In its early days some 40 years ago, hospice entered the U.S. healthcare system quietly, providing end-of-life care to patients inside church basements. No longer just a cottage industry, it has evolved into a lucrative business so attractive that home health company Gentiva Health Services announced last week its plans to acquire one of the nation's largest hospice companies for $1 billion.
Capitalizing on an aging population and a common patient base, Gentiva expanded its reach in the hospice segment on May 24 with its planned purchase of Dallas-based Odyssey HealthCare for $27 per share, a 40% premium to the stock's then previous closing price. If the deal is completed as expected in the third quarter, Gentiva will have a combined average daily patient census of 14,000 and operate in 30 states, making it one of the nation's largest hospice providers. Meanwhile, Gentiva said it expects more than $1.8 billion in annual revenue, based on 2009 figures from both companies. The size of the deal came as a surprise to some, including those who remember when hospice started small.
But those days are gone after hospice experienced robust growth in the past decade, especially in the past five to seven years. More than 1 million Medicare beneficiaries received hospice services from more than 3,300 providers while Medicare expenditures exceeded $11 billion in 2008, according to the Medicare Payment Advisory Commission. After Odyssey, the other big players in the segment include Miami-based Vitas, a subsidiary of Chemed Corp.; Manor Care in Toledo, Ohio; SouthernCare in Birmingham, Ala.; Amedisys in Baton Rouge, La.; and nursing home provider Golden Living, based in Fort Smith, Ark.
“If you look at any of the MedPAC numbers, it's clear you've had an almost fourfold increase in Medicare expenditure,” said Darren Lehrich, an analyst who covers Gentiva for Deutsche Bank. “At the same time, there has been a general endorsement of the benefit itself,” he said, adding that end-of-life care “can prevent hospitalizations or other, more expensive institutionalized settings and allow the patient to progress in a terminal disease in the comfort of their own home. There's no question that the for-profit sector has played a big role in the industry throughout the last 10 years.”
That's what MedPAC reported to Congress in March, when the commission said the number of hospices has grown by 47% from 2000 to 2008, as for-profit providers accounted almost entirely for the increase (See chart, p. 16). The study also noted that hospice programs increased in all settings except for hospital-based programs. New research, however, shows that hospitals are seeing growth in palliative-care programs (See p. 30). The primary difference between the two types of care is that hospice focuses on terminally ill patients with a life expectancy of six or fewer months.
The ‘perfect marriage'
The Gentiva-Odyssey deal is a “perfect marriage” for both companies, according to Donald Schumacher, president and CEO of the National Hospice and Palliative Care Organization in Washington. “It is a part of what we'll be seeing in our industry more and more—organizations joining forces as they build their footprint in the home health and hospice world,” he said. “So this is the beginning of changes we'll see.”
For its part, Gentiva saw four strategic issues that it found attractive in Odyssey, according to remarks from Gentiva President and CEO Tony Strange in a May 24 conference call with analysts. First, home health and hospice share a common patient base. And with the size of the 65-and-older population growing at a rate that is 3½ times faster than the rest of the population, there are home health patients who will receive hospice in the future, Strange said in a transcript of the call.
Next, the two segments share a common customer base, as referral sources that care for home health patients also care for potential hospice patients. This would allow Gentiva to leverage customer relationships across multiple business lines, Strange said. The deal also allows Gentiva to diversify its business line as the healthcare industry braces itself for reimbursement changes in the near future. And lastly, Strange referred to Odyssey's geographic fit as “just about perfect,” saying that the two companies' hospice programs have little overlap, but that Gentiva's “home health operations overlay with their hospice locations very nicely.”
Asked by an analyst if he thinks it would be easier to layer a home health business under an existing hospice infrastructure or the other way around, Strange said that question can be answered only on a state-by-state basis, given issues surrounding licensing, certificate-of-need and state budget issues.
“I think it's worth noting that Gentiva has been really, really thoughtful in the last three to four years in focusing the organization on home health and increasingly in the last two years on hospice,” said Deutsche Bank's Lehrich. “They had a strange set of businesses, including an outsourced, managed-care business called CareCentrix that they ended up selling. What you're left with is a truly national home health company that will now become a home health and hospice company,” he said, adding that the deal will make Gentiva a “much stronger national company.”
Originally based in Melville, N.Y., Gentiva spun off from parent company Olsten Corp. in 2000 (March 19, 2001, p. 5) and relocated last year to Atlanta. In February, it sold its respiratory therapy/home medical equipment businesses to Clearwater, Fla.-based Lincare Holdings in an all-cash transaction for which terms were not disclosed. Now, if the Odyssey deal closes, hospice will account for about 40% of Gentiva's total revenue. In the conference call last week, Strange said Gentiva does not plan to consolidate the two business lines.
