The change in agreement with Humana Inc. (HUM - Free Report) led to a decline in the share prices of Amedisys (AMED - Free Report) – the leading U.S. player in the home health and hospice segment – by 9.38%, to $12.08 yesterday. As per the new contract with Humana, one of the largest health care plan providers in the U.S., Amedisys’ revenue level will be trimmed by approximately half of the original amount generated. Amedisys expects this revenue cut to impact its fourth quarter 2012 sales performance. However, the full impact will take place in fiscal 2013.
The earlier agreement with Humana was used to pay back Amedisys on a per–episode basis and contributed about $65 million to $70 million in annual revenue for the company, representing 4%−5% of its total revenue. As per the new agreement, Amedisys will be reimbursed by Humana on a per-visit basis. According to Amedisys, the original contract had greater scope compared to the recent one as it used to cover more markets.
Earlier in July, Amedisys received a notice of termination for its episodic-based national home health services provider agreement with Humana. Notably, revenue from patients admitted under the existing Humana agreement was 5% of total net service revenue in the last reported quarter. Although the process of renegotiation fetched an entire new contract, we consider this to act unfavorably for Amedisys and expect it to create further bottom-line pressure in 2013.
Amedisys is already suffering from near-term pressure associated with substantial reimbursement headwinds with a Medicare home health reimbursement cut for 2013. In July 2012, Centers for Medicare and Medicaid Services (CMS) issued a proposed rule to update and revise Medicare home health reimbursement rates for the calendar year 2013. The proposed rule includes a 2.5% market basket increase, a 1% reduction mandated by the PPACA, and a negative 1.32% case-mix adjustment.
Amedisys competes in a fragmented industry with a number of small local providers. Further, the company has a strong reputation for high-quality service and positive patient outcomes. In most cases, the company leverages this reputation by branding both new and acquired offices with the Amedisys name. Since the home healthcare business relies heavily on referrals, name recognition and reputation are invaluable.
Although reputation takes time to build up at the local level, management hopes that its disease management programs and quality of care will differentiate the company from its peers and yield more referrals in the long run. We believe that the ongoing reimbursement uncertainty could force Amedisys to refrain from acquisitions leading to further deteriorating growth trends.
Moreover, Amedisys faces stiff competition from the home health agencies and bigger companies like National HealthCare Corporation and Gentiva Health Services . Currently, Amedisys retains a short-term Zacks #3 Rank (Hold).