Some new faces appeared in MODERN HEALTHCARE's 1996 portrait of the home-care industry, but major changes soon will shatter the picture.
The government's stepped-up scrutiny of the healthcare industry has Nashville-based Columbia/HCA Healthcare Corp. putting its dominant, $1 billion home-care division up for sale. And ongoing anti-fraud efforts may prompt other hospital systems to step back from the increasingly complex home-care business, too.
Meanwhile, integration and managed-care pressures recently led another industry leader, Costa Mesa, Calif.-based Apria Healthcare Group, to restructure and consider buyout offers.
Reimbursement issues settled in the new federal budget also are expected to accelerate merger-and-acquisition activity in the industry and cause hospitals to rethink their home-care strategy.
The changes are transforming an industry dominated last year by diversified, investor-owned players, such as Columbia, that traditionally have been identified with other businesses, this year's MODERN HEALTHCARE's Home Care and Durable Medical Equipment Providers survey shows.
Columbia, the nation's largest hospital company, and Owings Mills, Md.-based Integrated Health Services, a pioneer in subacute care, debuted in top slots as they hooked home-care agencies to their established patient pipelines.
Meanwhile, the health services division of Melville, N.Y.-based Olsten Corp., a leader in temporary staffing services, held onto the No. 1 position in both number of branches and annual visits.
Enter Columbia. Over the past two years, Columbia milked a new source of patient revenues by linking home-care sites to its nearly 350 acute-care hospitals.
Columbia entered the home-care business through its April 1995 merger with Healthtrust, which controlled KeyStone Home Health Management, a manager of home-care agencies for 29 hospitals (Jan. 27, p. 41).
Since then, Columbia has continued to pick up additional home-care agencies through acquisitions of independent home-care providers and of hospitals with existing home-care services.
According to the survey, Columbia's Dallas-based Columbia Homecare Group ended 1996 with 474 branches in 32 states and more than $1 billion in revenues, making it the nation's largest hospital-based home-care agency.
IHS has been similarly integrating agencies into its post-acute network of subacute and long-term-care services. The company now provides home care in 24 states. It increased its home-care holdings by 281% to 484 branches in 1996 from 127 in 1995, according to the survey. The new business boosted home-care revenues by 188% to $245 million in 1996 from $85 million in 1995, the survey found.
IHS also provides subacute care, inpatient and outpatient rehabilitation, hospice care and diagnostic services at more than 1,000 locations.
In its third quarter alone last year, IHS acquired five home-care companies: Signature Home Care Group, Century Health Services, Edgewater Home Infusion Services, Extendicare of Tennessee and First American Health Care of Georgia.
But IHS failed to find the right deal to broaden its home infusion services.
Last October it signed a definitive merger agreement with Denver-based Coram Healthcare Corp., a leading provider of home infusion therapies and No. 8 overall on the 1996 list of home-care companies.
At the time, Coram was involved in a longstanding legal battle with Caremark International, a subsidiary of Birmingham, Ala.-based MedPartners, over the 1995 sale of Caremark's infusion unit to Coram. As a result, the company faced mounting legal costs.
The merger fell through earlier this year when IHS got cold feet and agreed to pay Coram a breakup fee of $21 million. Last month, Coram settled the lawsuit, receiving $165 million from Caremark.
Olsten's Olsten Health Services division spent last year integrating its $300 million acquisition of Indianapolis-based Quantum Health Resources, which provides home-care services to the chronically ill. Olsten completed the transaction in July 1996.
Olsten remained untoppled despite shedding 12%, or 71, of its branches, ending the year with 541 branches in 42 states and $1.8 billion in home-care-related sales.
Single focus. In contrast to the top three, most of the 42 survey respondents, like No. 4 Apria, focus exclusively on home care and related services.
Apria spent most of 1996 completing the integration of Abbey Healthcare Group and Homedco Group, which merged to form Apria in 1995.
Apria fell two spots on this year's list. It dropped 33%, or 175, of its home-care agencies last year through consolidation efforts, ending 1996 with 350 branches in 48 states. It posted year-end net income of $33.3 million on revenues of $1.2 billion, results that fell below analysts' expectations.
The consolidation of the companies' computer systems into one platform particularly dragged down earnings.
Apria also stumbled in its efforts to build its managed-care business. The company became a national preferred provider for United HealthCare Corp. and Aetna Health Plans. But it found the contracts were too expensive and didn't cover the costs of various ancillary services.
