On April 1, Birmingham-based Encompass Health Corp. announced its plans to purchase Alacare Home Health & Hospice for $217.5 million. The deal, which closed July 9, will make Encompass one of the top 10 largest hospice providers in the country.
“Alacare is an outstanding organization, and we’re very excited to have them become part of our organization, and we believe their services will be a very good addition to our existing services,” says Mark Tarr, CEO of Encompass Health. With the Alacare acquisition, Encompass Health will add hospice services across the state of Alabama, including overlapping services in three markets — Gadsden, Huntsville and Montgomery.
Encompass already is an important player in the hospice business; its main headquarters is in Birmingham, but its home health and hospice division is headquartered in Dallas. Acquiring Alacare, which operates 23 home health locations and 23 hospice locations across Alabama, generating about $117 million in revenue in 2018, will allow Encompass to become a dominant player in the state’s home health and hospice industry.
The investment doesn’t just significantly expand Encompass Health’s commitment to the home health and hospice segment of its business; it also shows that leaders are confident they can be profitable in an industry that is overshadowed by concerns about changing Medicare payment policies.
Surprising the Industry
In a first-quarter earnings call, Tarr told investors that Encompass would plan to spend $50 million to $100 million to grow and acquire new home health and hospice locations during 2019. So the $217 million price tag for Alacare, announced via SEC filings in April, was roughly double the amount investors were expecting.
For Encompass leaders, the opportunity was too good to pass up. “We’ve been talking to Alacare for years about the potential opportunity,” April Anthony, CEO of Encompass Health’s home health and hospice business, told Home Health Care News. In late 2018, when Alacare officials got serious about selling the business, those discussions became more intense.
Because Encompass leaders weren’t sure when or if the Alacare opportunity would actually pan out, “We’re always pretty conservative in that acquisition profile,” Anthony says.
Why Encompass Is Bullish on HH&H
Home health and hospice has been an important part of the Encompass business, but the company’s Alacare acquisition shows that it’s committed to growing that segment.
“We’re well positioned to take advantage of the demographic tailwinds of our aging population,” Tarr says. “It’s just a fact that as we age, we’re more likely to need rehab services, whether inpatient or outpatient. And as we grow, Encompass will have both the facility-based setting and the home-based setting of care to meet those needs.”
The average age of an Encompass Health patient is between 76 and 77 years old, Tarr says. As Baby Boomers age, the U.S. population is undergoing a transformation: By 2035, there will be more people 65 years and older (78 million) than people under the age of 18 (76.7 million), for the first time in U.S. history, according to Census Bureau figures.
“We like the hospice area because there are a number of areas of overlap with our other businesses, such as having a mobile staff,” Tarr says. “The same demographic driving the increased need for rehab is also driving hospice, and societal acceptance of hospice has grown. More and more people want to live the final stage of their lives at home rather than in an institution.”
While the need for home-based health services continues to increase, continuing changes in regulations and payment models mean the category is not without risk. For instance, in late 2018, the Centers for Medicare and Medicaid Services published new rules that will change the way home health agencies are paid for services. Home health agencies have traditionally received a bundled payment for all services provided in a 60-day episode of care, but the new standard, known as the patient-driven groupings model (PDGM), reduces that episode of care to just 30 days. Also, the number of therapy visits has traditionally been a determining factor for the payment amount, but new rules stop using the number of therapy visits to determine reimbursement.
These and other changes, set to take effect in January 2020, mean that most home health agencies will have to change their documentation and coding practices to remain competitive. While the new rules are expected to revolutionize the way home health agencies operate and how they are reimbursed, Encompass Health remains undeterred from expanding this category of its business.
“If you look at the purpose and objective of most Medicare reforms, almost all of them are intended to reduce costs from a provider standpoint,” Tarr says. “We’re already positioned to be a high-quality, low-cost provider, and we have a strong track record of being adaptable, flexible and mitigating regulatory changes. Medicare is a big part of the environment in which we provide services, and being a high-quality, low-cost provider puts us in a much better position to operate effectively under its rules.”
Building on a Strong Foundation
Encompass Health’s decision to expand its home health and hospice division is just the latest news in an already solid and growing company. During fiscal year 2018, the company’s annual report showed revenues of $4.27 billion and earnings of $555.2 million.
With more than 40,000 employees, Encompass Health consistently has been ranked as a good place to work. It was included among the 2019 Fortune 100 Best Places to Work, and Great Place to Work Institute and People magazine named Encompass as one of 50 Companies that Care in 2018.
“Encompass is a good place to work because of our people,” Tarr says. “We take great pride in our culture.”
When the company underwent a rebranding and name change initiative in early 2018, employees were asked to identify the company values they viewed as most important and representative of the organization. They said things like “focus on the positive,” “stronger together” and “lead with empathy.”
Many employee suggestions became part of the company’s cultural standards, and “it speaks volumes that our employees view our organization this way,” Tarr says. “Our values show why it’s a great place to work, and in healthcare, where there are so many staffing shortages, having and keeping a great staff is essential to maintaining a profitable business.”
Nancy Mann Jackson and Cary Norton are freelance contributors to Business Alabama. Jackson is based in Madison and Norton in Birmingham.
