Summary: As with the rest of health care, home health care is plagued by business models that are driven by reimbursement rates rather than the value they offer to the patient. No matter how hard working or well intentioned home care executives are, they have been limited in their ability to deliver real value to patients, payers, and referral sources as a result of the structural flaws of the current reimbursement system. While home health care’s mantra has been: “we are the low cost provider,” it has not been an effective argument against reimbursement cuts or criticisms of the industries operational practices. In fact, with some agencies’ average reimbursements per episode greater than $3500 and a hospital readmission rate of above 30%, it can easily be argued that home health care is costing the system money rather than saving. This is certainly not to say that home health care is not strategically positioned to bring the highest value to the patient and the overall health care continuum. Wyatt Matas & Associates argued in our last white paper, “The Delineation of Home Health Care: The Natural Evolution of a Healthy Industry,” that those companies that evolved into coordinated chronic care management companies would have a clear competitive advantage over providers and post-acute sectors that do not. This white paper will further that argument by establishing two points: 1) avoidable hospital re-admissions represent the most important measure by which home health will be evaluated, and 2) to advance along the “Value Continuum”, a company must build care delivery and business models that add value to their patients, which will in turn bring value to referral sources, the health care system, and the provider and/or their organization.
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How Home Healthcare Thrives
Wednesday, April 20th, 2011Home Care Industry Analysis and Introduction to the Care Cycle Management
Wednesday, April 20th, 2011Summary: The presentation covers the latest economic trends impacting the home healthcare and hospice industry. Presenter will discuss specific developments in mergers and acquisitions, Medicare and Medicaid managed care plans and opportunities created in healthcare reform. The presentation builds on the foundation of these trends to introduce a transformative industry called Care Cycle Management. Care Cycle Management has the opportunity to change how care will be delivered in the home by integrating disease management and care delivery to care for 25% of the population that makes up 85% percent of total healthcare expenditures. The presentation will dissect the Care Cycle Management business model for participants to understand the significance of this emerging industry.
Introduction to Care Cycle Management
Wednesday, April 20th, 2011Based on our research and experience, Wyatt Matas & Associates has identified an emerging opportunity for care providers focused on serving severely chronically ill patients. We have named this new industry Care Cycle Management, which is defined as coordinating care and managing all of a patient’s care throughout the disease process. The industry is not constrained by episodic care or the siloed care that results from fee-for-service, but manages the patient as long as there is a potential for an exacerbation of their illness. In turn, Care Cycle Management companies improve the quality of life of their patients and lowers the overall cost of care. Because of their effectiveness managing patient’s total cost or care, Care Cycle Management companies are willing to go “at-risk” with payor sources and share in the savings they produce on behalf of the payor, which aligns the interest of the patient, care providers and payor sources.
Valuation Matrix: Determining if Your Company is Worth a Premium
Friday, May 14th, 2010Introduction
The past 18 months have been difficult for business owners and financing markets as the economic recession curtailed growth prospects and tightened credit markets. While improving economic indicators are motivating strategic buyers to take advantage of their cash-heavy balance sheets, there remains a great deal of uncertainty as to what fair market value truly is in the 2010 economy. Rumors and anecdotes surrounding M&A activity often conflict, indicating rebounding, flat, or falling valuations. Additionally, sellers and buyers cannot be confident a bank will provide financing for a transaction until a deal is closed, given that banks are avoiding risk. The uncertainty over the reliability of valuations and financing may discourage M&A activity, though the prospect for advantageous deals remains strong going into the third quarter.
Despite the favorable environment for M&A activity, sellers must be aware that buyers, though interested, are unlikely to pay a premium price during a transaction and will offer a low valuation, citing the uncertainty over the current definition of fair market value. In order to obtain a market premium, sellers must prove their company’s worth. In order to prove worth, sellers will have to understand the details of the valuation process in an uncertain economy.
Valuation Process
While the valuation process utilizes quantitative techniques to estimate a market value for a business, there is a substantial element of subjectivity. Valuation is also influenced by institutional, economic, and personal perceptions of attributes and detriments. The qualitative factors utilized in valuations include the discounted cash flow method and the market approach.
Discounted Cash Flow (DCF)
DCF is a relatively simple premise that measures the worth of a company based on the total amount of after-tax cash it generates for the shareholders’ benefit. The value is indicated by an estimation of the company’s future economic capabilities, calculated as the present value of projected cash flows for a predetermined period in addition to the present value of residual value at the end of the projection period. DCF is typically computed as a range of values, including best- and worst-case scenarios in addition to the expected value.
While buyers typically favor the DCF methodology of valuation, it is rarely used for companies pursuing multiple offers.
Market Approach
The market approach uses either comparable companies or comparable transactions as the basis for preparing a valuation. The comparable companies approach uses the values of public companies similar to the company looking to be acquired as a benchmark for determining fair market value. The theory with the comparable companies approach is that the market is an efficient evaluator of a company’s worth, since price of exchanged securities is a reflection of available information in addition to the supply and demand created by rational buyers and sellers. Therefore, a company’s worth on the marketplace is an expression of the market’s valuation of that company. When buyers and sellers utilize this approach, a peer-group of publicly traded companies are compiled, multiples are applied, and a valuation is calculated based on a variety of factors.
The comparable transactions approach is similar to the comparable companies method, except that the benchmark is recently acquired companies. A portfolio of recently acquired or divested companies similar to the subject company is compiled and the multiples that were implied in these companies’ purchase prices are used to determine the subject company’s value. The most widely used quantitative analysis is EBITDA times market multiplier.
Challenges of Valuations in an Economic Recession
While a sound valuation is always a complex and nuanced undertaking, there are particular challenges to completing an appropriate valuation in the current economic environment.
First, choosing the companies to form the basis of a comparable transactions analysis is very difficult. The companies that have been acquired or divested over the preceding 18-month period have most likely been in distress or similar unfavorable fiscal situations. Therefore, these purchase prices are likely to be low, misleading a valuation analysis to place a company’s value below fair market value. However, reaching beyond the preceding 18 months into the time period prior to the recession for transaction history is likely to yield valuations that were too high, yielding an above-market valuation that buyers will be reluctant to accept on the basis of the transaction history analyzed.
