At Amedisys Inc. (Nasdaq: AMED), phones are ringing off the hook, with smaller home health providers calling the Baton Rouge, Louisiana-based company to talk about dealmaking opportunities.

LHC Group Inc. (Nasdaq: LHCG) is experiencing much of the same, so much so that its top executives anticipate “historic” consolidation over the next several months.

Elsewhere in the industry, Glenview, Illinois-based JourneyCare is ceasing its home health operations, eliminating an estimated 100 positions as part of a “general business reorganization.” Meanwhile, in Florida, at least four home health agencies have filed for voluntary Chapter 11 bankruptcy protection since the start of this year.

The Patient-Driven Groupings Model (PDGM) has only been in effect for two full months, but it already appears to be making its mark on the home health market, at least anecdotally. The shifts in the market have even caught the attention of S&P Global Ratings, one of the world’s largest providers of independent credit risk research.

“I think there’s a pattern you see whenever an industry goes through this kind of pressure,” David Kaplan, a director at S&P Global Ratings, told Home Health Care News. “The weaker players kind of get squeezed out.”

S&P Global Ratings — a part of S&P Global Inc. (NYSE: SPGI) — analyzed PDGM’s likely impact on the home health market in a report released at the end of February. Among its key takeaways, the report supports the somewhat disputed notion that PDGM may ultimately push 30% of home health businesses out of the $100 billion market.

“I think the larger players will be able to survive the sort of working capital needs and short-term administrative needs that PDGM requires,” Viral Patel, a credit analyst at S&P Global Ratings, told HHCN. “And I think the bigger guys will be able to invest in their tech, their systems and even in the personnel to keep up to speed with needed requirements.”

In addition to offering their take on PGDM-fueled consolidation, Kaplan and Patel also dug into several indirect consequences that may arise from the Medicare reimbursement overhaul.

Winners and losers

Following the initial rollout of the old Prospective Payment System (PPS), the home health industry saw significant consolidation, with an estimated 25% of agencies either closing or being absorbed by larger players. S&P Global Ratings believes PDGM will bring similar change, especially when paired with an elimination of Requests for Anticipated Payments (RAPs).

“Economies of scale will provide meaningful cost advantages in the low-margin home health industry, and we expect larger players to be opportunistic in increasing market share and making the industry more efficient,” the February report states.

When it comes to winners and losers under PDGM, S&P Global Ratings specifically sees the large publicly traded companies as having an edge. Currently, publicly traded companies with a strong home health presence include Amedisys and LHC Group, along with Encompass Health Corp. (NYSE: EHC), Pennant Group Inc. (Nasdaq: PNTG) and Humana Inc. (NYSE: HUM).

Typically, publicly traded companies have conservative levels of leverage, while PE-backed companies sometimes are a bit more restricted, according to Kaplan.

“[PE-backed companies] tend to take on higher levels of leverage and have more interest expense,” Kaplan said. “Because they have high levels of debt, they’re a little more constrained in terms of the ability to sustain or bear significant shortfalls. You can have a company that’s very large, but if they’re owned by private equity and they have a lot of debt, that could undermine their [scale].”

Patel agreed, adding that he has already “received word” of attrition at the smaller-agency level.

“I think the public companies will have a little bit more capital to deploy for business development,” Patel said.

Therapy mix and referral sources will also likely separate winners from losers, the S&P Global Ratings report states.

Of course, not everybody shares the same opinion when it comes to the doom and gloom for smaller agencies.

Compared to when PPS came into play two decades ago, home health agencies are generally far more prepared, thanks to nationwide training efforts spearheaded by industry associations, consultants and technology partners. PDGM additionally came with ample warning, with its origins in the thwarted Home Health Groupings Model (HHGM).

Furthermore, smaller agencies are often nimble, able to quickly pivot and respond to change.

“A lot of the smaller agencies are able to make changes a lot quicker than some of the larger ones,” Simione Healthcare Consultants Managing Principal William J. Simione III said at the 2019 National Association for Home Care & Hospice (NAHC) conference in Seattle. “They’ll be able to be nimble. They just need to make sure they’re keeping their eye on the ball and that they’re looking at data.”

If PDGM does end up sending waves of smaller providers out of business, the U.S. Centers for Medicare & Medicaid Services (CMS) may have to step in and adjust the model.

“We expect significant disruption in the industry including closures of smaller agencies, consolidation driven by the largest providers and potential payment model revisions from CMS, should the industry unexpectedly become unstable,” the S&P Global Ratings report noted.

Opportunity for SNFs

While home health providers continue to adapt to PDGM, other post-acute care players may look for a piece of the action. In particular, the overhaul may prompt more skilled nursing facilities (SNFs) and even long-term acute care hospitals (LTACHs) to explore the home health market.

“We expect [that SNFs and LTACHs] could enter the home-health market, for the right opportunity, as that would give them the ability to better manage their discharged patients through the continuum of care (more control to avoid readmissions), and enable them to establish a relationship with potential future customers,” the S&P Global Ratings report stated.

The opportunity to land a home health business for cheap is likely appealing to SNFs and LTACHs, many of which currently do not have home health division of their own.

“If they were previously contemplating getting involved in the home health, now would be a time where you can pick up maybe an opportunity in your market at a relatively low cost, possibly even without any cost,” Kaplan said.

PDGM will likely have a lesser impact on senior housing operators’ interest in acquiring home health assets.

“They might look for an inexpensive opportunity to acquire someone that’s large, but the defensive side of it is not there,” Kaplan said. “They’re not getting their patients from hospitals and don’t have to worry about how they’re perceived on readmissions.”