“Those are different business,” he said. “They are run by different management teams; they have different sales organizations; and so there is not a lot of synergy, internal synergy between home health and hospice,” he added. “However, what we will begin to do is to begin to leverage the customer base as well as the referral source base and the patient base.”
Keeping the two business lines separate might not be the best approach, said Cindy Reisz, a lawyer with Bass Berry and Sims in Nashville. Reisz said it would be effective for Gentiva's management to take a longitudinal approach and consider putting the two businesses together.
“That's a lot of patients and an opportunity for a more integrated way to treat your patients—and a model that could be an example for others,” she said.
The concept of joining home health and hospice is certainly not new, said Cathy Hamel, executive director and chief operating officer of Gilchrist Hospice Care in Hunt Valley, Md. “When we look at the hospice segment, a little over 19% are already home health providers,” Hamel said, referencing 2008 numbers. “So the concept is not new, but certainly the size is new,” she said of the Gentiva-Odyssey deal. “It's just a big number. Most hospices today—70% still serve less than 50 patients a day. So an enterprise that serves 14,000—it's just big.”
Although they may have similarities, hospice and home health clearly have different aims, said Jay Mahoney, former president of what had then been called the National Hospice Organization and is now the National Hospice and Palliative Care Organization. The biggest difference is that home health takes a rehabilitative approach, while hospice manages terminally ill patients.
“Hospice is pretty fragmented,” said Mahoney, now a consultant with Summit Business Group in Penfield, N.Y. “There are lots of hospice programs out there. It wouldn't surprise me to see more consolidation of hospice programs simply because of the cost of doing business—maintaining regulatory compliance, recruiting and maintaining staff—all of that is getting more expensive and putting pressure on small hospice programs,” he said.
While Mahoney said payments to hospice providers will remain relatively stable for the next few years, change in that area is coming.
“Healthcare reform is going toward a different payment system for hospice and quality indicators,” said Barb Miltenberger, a partner with Husch Blackwell Sanders in Jefferson City, Mo. Miltenberger explained later in an e-mail that Congress' language in the Patient Protection and Affordable Care Act combines reimbursement measures that have been used for hospitals and nursing homes. “They're using the quality indicators and if they're not reporting the quality measures, government will take money away,” she said in an interview.
According to a summary of the health reform bill from the National Hospice and Palliative Care Organization, the legislation incorporates a productivity adjustment reduction into the inflation, or “marketbasket,” update for hospice starting in 2013 as well as a marketbasket reduction of 0.3% for hospice providers from fiscal years 2013 to 2019. It also requires hospice to report on quality measures determined by the HHS secretary or face a 2% reduction to the marketbasket update. This, too, would not happen right away. The measures would be published no later than Oct. 1, 2012, for reporting to begin in fiscal 2014, which starts on Oct. 1, 2013.
Government oversight
Even with these considerable payment changes looming, the NHPCO's Schumacher said reimbursement is not his primary concern. He said a bigger issue is the need for proper government oversight and surveys of hospice providers. Consultant Mahoney said this has been a significant issue for years.
“When I ran it (then NHO), we were looking to have more involvement in certification surveys from CMS because you go a long period of time and hospice programs who believe they are operating to the letter of the law go three, five, seven, eight years between surveys,” he said. “When you go seven or eight years without being surveyed, you could begin to operate in a way that was appropriate five years ago. Now you find yourself operating out of strict compliance,” he added.
Another provision in the health reform bill—and one that excites hospice providers—is the Medicare Hospice Concurrent Care Demonstration Program, which directs the HHS secretary to establish a three-year demonstration program that would allow patients to also receive all other Medicare-covered services while receiving hospice care. The project would be conducted in up to 15 hospice programs in rural and urban areas.
“As medicine advances, there are more and more therapies that may help to prolong a patient's life and that's a wonderful achievement,” said Lyle Fettig, assistant professor of clinical medicine at Indiana University and associate program director of palliative care at Wishard Health Services in Indianapolis. “However, since patients must select to forgo those therapies to receive the hospice services, this puts them in a place where they have to make a terrible choice,” he said. The new demonstration project would allow patients to benefit from life-prolonging measures even as they receive hospice care.
“Patients, families and doctors hope for the best possible outcome in terms of prognosis,” Fettig said, “and patients want to receive therapies that will prolong their life, even if it's just a matter of months.”
