Update on Home Healthcare Providers

 |  Includes: AFAM, AMED, GTIV, LHCG
by: Strubel Investment Management

Since the Senate Finance Committee launched an investigation of home healthcare providers on May 12, there have been a number of new and interesting developments. On June 30, Amedisys (NASDAQ:AMED) and Almost Family (NASDAQ:AFAM) announced that they were being investigated by the SEC. On July 13, Amedisys announced that earnings for this quarter would come in at $1.12 per share versus previous expectations of $1.40, and it suspended its annual guidance. Then on the evening of July 13, LHC Group (NASDAQ:LHCG) and Gentiva (NASDAQ:GTIV) announced that the SEC has asked them to preserve all documents related to Medicare billing practices, which is likely a precursor to an investigation. So what’s going on?

The evidence that Amedisys has committed some type of fraud regarding its Medicare billing practices continues to mount. The company said the earnings shortfall was due to a decline in newly admitted patients, changes in recertification of existing patients, and increased expenditures for infrastructure and clinical staff training. Reading between the lines, we can guess that a few things are happening.

First, physicians and hospitals are likely not referring as many patients to Amedisys because of the negative press surrounding them. This isn’t surprising and hasn’t had a large impact on earnings according to the company.

Second, the vaguely worded language about increased infrastructure and training programs seems suspiciously like an attempt by the company to revamp its centralized patient billing and coding systems. Amedisys has always been known for its centralized infrastructure. For years, rumors have swirled about them going through the system and ensuring that patients received the number of visits that qualified Amedisys for higher Medicare payouts and/or making sure patients qualified for higher margin therapy treatments. We can’t be sure what is going on, but it seems odd that Amedisys has suddenly decided to make changes to this infrastructure while it is under investigation, including changes it didn’t think it would make when it released guidance before investigations were launched.

The third and largest item impacting earnings this quarter were changes in recertification. That means changes in how much and what types of treatment patients received. Again, it seems very suspicious that suddenly, and surprisingly to Amedisys, patients have developed different treatment needs right as there is an investigation into its treatment practices.

While Amedisys, Almost Family, and Gentiva have not made any additional data available about their practices and continue to release vaguely worded press releases, LHC Group has been the only provider to explicitly deny allegations of improper billing practices and to release additional information.

LHC Group’s press releases (May 12 and July 13) contain some interesting facts pertaining to their therapy practices that cast serious doubt on the allegations of the WSJ article and the investigations of the Senate and SEC. Before we discuss the data LHCG released, its important to remember two key points about what is being investigated. First, therapy is a high margin service and the investigation is looking into whether patients who didn’t need therapy were certified as needing it. Second, the investigation is looking at changes in the number of therapy visits. Over the years Medicare has given bonus payments after a certain amount of therapy visits. So the investigations are trying to determine whether or not companies took advantage of these bonus payments by providing unneeded extra therapy visits.

LHCG has offered the following additional data in both its press releases.

From 2006 to 2008, the company’s therapy utilization rate was 13% below the national average. Its reimbursement rates per episode and per therapy episode were both below the median from 2006 to 2009. The average number of therapy visits received by their top 20 patient diagnoses that required therapy in 2007, as compared to those same patient diagnoses in 2008, was consistent despite the change in therapy thresholds by Medicare from 2007 to 2008. In none of those top 20 diagnoses did the average number of visits increase to a level that would result in the patients meeting or exceeding a higher therapy threshold. Also, all its treatment programs are dictated by an independent physician order.

There is also one other interesting tidbit of information in the company’s press release, and perhaps it is the most important. The company has a decentralized operating model, meaning all its locations operate independently to a certain degree. This is borne out by the long list of subsidiary companies shown in the annual reports. It would be very hard, perhaps impossible, for a company to commit systematic companywide billing fraud without having a centralized operating model.

Furthermore, LHCG has reaffirmed its 2010 guidance of $2.75 to $2.85 per share. This points to the company making no changes in its infrastructure or patient certifications. It is highly unlikely that a company would continue to commit the frauds alleged while under investigation by the Senate and SEC. LHCG seems to indicate everything is business as usual.

Almost Family and Gentiva remain more of a mystery. Almost Family has released no additional data regarding its therapy practices and has not offered any additional earnings guidance. Gentiva again has released no additional data.

LHCG’s stock seems to fall in lock step with the bad news released by Amedisys. Based on the data LHCG has released and its business practices, it seems highly unlikely that it is guilty of any systematic fraud. The preponderance of evidence in Amedisys’ case meanwhile seems to point to some bad behavior. Almost Family and Gentiva still largely remain mysteries.

Disclosure: Author long LHCG