For-Profit Hospices: Is Their Reliance on Medicare Funding a Liability?

Harriet is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Editor's Note: This article has been amended to better reflect the legislative environment for Chemed. Motley Fool apologizes for the error.

Should you as an investor be giving for-profit hospices more than a casual glance? Some statistics indicate that might be a smart move: In 1983, less than 1% of all Medicare -- certified Hospice Providers were run on a for-profit basis, but by 2011, that figure had ballooned to 60%; this clearly is a growing industry.

And then, there is the fact that Medicare paid for more than 87% of all hospice expenses during 2010 and 2011, providing a secured cash flow that should inspire confidence in investors. But a hitch makes this “happy” scenario less sanguine than might originally appear to be the case.

Relying upon this governmental funding has left many hospice chains vulnerable to allegations of Medicaid fraud, accusations that can prove costly even if they are eventually found to be unsubstantiated. Three companies which are leaders in that field - Chemed (NYSE: CHE), Amedisys (NASDAQ: AMED), and Gentiva (NASDAQ: GTIV) - have learned this lesson all too well.

Chemed: A possible double jeopardy

Phrases such as “end of life care” and “palliative” medicine are only now becoming part of our national lexicon. But VITAS, a division of Chemed, first entered the hospice movement during 1978. And since that point, it has become the nation’s largest provider of hospice services; it currently operates 52 facilities and employs 9,000 professionals.

Its record has, however, been blemished by allegations of Medicare fraud related to its billing strategies and other practices. And Chemed shareholders seemingly find themselves to be the real “losers” in this legal fisticuffs when that company’s stock plunged 7% during one trading day after the Department of Justice sued Chemed for what it claimed were improprieties.

But wait, the situation gets even murkier and more twisted. As noted, VITAS remains a division of Chemed. And in addition to being the parent company of VITAS, Chemed also has a division that provides drain and plumbing cleaning services, Roto-Rooter, which has faced numerous class action law suits both from customers and from employees.

If you want to invest in VITAS, you can only do that by purchasing Chemed Stock, adding Roto-Rooter and any liabilities it might bring in its wake into your portfolio. Is that necessarily what you want?

Gentiva and Amedisys don’t fare as well

Gentiva has also encountered allegations of Medicare fraud. During October 2011, the company underwent an investigation by the Senate Finance Committee. The committee subsequently alleged that Gentiva deliberately overscheduled visits to patients, hoping to reach a threshold for bonuses from Medicare. Amedisys was the subject of these same allegations.

At least as of this point, allegations of Medicare fraud and other legal entanglements have not prevented Chemed from remaining profitable. Its year to year earnings growth for the first quarter of 2013 was 9%.

Gentiva and Amedisys, however, have not managed to earn such glowing reports. For the first quarter of 2013, Amedisys reported a diluted EPS of $(2.86). These results might explain why Amedysis, anxious to turn itself around, has retained a merger and acquisitions firm, The Braff Group, to help it divest some of its properties.

And Gentiva fared even worse, reporting a diluted EPS for the same period of ($6.08). And its Return on Equity, a measure of managerial effectiveness, was a real mind boggler, (154.10)%. So, it is hardly surprising that Zacks Equity Research recently downgraded this stock to under perform. 

A Foolish conclusion

Utilizing Medicare as their major source of income might translate into for-profit hospices enjoying a secured cash flow. However, it also leaves them open to costly lawsuits alleging misuse of governmental funds, a vulnerability that could translate into losses.

And this vulnerability seemingly might increase as the Patient Protection and Affordable Health Care Act (Obamacare) takes effect during 2014. This complicated legislation, hundreds of pages in length, includes $200 million to fight Medicare fraud, such as over-billing, which is estimated to cost tax payers $6 billion annually.

Then, there is another even more fundamental quandary worth considering, one that cannot be approached in strictly dollars and cents terms. Are these facilities really offering high quality end of life care to patients or are financial interests taking precedence over everything else?

There are obviously no easy answers to these highly-charged emotional questions. Among other things, everybody would have their own understanding of what “high quality care” means. But these are issues you might want to consider before you do any investing.

Obamacare will undoubtedly have far-reaching effects. The Motley Fool’s new free report, “Everything You Need to Know About Obamacare,” lets you know how your health insurance, your taxes, and your portfolio could be impacted. Click here to read more. 

Harriet Tramer Tramer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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