Almost Family, Inc. (NASDAQ:AFAM)
31st Annual J.P. Morgan Healthcare Conference Call
January 10, 2013, 10:30 am ET
Steve Guenthner - President & Principal Financial Officer
Good morning. Before we get in, just a couple of housekeeping items if you could just make sure your cell phones are on silence, that would be appreciated. And also this room does its Q&A session in the Olympic Room. First off this morning, we have Almost Family and to present, we have its President, Steve Guenthner.
Thank you, good morning; appreciate you guys getting up early to come out and hear our story and we want to thank J.P. Morgan for inviting us to present. For the next 20 or so minutes I am going to tell you a little bit about home healthcare and a little bit about Almost Family.
We are a skilled and personal care home healthcare services company based in Louisville, Kentucky. We were founded in 1976. We have two operating segments; our visiting nurse segment which sends skilled nurses, physical therapists, occupation speech therapists to the homes of patients usually with post acute conditions to help restore their ability to care for themselves. Our personal care segment which is predominantly Medicaid waiver funded provides in-home support services to individuals who wish to avoid nursing home placement predominantly.
Our revenue run rate is about $350 million. Our general business thesis despite regulatory headwinds and regulatory pressures is that the compelling demographics of the senior population and fragmentation in our industry outweigh those regulatory pressures. We over a long period of time have proven an ability to grow our business both organically and through acquisitions. We have a long history of strong revenue and earnings growth and we take a very conservative perspective in the environment with our capital structure.
Maintaining focus of geographic development is an important part of our business model. We believe that operational span of control in a personal service business like ours is extremely important. So we cluster our business opportunities and our development activities into three clusters. One, in that Ohio River Valley area around our foundation, we have a large presence in the Southeast predominantly Florida. We are in the top two or three homecare providers in the State of Florida. And we also have a cluster, a little bit newer cluster, up in the Northeast, Pennsylvania, New Jersey, Connecticut and Massachusetts. We have 170 operating branches throughout those clusters.
Our four year compound annual revenue growth rate has been about 27%. Our earnings growth at about 13% due to Medicare rate pressures over that timeframe. Over that last four years, about 70% of our growth has been organic and we've acquired about $116 million in revenue.
I want to talk a little bit about where home healthcare fits in to the healthcare spectrum. It is we believe the preferred setting of care. It's the lowest cost care. We have about half of our patients are from in patient discharge. They’ve been into the hospital and are now being sent home and we are there in their home to provide support services for them. The growing demographics I touched on earlier make it fiscally infeasible to build enough facilities to household these folks and in reality the patients really want to go back to their home.
There are about 3.5 million patients each year in this country who rely on home healthcare to stay in their home. We think about the Medicare population as 65 and older, but our patient base tends to be 80 and older. They have chronic conditions, usually multiple chronic conditions and tend to be sicker than the average patient. These folks, like most folks, still want to stay in their home and they want to age in place and because they’ve had an acute care episode, they want to restore their ability to care for themselves and that’s really our mission in the visiting our segment, we're not really there so much to take care of the patients as we are to help them restore their ability to care for themselves.
We do think home health is evolving as a broader solution than just post hospital discharge; while we still do that and about half of our patients are from post-hospital discharge. We are also evolving a whole new component to our service delivery in our industry and in our company to serve patients who are chronically ill on a pre-acute basis.
So in addition to helping them get out of the hospital sooner we are working with physician practices in the community to help the doctors keep these patients from going to the hospital to start with. And interestingly, over the last five years in-patient stays in hospitals are down about 4%. We don’t think that’s directly as a result of home care, but we do think home healthcare is having an indirect impact and helping with that.
The Medicare population is about 45 million people. These folks tend to have significant chronic health conditions. They also tend to be in the lower financial resource group. So limited resources of one in two have income of less than $21,000 that’s about two times the poverty level, one in five have significant limitations in their activities of daily living. With the Medicare program in its current form, we, the government, we, the people of the United States have a statutory obligation to provide all the healthcare services that these folks need through the rest of their lives and we think that home healthcare is a very important extender of the Medicare benefit and we are working hard to demonstrate that both to our patients and (inaudible), but also to the policy makers.
