BANGALORE (Reuters) - U.S. home health service providers will remain under pressure in the near term as newly introduced rules and reimbursement rate cuts squeeze margins, but the tide should turn in 2012 as the regulatory uncertainty clears up.
Companies like Amedisys, Gentiva Health Services, Almost Family and LHC Group have been under intense scrutiny since last year, when various government bodies launched investigations into their billing practices.
"If Congress enacts legislation that cuts reimbursement rates significantly, there might be some negative headlines initially, but it could set the stocks up to perform better mainly because there will be some clarity," Avondale Partners analyst Kevin Campbell said.
Last week, the Centers for Medicare & Medicaid Services (CMS) proposed reducing $640 million in 2012 reimbursements to home health companies -- that provide home-based nursing for the elderly with chronic diseases -- with a 3.35 percent rate cut.
However, many saw the cut as a reprieve for the nearly $20 billion home health services industry.
"The 2012 proposal is likely better than most investors' expectations ... this should signal investors that CMS is not aggressively 'going after' the industry as many fear," Ellen Spivey of Stephens Inc said.
"It is not the worst case scenario. The cut could have been 5-7 percent."
Shares of the top home health providers have dropped by 20-30 percent in the last six months, dragged down by the increased scrutiny and uncertainty.
They are trading at forward 12-month price-to-earnings ratios that are well below their long-term averages, according to Thomson Reuters StarMine.
The record federal budget deficit has been pushing the government to find savings of about $200-$400 billion over 10 years from Medicare, talks for which will end mid-August.
"The Washington noise on (the federal) debt ceiling is driving a lot of volatility. It is the largest near-term risk," Michael Wiederhorn, an analyst with Oppenheimer, said.
According to the Congressional Budget Office, federal spending for Medicare is expected to nearly double in 10 years to $1.02 trillion, as beneficiaries grow to almost 60 million and healthcare costs rise faster than inflation.
There are talks to introduce co-payments -- money the patient pays out of pocket -- of $150 per episode of treatment in the home health sector, which could prompt people not to opt for the treatment at all.
"Higher the co-pay amount (the government) put in place, the more impact on utilization of these services," RBC Capital analyst Frank Morgan said.
Near-term, the second-quarter results for these companies, expected soon, will also reveal the real impact of recent regulation introduced to tackle unwarranted billing.
The 'Face-to-Face Encounter' rule, that went into effect from April 1, requires doctors to see their patients at least 90 days prior to, or within 30 days after the start of treatment.
It also requires doctors to present signed documents attesting to the need of a particular treatment -- raising concerns that the companies' volumes will take a hit, as doctors burdened by the added administration and expense refer patients to other care settings.
Included in the most recent reimbursement proposal is a 5.06 percent adjustment to the billed amount, to account for discrepancies in billing procedures -- known as code creep.
The adjustment compensates for the assumed overstatement of billed services by home health providers.
"Coding creep will certainly be affecting the industry in 2012 and 2013, because there will be cuts not only for this year, but cuts from the prior years as well that will be carried forward," CRT Capital Group analyst Sheryl Skolnick said.
Still, home health stocks inched up slightly after the 2012 reimbursement cut announcement.
"As we get through a lot of this reimbursement noise around the CMS regulation, around the deficit reduction and also gain clarity on second-quarter results, people get more comfortable with (these stocks)," Robert W. Baird analyst Whit Mayo said.
"Once you work through some of those reimbursement issues, it will allow them to get more aggressive in their mergers and acquisitions," Mayo said.
Oppenheimer's Wiederhorn, who sees the stocks beginning to bottom out around late November when the final CMS reimbursement cuts are announced, expects Almost Family, LHC Group and Amedisys as the three best positioned to make buys in 2012.
Almost Family has near zero debt and cash of $55.5 million at end March, while Amedisys has $149 million in cash to fund acquisitions.
LHC, half of whose patients fall under the rural category, will also take less of a hit from the new rules, as CMS offers higher reimbursement rates for rural patients.
(Reporting by Shravya Jain and Kavyanjali Kaushik in Bangalore; Editing by Saumyadeb Chakrabarty)