This earnings season has provided us with insights into how various publicly traded healthcare companies are navigating the current landscape. Let’s delve into the trends and outcomes that defined the second quarter of 2023.
The Home Health & Hospice Market: The Erosion of Medicare Fee-For-Service
The Home Health & Hospice (HH&H) market has been volatile of late, with companies like Amedisys Inc. (NASDAQ: AMED) reporting a significant shortfall in earnings and a decline in revenue compared to the same period last year.
Amedisys reported a financial loss in the second quarter of $80.3 million, after reporting a profit in the same 2022 period. A significant portion of this loss seems to be linked to costs associated with Amedisys’ transaction plans, according to the company.
The Baton Rouge, Louisiana-based company announced in May its plans to merge with Option Care Health (NASDAQ: OPCH). By June, it had announced a new buyer, Optum, which is acquiring Amedisys in an all-cash transaction valued at about $3.7 billion, or $101 per share.
Despite disappointing results during the Q2:23 earnings season, there was some good news for Amedisys. The company has not only experienced expansion in its Medicare home health business but has also witnessed a notable rise in patient admissions and overall volume. At the same time, the company also is seeing a rise in cost per visit figures.
Enhabit, Inc. (NYSE: EHAB) also faced challenges during the quarter as it fell short of earnings and revenue estimates, highlighting the complexities of the sector. According to Enhabit executives, a loss of fee-for service Medicare volumes hurt the company’s profits and revenues during Q2:23.
“While we are making significant progress, demonstrating our value proposition to payers as we negotiate new agreements with improved rates and have success shifting volumes into our payer innovation agreements, it has not been enough to overcome the erosion of Medicare fee-for-service volumes,” Enhabit CFO Crissy Buchanan Carlisle said during an earnings call. “We estimate the impact of this payer mix shift was approximately $8 million, net of the impact from improved pricing and payer innovation contracts on both revenue and adjusted EBITDA during the second quarter.”
Enhabit reported a net loss of $74.1 million during the quarter, while revenue declined 2.1% year-over-year to $262.3 million.
Enhabit CEO Barbara Jacobsmeyer mentioned during the call that the company has not been able to keep pace with the country’s dramatic shift to Medicare Advantage, which is expected to enroll 70% of Medicare eligibles by 2030. Right now, it is right around 50%.
“We are working diligently to combat the erosion of Medicare fee-for-service admissions,” she said. “We know referral sources want providers who can serve all of their patients regardless of payer source. So while we can’t slow the transition of Medicare eligibles to Medicare Advantage, we can strategically target referral sources who have strong Medicare fee-for-service market share and those we know send both Medicare fee-for-service and Medicare Advantage patients to us.”
The admission of these issues comes just a day after the company disclosed plans to launch a strategic alternatives process, which could potentially result in a sale, merger or other strategic transaction. Enhabit spun off from Encompass Health (NYSE: EHC) last July, becoming its own publicly traded entity, but the company is now weighing the impacts and outcomes of a potential sale, though according to Jacobsmeyer, no plans have been solidified.
AREX Capital Management, a New York-based hedge fund and minority investor in Enhabit, proposed the sale idea in a letter sent to the provider’s board of directors. In its letter, AREX pushed Enhabit to consider strategic alternatives because of the company’s “poor operational and share price performance.”
Since the start of 2023, Enhabit’s stock value has dropped by more than 7%, with shares currently trading below $12 each. This is a substantial decrease compared to when the company first separated from Encompass.
Enhabit’s financial pressures are tied to strains in hospice admission volumes and referral streams, as well as shorter lengths of stay. Hospice admissions reached 2,837 in the second quarter, while average daily census volumes hit 3,423, a 0.1% and 0.7% decrease year-over-year, respectively. Meanwhile, Enhabit’s average length of hospice stay was 108 days, a 0.9% drop compared to Q2 in 2022. According to AREX, a sale could result in the most value to Enhabit shareholders.
This marks the latest move in a trend of large home health and hospice providers weighing the benefits and risks of similar deals in the industry, including UnitedHealth Group’s (NYSE: UNH) Optum, which closed a $5.4 billion deal to acquire LHC Group in February and is currently in the process of acquiring Amedisys.
