MIZUHO SECURITIES USA INC.  |  US EQUITY RESEARCH

Summary

This afternoon CMS published an Interim Final Rule in the Federal Register that further delays the effective and implementation dates of three key expansions of the bundled payments pilots: Cardiac Rehab, Acute Miocardial Infarctions & Hip and Femur Fractures from 3/21/17 (tomorrow) to 5/20/17 and from 7/1/17 to 10/1/17. CMS requests comments on a further delay to 1/1/18. The Rule talks about further changes to underlying regulation as being possible and notes that to implement the original rule for only a short time and then change it would be disruptive for those hospitals (and post-acute providers) subject to the rule for post-acute bundling.

It looks to us as if Sec'y Price, who was quite anti-bundling when in Congress, is starting to make good on his comments that further ACA changes, beyond the repeal/place bill, would be done through the regulatory process: the war on value-based payments seems to have begun. This could be negative for home health, as it delays, perhaps indefinitely, the move of hip/femur fracture patients out of SNFs and into home health - so it seems correspondingly positive for SNFs in the short term, at least in our view. Heart attack (AMI) patients and those who have had open heart procedures have been shown to benefit materially from cardiac rehab, an under-utilized service. Cardiac rehab is outpatient, as a rule, or would likely move there under the bundled payment arrangement. So a delay in the financial incentives and bundling for these conditions probably helps the Inpatient Rehab Hospitals (like HLS's) at the margin (because they do get cardiac rehab cases), but more likely means fewer patients will get it as a result of the delay. How this is good for patients/Medicare beneficiaries is hard for us to understand. We are further concerned that the potential changes to the underlying bundled payments model, alluded to in the Rule, could make this delay a more permanent one, not so good for home health, IRFs and even outpatient rehab providers' traditional Medicare business.

But the private sector moves on....UNH now spends more than $5B/yr out of $53B in total value-based arrangements annually (per UNH) on specific-condition value-based contracts, including bundles, and we expect that effective model to continue to grow. The Surgical Care Affiliates acquisition by OptumCare could accelerate UNH's move into even more value-based arrangements that lead to better outcomes at materially lower costs. One concern we have about home health is that Medicare Advantage rates for home health are materially below that of traditional Medicare - so while there may be more cases available, the margins would be under significant pressure in a privatized bundled market. As more Medicare beneficiaries move into Medicare Advantage, the impact on practice patterns, away from high cost settings to home/outpatient, likely continues to accelerate. We like UNH, and are cautious on AMED, HLS and KND as the war on the ACA continues.

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