Compounding the challenges of finding the appropriate transactions for benchmarking, buyers are typically very reluctant to discuss the types of attributes that would induce a selling price that is a market premium. Multipliers are typically discussed in a wide range to garner interest among sellers, but determining the exact circumstances that would lead a buyer to pay above this range are difficult to gauge in the absence of an expert who works with both buyers and sellers on a regular basis. Additionally, determining if a company is worth a market premium requires in-depth analysis of each component that goes into a valuation.
Wyatt Matas & Associate’s Valuation Matrix and Expert Guidance
Wyatt Matas & Associates has developed a valuation matrix that serves as guidance for a business owner to determine the valuation price of his or her company. When formulating the variables for this matrix, Wyatt Matas & Associates formulated and weighted the variables that buyers usually look for when deciding to place a valuation on a company. While the matrix is a helpful standalone tool for determining the general baseline of a company’s standing in the market, Wyatt Matas & Associates also provides the expert guidance throughout the valuation process that will always be a seller’s best option if he is seriously considering strategic alternatives for his business.
The Matrix
To use the matrix, one must first identify comparable transactions, typically between 5 and 10 transactions that are similar in revenue size to the subject company. Given the challenges noted above in determining appropriate transactions, engaging the services of a valuation expert may be an appropriate strategy to ensure proper benchmarks are selected. Once identified, the price/EBITDA mean of those transactions should serve as a benchmark range for the subject company’s valuation. The valuation matrix will serve as the tool for determining whether the subject company is worth above or below the mean range.
The matrix is divided into three separate general sectors that a seller must take note of when deciphering the value of his company:
? Individual Company Inputs
? Industry Inputs
? General Economic Inputs
Each of these general inputs contain metrics that affect the valuation of a company, and each metric’s weight has been appropriated based upon the importance of the variable from a buyer’s perspective. By using a ranking system based on a scale of -3 to 3, one can determine a number which can tell whether a company will sell below market value (negative), at market value (0), or for a premium (above market value), after weighting and summing. Once completed for all categories, the sum should be a number anywhere from -3 to 3 depending on the grading.
Designating rankings to a business is in itself a fairly subjective measure, however Wyatt Matas & Associates provides a description of each variable and what is considered to be a “-3” and a “3” for each metric, outlined in detail in an appendix accompanying the valuation matrix.
The valuation matrix is also a powerful tool for determining strategic plans. For example, once an owner calculates a final number, a number that is negative or around 0 indicates that it may not necessarily be the right time to sell a business, and if considering retirement soon, owners should develop a value enhancing strategic initiatives for the business in order to ensure an accretive exit as quickly as possible. Numbers closer to 1-3 are a good sign, and these owners should consider taking the next step by having an official valuation performed and contacting an investment banking professional for further guidance.
Valuation Matrix Model: Determining If Your Company is Worth a Premium
Monday, May 3rd, 2010The past 18 months have been difficult for business owners and financing markets as the economic recession curtailed growth prospects and tightened credit markets. While improving economic indicators are motivating strategic buyers to take advantage of their cash-heavy balance sheets, there remains a great deal of uncertainty as to what fair market value of companies truly are in the 2010 economy. Rumors and anecdotes surrounding M&A activity often conflict, indicating rebounding, flat, or falling valuations. The uncertainty over the reliability of valuations seems to have discouraged many sellers from considering their exit option, though the prospect for advantageous deals remains interesting going into the rest of 2010.
Despite an improving environment for M&A activity, sellers must be aware that buyers, though interested, are unlikely to pay a premium price during a transaction and will offer a low valuation, citing the uncertainty over the current definition of fair market value. In order to obtain a market premium, sellers must prove their company’s worth.
In order to prove worth, sellers will have to understand the details of the valuation process in an uncertain economy. We developed a valuation tool for those sellers interested in determining if their company is worth a premium.
Valuation Process
While the most valuation processes utilizes quantitative techniques to estimate market value for a business, there is a substantial element of subjectivity. Valuations are also influenced by institutional, economic, and personal perceptions of attributes and detriments. The qualitative factors utilized in valuations include the discounted cash flow method and the market approach.
Discounted Cash Flow (DCF)
DCF is a relatively simple premise that measures the worth of a company based on the total amount of after-tax cash it generates for the shareholders’ benefit. The value is indicated by an estimation of the company’s future economic capabilities, calculated as the present value of projected cash flows for a predetermined period in addition to the present value of residual value at the end of the projection period. DCF is typically computed as a range of values, including best- and worst-case scenarios in addition to the expected value. While the premise is simple, there are multiple components that can be disputed, argued and/or negotiated when using a DCF and it is not often used when a seller is receiving offers from multiple buyers.
Market Approach
The market approach uses either comparable companies or comparable transactions as the basis for preparing a valuation. The comparable companies approach uses the values of public companies similar to the company looking to be acquired as a benchmark for determining fair market value. The theory with the comparable companies approach is that the market is an efficient evaluator of a company’s worth, since price of exchanged securities is a reflection of available information in addition to the supply and demand created by rational buyers and sellers. Therefore, a company’s worth on the marketplace is an expression of the market’s valuation of that company. When buyers and sellers utilize this approach, a peer-group of publicly traded companies are compiled, multiples are applied, and a valuation is calculated based on a variety of factors.
The comparable transactions approach is similar to the comparablecompanies method, except that the benchmark is recently acquired companies. A portfolio of recently acquired or divested companies similar to the subject company is compiled and the multiples that were implied in these companies’ purchase prices are used to determine the subject company’s value. The most widely used quantitative analysis is EBITDA times market multiplier.
Challenges of Valuations in an Economic Recession
While a sound valuation is always a complex and nuanced undertaking, there are particular challenges to completing an appropriate valuation in the current economic environment.
First, choosing the companies to form the basis of a comparable transactions analysis is very difficult. The companies that have been acquired or divested over the preceding 18-month period have most likely been in distress or similar unfavorable fiscal situations. Therefore, these purchase prices are likely to be low, misleading a valuation analysis to place a company’s value below fair market value. However, reaching beyond the preceding 18 months into the time period prior to the recession for transaction history is likely to yield valuations that were too high, yielding an above-market valuation that buyers will be reluctant to accept on the basis of the transaction history analyzed.
Compounding the challenges of finding the appropriate transactions for benchmarking, buyers are typically very reluctant to discuss the types of attributes that would induce a selling price that is a market premium. Multipliers are typically discussed in a wide range to garner interest among sellers, but determining the exact circumstances that would lead a buyer to pay above this range are difficult to gauge in the absence of an expert who works with both buyers and sellers on a regular basis. Additionally, determining if a company is worth a market premium requires in-depth analysis of each component that goes into a valuation.