“The recent M&A activity among Enhabit’s peers illustrates the enormous potential returns to shareholders if Enhabit were to pursue a sale,” AREX wrote in its letter.
Despite some larger deals with big price tags, the HH&H M&A market has slowed dramatically recently. According to our LevinPro HC data, deal volume in the HH&H sector as a whole has been on a steady decline, with Q2 being the first quarter in a long time where we experienced increasing deal volume. With only 44 HH&H deals announced, the first half of 2023 has been the slowest start to a year since the first half of 2020, when the world was stopped in its tracks.
The Managed Care Market: From Medicare Bids to Medication Trends
Many major health insurers saw their shares dip coming into the second quarter, as investors prepared for skyrocketing medical costs due to seniors returning for outpatient care. Despite this, health insurers generally outperformed market expectations during the quarter, thanks to effective cost control measures. Insurers also addressed significant stressors such as initiating Medicaid eligibility checks after years of postponement during the COVID-19 pandemic, releasing Medicare Advantage star ratings and the growing popularity of GLP-1 drugs for weight control, such as Ozempic.
Most of the major payers succeeded in keeping medical costs below analyst forecasts.
UnitedHealth Group and The Cigna Group (NYSE: CI) attributed rising utilization to increased use of outpatient services, especially orthopedic and cardiac procedures. Molina Healthcare Inc (NYSE: MOH) and Centene Corporation’s (NYSE: CNC) rising utilization, on the other hand, was attributed to heightened preventive care and primary care visits.
Meanwhile, Humana Inc (NYSE: HUM) reported higher-than-expected inpatient utilization during the quarter. This trend could be a cause for concern given inpatient services tend to be more expensive than outpatient services.
Major health insurers said they factored heightened care activity into their Medicare Advantage plan bids for 2024, which were filed earlier this summer. Notably, major health insurers have factored the heightened care activity into their Medicare Advantage plan bids, demonstrating their proactive approach to evolving market dynamics. Cigna CEO David Cordani said on a call with investors that the payer filed “sizable” rate increases for 2024 for its Affordable Care Act marketplace plans in its two largest states, to deal with higher estimated risk-adjustment payments.
It’s safe to say, the healthcare industry is moving in the direction of value-based care. The demand from consumers for greater price transparency is pushing health insurers into adopting episodic-based care, including capitated arrangements and bundled payments. A value-based, affordable care plan can help lower preventable clinician visits and reduce the burden on the healthcare ecosystem.
As health insurers continue to shift their strategies towards value-based care, they must remember that just moving members over to a value-based model wouldn’t suffice; more needs to be done to shoulder the increased risk in order to make value-based care a reality. UnitedHealth Group, for example, announced its plans to eliminate co-pay and out-of-pocket costs for critical medicines such as insulin, epinephrine and albuterol by 2023.
Another battle health insurers are facing, especially those with substantial government portfolios like Centene, Elevance and Molina, is navigating volatility stemming from the Medicaid redeterminations process. The impact of redeterminations on their member rolls remains uncertain, yet executives express optimism in recapturing members who lose Medicaid coverage through alternative plan offerings or re-enrollment initiatives.
Centene, Elevance and Molina lost 262,700, 135,000 and 93,000 members respectively from their Medicaid rolls in the second quarter, with administrative reasons cited as a significant factor. Molina, for example, said two-thirds of its Medicaid beneficiaries were disenrolled for procedural reasons.
Insurers are also focused on improving their Medicare Advantage star ratings, which are a measure of plan quality and member satisfaction that result in bonuses. Centene is focused on its core member base in Medicare, and investing in priorities like provider enablement tools for value-based care, which is expected to positively impact ratings. Managed care companies feel the urgency as CMS is set to release the 2024 star ratings in October.
The pullback in coverage of GLP-1 drugs to manage healthcare costs has led to increased demand for weight loss medications. Health insurers with pharmacy businesses are experiencing benefits from the rising utilization of these drugs.
Cigna health services division Evernorth, for example, has seen a “meaningful uptick” in utilization of GLP-1 agonists, leading the company to form a new chronic condition management program around them, Evernorth CEO Eric Palmer said on a call with analysts.