We have the somewhat obligatory demographic slide, the number of new 65 year olds per day is pretty substantial; we have been hearing and talking about for years the age wave and the boomers are now beginning to hit 65 and hit the rolls of the Medicare population. The benefits of homecare bending the cost curve, we've heard a lot for a lot of years about bending the cost curve but we haven't seen a whole lot of things outside of home healthcare really actually having that effect, and we believe that we really lower the cost of our program.
So let me talk for just a moment about the regulatory front. Most of our business is regulated at the federal level. They are also things that we have to comply with and a lot of the future of our business depends on our relationships with DC, with policy makers and their understanding of what it is that we are doing. So as one of the things that's developed in our company over the past few years that's sort of different new for us is the amount of time that William Yarmuth, our CEO and I have spent in Washington with policy makers with staffers and with members of Congress.
One of the things that we usually run through is all of the stuff that I just talked about, and everybody nods and says that's great. But what about isn't the benefit growing too fast for appropriate spend and controls. Isn't there too much fraud and abuse? What do we do about those things? So we've been working together with others in the industry. Our peer companies and a partnership that we've formed together to help get that message out and I want to run through just a little bit of that here with you.
According to CBO home healthcare is the smallest slowest growing venue in which skilled nursing services can be provided to patients. You can see on this chart. I don't know if you can read if from the back there, but the 10-year spend in the CBO base line for home health is about $275 billion, hospitals are $2.5 trillion and sniffs are about $0.5 trillion. The 2012 spend for enrollees are about $500 for home health, about $4500 for hospitals and $740 roughly for sniffs. Most importantly though look at this annual growth rate. According to CBO the smallest lowest cost care venue is also the slowest growing, it’s 6% versus 8% in hospitals.
We think that's upside down and we think by inverting that we can actually be an extender to the Medicare program. Also interestingly the total spend on home healthcare in 2011 actually decreased. So we are not talking about a slowing growth rate, the number actually went down in 2011 and that did not happen in any other sector of Medicare spending. So let's talk about the fraud and abuse issues. According to the HHS Office of Inspector General Dan Levinson, the OIG conducted a study which they do every year and they do it in every venue of healthcare. They do claim sample and they determined that medical records in home healthcare supported the claims at about 2.5% error rate as a result of their work.
If you have had an issue, a compliance issue with the government and you enter into a corporate integrity agreement, you have essentially a Safe Harbor rate of 5% error rate. So once a company has had an issue and they have sort of fixed their problems, they have to self report and do self audits, and below 5% you are considered good, you don't owe any money back to the government. The OIG found about half of that error rate in the whole country and then Dan Levinson in testimony before the Senate Finance Committee commented the quotes are on the page, but I'll read them for you.
As we move towards increasing reliance on the home health model which is good for taxpayers because costs will be reduced overall, we need to address the fraud risk inherent. And he also said a study of home health compliance showed a high level of compliance but a high level of frauds. So how do these things co-exist and I think the answer to that is that the fraud issues are very isolated. I am going to flip forward just a couple of slides here and talk about where the fraud issue have been. There have been some high profile fraud issues in homecare and in healthcare generally and what we did is we put on the left side of this slide under this red heading; those cities have had some fairly high profile fraud bust. Miami-Dade, Dallas, Houston, Chicago, Detroit and Los Angeles.
Very similar cities on the right hand side under the green comparable cities section. Seattle, New York, Atlanta, Phoenix, Philadelphia. Each one of these population groups is about in their low 40 million, total population. There is about 3.7 million eligible, Medicare eligible people on in each of these population areas, but the spend in the group on the left is three times what it is on the right. Now that’s really a function. These numbers that are on here eligible per provider mean in Miami-Dade for example, there are 552 Medicare eligible people for every home health agency. So one home health agency for every 500 people.