Our Valuation Matrix and Expert Guidance
We developed a valuation matrix that serves as guidance for a business owner to determine the valuation price of his or her company. When formulating the variables for this matrix, we formulated and weighted the variables that buyers usually look for when deciding to place a valuation on a company. While the matrix is a helpful standalone tool for determining the general baseline of a company’s standing in the market, we also provides the expert guidance throughout the valuation process that will always be a seller’s best option if he is seriously considering strategic alternatives for his business.
The Matrix
To use the matrix, one must first identify comparable transactions, typically between 5 and 10 transactions that are similar in revenue size to the subject company. Once identified, the price/EBITDA mean of those transactions should serve as a benchmark range for the subject company’s valuation. The valuation matrix will serve as the tool for determining whether the subject company is worth above or below the mean range.
The matrix is divided into three separate general sectors that a seller must take note of when deciphering the value of his company:
• Individual Company Inputs
• Industry Inputs
• General Economic Inputs
Each of these general inputs contain metrics that affect the valuation of a company, and each metric’s weight has been appropriated based upon the importance of the variable from a buyer’s perspective. By using a ranking system based on a scale of -3 to 3, one can determine a number which can tell whether a company will sell below market value (negative), at market value (0), or for a premium (above market value), after weighting and summing. Once completed for all categories, the sum should be a number anywhere from -3 to 3 depending on the grading.
Designating rankings to a business in itself requires market knowledge, however we provide a description of each variable and what is considered to be a “-3” and a “3” for each metric, outlined in detail in an appendix accompanying the valuation matrix.
The valuation matrix is also a powerful tool for determining strategic plans. For example, once an owner calculates a final number, a number that is below 0 indicates that it may not necessarily be the right time to sell a business, and if considering retirement soon, owners should develop value enhancing strategic initiatives for the business in order to ensure an accretive exit as quickly as possible. Numbers closer to 1-3 are a good sign, and these owners should consider taking the next step by having an official valuation performed and most likely have multiple strategic options open to them.
We developed this matrix after several years of transactional experience where we were asked to prove or defend a client’s valuation premium. Our expertise in business valuations and our ability to understand how the market will perceive a company’s strategic initiatives from a valuation perspective allows us to assist our clients identifying all the options available to them in today’s market.
To receive a copy of the Valuation Matrix Excel Worksheet, email research@wyattmatas.com.
The Delineation of Home Healthcare: The Natural Evolution of a Healthy Industry
Tuesday, April 27th, 2010The Delineation of Home Healthcare
The Natural Evolution of a Healthy Industry
INTRODUCTION
The home healthcare industry faces many challenges, but one of the most significant issues is the delineation occurring between agencies. The division is happening between those agencies that are advancing towards becoming chronic care management companies and those agencies that are either choosing not to evolve or do not realize the shift that is happening in home healthcare industry and the overall healthcare continuum. In most industries this would be seen as a competitive win for those that are developing into a more complex model of care; however, the entire industry’s buy-in is necessary to take advantage of opportunities to push productive industry policies forward in order to become the center of the chronic care continuum. Because the industry is made up of mostly smaller providers, the industry’s national associations will likely waiver in their efforts to push home healthcare to the center of the chronic care management continuum, which many would agree is the best path for the industry and overall healthcare system.
There are two certainties for home healthcare and hospice: 1) reimbursement cuts will continue to be a constant threat to industry margins and 2) the large publicly traded companies will continue to get larger. Neither of these threats means the demise of the industry, but they will continue to change the dynamics of how small and mid-size agencies compete. From a positive prospective, the industry is well positioned to care for a wave of baby boomers with chronic diseases that will tax an ill-prepared healthcare system. To take advantage of an opportunity to become the healthcare continuum’s leader in chronic care management, home healthcare will have to consider how it is currently perceived in the healthcare system, evolve from basic home health care to true chronic care management companies and find industry leadership to effect policy change before stronger competing industries can marginalize the industry’s role.
The impact of chronic diseases on the U.S. healthcare system has been well documented. Over 130 million Americans are affected by a chronic disease, and this is expected to increase significantly as baby boomers reach an age where congested heart failure, chronic obstructive pulmonary disease and coronary artery disease are more likely to be diagnosed. The chronically ill account for 76% of all hospitalizations, which puts tremendous stress on an already burdened healthcare system. Specific to Medicare, 12% of the Medicare population accounts for 69% of the cost, with 96% of the Medicare expenditures spent on patients with more than one chronic disease.
The purpose of this white paper is not to make the case of chronic care disease management. Fortunately, the statistics clearly demonstrate the need for a proactive care management role for those with a chronic disease(s). Neither is this paper’s role to make the case for home healthcare to become the chronic care disease managers. To a large degree, the industry has steadily progressed in this direction through the development of successful disease management programs. The purpose of this paper is to highlight the bifurcation that is happening between those agencies that have the resources to develop into chronic care management companies and those that do not. We will also highlight the consequences for the industry that is dominated by small agencies that make up the bulk of the membership of the national associations. This situation could cause the industry to become frozen with indecision if it does not accept delineation as part of a sign of healthy life cycle of an industry.
HIGHER VOLUME/LOWER MARGINS WILL BE THE NEW PARADIGM
DEMAND FOR SERVICES
The acceptance of home healthcare as an alternative to lengthy hospital stays, nursing homes and other inpatient treatments has seen a steady compounded growth rate of over 8% since 2000. The growth rate is expected to increase to 10% through 2015 as baby boomers mature and government policies drive the use of home healthcare over higher cost inpatient care.
FIGURE 1.0 MEDICARE HOME HEALTH SPENDING (HISTORICAL AND PROJECTED), IN BILLIONS $
DEMAND FOR LABOR
This demand is encouraging for home healthcare agency owners and stakeholders; however, with demand for services, there comes a demand for staff. One of the biggest challenges most home healthcare agency managers face, even today, is finding enough qualified nurses and physical therapists to meet current service demand. In some areas of the country, they resort to using “travel staffing” agencies or referring the patients to other home healthcare companies. As demand for services increases, the demand for qualified staff will be exacerbated.
FIGURE 2.0 PROJECTED SUPPLY AND DEMAND FOR NURSES
According to the Bureau of Labor and Statistics, home healthcare services are projected to be the 4th fastest growing industry employers through 2018. This demand for staff will increase leverage of nurses and physical therapists to command higher wages and benefits, which will put direct pressure on gross margins for all home healthcare agencies.
