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To be the beneficiaries of an overwhelming amount of home health demand, providers have to take on a larger share of Medicare Advantage (MA) patients. In the short-term, that doesn’t come off as a financially shrewd strategy, but it makes sense from a long-term perspective.
Last week, I wrote about a potential “leveling off” of MA penetration across the U.S., which could offer a respite to providers. I made sure to mention, however, that a leveling off would not mean that providers are free from the changes that MA penetration has brought, and is bringing.
Even with MA penetration potentially leveling off, and even with MA rates being substandard, contemporary home health growth requires taking on a diverse group (by payer) of patients.
Leaders with Enhabit Inc. (NYSE: EHAB) has explained this reality ad nauseam, though their explanation has at times fallen on deaf ears. The company came onto the public market with the majority of its home health revenue – close to 80% – coming from Medicare fee for service. Since then, over the last two years, it has gotten that down to close to 60%.
That has hurt its bottom-line in the interim, given the aforementioned fact that MA plans pay less for services. But it was still necessary, or at least in line with a particular strategy.
“It became clear that patients were trending from traditional fee-for-service Medicare, the more profitable payer, to Medicare Advantage plans more quickly than the industry as a whole anticipated,” Enhabit wrote in defense of its payer innovation strategy recently. “At that time, traditional Medicare made up approximately 75% of Enhabit’s total Home Health revenue. Furthermore, referral sources needing to service a mix of Medicare and Medicare Advantage patients were seeking providers that would take all patients. As a result, not only were we not growing, but we were also losing Medicare fee-for-service business we had because we were not seen as ‘full service.’”
The company is not alone, either. If you look at the last two years, the largest home health companies have all demonstrated strong reactions to the MA problem.
In this week’s exclusive, members-only HHCN+ Update, I explain the Catch-22 that home health providers face when they take on more MA patient referrals.
The public market and MA
Enhabit has been at odds with the activist investor AREX Capital Management – which owns 4.9% of Enhabit’s outstanding common shares – for over a year now. One of AREX’s chief complaints was how quickly Enhabit took on more MA patients.
On Thursday, AREX Capital won a seat on Enhabit’s board.
But if Enhabit, after it spun off of Encompass Health (NYSE: EHC), tried to maintain a mix tilted heavily toward fee-for-service Medicare, it likely wouldn’t have been taken seriously as a referral partner in most markets moving forward.
As the company explained, referral partners don’t want home health partners that are picky and choosy about the patients they take.
“Rather than gradually normalizing its payer mix by growing Medicare Advantage volumes in a controlled manner while protecting its existing Medicare fee-for-service (‘FFS’) market share, Enhabit allowed a precipitous drop in its substantially more profitable FFS volumes,” AREX Capital wrote in June. “The sharp decline in FFS volumes was significantly out of proportion with any underlying decline in FFS beneficiaries. While FFS beneficiaries nationwide shrank by ~7% from 2021 to 2023, we estimate Enhabit’s FFS admissions declined by more than 20% during that period.”
AREX Capital also compared Enhabit’s performance to that of Amedisys Inc. (Nasdaq: AMED), which is largely unfair. Amedisys is a longtime independent and public home health company, while Enhabit still only has two years under its belt.
The activist investor certainly does have some warranted gripes, given the fact that Enhabit’s stock price has dropped by nearly 60% since its first day on the public market in the summer of 2022.
But when it comes to Amedisys, its non-Medicare revenue (not fee for service) revenue actually suggests that it is in line with Enhabit on the issue.
In its second-quarter earnings, Amedisys’ non-Medicare revenue increased by 24% year over year. Since the second quarter of 2022, Amedisys’ non-Medicare home health revenue has gone from $118.2 million to $161.3 million, an over 36% increase. Overall home health revenue, comparatively, has increased by just about 11%.
Amedisys is in the process of being acquired by UnitedHealth Group’s (NYSE: UNH) Optum. As tailwinds started at the back of the home health industry – before and after the pandemic hit – it planned to remain a standalone company and to benefit from those.
Two years ago, Amedisys changed its tune. That was likely due to not just fee-for-service cuts, but also MA penetration – and all that comes with it. Headwinds began competing with the tailwinds.
Amedisys followed in the footsteps of LHC Group, which was the largest home health provider left on the public market before it was acquired by Optum in February 2023.
Later on, Keith Myers, the longtime LHC Group CEO – and now CEO Emeritus and a senior advisor at Optum – admitted that the company was also feeling the pressures of those headwinds.
With more MA referrals coming its way, it wasn’t able to care for all of the patients it wanted to.
“The … growing number of patients that we weren’t able to provide care to,” Myers said, explaining why the deal made sense. “We recognized that more quickly than a lot of providers, just because of the referrals we got from hospitals. We had a much higher percentage of managed care referrals coming our way. And we didn’t have the resources to care for those patients, and we wanted to care for them. And the hospitals need us to care for them.”
That’s precisely what Enhabit is arguing. While it’s taking on more MA patients, it’s also fighting hard to get better rates. But, without taking on more MA patients, there’s limited referral partners to work with and limited room for growth.
“If you aren’t able to provide care — you can’t grow the company,” Myers added.
In most other industries, companies are going toward the money. In home health care, companies are in a unique position.
They need to go where the money is not, in order to survive.
