Acquisitions Boost Encompass’ Hospice Revenue Nearly 69%

Encompass Health Corp.’s (NYSE: EHC) hospice component grew net operating revenues nearly 69 percent between the first quarter of 2018 and Q1 2019, propelled by acquisitions and a rise in same-store admissions.

Revenue for Encompass’ hospice business—included in its Encompass Health-Home Health & Hospice segment—rose to $34.4 million in Q1 2019, up from $20.4 million for the same quarter in 2018, outstripping Q1 increases for the company’s home health care business as well as its inpatient rehabilitation segment.

Acquisitions contributed substantially to the hospice and home health segment, particularly the $135 million Camellia Healthcare transaction that closed in May 2018, which added 18 hospice, 14 home health, and two private duty locations to the Encompass portfolio.

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“The increase in hospice EBITDA contribution was partially attributed to scale economies,” Encompass CFO and Executive Vice President Douglas Coltharp told Hospice News. “Increased market density provides for improved labor productivity, with clinicians seeing more patients and traveling less to do so, and volume leverages fixed (or relatively fixed) expenses such as administrative personnel costs and occupancy expense.”

A key part of the Encompass M&A strategy is building the clinical collaboration rate between its segments. The rate measures the frequency of patient transitions from the company’s inpatient rehabilitation division to hospice or home health.

“Our first priority is to create incremental overlap markets so that we can bring clinical collaboration to new areas and new groups of patients,” said CEO Mark Tarr.

As of March 31 the company operates in 81 overlap markets—areas in which an Encompass inpatient facility is located within 31 miles of one of its home health or hospice locations. The overlap allows the inpatient facilities to feed referrals to the company’s post-acute services.

With the Camellia acquisition, the Q1 2019 clinical collaboration rate rose to 36 percent, up from 33.5 percent in Q1 2018.

The rate will likely continue to grow as the year progresses. Encompass is expected to close its $217.5 million acquisition of Alacare Home Health & Hospice in June, creating new overlap markets in Alabama. Encompass owns several inpatient facilities in the state and will obtain 23 hospice and 23 home health locations via the purchase.

Further acquisitions may occur during 2019 as the company continues to prioritize expansion of its hospice business scale.

“We do anticipate that we will do more tuck-in acquisitions as the year goes on and will likely hit something exclusive of the Alacare transaction where we’ll spend something in the $50 to $100 million range,” April Anthony, CEO of Encompass Health-Home Health and Hospice, told Hospice News earlier this month.

Acquisitions have been a significant driver of revenue growth throughout the hospice space. Encompass also attributed much of its strong Q4 2018 revenue growth to acquisitions, as have other large hospice providers such as Amedisys (NASDAQ: AMED) and LHC Group (NASDAQ: LHCG), a trend that analysts expect to continue through 2019 and 2020.

“We are undoubtedly in the hottest home health and hospice M&A market that I have seen in terms of the number of transactions and the valuation multiples that are being paid both by strategic investors and private equity,” said Eugene Goldenberg, director, Cain Brothers, in a hospice M&A webinar on Thursday.

In addition to acquisitions, same-store admissions were a secondary driver of Encompass Q1 earnings, rising 13.7 percent from the same period in 2018. Their average daily combined hospice and home health patient census reached 2,656 in Q1.

Overall, the company’s consolidated earnings for Q1 2019 reached 1.12 billion, up 7.5 percent from Q1 2018. Adjusted earnings per share rose 11.8 percent to $1.04 from $0.93, and adjusted EBITDA jumped to $242.9 million from $223.3 million.

The company expects further growth throughout the year and beyond as the aging population contributes to rising demand. Coltharp said the company was not concerned about a proposed 2.7 percent cut to Medicare hospice payments for routine home care in 2020, as those services represent a small portion of their business.

Overall, Encompass leadership expressed confidence in the company’s ability to weather regulatory and reimbursement changes.

“We have successfully managed through economic recessions, regulatory changes, sequestration, medicare payment freezes and cuts, while still growing adjusted EBITDA in 40 of the last 41 quarters,” Tarr said. “As the population continues to age, the demand for our facility and home-based services will grow, and we will meet that demand with enhanced capabilities and expanded capacity.”

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