President Obama’s 2010 budget proposal for home health agencies (HHA) calls for a reduction in Medicare payments of .16 billion spanning 5 years. These reductions include eliminating the annual inflation update in 2010 and rebasing payment rates in 2011. The cuts also incorporate productivity adjustments into Medicare payment updates. The proposed changes are in addition to already scheduled regulatory cuts of billion implemented by the Centers for Medicare & Medicaid Services (CMS).  The CMS cuts aim to change the case-mix adjustment system for home health payment. There will almost certainly be increased government regulation of Medicare home health care, resulting in decreasing margins, but the final cuts to Medicare reimbursement will not be as drastic as the ones proposed by the White House.

The nationwide shortage of registered nurses is driving wages up as evidenced by the fact that nursing wage growth has grown at nearly twice the rate of inflation from 2002 to 2005. Helping to blunt the effect of the nursing shortage is the fact that many previously inactive nurses are returning to their jobs in response to the faltering economy.  

The malaise currently affecting mergers and acquisitions as a whole has spread to the home health care M&A market. 2009 Q1 M&A activity in the home health industry is 30% lower than Q1 2008 and 22% lower than Q4 2008. Of the deals that are getting done, both financial and strategic buyers have been focusing on home health agencies that incorporate a private payer aspect to their business model. Due to uncertainty over impending government pressure on reimbursement we believe that companies gearing more of their operations towards a private payer model are well positioned for continued success and will be considered more attractive targets to buyers.  As Wyatt Matas & Associates has stated in previous reports, the threat of reimbursement cuts and lower margins paired with an increasing patient demand will turn the industry into a volume game. While short term valuations remain slightly lower than 2007-2008, we expect long-term valuations to continue to decline as small providers are driven out of the market because of low profitability and consolidation. 

The macro environment continues to present a muddy picture but we are cautiously optimistic. Orders for durable goods unexpectedly jumped 1.8% in May, defying forecasts that had them pegged for a decline of .9%.  As a result of positive signs in the US economy the Organization for Economic Cooperation and Development raised its economic forecast for member countries for the first time in two years.