As it expands its home care business, Addus faces managed care and M&A challenges

Addus HomeCare Corporation (Nasdaq: ADUS) wants to continue to grow its personal care and home health segments, the former being its largest segment and the latter its smallest.

This has been her plan for some time, but the surrounding factors around these goals continue to change.

For example, after the CY2023 payment rule for 2023 was finalized last fall, Addus believed he would have more options for home health care.

But instead, its leaders are facing a trend that is hindering M&A in the home healthcare industry as a whole. This is the valuation gap between potential buyers and sellers.

Buyers see the industry facing a reduction in reimbursement this year and possibly beyond at a time when debt is more expensive. Sellers, on the other hand, point to past valuations and past performance.

“I think the real question is what sellers and buyers think,” Addus Chairman and CEO Dirk Ellison said Tuesday at the company’s fourth-quarter earnings report. “I don’t know if all sellers today have come to the conclusion that they have taken into account that there may be limits on rate increases in the future, and therefore their price expectations may still be a little high.”

Ellison acknowledged that there is still a lot to decide and that the severity of future rate cuts – or the certainty of it – is still up in the air.

“I think we as buyers … we are trying to be very careful and strategic about how much we pay for deals until we really understand the decision,” he added.

Addus’s same-store home health segment revenue grew 8.3% year-on-year, though this was mainly due to the company prioritizing episodic cases and moving away from non-emergency referrals.

In this note, as in Enhabit Inc. and other home care companies, Addus has a managed care team that works to improve home health care contracts with health insurance plans.

“If they want to have adequate coverage for their beneficiaries, they need to do something about the rates,” Addus President and COO Brad Bickham said by phone. “We approach it this way: let’s try to achieve some short-term victories. Let’s adjust these non-episodic rates according to our position when we can start accepting these referrals and they can become profitable for us. And then, at the same time, let’s look at a longer-term solution, which is that we need to move to an episodic type of rate that is more comparable to the Medicare service fee.”

But as a service line, home health care only makes up about 5% of Addus’ revenue. In the fourth quarter, the company’s revenue was about $13 million.

However, Addus’s interest in home health care isn’t just about growing in a vacuum.

“We continue to delight in home health care work as it complements our personal care services, especially where we participate in value-based contracting models,” Ellison said.

Total revenue for the quarter was $247 million, up 10% year-over-year. For all of 2022, Addus earned $951 million, also up 10% from 2021.

Personal care revenue was over $183 million, up almost 5% year-over-year. However, the increase was mainly due to positive rate adjustments in the markets served by Addus.

“Over the past three years, most of our growth has been in the same store in [personal care services] was due to higher rates in our states,” Ellison said. “Due to disruptions caused by the pandemic, hourly growth has been more challenging.”

Extended federal Medicaid rates that states received due to the public health emergency will begin to be phased out at the end of March. But Ellison believes the states she serves are in a “much stronger financial position than they were before the pandemic.”

“It’s been an industry-wide struggle for the past two, two and a half years,” Ellison said. “And now that we can hire more people, they’re back to work, we can make them work. [to see this] hourly growth and then add to that just normalized speed effect. We believe that 2023 will be a good year for us.”

Numbers for hire

Working conditions continue to improve, Addus executives say. But every segment is not equal when it comes to hiring.

In the fourth quarter, the number of hired employees per working day increased by 10% compared to last year. This trend continued into January and February 2023, according to the company.

“Part of our improved hiring results were due to the recent investment we made in an applicant tracking system that allows us to better interact with potential hires as well as reduce the time between application and hiring,” Ellison said. “We are continuing to roll out this system across all of our facilities and this process should be completed in 2023.”

However, hiring in home health care and hospices lags behind personal care.

Although there was an increase in the number of employees in clinical settings in the second half of 2022, this was more evident in the hospice, Ellison said.

“There are some geographic areas where both the hiring of doctors and the pressure on wages continues,” he said. “But in general terms and conditions of employment have certainly improved and we expect this trend to continue in 2023.”

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