Home Health Market Overview December 2013 Investment banking services are provided by Harris Williams LLC, a registered broker-dealer and member of FINRA and SIPC, and Harris Williams & Co. Ltd, which is authorised and regulated by the Financial Conduct Authority. Harris Williams & Co. is a trade name under which Harris Williams LLC and Harris Williams & Co. Ltd conduct business.
Large, Rapidly Growing Market Home health is a $30 billion industry, with over 12,000 Medicare certified home health agencies ( HHAs ). Introduction of the Prospective Payment System ( PPS ) in 2001 ushered a rapid expansion in number of HHAs. Over 2,000 new agencies have been added in the last five years The market remains very fragmented with over 50% of HHAs generating less than $3 million in Medicare revenues. Larger agencies are actively consolidating to spread fixed costs across broader populations Large, Growing Market Total Home Health Spend Number of Medicare Certified HHAs ($ in billions) (000 s) $60 $50 $40 $30 $24 $26 $28 $30 2010-2019 CAGR: 9.1% $34 $38 $40 $45 $49 $54 14 12 10 8 6 7.1 7.3 7.8 8.3 9.0 2002-2012 CAGR: 6.0% 9.4 10.0 11.0 11.5 12.2 12.7 $20 4 $10 2 $0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: RBC Capital, NAHC Source: BB&T Research, MedPAC, NAHC 1
Demographics and Cost Advantages are Driving Utilization Key underlying demographic trends and compelling cost-saving opportunities are driving strong demand for home health. Home health provides a cost-effective alternative to facility-based care and has been proven to provide equal efficacy. Represents ~20% of the cost of skilled nursing facility care and ~5% of the cost of hospital-based care Favored by payors as they are focused on containing costs while providing quality care for chronic patients Favored by patients because they prefer receiving care in the familiar setting of their own homes Industry is poised for continued growth as the population of people over 65 years old is expected to expand by over 40% by 2020, as the baby boomer generation ages. Today, home health and hospice make up over 35% of post-acute care destinations for Medicare patients. Compelling Home Health Cost Advantages Treatment Cost by Setting $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0 Source: NAHC $3,250 (Average) Acute-Care Hospital $1,500 (Average) $725 (Average) $450 (Average) $150 (per day) Care treatment costs per day are 95% less than in acute care setting $50 (per day) LTACHs IRFs SNFs Hospice Home Health (Episodes in millions) 9 8 7 6 5 4 3 2 1 0 4.1 4.5 Number of Home Health Episodes of Care 4.8 5.2 5.5 5.8 6.1 6.6 6.8 6.9 7.0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: MedPAC, HW&Co. Analysis 2002-2012 CAGR: 5.5% 2
Home Health Reimbursement The home health reimbursement process is complex, with numerous operational and regulatory challenges. Under the current PPS, Medicare pays HHAs a base rate for services provided over a 60-day episode of care. Base rate is adjusted according to the intensity of care delivered and the frequency of visits. Assuming appropriate documentation is filed, 60% of expected reimbursement is paid in approximately two weeks after receiving the Request for Advanced Payment ( RAP ) (50% for recertified patients) and the remainder is paid upon discharge or at the end of an episode. Payor Mix Typical Home Health Workflow Private / Other 7.0% Typical 60-Day Episode of Care Referred Patient Intake and Admissions Prepare Plan of Care Care Delivery Discharge Outcomes Measurement Medicare / Medicaid 93.0% Medicare is the primary payor for home health Prepare OASIS Assessment to qualify patient for home health Assign Caregiver responsible patient s care Physician Approval required for reimbursement Submit RAP to begin payment process Recertify, if necessary Document Visits to ensure plan of care is followed Coordinate with care team to ensure quality care Receive remaining HHRG Reimbursement ~70% of home health patients are senior citizens Patients average three or more impairments with daily living activities Key Home Health Statistics Patients average 4.2 medical diagnoses each Over 3.3 million Medicare beneficiaries receive home health services Over 400,000 licensed or registered nurses, aids, and other practitioners provide care ~89% of seniors prefer care at home 3
Number of States Increased Regulation and Reduced Reimbursement Home health is expected to continue to operate in a challenging reimbursement environment, which will drive M&A activity. CMS recently issued the CY 2014 final rule for home health rebasing. Net payment reduction of 1.1%, including a negative 2.7% rebasing adjustment (the maximum allowable under the Affordable Care Act). 170 ICD-9 codes removed due to their acute nature Since 2009, Medicare home health funding has been reduced by over 20% Policy makers have finalized rebasing plans for the next four years. Policymakers continue to perceive the system as encouraging overutilization and overpayment Rebasing will occur at the maximum rate allowed by the Affordable Care Act (2.7% annually for four years starting in 2014) Timeline Impact of Rebasing to Average Industry Margins Regulation 2010 2011 2012 2013 2014 2015 2016 2017 Face-to-Face Functional Assessments / Therapy Reassessments GAO Report on Increased CMS Oversight 50 40 30 20 6 11 23 35 44 39 27 Reimbursement Recovery Audit Contractors (RAC) and Zone Program Integrity Contractors (ZPIC) Rebasing and Rate Cuts 10 0 2014 2015 2016 2017 15 ACOs Readmission Penalties Additional Readmission Penalties Average Margin All States: 8.6% 4.3% (0.2%) (5.0%) Positive Margin Negative Margin Source: Partnership for Quality Home Healthcare Note: Maximum allowable rebasing adjustment under the Affordable Care Act is negative 3.5% from 2010 levels, which equates to 2.7% from 2013 levels 4
Fragmented Market with Significant Consolidation The need for greater scale, operational efficiency, and comprehensive care delivery capabilities is driving market consolidation. Highly fragmented market with over 50% of HHAs generating less than $3 million in revenue. The home health industry is competitive and experiencing consolidation. Reimbursement pressures will reinforce the consolidation trend driven by the need for scale and better operating leverage to maintain and increase profits. The opening of new agencies is limited in states that possess a Certificate of Need ( CON ), driving established players to make acquisitions in order to gain access to those states. Non-CON states also have a high number of small, undercapitalized agencies that present additional opportunities for consolidation in the industry. Representative Home Health Companies Acquired Since 2008 Select Home Health Consolidators Home Healthcare Connection Over 130 acquisitions in the last 5 years Radiant Healthcare Services 5
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