Home Health Stocks Plunge After CMS Proposes Changes To Medicare Payments
Shares of home health services providers are sliding after the Centers for Medicare & Medicaid Services, or CMS, issued a proposed rule that would update the 2018 Medicare payment rates and restructure its reimbursement system in 2019. Mizuho analyst Sheryl Skolnick downgraded Amedisys (AMED) to Neutral following the news.
NEW PAYMENT SYSTEM: According to its website, CMS has issued a proposed rule that would update the 2018 Medicare payment rates and the wage index for home health agencies serving Medicare beneficiaries. Additionally, the rule proposes changes to the home health prospective payment system case-mix adjustment methodology, including a change in the unit of payment from 60-day episodes of care to 30-day periods of care, to be implemented January 1, 2019. The proposed case-mix methodology refinements, called the home health groupings model, of HHGM, rely more heavily on clinical characteristics and other patient information to place 30-day periods of care into meaningful payment categories. The HHGM also eliminates therapy service use thresholds that are currently used to case-mix adjust payments under the HH PPS. The proposed decrease reflects the effects of a 1% home health payment update percentage.
MOVING TO THE SIDELINES: In a research note this morning, Mizuho's Skolnick downgraded Amedisys to Neutral from Buy, and called the CMS proposed rule a "body blow" that represents a significant headwind for the industry. The proposed new system not only would cut industry payments by $950M in 2019, but would also make Low-Utilization Payment Adjustment, or LUPA, reimbursement worse, she told investors. Nonetheless, Skolnick acknowledged that mitigation could be possible as this is only a proposed rule and the industry could get a delay or reduction in the cut. The analyst lowered her price target for Amedisys to $50 from $65, cut her price target for HealthSouth (HLS) to $45 from $47 and trimmed her price target on Kindred Healthcare (KND) to $8 from $9.
POTENTIAL SIZEABLE CUT IN 2019: Commenting on the news, Jefferies analyst Brian Tanquilut told investors that CMS's proposed home nursing rule for 2018 was "benign," but the reimbursement system change proposed for 2019 that would result in a rate cut, if approved, is a negative. The analyst pointed out that his concern is that the proposed rate cut does not seem to follow the typical requirement for the agency to put through budget-neutral changes unless approved by Congress. Tanquilut also pointed out that the three-week delay in the home health proposal's release drove investor concerns about the potential inclusion of the HHGM in the proposal. With Almost Family (AFAM), LHC Group (LHCG) and Amedisys trading lower, he believes the HHGM was already somewhat baked into stock valuations. In 2019, the net rate cut from the HHGM will be partially offset by a market basket adjustment and the bonus payments that each company is scheduled to receive from the rollout of value-based payments, the analyst contended, adding that he believes net rate cuts, assuming a 2-year phase in of HHGM, would amount to less than 50 bps.
PRICE ACTION: In morning trading, shares of Amedisys have dropped 16%, Almost Family slid over 13%, and HealthSouth slipped 5%. Meanwhile, Kindred Healthcare is down 14% and LHC Group is down 10%.
Disclosure: None.