CONTINUED PRESSURE ON REIMBURSEMENT
While the national healthcare bill has passed and provided the home healthcare industry with more reimbursement clarity, the threat of reimbursement cuts is far from over. The state of the U.S. healthcare system will require the government to continue to reduce expenditures, and home healthcare is an easy target because of poor representation in the Halls’ of Congress. The form these cuts will take are difficult predict, but business owners and managers of home healthcare agencies should certainly prepare to live in an environment where Medicare reimbursement will be under a constant pressure of reduction.
Likewise, Medicare Advantage Plans will also continue to reduce reimbursement rates, as the current White House Administration has made it clear that it will attempt to cap and even reduce Medicare Advantage Plans. In turn, Medicare Advantage Plans will look to recoup administrative costs, thus reducing reimbursement rates they are willing to pay to home healthcare agencies.
Reimbursement cuts, coupled with staffing shortages, will inevitability mean declining margins. This will make it more difficult for the small agencies to survive in what is already a competitive market. However, many agency owners believe the wave of baby boomers needing home healthcare services will drive volumes higher, although margins will be substantially lower than what they are today.
FIGURE 3.0 EBITDA MARGIN COMPARISON: CURRENT VS. PROJECTED
These reduced EBITDA margins obviously do not take into account tax obligations an owner or company would have to pay from remaining profits or working capital required sustain the business. After reduced margins, tax obligations and required working capital, very little capital remains to reinvest in innovative technologies or new efficiency initiatives.
If the thesis that home healthcare is headed towards a high volume, low margin business is correct, those companies that are currently innovating and investing in their infrastructure that will make them more efficient when margins are lower will be the ultimate winners. Those that are not will ultimately be driven out of the business or acquired due to poor cash flow.
OPPORTUNITY TO REVERSE THE LOWER MARGIN TREND
THE EVOLUTION OF CHRONIC CARE MANAGEMENT IN HOME HEALTHCARE
In reality, the evolution of chronic care management started when nurses first started visiting the sick in their homes in the early 1900’s. While it may not have been defined as such, home healthcare has been managing and coordinating the care of the chronically sick informally before most chronic illnesses were even defined. However, it wasn’t until the proliferation of new agencies in the mid 2000’s that home healthcare companies realized that they needed to find ways to differentiate the way they present their services to referral sources.
Home healthcare agencies, in general, are difficult for referral sources to differentiate from one to another. For instance, it is a standard presentation for an agency marketing person to offer up to a referral sources the following:
• We provide the highest quality of care
• We care about our patients
• We care about our staff
• We take all insurances
• We take referrals on the weekend
• We take any referral source
• We are financially stable
However, these statements, while reassuring, are not differentiators. In an effort to separate from the pack, Gentiva Health Services, Inc. began to develop specialty programs in the mid 2000’s that achieved two primary objectives for the company:
• Differentiated the company by offering identifiable “products” to referral sources
• Gave the sales force a set of definable services/specialty program to sell to specific referral sources depending on the referral source’s patient base
Gentiva has since taken these specialty programs, sometimes referred as disease management programs, and branded the programs, making it even more easy for the sales force to communicate the benefits of the programs. Some of these programs include:
• Gentiva Orthopedics
• Gentiva Safe Strides
• Gentiva Cardiopulmonary
• Rehab without Walls
Since the mid 2000’s, Gentiva has introduced over 400 specialty programs and now generates over 40% of its revenue from these programs.
FIGURE 4.0 GTIV: SPECIALTY PROGRAMS AND % OF MEDICARE HOME HEALTH REVIEW FROM SPECIALTY PROGRAMS Q2’08-Q4’09
PROLIFERATION OF SPECIALTY PROGRAMS/DISEASE MANAGEMENT PROGRAMS
As Gentiva and other home healthcare agencies began having success with referral sources by discussing home healthcare in terms of disease management programs, other agencies began to develop their own programs. Publications such as the Remington Report began devoting industry magazines and conferences to the topic and became thought leaders in the concept of chronic care disease management in home healthcare. Consulting firms from across the industry based their entire practices on assisting agencies on developing specialty programs to market to physicians and other referral sources. This acceptance of chronic care disease management in home healthcare has led to some very positive results for those agencies with these types of specialty programs, including:
• Improved quality scores,
• Elevated reputation among many referral sources that partner with home healthcare agencies with specific specialty programs, and
• Increased agency profitability due to increased patient acuity levels.
However, these specialty programs are quickly become a commodity in many markets, as most of the mid-sized to large companies now have disease management programs that they are marketing to referral sources. A simple example of this is the specialty program that has been developed for Medicare patients with balance issues.
FIGURE 5.0 PROLIFERATION OF SPECIALTY PROGRAMS
While the balance programs may not even be considered disease management programs by some, the point is that many of these programs are being marketed to referral sources by multiple agencies. The positive effect is elevating the conversation with referral sources that home healthcare is advancing towards managing the disease rather than just reacting to the episode; however, referral sources are starting to hear the same specialty program pitch as they did with the traditional story of home healthcare.
SMALLER AGENCIES BLOCKED FROM THE MARKET
Wyatt Matas & Associates defines small home healthcare agencies as those below $8 million in annual revenue. While there are exceptions to the rule, many smaller agencies have not invested in the development of specialty programs. In an informal survey of 35 agencies under $8 million in annual revenue, Wyatt Matas & Associates found that only four agencies had developed specialty programs. All four of those agencies admitted that they had seen little success in generating new referrals from marketing the programs.
Because of the explosion of these specialty programs, the marketing message of the smaller agencies is rarely heard by referral sources. The referrals they get are deeply rooted in personal relationships, most likely with the owners of the agency. Otherwise, the message is the undifferentiated message as discussed above. If they do have specialty programs, it is likely they do not have a properly trained sales force, if they have a sales force at all, that can penetrate the appropriate referral sources to market their programs or do not have the resources to properly brand their programs. The result is an agency that is most likely achieving the following results:
• Receiving the “undesirable” referrals
• Low acuity patients
• High rate of commercial insurance referrals
• Low profit margins
These issues tend to build on one another and lead to cash flow problems that limit their ability to invest in new technologies and develop their sales force and/or their infrastructure that would allow them pursue higher-level strategic initiatives. While many of these smaller agencies see the benefits of specialty programs and home healthcare’s evolution into chronic care disease management, most believe their ability to attain that level is unachievable.