Cigna CEO David Cordani said growing GLP-1 utilization has been a “positive contributor” to Evernorth earnings.
Elevance CFO John Gallina also reported that its members’ GLP-1 utilization has been consistent with expectations, and the drugs are benefiting pharmacy benefit manager and Elevance subsidiary CarelonRx.
The Managed Care M&A market has been on the decline in recent quarters. With ten Managed Care deals announced during Q2:23, this marks the first time the sector has increased in deal volume since the 18 acquisitions reported in Q3:22. Like HH&H, we hope this increase is the start of an upward trend, and not just an outlier. Only time will tell.
Other Services: The Unconventional Retail Players in Healthcare
First, we’ll start with CVS Health (NYSE: CVS), a retail pharmacy company that continues to shape its strategy to become a fully fledged healthcare services company. The company announced its plans to shed 5,000 jobs across the country. This comes in the wake of CVS putting billions of dollars into adding healthcare services to its stores and medical care provider networks.
“As part of an enterprise initiative to reprioritize our investments around care delivery and technology, we must take difficult steps to reduce expenses,” the company said. “This unfortunately includes the need to eliminate a number of non-customer facing positions across the company.”
There’s already been news of CVS laying off staff across the country, from Plantation, Florida to Blue Bell, Pennsylvania.
The retail giant posted net income of $1.91 billion for the quarter, or $1.48 per share, a 37% decline from the same period in 2022 when CVS reported net income of $3.04 billion, or $2.29 per share. The company reported revenues of $88.9 billion for the quarter, a 10% increase compared with the year-ago period.
CVS, which runs the nation’s largest pharmacy-benefit manager and a sizable health insurance unit, has made two acquisitions this year. In March 2023, the company acquired Signify Health for $8 billion, bringing the drugstore giant in-home medical services from a national network of clinicians.
CVS followed that up in May with its acquisition of Oak Street Health for $10.6 billion, adding a large network of doctor-staffed clinics primarily used by seniors. CVS reportedly beat out several other suitors for Oak Street.
Another retailer taking a similar route, shedding jobs and cutting costs, is CVS’s retail rival Walgreens Boots Alliance Inc (NASDAQ: WBA). During its Q2:23 earnings call, the company mentioned cutting more than 500 employees, representing 10% of its corporate and U.S. support office workforce.
The Deerfield, Illinois-based company is spending billions on everything from doctor-staffed clinics via its investment in VillageMD to home care and technology.
Rosalind Brewer, CEO of Walgreens, said during the earnings call, “We are announcing several specific actions to accelerate U.S. healthcare’s path to profitability focused on VillageMD and Summit Health. We are also accelerating the synergies between our U.S. healthcare segment and our core Walgreens business.” Walgreens’ growth strategy moving forward includes realigned CityMD costs, accelerated VillageMD patient panel build, aggressive integration of prior Summit Health acquisitions, upgraded VillageMD management, and an increased and accelerated synergy target for VillageMD/Summit Health.
Along with cutting jobs, Walgreens also cut its 2023 outlook as it missed its earnings expectations, with executives citing macro factors including a weak respiratory season and falling demand for COVID-19 tests and vaccines as the cause. As a result, the company’s stock fell more than 10% the morning after its quarterly results were released, reaching its lowest stock value in more than a decade.
Despite a shaky quarter, Walgreens is still focused on its M&A strategy, with the acceleration of the acquisition of CareCentrix completed on March 31, 2023. This deal was announced in October 2021, the same month Walgreens announced its acquisition of the acquirer, VillageMD.
The company also sold its remaining stake (10.8 million shares) in post-acute care and infusion services company Option Care Health for $330 million in June 2023. According to the original press release published by Walgreens, the drugstore chain planned to use the proceeds primarily for debt paydown, continued support of the company’s strategic priorities and to help fund its healthcare-focused business initiatives.
Even retail giant Walmart (NYSE: WMT) is continuing to invest into its healthcare segment, with its CEO Doug McMillon saying, “We continue to build our healthcare services capabilities with clinic expansion” during the Q2:23 earnings call. These unexpected entrants in the healthcare sector, although unconventional, just seem to make sense given their widespread presence, often extending into rural communities, thus poised to reshape the industry in unforeseen ways.
