Senior living providers have been eyeing home health operators in recent years, forging partnerships and undertaking acquisitions to extend services into this part of the care continuum. But while there are compelling reasons for senior living companies to get into the home health game, that sector faces some steep challenges: Profit margins for U.S. home health agencies have been in free-fall over the past four years.
In 2010, the full-year margin for four of the largest home health companies averaged 7.1%, according to an Avalere Health analysis released Thursday by the Partnership for Quality Home Healthcare. The average margin for these four companies had fallen to 2.4% as of 2014.
These numbers are based on financial reports that the four companies—Almost Family, Amedisys, LHC Group and Gentiva—filed with the Securities and Exchange Commission. Gentiva was acquired by Kindred Healthcare in February 2015 for $1.8 billion.
The steep decline in margins can be attributed in part to drastic rebasing of Medicare reimbursements. Under the Affordable Care Act, the Centers for Medicare & Medicaid Services is cutting home health reimbursements 3.5% per year between 2014 and 2017.
CMS has estimated that 40% of all home health agencies will experience negative margins due to this cumulative 14% cut, the Partnership for Quality Home Healthcare noted in a written statement released in conjunction with the new report.
The four companies in Avalere’s analysis are among the giants of U.S. home health care, and so have significant resources that smaller providers lack. These smaller providers, including those serving rural populations, likely are facing even more devastating margins due to the CMS cuts, the Partnership stated.
For instance, Asher Home Health Services of Fossil, Ore. is taking extraordinary measures to continue operations.
“Due to the net losses they are experiencing as a result of recent cuts, their staff is working around the clock, without the benefit of sufficient backup, and often at substandard wages, all to help seniors receive the clinical treatment they need in the setting they most prefer – their home,” said Sarah Myers, executive director of the Oregon Association for Home Care, in a written statement. “Without relief – soon – even the heroic efforts of providers like Asher will be unable to prevent the large-scale closures that CMS itself has projected.”
Of particular concern: Congressional lawmakers and the policymakers who help determine payment rates might not have an accurate impression of home health agencies’ margins. This is because the number that often gets attention is the Medicare margin as calculated by the Medicare Payment Advisory Commission, an expert panel tasked with advising Congress on Medicare policy.
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But the MedPAC number reflects the average Medicare margin only, not the overall profit/loss that providers achieve based on all revenue and expenses. In 2014, MedPAC estimated that home health agencies would see a 12.6% Medicare margin.
Despite being under pressure from the CMS rebasing, the publicly traded home health companies that Avalere analyzed recently posted strong overall results for the first quarter of 2015, sparking a positive response from Wall Street analysts.
And for a senior living and care company, the benefits of acquiring a home health provider are not entirely contingent on the enterprise’s margins; buying Gentiva was part of Kindred’s self-stated strategy of having diverse services across the post-acute continuum, to achieve smooth patient transitions and solidify itself as a partner for health systems seeking to better manage episodes of care. Kindred is on track to realize $35 million of contribution from synergies thanks to its integration of Gentiva, company leaders announced earlier this month.
Written by Tim Mullaney