THE CONTINUED EVOLUTION OF CHRONIC CARE MANAGEMENT IN HOME HEALTH CARE
Wyatt Matas & Associates believes that Amedisys, Inc., now the largest home healthcare agency by market capitalization, realized the commoditization of these specialty programs as early as 2007-2008 and began exploring different business models that would ultimately revolutionize how home healthcare is perceived. Around the same time, Wyatt Matas & Associates began pushing a business model of home healthcare that would look beyond the episode and manage a patient’s disease process from the start of an episode through end-of-life, if necessary.
In 2008, Amedisys CEO, Bill Borne, announced they had begun to evaluate a post-episode program called Encore. In the announcement, Mr. Borne commented:
• Healthcare is likely to move away from symptom-based care into coordinated care management.
• The Encore program is in development and allows Amedisys to provide care extension services to follow the patient post-discharge for a short period of time.
• The care management program tracks critical issues to prevent exacerbation of illness for which the patient was treated.
• Results in the reduction of emergency care in the follow-up period, which has been significant.
This was an early signal from the company that they believed the future of home healthcare responsibilities’ would not stop at the end of an episode. Since this time, the company has developed into what is probably the most comprehensive care management company.
The idea of home healthcare as the center of chronic care management is not a difficult argument to make. First, in most cases, home healthcare agencies give away care management or care coordination services for free. It is quite common during an episode of care for the patient, the patient’s family and even the patient’s physician to call on the home healthcare company for services that are not provided by the agencies. This puts the burden on the home healthcare company to identify a provider of the required service. Or in many cases, if there is a related health situation, the home healthcare nurse or agency is the first call rather than 911 or their physician. This is care coordination that is unbillable and often goes untracked by an agency and certainly does not show up on a cost report.
Second, there is a clear policy drive to reduce hospital readmits and hospitalizations. For instance, there are current pilot projects or legislative initiatives currently underway that include such projects as:
• Community–based Care Transition Programs:
• Hospital Readmission Reduction Programs
• Medicare Medical Home Demonstration
• Independence at Home—Relaxing of the Definition of Homebound
• Payment Bundling
There are publications that discuss these programs in-depth, so this white paper will not go into the validity of each program except to say that even the discussion of these programs brings closer the reality of a chronic care management program in the U.S. healthcare system. The question will be who will be at the center of the care coordination.
DESIGNING A CHRONIC CARE MANAGEMENT COMPANY
It is Wyatt Matas & Associates’ belief that in order for home healthcare to become the center of chronic care management, the typical home healthcare agency will have to evolve into an actual chronic care management company instead of just providing specialty or disease management programs. The reason for evolving into a care management company is the government (Centers for Medicare and Medicaid Services, CMS), insurance companies and other payor sources have to see it as a comprehensive service rather than just a short-term episodic solution.
To grasp this model, three concepts have to be considered:
• First, one has to discard the current definition of home healthcare and look beyond just episodic care and the definition of “homebound.”
• Second, it is also necessary to consider the entire disease processes that are most prevalent, such as DM, COPD, CAD and CHF. While there are certainly others that should be included, these four tend to be diagnosed because of other issues that may be treatable through the traditional episodic care model, but the major diagnosis needs to be managed past the episode.
• Finally, a chronic care management company is the care coordinator, the educator and the caregiver. Traditional disease management companies have stopped at educating their patients/members, which many have argued has been the reason why these companies have seen poor patient compliance and outcomes.
To fully understand chronic care companies, it is often better to examine each component of the model. We have provided a graphical model in “Appendix A” and discuss each component below.
In order to completely understand the model, it is appropriate to discuss the foundation of the chronic care management model and work up through each component:
Foundation of Chronic Care Management
Technology Platform: It is Wyatt Matas & Associates’ opinion that the technology platform will be the hub of the operations. The platform will allow the organization to scale, communicate with various providers, manage costs and provide evidence-based outcomes and resource tools that the care managers will use to solve and manage the disease processes’ of their patients. The technology will also need to provide the following:
• Point of care data entry
• An EMR system that is accessible by the physician(s)
• A cost of care collection system to be used to demonstrate how the company is lowering the cost of care for a particular disease
• Eventually the technology will need to communicate across provider platforms as the patient’s disease progresses
Telehealth System: Wyatt Matas & Associates makes a distinction between telehealth and telemonitoring. We define telehealth as a device that provides direct communication between the patient and the healthcare provider through a video-feed, whether that provider is a care manager, nurse, or physician. Telemonitoring is when a healthcare professional is monitoring reports generated from an in-home device, such as a patient’s weight, glucose levels, blood pressure, etc. While a telehealth monitor may provide the same reports and medication reminders as a telemonitor, the distinct difference is telehealth allows the healthcare provider to make an assessment of the patient through a video-to-video interaction. Wyatt Matas & Associates believes that a robust telehealth system will be required as a patient’s disease progresses in order to add value to the overall care management system. While telemonitors have their place in the continuum of care, we believe the CMS and insurance companies are more likely to reimburse for the interaction or the service provided through telehealth than the equipment provided via telemonitoring. As part of the overall company, the telehealth system will need to allow:
• Accessibility by the patient’s physician(s) and the family
• Integrate with the EMR system of the company’s technology platform
• In the future, vitals will be monitored 24/7 by a mobile devices via body sensors
Physician Involvement
Specialist and Primary Care: Because of the changing reimbursement environment for physicians, promotions of pay-for-performance among all healthcare providers and the developing initiatives surrounding the Medical Home Model, physicians are likely to be more incentivized to monitor their patients’ care in the home and not just at the time of the visit. This will require:
• More direct interaction with the patient in the home (perhaps through telehealth)
• More interaction with the care coordinators and in-home providers
• Electronic access to their patients’ records in order to monitor care remotely
Physician-Driven Care Management: While the home healthcare company may be the center of chronic care management, the physician will still drive the care. For this reason, we will suggest later in this white paper that it is advisable for the industry to partner now with the more powerful physicians’ association (AMA) to push this model forward.
