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Investigators Send Home Health Care To The Hospital
If you take care of sick people, and particularly sick people whose treatment is paid for by the government, it is almost a given that you are going to be the subject of an investigation sooner or later. Whether it is nursing homes, dialysis centers, orthopedic device makers or blood-derived drug companies, they have all had their time under the magnifying glass.
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Home Health Care
Now it is home health care's turn. Amedisys (Nasdaq:AMED), Almost Family (Nasdaq:AFAM), Gentiva (Nasdaq:GTIV) and LHC Group (Nasdaq:LHCG) have all announced that they are party to investigations underway by the SEC and the Senate Finance Committee.
These investigations apparently stem from allegations that first appeared in the Wall Street Journal. Under an old reimbursement system, home care companies received a special higher payment when patients required a 10th therapy visit. The allegation, then, is rather simple: these companies pushed patients into unnecessary visits so that they would trigger the higher payments.
The rule was changed starting in 2008, and the WSJ has essentially claimed that visits dropped in the wake of the rule change. Interestingly, though, these companies have reported consistently higher revenue since the change (except Gentiva, where 2009 results were lower than 2008). Moreover, as LHC has pointed out previously, it is unclear as to whether the WSJ's analysis took into account the growing base of the business, such as more patients, more sites, etc.
Dead in the Water, for Now
Institutional investors hate uncertainty more than almost anything else, so I have to believe that there will not be a quick turnaround in these stocks until the industry resolves this matter. In the meantime, there will be distractions for management, higher legal fees, and perhaps a bit of grandstanding by investigators. Of course, if it turns out that any of these companies knowingly did what they are accused of (including, perhaps, paying independent doctors to prescribe unnecessary visits), investors should expect significant fines and perhaps some restrictions vis-a-vis Medicare payments and eligibility.
The Bottom Line
This was a sector that I found interesting prior to these investigations. Truth be told, I still find it interesting even though the risk has gone up significantly. Investors should not just dive in indiscriminately, however. Gentiva still has to figure out whether it can go forward with a $600 million syndicated loan offering, and Amedisys suspended its full-year guidance. Worse still for Amedisys, company management is now talking about restructuring the business because of a change in the composition of its patients, even though it does not know if that change is permanent!
My favorite stock in this space before this mess was LHC Group, and I am sticking with that now. Even with modest forward growth assumptions and a high discount rate (to acknowledge the current operating risk), the stock looks cheap. Remember, though, that there is likely to be more noise from this investigation and the uncertainty will likely weigh on shares. If you can be patient, and if you can stomach the possibility of an ugly outcome, this could be an interesting turnaround idea for more aggressive investors. (For more, see Investing In The Care Side Of Healthcare.)
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Home Health Care
Now it is home health care's turn. Amedisys (Nasdaq:AMED), Almost Family (Nasdaq:AFAM), Gentiva (Nasdaq:GTIV) and LHC Group (Nasdaq:LHCG) have all announced that they are party to investigations underway by the SEC and the Senate Finance Committee.
These investigations apparently stem from allegations that first appeared in the Wall Street Journal. Under an old reimbursement system, home care companies received a special higher payment when patients required a 10th therapy visit. The allegation, then, is rather simple: these companies pushed patients into unnecessary visits so that they would trigger the higher payments.
The rule was changed starting in 2008, and the WSJ has essentially claimed that visits dropped in the wake of the rule change. Interestingly, though, these companies have reported consistently higher revenue since the change (except Gentiva, where 2009 results were lower than 2008). Moreover, as LHC has pointed out previously, it is unclear as to whether the WSJ's analysis took into account the growing base of the business, such as more patients, more sites, etc.
Institutional investors hate uncertainty more than almost anything else, so I have to believe that there will not be a quick turnaround in these stocks until the industry resolves this matter. In the meantime, there will be distractions for management, higher legal fees, and perhaps a bit of grandstanding by investigators. Of course, if it turns out that any of these companies knowingly did what they are accused of (including, perhaps, paying independent doctors to prescribe unnecessary visits), investors should expect significant fines and perhaps some restrictions vis-a-vis Medicare payments and eligibility.
The Bottom Line
This was a sector that I found interesting prior to these investigations. Truth be told, I still find it interesting even though the risk has gone up significantly. Investors should not just dive in indiscriminately, however. Gentiva still has to figure out whether it can go forward with a $600 million syndicated loan offering, and Amedisys suspended its full-year guidance. Worse still for Amedisys, company management is now talking about restructuring the business because of a change in the composition of its patients, even though it does not know if that change is permanent!
My favorite stock in this space before this mess was LHC Group, and I am sticking with that now. Even with modest forward growth assumptions and a high discount rate (to acknowledge the current operating risk), the stock looks cheap. Remember, though, that there is likely to be more noise from this investigation and the uncertainty will likely weigh on shares. If you can be patient, and if you can stomach the possibility of an ugly outcome, this could be an interesting turnaround idea for more aggressive investors. (For more, see Investing In The Care Side Of Healthcare.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Stephen D. Simpson, CFA
Stephen D. Simpson, CFA, is a freelance financial writer, investor, and consultant. He has worked as an equity analyst for both sell-side and buy-side investment companies in both equities and fixed income. Stephen's consulting work has focused primarily upon the healthcare sector, while he has also written extensively for publication on topics pertaining to investments, security analysis, and healthcare. Simpson operates the Kratisto Investing blog, and can be reached there.
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