Alacare Purchase Boosts Encompass Hospice Despite COVID-19 Woes

Encompass Health’s (NYSE: EHC) hospice business saw positive growth during the first quarter of 2020 despite the company suffering some blows due to the COVID-19 pandemic. The 2019 acquisition of Alacare Home Health & Hospice for $217 million continues to bear fruit, offering major contributions to the company’s hospice revenue during the first quarter, which saw an 39.5% increase from the prior year.

Despite the revenue growth in hospice, all Encompass business lines have experienced many of the same troubles that have been plaguing the health care system at large since the onset of the crisis. Supply costs have surged since the outbreak sparked, as have costs associated with telehealth programs and paid leave for exposed staff, among a barrage of other expenses.

Due to these pressures as well as pandemic-related volume reductions, the company is beginning market-specific staff furloughs and some changes to employee compensation in some business lines.  

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“We had a lot of momentum heading into 2020 in January and February for a strong start to the year. In mid-March, we began experiencing a significant impact from the COVID-19 pandemic,” said Encompass Health President and CEO Mark Tarr in an earnings conference call. “Prior to the explosive growth of COVID-19 across the United States, all of our business lines were experiencing strong volume growth. However, beginning in mid-March we began experiencing decreased volumes in both segments, and the lower volume trends we saw in March have continued in April.”

Reductions in hospice average daily census (ADC) were slight for Encompass during Q1, with most of the volume loss occurring in their home health and inpatient rehabilitation business lines. Hospice ADC dipped to 3,633 in April, down from 3,677 in January and February. 

About 75% of the hospice revenue growth during Q1 stemmed from the Alacare acquisition. Through the purchase of Birmingham, Ala.-based Alacare, Encompass Health gained 23 hospice and 23 home health locations in Alabama, which collectively earned $117 million during 2018. This acquisition, funded with cash on hand and borrowings under its revolving credit facility, marked the entry of Encompass Health into the Alabama hospice and home health market.

“We continue to be very pleased with the integration of Alacare, which was primarily responsible for the Q1 revenue growth,” Encompass CFO Doug Coltharp said in the earnings call.

The economic impact of the pandemic has hit the nation hard across a wide spectrum of industries, but hospice operations may be better protected than most due to strong demographic tailwinds and rising demand, a least in the short term. More difficult to predict is the potential long-term impact as the outbreak drags on, as is the effects on providers’ non-hospice business lines.

“The COVID-19 pandemic is creating near term pressures on our operations. It’s impacting volumes, revenue per patient and expenses,” Tarr said. “At a minimum, we expect this choppiness to continue in the second quarter, but at this time we cannot reasonably predict when it may end.”

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