Care Coordinator/Chronic Care Provider
The Chronic Care Management Company: Wyatt Matas & Associates believes the more advanced home healthcare agencies are already performing as chronic care management companies but are not reimbursed fully for all the services they provide. We also believe the industry will have to prove its value in order to push down the walls of the traditional episode of care provided by a home healthcare agency and possibly modify the definition of homebound status. Every year it is suggested that evidence should be gathered to demonstrate how home healthcare prevents readmissions to the hospitals by providing post-episodic care. To our knowledge the only company that is proving this model is Amedisys via their new contract with Humana. While they are not likely to share the data with the rest of the industry, they seem to be providing full-service care management services to Humana’s chronically-ill patients both from an episodic standpoint and post-episode, where appropriate. Amedisys used data collected from their Encore program, mentioned above, and took it to Humana and asked to be reimbursed a reasonable rate for a full range of services. A lesson for the entire industry.
Care Coordinator and Care Provider: In this model, it is contemplated that the care coordinator will also be the care provider. The patient may initially need the traditional home healthcare episode that the care coordinator may provide; however, when the patient is discharged from the episode, the care coordinator is still providing services to the patient which may include:
• Disease monitoring
• Care coordination of services, which may or may not be owned by the chronic care management company, such as:
• Home infusion therapy
• HME
• Diagnostic testing (possibly in-home, as ordered by physician)
Transitional Care: Transitional Care is a concept that has been discussed since the mid-2000’s where the patient has exhausted his/her home healthcare benefits, needs extensive medication management, but does not qualify for hospice. This is a natural extension of chronic care management and one where the patient has traditionally ended up in and out of the hospital or a nursing home.
Hospice: Many transitional care patients end up in hospice, and Wyatt Matas & Associates believes that many chronic care management companies own hospice care companies. While this may not be the case for all, the hospice industry faces similar challenges as the traditional home healthcare industry, increasing volumes and declining margins. However, the infrastructure of a hospice agency can be absorbed within this chronic care management model, therefore, insulating the margin erosion to some degree.
The Chronic Care Management Model allows the industry to catapult itself up the ladder of the overall continuum of care and become the center of chronic care disease management. The model allows the industry to capture more of the total revenue of the patient’s disease rather than just the episodic care revenue. At the same time, it reduces the overall expense burden to insurance companies and the government because it keeps the patient in the lower cost in-home setting rather than a hospital or long-term care institution.
THE DELINEATION OF HOME HEALTHCARE
As mentioned above, Wyatt Matas & Associates has been discussing this model since 2007, and others have discussed similar models for much longer. The question becomes why hasn’t this model become reality or a priority for the industry’s associations.
First, Wyatt Matas & Associates asked the industry providers if they were satisfied with their position in the healthcare continuum. This question, asked in a survey conducted by ChangingHomeCare.com sponsored by Wyatt Matas & Associates, was posed and the answers are provided in Figure 6.0
Figure 6.0 What Are the Biggest Threats to the Homecare Industry?
While the obvious threat is reimbursement cuts, it is also clear the industry is unsatisfied with its position in the overall healthcare continuum. This leads to the next question of whether home healthcare agencies really want to become more chronic care management oriented. In the same survey, we find the answer identified in Figure 7.0.
Figure 7.0 What Are the Biggest Opportunities for Homecare to Elevate its Position within the Healthcare Continuum?
Again, we clearly found that the industry is in favor of chronic care/disease management and programs that support a full service chronic care management model. So, why has the industry not progressed further down a path chronic care management? With all the supporting evidence from multiple publications, including Decision Health, Caring Magazine and The Remington Report, and the success several dozen home healthcare agencies are having with disease management programs, why hasn’t there been a concerted effort to push for home healthcare as the center of chronic care disease management? Wyatt Matas & Associates believes the lack of effort is caused by the make up of the industry, and we expect that it will continue to cause a further delineation between those home healthcare providers that have committed to chronic care management and those that do not. FIGURE 8.0 DELINEATION OF HOMECARE While the industry as a whole may say they want to become more chronic care focused, when smaller companies start to dissect the investment and skill-sets required to execute a chronic care management model, they often reject the idea. Especially because, to date, they may not be feeling the full impact of the lower margins that will certainly come to the industries in the near future. Therefore, they prefer to retain the profits or carve out their own niche and remain a small provider. Certainly there is nothing wrong with this approach; however, many would argue, for the betterment of the industry, a majority of home healthcare agencies will have to buy into the idea of evolving into chronic care management companies. Considering the lobbying and public relations effort it will take to transform the industry’s reputation, it could be argued that a clear majority would be needed. Getting a majority of home healthcare agencies to buy in poses a significant problem. Consider the make up of the industry as demonstrated in Figure 9.0. FIGURE 9.0 MARKET SHARE BY MEDICARE REVENUE WHEN ANALYZED BY PROVIDER NUMBERS OWNED With 66% of total agencies under $8 million in revenue, two issues should be considered: • It is likely that a majority of these agencies could not evolve into chronic care management companies and would go against an industry-wide effort to press for policy changes that might leave them with the lower margin home healthcare business. This second issue is most significant. Without a national association to support the efforts of a national lobbying campaign, one must ask how change will happen. Historically, home healthcare has had little to no national lobbying effort. It wasn’t until Gentiva, LHC Group, Amedisys, Bayada Nurses, HCR ManaorCare and Almost Family created the Alliance for Home Health Quality and Innovation (AHHQI) that the industry had any lobbying effort at all. While the Alliance has grown to include 10-15 companies, it far from represents the entire industry. Furthermore, home healthcare is not the only industry that is considering being the center of chronic care disease management. Certainly, disease management companies and even insurance companies have lobbied to have their solutions heard. But most significantly, hospitals represent the most direct threat. First, many hospital systems own all of the components necessary to effectively manage a patient’s entire disease. Second, they have a powerful lobbying machine that could minimize the homecare national associations and AHHQI. If this were to happen, and the home healthcare industry had no lobbying momentum in pushing to become the center of chronic care management, home healthcare would be relegated to a component of the continuum, as it is now, and the industry would meet its destiny of becoming a high volume, low margin business if it can get any referrals at all from the hospitals. The recent national healthcare legislation is a prime example of the reactive lobbying effort of the home healthcare industry. This should be a wake up call for each provider and the national associations. The future problems of moving the industry forward will be internal. Smaller providers will resist change because they may not be able to participate; however, it is likely, with margin erosion on its way, they will not be able to participate anyway. The delineation of home healthcare should be embraced, and those that can move forward should. This is an inevitable part of the life cycle of a healthy industry. PROPOSED SOLUTIONS TO MOVING THE INDUSTRY FORWARD Wyatt Matas & Associates is an investment firm and does not have expertise in formulating legislative policies. However, we have extensive experience in strategy development and in the home healthcare and hospice industries. This base of knowledge has come from advising clients developing and executing growth strategies on behalf of large and mid-sized companies. In preparing this paper, we surveyed over 900 home healthcare stakeholders and personally interviewed dozens of agency owners and industry participants. While the solutions we provide below represent our own opinions, they are a compilation of results from the survey and interviews we sponsored and conducted. STRATEGIC INITIATIVES FOR THE HOME HEALTHCARE INDUSTRY TO BECOME THE CENTER OF CHRONIC CARE DISEASE MANAGEMENT: • Home healthcare agencies with the capital to do so should begin building a chronic care management model.