Apria further struggled with what direction it wanted to take. At the end of November, the company terminated its planned merger with Vitas Healthcare Corp., paying the Miami-based hospice provider $4 million in breakup fees.
A few weeks later, Apria agreed to pay $1.7 million to settle allegations that it improperly compensated physicians in exchange for patient referrals.
The No. 5 company, Brentwood, Tenn.-based American HomePatient, maintained an aggressive acquisition schedule last year, growing its number of home-care branches 108% to 300 in 1996 from 144 in 1995.
The company acquired more than 30 home-care companies last year, including Baker Health Care Specialists, Happy Harry's Health Care and Penn Oxygen Services.
Almost all the survey respondents showed increases in their specialized offerings, with services for cancer, AIDS and pain management being the most prevalent.
Changing picture. But this snapshot of the home-care industry will likely look much different next year.
Columbia's reign, for example, appears as if it will be fleeting. The company's home-care operations, particularly in Florida where it has 124 sites, are under federal investigation for possible Medicare fraud.
Competitors also have alleged that Columbia offers physicians incentives to refer patients to the company's home-care agencies and that it doesn't offer patients choices about where they receive their home-care services.
In response, Columbia recently announced plans to sell its home-care division, which should create opportunities for other providers.
"This will give a lot of agencies a new lease on life in terms of referrals," says Patricia Sevast, clinical and operations consultant for Lorenz & Associates in Baltimore. "A lot of agencies were shut out of referrals because of Columbia's presence in certain areas."
Raising questions. The move also raises questions about the future of hospital-based home care.
Ann C. Logue, an analyst with Volpe Brown Whelan & Co. in San Francisco, predicts hospital systems with aggressive plans to expand their home-care operations may wait until the Columbia probe shakes out before proceeding.
Logue says hospitals are finding the development of integrated delivery systems that include acute-care, home-care and other outpatient services can be a two-edged sword.
"One of the underlying issues in the government investigation of Columbia is just how an integrated delivery system should work," Logue says. "The beauties of an integrated delivery system are supposed to be the ability to share overhead and refer patients in a continuum of care, which are exactly what the government has problems with."
Besides the government's investigation, upcoming reimbursement changes also may have influenced Columbia's decision to sell its home-care division, says John Runningen, a healthcare principal with Cordova Capital in Atlanta.
The newly passed federal budget calls for home-care and other post-acute companies to shift in 1999 to a prospective payment system, which is currently used by acute-care hospitals. Home-care providers now are reimbursed for the full amount of their costs, within certain limits.
Under a PPS, Runningen notes, hospitals will no longer have an incentive to boost their profit margins by shifting acute-care-related costs to their home-care operations. If they get out of the home-care business, he says, they could contract with the lowest-cost providers.
"Columbia is getting out of the business primarily to appease the regulators," Runningen says. "But it may not be such a bad strategy anyway given the reimbursement changes. Columbia will now have negotiating clout with other providers."
Apria also has announced it is considering a sale as part of a major restructuring.
In June the company said it planned to focus on three core business-respiratory services, home infusion therapy and home medical equipment-and phase out lower-margin businesses, such as subcontracted home nursing and sales of rehabilitation equipment and medical supplies, by year-end. It attributed the decision to last year's problems with integration and managed-care contracting.
Logue says there are few potential buyers for either Columbia's or Apria's entire home-care packages. She predicts both companies will sign agreements with a healthcare company that has partnered with an investment firm or sell off the operations in pieces.
Changing under scrutiny. As the government's scrutiny of the industry continues to intensify, other home-care companies could end up repositioning and fundamentally changing how they do business.
HHS' inspector general's office says about one-quarter of all home-care providers it audited had billed Medicare improperly during the 15 months ended March 31, 1996. The agency also found that Medicare made a total of $2.6 billion in overpayments to home-care providers during the same period.
And in testimony before the U.S. Senate's Special Committee on Aging, officials of the General Accounting Office complained that Medicare's survey and certification process "imposes few requirements on (home-care agencies) seeking to serve Medicare patients and bill the Medicare program."
Olsten has acknowledged that it, too, is the subject of an ongoing federal probe into its Medicare cost reporting practices.
Meanwhile, on Aug. 7, a grand jury returned a 102-count indictment charging 12 people connected to Mederi of Dade County, a Coral Gables, Fla.-based home-care agency, with defrauding Medicare of $15 million in what the government calls the nation's single largest home-care scam (Aug. 11, p. 16).