Healthcare services companies fell off sharply yesterday after the Senate Finance Committee released a staff report showing tactics used by major for-profit home health companies in gaming Medicare. Specifically, internal documents provided by home nursing and hospice operators Gentiva Health Services (GTIV), Amedisys Inc. (AMED), and LHC Group (LHCG) revealed blatant top-down strategies aimed at increasing revenues and profits by basically providing unnecessary care. Strategies used at these companies as detailed in the report included the designation of an “A-Team” tasked with developing programs to target the most profitable Medicare therapy treatment patterns and maximize Medicare reimbursements, and increasing the number of therapy visits to increase mix and trigger bonus payments. All three were down steeply yesterday, with GTIV being the biggest loser falling 33.3% yesterday; AMED fell 9.6% and LHCG fell 8.3%.
We believe that if the companies broke any laws and committed fraud, then they should be prosecuted under the fullest extent permitted by law. However, absent that (as may very well be the case), the hard questions that need to be asked should be what government incentives allowed and maybe even drove these and other healthcare services providers to game the Medicare system for higher profits, and how that incentive system can be changed to instead drive them to provide the best care for the lowest cost. In a capitalist system, private corporations are driven by the incentive to generate maximum profits. However, we recognize that in the current politically charged climate, there is a real danger that some of these companies may be crucified for doing exactly that.
The stocks of home healthcare companies, including the three mentioned in the report, have been under correction since April amid concerns regarding cuts in Medicare reimbursement. Subsequently, in July, the Centers for Medicare & Medicaid Services released their 2012 pricing for home health operators that cut the reimbursement rates by 3.35%, representing a $640 million reduction in payments. This is on top of a 5.5% decrease in reimbursement rates announced in November 2010 for 2011. The stocks of home healthcare companies have fallen off even more steeply since July; GTIV is now off 86% YTD, AMED is off 60%, and LHCG is off 47.8% YTD. GTIV trades at just two times forward P/E, based on current projections for 2012 earnings; both AMED and LHCG trade at 7 forward P/E. While these are very cheap multiples, all three are still very risky situations, given the current uncertainty about the outcomes of these findings, and we would avoid them here and look for opportunities elsewhere in the healthcare space.
Non-home healthcare services companies have also been affected due to fears that the probe could be expanded to include other healthcare services providers. We believe that the weakness in these companies is merely speculative at this point, and can be looked at as an opportunity to buy into some growth names at bargain prices.
Besides the three home healthcare services mentioned in the Senate report, the ripple effects of the report were felt throughout the healthcare services industry, including at other home and outpatient providers, hospital operators, operators of senior centers, and even providers of outsourced healthcare services, including:
- Tenet Healthcare Corp. (THC), an operator of 49 general hospitals and critical access hospital, fell 14.6%. THC trades at a forward 9 P/E while earnings are projected to increase from 28c in 2010 to 45c in 2012.
- HCA Holdings Inc. (HCA), an owner and operator of 151 general acute care hospitals in the U.S. and U.K. fell 6.7%. HCA trades at a forward 6 P/E while earnings are projected to increase from $2.49 in 2010 to $3.19 in 2012.
- Health Management Association (HMA), an operator of 59 acute care hospitals, primarily in non-urban communities in the southern U.S. fell 8.7%. HMA trades at forward 7 P/E while earnings are projected to increase from 65c in 2010 to 88c in 2012.
- Sun Healthcare Group (SUNH), an operator of 164 skilled nursing, 16 assisted living and 8 mental health facilities fell 14.9%. SUNH trades at forward 12 P/E while earnings are projected to fall from $2.32 in 2010 to $1.04 in 2011 and then to 19c in 2012.
- Almost Family Inc. (AFAM), a provider of in-home nursing services and personal custodial care for recuperating and disabled patients fell 10.9%. AFAM trades at forward 7 P/E while earnings are projected to fall from $3.41 in 2010 to $2.14 in 2012.
- Examworks Group Inc. (EXAM), a provider of independent medical examinations for insurance carriers, law firms and third-party administrators feel 17.3%. EXAM trades at forward 35 P/E while earnings are projected to go from a 19c loss in 2010 to a 24c profit in 2012.
- Sunrise Senior Living (SRZ), a provider of assisted and independent senior living services in 319 communities in the U.S., Canada and U.K. fell 9.1%. SRZ is projected to reduce losses from 38c in 2011 to lose 8c in 2012.
- LCA Vision Inc. (LCAV), a provider of laser refractive eye surgery services through 54 vision correction centers fell 9.2%. LCAV is projected to reduce losses from $1.10 in 2010 to a 21c loss in 2012.
- Radnet Inc. (RDNT), an operator of 201 diagnostic imaging facilities fell 9.0%. RDNT trades at forward 8 P/E, while earnings are projected to increase from 2c in 2010 to 29c in 2012.
- US Physical Therapy (USPH), a provider of pre- and post-operative care for orthopedic, sports, work and neurological injuries and disorders fell 7.7%. USPH trades at forward 10 P/E while earnings are projected to increase from $1.23 in 2010 to $1.61 in 2012.
- Lincare Holdings Inc. (LNCR), a provider of oxygen and respiratory therapy to patients at home through 1,090 operating centers fell 4.5%. LNCR trades at forward 10 P/E while earnings are projected to increase from $1.87 in 2010 to $2.26 in 2012.
- Bioscrip Inc. (BIOS), a provider of specialty and traditional pharmacy services for patients, physicians, payers, and manufacturers fell 9.3%. BIOS trades at forward 10 P/E while earnings are projected to increase from 23c in 2011 to 55c in 2012.
- Community Health System (CYH), an operator of 130 acute care hospitals in non-urban and selected urban markets in 29 states fell 8.1%;
- Brookdale Senior Living (BKD), an operator of assisted living, retirement centers and continuing care retirement communities fell 8.0%. BKD trades at forward 4 P/E while earnings are projected to increase from $3.03 in 2010 to $3.48 in 2012.
- Molina Healthcare Inc. (MOH), a provider of managed healthcare services to 1.6 million members via government-sponsored programs for low-income families fell 7.6%. MOH trades at forward 8 P/E while earnings are projected to increase from $1.32 in 2010 to $1.70 in 2012.
- Accretive Health Inc. (AH), a provider of patient registration, insurance verification, documentation, bill preparation, and collection services fell 6.8%. AH trades at forward 28 P/E while earnings are projected to increase from 24c in 2010 to 72c in 2012.