Deutsche Bank's Home Health Industry Report

Deutsche Bank has published a research report on the Home Health Industry as 2011 is expected to be challenging for the sector due to pricing problems and administrative issues.

In the report, Deutsche Bank writes "(1) 2011 final rate looks slightly worse relative to the proposed rule; the
impact table shows -4.89% vs. -4.63% from the May 2011 proposed rule. CMS did not ease off of its proposed -3.79% case mix creep adjustment and the market basket got incrementally worse at 2.1% vs. 2.4% in the proposal. For most home health agencies, this type of rate cut will be difficult to mitigate without significant changes to the cost structure or service level. Bottom line: relative to our models, the rate cut is in-line to slightly worse, as we've assumed blended home health pricing at -4.5%. See attached Figure 1 for side-by-side (proposed/final versions) of Impact Analysis table.
(2) The final rule clarifies concerns surrounding the need for a face-to-face physician encounter for recertification. Specifically, the final rule states that the face-to-face provision apply only to the initial certification. This allays some administrative and logistical concerns in the industry about CMS' face-to-face requirements, which some observers thought might further impede volume growth in 2011. Bottom line: this clarification is positive.
(3) The final rule clarifies proposed changes to therapy coverage which requires functional reassessment. Specifically, CMS is moving forward with its requirement to perform functional reassessments in order to establish that the patient is progressing toward therapy goals and to determine if therapy services should be continued; this provision applies to therapy episodes with 13+ and 19+ therapy visits. These provisions are delayed until April 1, 2011 to allow agencies time to transition. The provisions are also altered to provide some flexibility around the timing of the reassessment by a qualified therapist in rural areas. Bottom line: this provision will add cost and administrative burden, while potentially reducing volume.
(4) The final rule clarifies some concerns about whether the 36-month CHOW rule applies to indirect ownership. CMS stated clearly (p. 278 of rule): "Indirect ownership changes are not subject to the 36-month rule. We have clarified this in the regulatory text of the final rule. However, CMS will further analyze and monitor this issue, and may consider modifying this policy in future rulemaking." Bottom line: this clarification may accelerate sales of private equity-owned home health chains."

Companies related to this report include:

Amedisys Inc (NASDAQ: AMED),$28.11 Hold
Gentiva Health Services (NASDAQ: GTIV),$24.81 Buy
LHC Group Inc (NASDAQ: LHCG),$26.79 Hold