New York has always been a challenging operating environment for Addus HomeCare Corporation (Nasdaq: ADUS). Thus, it came as no surprise when the company announced the sale of its personal care business in that market, as well as its fiscal intermediary services for the state’s consumer-directed care program.
On Wednesday, the Addus leadership team shed more light on the factors that led to this decision during a discussion at Jefferies Global Healthcare Conference.
“About three years ago, the state decided they were going to make some changes with CDPAP, and eliminate some providers,” Addus CEO Dirk Allison said during the discussion. “We were not chosen to stay, so we started refusing to accept new business, waiting for that to occur. After about a two-year period, they decided they couldn’t do it, so everything went back to normal.”
Based in Frisco, Texas, Addus provides personal care, home health care and hospice care to over 49,000 consumers through 214 locations spanning 22 states.
Though things went back to normal, in terms of CDPAP, Addus began seeing minimum wage pressures, wage parity pressures and the state had difficulty reimbursing providers, Allison noted.
Additionally, New York has since passed a budget that will designate one statewide fiscal intermediary to oversee CDPAP.
For Addus, the math stopped making sense, so to speak.
“New York authorizes about four times as many hours, per month, as any other state in which we operate,” Allison said. “So normally where we’d get about 50 hours a month, we’re seeing 200 hours a month in New York. It was a program that’s very expensive to run. Their answer was to continue to reduce pricing. For us, while it’s $100 million in revenue, it’s really zero on the bottom line — we were making nothing.”
Brian Poff — CFO of Addus — added that New York was a market where the company saw gross margins in the mid-teens and EBITDA margins in the low- to mid-single digits.
“Run rate basis is running about 3 million in EBITDA, but after taxes, amortization, depreciation it really gets to a literally zero EPS impact, so very little financial impact to us,” he said.
Addus eventually came to the realization that New York wasn’t a stable environment for the company.
“It wasn’t a stable environment … we felt we could take our capital and move it to other states that were more appropriate for our programs,” Allison said. “When we were approached to look at selling it, we decided to make that move. While we hate to leave New York, from a standpoint of financial implication, and the time we’ve had to put in, it’s a good move for us.”
During the discussion, Allison also weighed in on HCS-Girling’s unique strengths that might allow them to see success with Addus’ personal care business, which is now under the former’s belt.
“[My understanding] is that they’re at about a half a billion in revenue,” he said. “They’ve been in New York. Their entire base is in New York, they have relationships in the city. I think they have different inroads than we do. I think we all [believe] there’s probably not just going to be a single [fiscal intermediary] by April next year. Honestly, that may never happen.”
Ultimately, Addus believes that the New York personal care segment that it has now offloaded is immaterial to its business.
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