LHC Group (
) is a medical service provider that supplies home health, hospice,
private duty and long-term acute care. The company's primary
business is providing home nursing care to geriatric patients. The
company also operates several hospitals, hospices, and other
medical facilities. Medicare reimbursements account for over 80% of
the company's revenue.
With an aging U.S. population and expanded healthcare coverage,
the company operates in an attractive growing market yet only
trades at 13-14 times earnings. Why is that? There are likely two
First, during the past two years Congress has kept the Medicare
reimbursement rates for home care services flat. Prior to that,
Congress had been increasing the reimbursement rate roughly in line
with inflation. Also MedPAC, a political action committee, has
recommended that Medicare cut its reimbursement rates.
The MedPAC issue does not seem worrisome as MedPAC has basically
always recommended cuts or no increases to reimbursement rates due
largely to fraud in the home healthcare field. It is helpful not to
focus on reimbursement rate trends as increases are random. From
2005 to 2007, rates were increased. If you were thinking about
making an investment at the end of 2007, you would have looked at
the trend and assumed that Congress would continue to up the rates.
But you would have experienced them as flat in 2008.
Based on that, I would not read too much into why Congress chose
to leave rates flat for 2008 and 2009. They seem just as likely to
raise rates as to leave them flat in any given year. With flat
rates or even cuts, LHC Group and all of the larger home healthcare
providers will remain profitable as they benefit from economies of
scale that smaller providers do not have.
Second, there is currently an investigation by the Senate
Finance Committee into the four largest home nursing care
providers: Amedisys (
), Almost Family (
), Gentiva (
), and LHC Group. The investigation focuses on billing practices;
specifically, Medicare reimburses providers with extra payments
after six, fourteen, and twenty therapy visits. The committee is
investigating whether the providers intentionally provided unneeded
services to reach the visit thresholds and trigger the bonus
payments. While questions have swirled over Amedisys's billing
practices for years, LHCG has not seen any scrutiny until now.
Based on documentation released by LHCG so far, there does not
seem to be any cause for concern. According to LHCG, their therapy
visits did not change after the Medicare payment structure changed.
The average number of therapy visits received by our top 20
patient diagnoses that required therapy in 2007, as compared to
those same patient diagnoses in 2008, was consistent despite the
change in therapy thresholds from 2007 to 2008. In fact, in none
of those top 20 diagnoses did the average visits increase to a
level that would result in our meeting or exceeding a higher
But we don't have access to all of the documentation to make any
firm conclusions, so let's use a technique promoted by the late
Phillip Fisher. His term for the technique was "scuttlebutt,"
meaning "what is the word on the street". What do employees,
customers, suppliers, etc., say about the company? Thankfully with
the advent of the internet our job is easier.
A quick search of job and nursing message boards reveals the
following. The indeed.com message boards have almost 200 posts
about Amedisys and a large number of those are by employees and
former employees complaining about potentially fraudulent billing
practices and how they are treated by the company. In contrast, the
LHC Group forum on indeed.com has one post (the user was having
trouble accessing an online application to apply for a job).
On the allnurses.com message board there are 4 discussion
threads for LHC Group, most dealing with questions regarding
employee pay and how to get a job there. Contrast that with 59
threads for Amedisys, including many threads filled with complaints
regarding nurses who were asked to change the billing codes for
patients in order to justify higher rates/more visits.
While one would expect Amedisys, which has 16,000 employees to
LHCG's 6,500 employees, to have more people discussing working
there and thus more people complaining, I was surprised by the
scale of the disparity. For reference, Gentiva had 114 threads at
allnurses.com and about 60 replies on indeed.com. Almost Family had
14 threads on allnurses.com and 2 replies on indeed.com. Gentiva
and Almost Family have 17,000 and 4,800 employees,
The only discussions with Gentiva and Almost Family seemed to be
the usual complaints from unhappy former employees regarding their
own pay and "bad" managers. Of course, this does not mean LHCG did
not commit in any fraud. With 6,500 employees it is a given that
somewhere someone engaged in some bad behavior.
The question is whether it is systemic throughout the company or
whether there are a few random cases of middle managers or
supervisors doing something they shouldn't have done. Judging by
the lack of complaints, specifically regarding how billing is done,
I believe it is more likely that there is no systemic fraud at LHC
How much is LHC Group worth? Over the past five years (excluding
the crash of 2008) it traded in a range of 15 to 24 times earnings.
With a growing market and attractive margins, I think a
conservative fair value would be slightly above the long-term
average of the S&P 500, perhaps in the range of 16 to 18. Using
trailing twelve months earnings of $2.45, that would give a fair
value of around $42 (17 x $2.45). A discounted cash flow model
using very conservative assumptions of five years of 5% cash flow
growth followed by long-term growth of 3.5% and using a 10%
discount rate gives us $42 per share as well.
Despite all of the current controversy LHC Group looks like an
attractive buy. Anyone buying now will likely have to endure some
ups and downs, as I am sure there will be more bad news regarding
But just like the financial crisis of 2008 allowed savvy
investors to pick up great banks such as Wells Fargo (
) and Hudson City (
) on the cheap, the Senate investigation has made shares of home
healthcare providers cheap. Just as with the banks, invest in the
cream of the crop and leave the rest for someone else.
Author holds a long position in [[LHCG]]
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