New Proposed Home Health Rules Helps 'Big Guys,' Boosts M&A Outlook, SunTrust Says

The Centers for Medicare and Medicaid Services (CMS) released this week its proposed 2016 home health reimbursement rule that includes the industry's annual update and a framework for the implementation of value based purchasing. The proposal is calling for a 1.8 percent cut in 2016, 1.72 percent of which is tied to a two-year phase.

In a report published Tuesday, SunTrust Robinson Humphrey analyst David MacDonald commented on the proposed rule which he described as "a bit disappointing" but the value based purchasing (VBP) "inherently favors larger players with likely better clinical outcomes."

MacDonald noted that in addition to the annual update, CMS also proposed a framework for the implementation of value based purchasing beginning in 2016. VBP would put at risk a growing portion of reimbursement (5 to 8 percent) from 2018 to 22 and would be based on performance. The analyst said performance will be scored based on 10 process measures (including timely initiation of care), 15 outcome measures (such as improvement in pain interfering with activity) and four new measures (e.g. adverse event for improper medication administration).

MacDonald added that the estimated savings of around $380 million from VBP are projected to come from decreased SNF usage/unnecessary hospitalization and not changes in payments to home health agencies.

"We view it as highly likely that clinical outcomes at the large public players stack up quite favorable and that these companies are the ultimate winners in an environment with an increased portion of reimbursement tied to quality of care," MacDonald wrote.

MacDonald further noted that a move towards an outcomes based reimbursement environment is a "positive" for the "larger, more sophisticated" providers and could result in "incremental pressure" on smaller operators.

Finally, the analyst suggested that the increased scrutiny and transparency around quality of care will drive incremental merger and acquisition opportunities in an already "frothy" environment.

MacDonald's favorite names in the group remain Amedisys Inc (NASDAQ: AMED) (Buy rated, $44 price target), The Ensign Group, Inc. (NASDAQ: ENSG) (Buy rated, $58 price target) and HealthSouth Corp (NYSE: HLS) (Buy rated, $54 price target).