Monday, May 24, 2010

San Angelo Hospice Will Change Owners for Second Time in Two Years

VistaCare Hospice in San Angelo will change hands again. Odyssey HealthCare consummated its VistaCare purchase in March 2008. Two years later, Odyssey will sell out to Gentiva, a huge home health care provider. The price is $1 billion, with Gentiva borrowing $1.1 billion to do the deal. There's no equity financing, all debt.

What makes banks willing to loan 110% on the deal? Uncle Sam's check writing. Medicare pays 93% of Odyssey's revenue and government programs account for 95% of Gentiva's hospice revenue. Gentiva's annual report stated:

Medicare reimbursement rates for hospice services increased 3.3 percent effective October 1, 2007, increased 3.6 percent effective October 1, 2008 and increased 1.4 percent effective October 1, 2009.
Gentiva has predictability on the revenue side. In addition, Uncle Sam pays a portion of provider's capital costs, so taxpayers will foot much of the interest on $1.1 billion in deal financing.

The San Angelo office is part of a larger organization.

VistaCare 4,500 average daily census (adc)
Odyssey/VistaCare 12,400 adc
Gentiva/Odyssey 14,000 adc
Odyssey is the heavier hospice hitter, with 90 Medicare certified hospice programs in 29 states. Gentiva is in six states. Hospice revenue breakdown shows a similar pattern:

Odyssey/Vistacare - $686 million
Gentiva - $75 million
Hospice David is buying Goliath and borrowing heavily to do so. San Angelo experienced this when Community Health Systems purchased Triad Hospitals, owner of San Angelo Community Medical Center. The increased debt burden passed onto to each CHS facility was $4.1 million per year.

Buyout costs are passed on to customers, in this case patients. How will Gentiva's purchase impact VistaCare of San Angelo? It remains to be seen. Obama's health reform is heating up the deals.

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