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Heed the Red Flags at Amedisys

When this reporter worked in investor relations at Abbott Laboratories (NYSE:ABT), I had the greatest respect for one particular securities analyst who followed the company. His name was Fred Greenberg, of Goldman Sachs. Unlike many of his colleagues, Fred actually went into the field to learn about the company and its prospects. For instance, he interviewed retail pharmacists to learn how Abbott drugs were faring in the marketplace. He also would frequent watering holes near plants and offices to get a handle on Abbott from both line and office employees.

Granted, oftentimes employee comments have to be taken with a grain of salt. Some might not be privy to the company’s big picture while others might have an ax to grind. But it’s instructive to at least hear what they have to say. And in the case of home health care provider Amedisys (NASDAQ:AMED), it might save investors some pain.

Baton Rouge, La.-based Amedisys, along with two other home-health care companies, LHC Group (NASDAQ:LHCG) and Gentiva Health Services (NASDAQ:GTIV), recently got their knuckles rapped by the Senate Finance Committee for allegedly gaming Medicare. Pointing to emails and other internal company documents, the committee said the firms encouraged employees to make enough home-therapy visits to reach thresholds that triggered bonus payments, whether or not the visits were medically necessary.

Perhaps the companies just wanted to get in on the party. After all, it’s estimated that government losses to Medicare fraud run as high as 20 to 30 cents on every dollar, or $80 billion to $100 billion a year.

Did Amedisys employees jump to the defense of their employer? Certainly not on the industry website Cafepharma.com. In one posting, an individual claiming to be an employee wrote: “I hope Billy Bob (an apparent reference to company founder and CEO William Borne) rots in jail for bilking the system … greedy bastard. I sat in many a meetings with AVP’s of BD & Ops and listened to them instruct our physical therapists to add visits regardless of need!! Serves this company right … hope they never see another referral!!!” Ouch!

Word of the alleged bilking of Medicare caused investors to flee all three stocks. Although their share prices have recovered somewhat during the market’s buying spree of the past week, shares of all three companies are down dramatically year to date, following an overall industry trend.

It appears the market softening is hitting Amedisys hard. In the second quarter, the company’s net income plunged 34% on a sales decline of 11%. At the time of the earnings release, in early August, the company also lowered its guidance for 2011, projecting earnings to range between $2.20 and $2.40 per share on revenue of $1.47 billion to $1.5 billion. That’s down from its April prediction for 2011 earnings of $3 to $3.30 per share on revenue of between $1.6 billion and $1.65 billion.

The road ahead for home health care companies seems fraught with obstacles. For one, the latest allegations might signal the government is serious about cracking down on Medicare abuse. If Amedisys has been gaming the system, the company might be in for a bigger fall, given 87% of its revenue is derived directly by Medicare reimbursement. Even without the fraud charges, this concentration of business is a significant risk factor.

To paraphrase Ricky Ricardo of the old I Love Lucy show, “Amedisys, you got some splainin’ to do.”

As of this writing, Barry Cohen did not own a position in any of the aforementioned stocks.

Article printed from InvestorPlace Media, https://investorplace.com/2011/10/heeding-red-flags-at-amedisys-home-healthcare/.

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