In Atlanta, Georgia, there is one home health agency for every 20,000 people. That desperate condition attracts, it allows providers to come in and those that are willing to cross the line are crossing it in these cities with the fraud bust. So we have been trying to get this point across. I want to touch on a couple other things that we've done. As we worked with the legislators and the administration in the development of the Affordable Care Act back in 2009 and ‘10, we in the industry worked to get a limit, a payment limit on a certain category of patients where fraud and abuse was happening. These were outlier patients, very high cost patients that agencies could get additional payment for those patients.
Now when CMS designed the benefit that was supposed to be about 5% of the patient spend, and should have been a fairly small number of patients. What we saw in our data analysis was that there were agencies that were 80 or 90% of the patients were being outliers. So our solution to that was to have CMS put a 10% limit at the provider number level to say that no given agency could build more than 10% of their revenues in that category. That unequivocally saved $900 million in the first year of implementation. Now unfortunately we couldn’t get CVO to score that at all, but everyone has recognized at this point that that limit worked.
We are proposing and working with the policy makers to get another limit in, and this would be a limit on a ratio of episodes per beneficiary served, which would save another $1 billion a year and we think these things are very targeted solutions. I am going to show you this map here which shows an overlay of these fraud busted. You see each of these little callout windows here Chicago, Dallas, L.A., Miami. They show you where those fraud bust are in these highlights on the map. I don’t know if you could read that from the back, but these highlights on the map show sort of like a USA today color map the darker the color the more the effect of these payment limits and it’s a striking overlay.
So we are really working hard to get this done for a lot of reasons; one simply as good corporate public citizens we think money is going out of the treasury here that doesn’t need to be going out, but we also think is relatively easy and straightforward to fix. So we are going to work and try to get that to happen. Improved regulation builds confidence in the use of this benefit. Our primary message in DC to policy makers as they fulfill their roles as stewards of the public treasury is they need to know that if the patients in home care they really qualify for it, they really need the service, its legitimate use and if the patient wasn't in home care they would be receiving care in another venue at a higher cost.
Now once you can get there you need good regulation to do it, you need things like our payment limits and you need some rationalization of providers to the patient population, but once you get there the goal really then needs be to move people from higher cost settings into those lower cost settings. So we need to build this system safeguards around it and there has been some things that are being going on, the federal government has been taken some steps to improve controls and we think that as a result of those steps that the regulators should become increasingly confident in the appropriate use of home healthcare.
Some examples of those, 2011 the CMS implemented a requirement that a physician document, a face to face encounter with the patient; we thought that made a lot of sense. There are some administrative burdens in the details of that. We probably like to see work a little bit differently, but we think that gives good comfort that physicians ordering care are doing so with a good basis to do so.
CMS also implemented a rule for assessment and reassessment of therapy patients within certain intervals within the plan of care and again those things add cost, but they should increase the confidence level in the appropriate use of homecare. OIG and DOJ have been stepping up their enforcement efforts and they have been knocking down some of these bad guys and by the way just about all of the agencies that have been busted just about all the arrests that have been made are of agencies who also pierce these payment limits that we are proposing. So we think that that's really working. We are also seeing a stepped up increased audit efforts on the part of the intermediaries referred to as ADRs or Additional Document Requests.
I want to talk now about the long term impact over the Patient Protection Act, The Affordable Care Act; on home care; market basket updates our annual cost of living increase. First those get reduced by 1%, in 2011, ’12 and ’13. The big issue though is rebasing of our standard episodic rate. We get paid on a 60 day episode basis so there's a national standard payment rate. It’s wage adjusted for the local area and then there is a patient specific case index that is a result of the assessment of the needs of that patient, their conditions, disease stage, etcetera that is applied to that national standard payment rate and we get a lump sum amount and we need to provide the care for that patient for that 60 day period.
