Financial report says outlook for home care is not good

By MEREDITH BONNER

HHBR Editor

A recent HealthCare Markets Group (Hilton Head, SC) report on the financial performance of public healthcare companies shows what many players in the home health field have known for a while: the home care industry is in financial trouble.

John Cumming, a managing director at HealthCare Markets Group, told HHBR that there have been many consolidations in the industry over the past several years that have not been effectively managed.

"That could be, in many instances, that the companies paid too much for acquisitions and ended up not getting the economies of scale they thought and, consequently, have suffered," he said. "And overlay on top of that the fact that the BBA has cut back on revenues, which cut back on earnings. The industry is in considerable trouble."

The report compares the 2Q99 revenues and earnings of public healthcare companies, including home health companies, to 2Q98 revenues and earnings. The report includes comparisons of each of the past four quarters with the respective quarters of the previous year.

According to the report, adjusted earnings, adjusted for various one-time events, for the home health sector were not calculable, on a 5.8% increase in revenues. Pro vi sions in the Balanced Budget Act of 1997 (BBA), affected the home health segment’s quarterly revenues and earnings, the report said. By way of additional comparison, 1Q99 adjusted earnings declined 51.7%, on an 8.9% increase in revenues. 4Q98 adjusted earnings were not calculable, on a 5% drop in revenues, and 3Q98 adjusted earnings were not calculable, on an 8.5% decrease in revenues. In addition, 2Q98 adjusted earnings were not calculable, on a .6% decrease in revenues, and 1Q98 adjusted earnings were not calculable, on a .8% decline in revenues.

Cumming said home health companies have had two primary problems that have caused the losses and drop in revenues, including companies not being able to realize the economic synergies from acquisitions, and problems caused by the BBA.

"Companies like American HomePatient (Brent wood, TN), Housecall Medical Resources (Atlanta), and Home Health Corp. of America (King of Prussia, PA) all had problems because they had accelerated growth and were not effectively able to manage it," said Cumming. "When companies are not getting any economies, and are seeing reduced reimbursement, nothing good can happen and it hasn’t."

Housecall and HHCA are no longer publicly trading, and HHCA filed for Chapter 11 bankruptcy in February. The decline in Medicare reimbursement has negatively effected AHOM’s quarterly earnings in FY99. The company was delisted from the Nasdaq National Market in July and has been trading on the Over-the-Counter Market.

But even worse is the news that Cumming said he doesn’t see the sector’s difficult time getting any better. Cumming told HHBR he is not sure the companies are going to be able to turn around from the financial debacles.

"That is real negative, but I’m not sure they can," he said. "I think the government is going to kill the golden goose. It is going to have to roll back some of these reimbursement reductions. There is some pressure now, and I’m hoping for that."

But it is not all up to the federal government.

"Companies are going to have to take some better approaches to running themselves," Cumming said. "They are going to have to do business a lot leaner. And this could affect quality patient care we don’t know yet. But in the end, they will be the ones to suffer."

Among publicly traded companies in the entire healthcare industry, 2Q99 adjusted earnings increased 11.7%, on a 12.7% growth in revenues. By comparison, 1Q99 healthcare industry adjusted earnings increased 15.3%, on a 14% jump in revenues, 4Q98 adjusted earnings increased 21%, on a 16.3% jump in revenues, 3Q98 adjusted earnings increased 14%, on a 14.3% hike in revenues, and 2Q98 adjusted earnings increased 11.5%, on a 14.3% growth in revenues.