• If the industry is dependent on the national associations to lobby for these changes, and if Figure 9.0 is representative of their membership, the national associations would have to go against a majority of their membership to lobby for policy changes that would create home healthcare as the center of chronic care disease management.
• The National Association for Home Care and Hospice should start a post-episode data collection center for agencies to report specific data that can be used to for lobbying CMS and Congress.
• Home healthcare agencies, as part of the above, should design post-episode follow-up calls/visits to their patients to collect data that will support the idea of chronic care management.
• Smaller providers that cannot or choose not to participate as chronic care management companies will have to accept lower margins or be acquired.
• The National Association for Home Care and Hospice will have to choose to do what is right for the long-term future of the industry, while that might mean going against a majority of its membership.
• The National Association for Home Care and Hospice will have to decide whether it will lead the industry or be a follower of the Alliance of Home Health Quality and Innovation. We hope they will lead and hire an outside lobbying group to provide a consistent and comprehensive lobbying effort.
• No matter who leads the lobbying effort, we believe an alliance will need to be made with other more powerful groups that may include American Medical Association.
• Other alliances that might be considered could include the American Homecare Association, National Home Infusion Association and the American Association of Homes & Services for the Aging, all of which would benefit from the home healthcare industry being the center of chronic care disease management.
WESCO International, Inc. Company Coverage
Monday, April 5th, 2010WESCO International is a distributor of products and supply chain services for the industrial, construction, utility, commercial, and government markets. With 400 full-service branches and over 1M products, WESCO is a major player in the distribution market. Due to a number of factors, including softening demand in construction markets, rising commodity prices, and an eight-year low in industrial demand for power, WESCO experienced somewhat disappointing margin performance in 2009, leading management to engage in a series of strategic cuts, including reducing headcount by 16%, reducing the number of branches, and enacting a number of discretionary spending freezes.
Despite the challenging market conditions and overall reduction in SG&A, management invested aggressively in the front end of the business, expanding the sales force by 5% in 4Q09. WESCO generates more revenue per employee compared to its industry peer group. Additionally, management organized a dedicated group to identifying opportunities to capitalize on the federal stimulus. WESCO also expanded international operations by establishing subsidiaries in China, Australia, and Africa. Overall, analysts are optimistic about the company’s future financial performance, growth opportunities, and overall direction and management.
WESCO has a strong history of deal activity. Due in large part to the overall trend in the distribution market towards increased consolidation, WESCO has been active, completing 34 deals since 1998, seven of which have been completed since 2004. Currently, WESCO holds 7% market share. Management notes that the economic downturn has negatively impacted the smaller players in the distribution industry, who may be looking to WESCO as a potential buyer. While the company remains open to accretive acquisitions, management is also firm in their stance that any potential deal must meet their profit expectations. WESCO is not currently engaged in an ongoing acquisition.
Revenue in 2009 was down 24% compared to 2008, due in large part to serious declines in WESCO’s major markets. Operating margins declined to 3.8% in 2009 from 5.4% the previous year. While gross margin was steady QoQ at 19.2%, this was down 70bps from the previous year, due largely to inventory reduction and less volume rebates. SG&A was down $140M from 2008, a 17% decrease. While some of this reduction was due to discretionary spending freezes on bonuses and similar line items that are expected to return in 2010, the company did manage to realize savings of approximately $70M in net permanent structural cost reductions. WESCO’s liquidity is solid, with analysts estimating the company is capable of generating approximately $75M in free cash flow in 2010. Management anticipates 2010 capital expenditures will be approximately $20M for growth initiatives. Additionally, management intends to convert 85% to 90% of 2010 net income to free cash flow.
Protecting Confidentiality Throughout the M&A Process
Monday, April 5th, 2010A confidentiality agreement is typically the first agreement entered into by the parties considering a potential merger or ac¬quisition. While seemingly straightforward, the issue of confidentiality is often critical to the success or failure of the transac¬tion. Both buyers and sellers have several key reasons to be concerned about confidentiality, including client/customer and employee reactions, market intelligence, and competitors.
2010 continues to show signs that merger and acquisition activity will increase, such as increased confidence in private and public sectors, companies with plenty with cash on hand, and improving economic indicators. As such, sellers in 2010 and 2011 can reasonably expect that they will encounter an M&A market with multiple targets looking to be acquired and an increased number of buyers looking to pay better multiples.
Wyatt Matas & Associates expects strategic buyers (competitors or those in similar businesses as the seller) to be the most active buyers and be willing to pay bet¬ter valuations. Financial buyers are still reliant debt markets to finance much of the transactions, which have yet to work themselves out. To this end, managing the vetting of the buyer, due diligence, and transaction process while maintaining confidentiality will be very difficult and more important.
Given the challenges in protecting confidentiality, companies should consider the following to help mitigate risk, manage confidentiality, and ensure a smooth transaction process.
While a confidentiality agreement is typically the first agreement to be entered into during a M&A transaction, the importance of confidentiality starts when the seller decides to pursue a sale.
The following are key points for confidentiality in the beginning of the M&A process:
Limiting exposure early on is key. Those sellers that plan on using an M&A advisor should be careful to pick an advisor that can access key decision makers directly. Do not sign with a broker that “lists” businesses for sale on websites, blast faxes or emails. These approaches are typical for business brokers. The vast majority of responses to business-for-sale advertisements are not serious or qualified. Businesses need to protect exposure to only serious buyers during this process. A broker will place a blind ad to attract interest and prematurely divulge information before appropriate buyer due diligence has been preformed. Typically, an investment banker will vet a potential buyer before contacting them and have the credibility to access C-level executives directly, assuming the strategic route is the preferred strategy. This allows for a frank conversation about the real interest of the potential buyer and how confidentiality will be handled within the buying company.