CMS is in the process of rebasing that national average standard rate; not really the case mix model, but recalculating what the number should be for that 60 day episode period. We should see preliminary rigs on this in July. So we've been spending the last couple of years really since this was legislated in 2010; essentially, in a little bit of a holding pattern trying to figure out what that reimbursement rate is going to be. We should know that in just a little bit.
We believe that once we know that number and we have some clarity to reimbursement that that will allow all of us in the industry to begin again the rational M&A valuation of businesses. We've sort of been in a holding pattern on M&A because of this issue and how to value that future cash flow stream and we are actually pretty excited to get that news, whatever it turns out to be so that we can begin the adaptation process and so that buyers and sellers in homecare businesses instead of the buyer assuming the worst case and the seller assuming the best case and then essentially being it stalled from transaction perspective. We think we can see that coming together and then capital can flow and we can then reenergize our acquisition and development activities. We will see a productivity adjustments of 1% beginning in 2015. I think that’s happening across most care venues. There is a real add-on that came in as a part of the Affordable Care Act and then there’s outlier cap that I was talking about earlier was actually legislated here.
We used to get questions about the final rule. Each year CMS proposes a rule in July and then usually around October, they make a final rule on what the reimbursement rates are going to be in 2013. So for 2013 we got our market basket update of 2.3% minus that 1% statutory reduction that we talked about. We did get a case mix creep adjustment. This is something that CMS has been doing across a lot of care venues, of about 1.3%. Most of which has been driven historically by therapy utilization, and then there is this thing called sequestration, which you probably all know about but essentially across the board, federal cuts which despite the recent legislation to kick the fiscal cliff can down the road for a couple of months still remains in, I believe beginning in March 1, we would get a 2% across the board rate cut. Assuming all of that happens, we would expect somewhere between 2% and 2.5% reduction in our average revenue reimbursement rate from Medicare.
I wanted to touch just for a moment on regulatory update. The public companies in 2010 were all made subject of federal investigation by the Senate Finance Committee following a newspaper article suggesting that therapy utilization in home health was inappropriate. Our case mix model that CMS has established for determining that patients severity in terms of determining that case mix to apply to the national standard payment rate figure out what the reimbursement is necessary for each patient does fairy heavily wait therapy services. There was some suggestion in this newspaper article that home care companies were inappropriately pushing therapy on patients.
The Senate Finance Committee issued lawyers of enquiry, the Securities and Exchange Commission jumped in behind them. We produced literally millions of documents in October of 2011 the Senate Finance Committee issued their report which mostly said the CMS needs to fix this issue in the case mix model that in their view essentially over weights therapy utilization or encourages therapy utilization. Importantly there was no finding of wrong doing on the part of any company and in particular Almost Family was singled out just a little bit for our clean record.
As a result of all that, we had a bunch of folks filing shareholder suits, all of those have been dismissed by the lower courts, there’s one appeal still pending. We had a couple of Qui Tam cases that were in our history from 2009 and 2010. Both of those Qui Tam cases were dismissed by the court after the US attorney declined to join in them, didn’t find enough merit in those two cases to join in. And then finally just recently may be around the first of November, the SEC staff informed us that they completed their enquiry and were recommending no action to the Commission. So we feel fairly scrubbed down as a result of all this that we've been poked and prodded and examined and frankly come out the other end of that process really in reasonably good shape.
So in summary we have our $350 million run rate. We are the smallest of the four public companies, who do what we do. But we've been growing pretty rapidly. Our strong capital position and our conservatism with our balance sheet we have zero debt, we have net cash, gives us over a $120 million available to fund our development program as soon as we get to the point where we believe we can appropriately value and negotiate transactions according to our disciplined way that we do acquisitions.
We are pretty dog on deliberate with how we look at things. We are awfully careful as we do our diligence. We don't close every deal. We get under letter of intent unless we like what's going on in that company upon further diligence review and of course we believe we are a growing force in this consolidating market.
And with about one minute to spare that concludes the prepared remarks and I believe we are going to the Olympic room for Q&A if anyone has any questions. Thank you.
[No Q&A Session for this event.]
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