hospital must accept responsibility for the program in order to satisfy the Conditions of Participations for this level of patient care,” CMS noted. “Additionally, the program must be integrated within a hospital to a sufficient degree to ensure that rapid escalation of care is seamless.”

That language suggests there may be ample hospital-at-home opportunities for home health agencies that are already housed within larger health systems, though that size of that group continues to shrink. In the late 1990s and early 2000s, many hospitals decided to close their agencies or spin them off as freestanding entities, partly due to reimbursement pressures.

Home health operators with pre-established joint venture relationships with health systems may likewise be well-positioned for the hospital-at-home opportunity, according to Stephens Inc. analyst Scott Fidel.

And that group, in contrast, is rapidly growing.

“Just conceptually, the most logical area that we would think about as being an opportunity here would be around areas where there’s already momentum around JVs,” Fidel told Home Health Care News.

Staffing shortages

Fidel — a veteran health care analyst who was brought in to lead Stephens’ health care services division in 2018 — described the hospital-at-home waiver news as an “encouraging” common-sense response to ongoing COVID-19 challenges.

“My gut reaction is that this is CMS trying to respond as actively as they can to the impact of COVID,” Fidel said. “I think these are changes to regulatory structures that they can deliver relatively easily to compensate for some of the pressures acute care hospitals are facing.”

Most headlines focus on bed capacity, but many hospitals are dealing with some degree of staffing shortages, too. In fact, a mid-November tally conducted by STAT and the American Hospital Association found that hospitals in at least 25 states were critically short of nurses, doctors and other staff members.

That situation has only grown more dire since then, with Thanksgiving travel and family gatherings projected to cause an even large spike in new infections.

One of the latest White House coronavirus task force reports sent to states included a warning that “the COVID risk to all Americans is at a historic high,” NBC news reported.

“Hospitalizations themselves are now reaching record levels from during the crisis,” said Fidel, who follows the managed care space as well as the post-acute and acute care sectors. “And there just seems to be a lot more pressure on staffing, in particular. I think staffing is the real big story here, frankly.”

With the staffing shortages, hospitals with new CMS waivers may look to enlist home health agencies as they shift patients into the home setting.

Agencies have historically faced their own staffing challenges, but their ability to care for new  patients is currently greater than that of hospitals.

Additionally, industry data on patient volume and new admissions suggests home health agencies are hovering around pre-pandemic norms — not record-breaking figures.

“Then connecting into that home health staffing apparatus, to me, it feels like there is still capacity,” Fidel said. “Home health volumes have improved quite markedly in terms of a recovery, but we’re still really just sort of back to pre-COVID levels. It feels like there’s a lot more volume, a lot more capacity that home health agencies can take on at this point.”

Putting ‘meat on the bone’

Apart from getting a piece of hospital-at-home action for staffing support, home health agencies may also eventually see a trickle-down effect as hospitals deliver more services in the home.

“I think the other area that we’ve also gotten some feedback from the companies on, where they see an opportunity, is just around whether this could actually end up supporting or codifying more of an ability for these types of services in the home to actually get reimbursed,” Fidel said.

For now, most agencies are in “wait-and-see mode,” however.

More information on the hospital-at-home waiver program will likely emerge in weeks to come, especially as more hospital systems complete the application process.

“There’s a lot of meat that needs to be put on the bone,” Fidel said. “As I’ve done checks with some of the home health companies about this, that’s the type of feedback that I’m getting from them already. I think everyone is encouraged by the thrust of what CMS is announcing here, but it still does feel quite preliminary.”

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Expected to close by the end of 2019, the Pennant spinoff will consist of 60 home health and hospice agencies and 51 senior living operations, in addition to mobile diagnostics and lab operations in 13 states. Following the spinoff, Ensign will maintain a portfolio of transitional and skilled services, rehabilitative care services and health care campuses, as well as new business ventures and real estate investments related to post-acute care.

Ensign and Pennant will remain close even after the spinoff is finalized, according to company executives, who discussed the news in-depth during a first quarter earnings call with investors on Tuesday afternoon.

Specifically, the two will work together in a preferred provider network — the Ensign-Pennant Care Continuum — aimed at strengthening transitions of care.

“As we move forward, we’re very excited to retain the benefits from our affiliation with Ensign, while simultaneously gaining the benefits of creating a separate platform to drive growth,” Daniel Walker — who currently serves as president of Ensign’s home health and hospice holding company, Cornerstone Healthcare Inc. — told investors.

Walker will assume the roles of chairman, CEO and president of Pennant moving forward. Ensign’s current CEO — Christopher Christensen — is set to step down from his role May 30, with skilled nursing division CEO Barry Port replacing him.

The spinoff news likely doesn’t come as surprise to those who have followed Ensign, which has long talked about the market underappreciating the embedded value in its small but fast-growing home health and hospice businesses, Stephens analyst Dana Hambly wrote in a note published Tuesday.

“We thought the company may wait to grow those [home health and hospice] lines a bit more,” the note reads. “But market conditions are favorable so the timing makes sense. We think the Pennant story will be similar to the Ensign story as an outstanding operator with a strong balance sheet that provides plenty of capital to acquire underperforming assets and a demonstrated track record of improving those assets.”

Once separated from Ensign, Stephens estimates that Pennant can grow its base 2018 EBITDA by about 15% in 2019 and 2020 to $28.4 million and $32.6 million, respectively.

Investor preferences and skepticism of the skilled nursing industry were partly behind the move to form Pennant, Christensen said during Tuesday’s call.

“There are people that don’t really like our profession, that don’t like our industry — and they like our model and they like the results we achieve,” he said. “This gives them a chance to invest in Ensign and what we believe in and how we operate and the fundamentals and the way we acquire — the contrarian acquisition model we tend to follow. It gives them a chance to do that without necessarily coming into an industry that they’re uncomfortable with.”

Ensign made 12 different acquisitions during the first quarter, mostly for skilled nursing assets in California, Utah and Arizona.

Since announcing its spinoff plans, Ensign has received multiple questions about mixing its home health and hospice businesses with its senior living assets. Executives, however, view the alignment as a natural one with ample cross-over opportunities.

“Home health happens a lot more in an [assiste living facility] setting than it does in a skilled nursing setting,” Christensen said. “There is a lot more overlap between these two particular industries than our industry with these. It is pretty natural even outside of our organization.”

Pennant will list its shares on the NASDAQ exchange under the ticker symbol PNTG.

Broadly, the spinoff’s growth profile will look similar to Ensign’s, though likely at a faster pace given its relatively small size, Hambly noted. Stephens expects the home health and hospice businesses to have a mid-to-high single-digit organic growth profile.

“We aren’t close to what we must become, but we have come a long, long way,” Christensen said.

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