Identify potential warning signs early in the process. While time consuming, the potential buyer vetting process is critical to protect confidentiality. If asked in a blind call without the appropriate due diligence, most potential strategic and financial buyers will initially express interest in reviewing the seller’s “selling documents,” if only to gain insight into a competitor or industry. While these selling documents are a necessary part of the acquisition process, only those qualified buyers should receive such documents. The vetting process should serve to identify potential buyers’ business plans, legal structures, competition approvals, and other strategic considerations that could potentially enhance or derail the deal later.
Avoid premature disclosure. As mentioned above, it is necessary to disclose certain information about the seller’s business in order to have productive conversations with potential buyers. However, sellers have significant motivation to avoid the premature disclosure of certain information that might do irreputable harm to the business if the transaction does not close or if they do not decide to sell. Failing to manage the release of information or preparing for the inevitable rumors surrounding a deal can result in several unfavorable consequences:
• If employees learn their company is looking to sell, they may quit out of fear of the unknown. Disruptions in staff or operations can serve as a deterrent to potential buyers to continue the deal.
• Competitors may use the information to undermine your company’s standing with clients/customers and other business partners by painting an air of weakness or uncertainty.
• If there are negative issues within the selling company that will eventually need to be disclosed to a potential buyer, managing the release and positioning of that information is essential to preventing the derailment of the transaction.
Maintain confidentiality throughout the transaction. Confidentiality does not stop with the introduction of the selling company to one or multiple buyers at the start of the acquisition process. Protection of confidentiality continues through the transaction process all the way through the closing of the potential deal. This requires some give and take from both the buyer and seller. The seller wants to be assured that the transaction will close on the terms agreed to in the letter of intent, and the buyer wants to be assured that they are buying what they were presented during the pre-LOI stages. Protecting confidentiality during this stage of the transaction requires a firm hand on the seller’s part where appropriate, but a willingness to compromise once milestones are hit by the potential buyer.
If a transaction is being managed properly, weekly calls between the buyer and seller will take place to update each side on the progress of the transaction. Part of the weekly agenda should be a discussion of confidentiality issues that might develop in the coming week. This reminds the buyer that confidentiality is important to seller and addresses how to proactively handle specific areas of concerns before they occur.
Ensuring confidentiality in the M&A process is key for a successful deal. While deals typically do not suffer from too much discretion, a failure to limit exposure, manage information, and protect information can derail a transaction and have negative consequences for a company. Enlisting the services of an real advisor helps to ensure appropriate confidentiality throughout the transaction.
Odyssey Healthcare, Inc. 1st Quarter Company Coverage
Wednesday, March 31st, 2010Quarterly Overview: Odyssey Healthcare turned in a record quarter that can be attributed to expense management, lower Medicare cap rates and a reduction in bad debt expenses. Aggregate admissions were up 4%, but same-store-sales were up only 1%. Q1’10 admissions were 12,744 patients, while discharges were 12,692. The specialty programs continue to be a major focus for the company’s marketing effort; particularly, their COPD specialty program. These programs enhance care by assessing patient needs based on their terminal diagnosis. The programs give Odyssey the ability to expand acuity capabilities, allowing for a greater gain of market share through diversification of services. Odyssey has developed four other programs that it intends to release over the next few quarters in an effort to jump start admissions. The Company changed its corporate logo, but indicated it remains committed to keeping its local brands of VistaCare, Avalon and Odyssey Hospice. The Company is spending a significant amount of time and effort to better train the local sales force. This includes training on the CareBeyond specialty programs and developing a marketing dashboard. The marketing dashboard will give local sales people daily feedback, goal progression and access to referral information and tips on how to market to them. With the Company’s success of managing the expense side of the P&L, they are clearly turning their attention to growing the revenue side.
Acquisitions and Market Developments: Odyssey completed no acquisition in the 1st quarter; however, the company said it was active on the business development front. Most of the discussions are in the early states with nothing imminent. Management remains very price sensitive, as they should with their own Enterprise Value/EBITDA trading at only 7.06 times. While this shows discipline, it also suggests there is a disconnect between buyers and sellers with sellers’ expectations above reasonable market valuations. The Company did consolidate two Medicare provider numbers into one and had two programs certified by Medicare (OR and CA). The Company now operates 92 Medicare certified programs. According to the recently filed 10-Q, Odyssey received an administrative subpoena for records from the HHS Office of Inspector General (OIG) requesting various documents and certain patient records of one its hospice programs relating to services performed from January 1, 2006 through December 31, 2009. These types of issues tend to work themselves out and do not seem to be a distraction for the company.
Financial and Operational Performance: Total revenue increased yr/yr by 2.4%, but was down 1.1% sequentially to $171.5M. Net patient revenue per day was $154.63. The average daily census (ADC) has only grown only 1% from the prior year; however, operations are now significantly much more efficient, and the company has improved cash flow. We expect management to turn more of its attention to growing its ADC whether organically or inorganically. Average Length of Stay (ALOS) was up to 87 days, which was up 4 days both sequentially and yr/yr. This is was primarily due to patient mix. Gross margins reached 43.8%, its highest level since Q2’05. Primary contribution to this margin improvement has been the use of technology by field staff. G&A expense also declined to 27.4% of revenue as the company leverages its corporate and program overhead. Adjusted Operation Expense Per Patient Day was $132.03 for the 1Q’10 compared to a year ago, $137.19/Patient Day. The improvements in GM and G&A expenses resulted in record EBITDA margins of 14.6% of revenue. Long-term, management believes EBITDA margins will run in the 13%-13.5% range. Odyssey continues to hoard cash, accumulating another $11.9M in the quarter. This was primarily achieved through improved expense management and a reduction of DSO from 58 to 56. Currently the Company has in excess of $141M of cash on hand and plans to pre-pay $29 million in debt in 2Q’10.
2009 Deal Point Analysis Study: Comparing Comparing Deals Comparing 2006 to 2008 Transactions
Friday, March 26th, 2010The study analyzes publicly available acquisition agreements from transactions completed in 2008 and 2006 that involve private targets being acquired by public companies. Final study sample of 106 acquisition agreements excludes agreements for transactions in which the target was in bankruptcy, reverse mergers, and transactions or otherwise deemed inappropriate for inclusion. Transaction values range from $25-$500M.