Amedisys: Caught Between a RAC and a Hard Place


Citron first reported on Amedisys over a year ago.  Never before have we received as much correspondence from former employees as we did after this story.  Last month, the market witnessed the abrupt resignations of two key executives from Amedisys.  In this post, Citron will shed some light on the “story behind the story” of Amedisys — a story that neither management nor its analysts want to talk about.

Amedisys business is providing home health care visits – nurses, hospice workers and therapists – on an outpatient basis.  An overwhelming amount of Amedisys’s revenues, in fact 87%, is paid directly by  Medicare reimbursement.  Under the best of circumstances, this concentration of business would be a significant risk factor.  However, for Amedisys, which operates with some of the highest gross and net margins in the business, red flags specific to the company are much more ominous.

Red Flag #1:  The hunt for Medicare fraud heats up

GAO cites fraud in Medicare in-home services billings

If we continue the status quo, Medicare is heading toward insolvency in eight years:
Medicare Insolvent In 8 Years

Estimates that Government losses to Medicare fraud run as high as 20 to 30 cents on every dollar ($80 to $100 billion a year):

More than any other time in history, the government has taken decisive actions to crack down on Medicare Fraud.  These include everything from the Fraud Enforcement and Recovery Act:
Health Care Organizations Targeted with the Fraud Enforcement Recovery Act

to the Health Care Fraud Prevention and Enforcement Action Team (HEAT) set up by Attorney General Eric Holder:

This week alone, the Attorney General in Amedisys’s home state of Louisiana discussed a crackdown on Medicare fraud:
Medicare Fraud Crackdown in Louisiana

If you’re still skeptical about the government’s enforcement abilities, look how the game has now changed. In what might be the most aggressive move to fight Medicare fraud to date, the government recently deployed a group of Recovery Audit Contractors (RAC’s) to rout out overbilling of Medicare.  Think of these contractors as Medicare bounty hunters:  they only get paid to find recoverable discrepancies.

How Recovery Audit Contractors Work

Red Flag #1A:  Citron has learned that Amedisys has received numerous ADR (Additional Document Requests) from Medicare. 
Red Flag #2:  Abrupt and Unexplained Executive Departures

In the month of July we see the President of the company, Larry Graham, who has worked there for over 10 years, sold most of his stock holdings in a single day – July 31 — a transaction that exceeded all of his prior stock sales combined.  And just five weeks later, on September 3, he resigns – effective immediately, without any stated reason (beyond the ubiquitous “personal reasons”) and without a succession plan in effect.

This leaves a question both obvious and troubling: are those stock sales improper?  Wasn’t he the ultimate insider, with advance knowledge that he was planning to resign soon, with likely negative effect on the stock?  Shouldn’t he have resigned first, and sold later?

The stock plunged sharply on the news, but recovered the loss within days as analysts (who spoke only with remaining management) reassured investors that Graham had resigned over a disagreement with the board regarding his ambition to be CEO.

Compounding the mystery, on the same day, CIO Alice Schwartz, an employee of over eleven years standing, also abruptly resigns, also effectively immediately, and similarly absent an explanation or succession plan.

Larry and Alice were the same people who were justifying Amedisys’s higher than industry margins on a conference all in Q3 2008, explaining that they just treat “a sicker population” than their competitors.

Conversations and correspondence with a plethora of former employees from a variety of different offices has given Citron a deeper view into the underbelly of Amedisys’s business. As a result, it is our opinion that the abrupt executive departures aren’t random circumstances, and are more likely a warning indicator of a more dangerous problem.  Citron challenges readers to cite a single other example where the resignation of top officers without notice or succession plan was not the harbinger of bad news.

What is the Connection?

Amedisys is a roll-up that has purchased various smaller agencies to “Amedisize” them with their corporate systems and controls.  Their strong-arm tactics are notorious in the industry: onerous non-compete and non-solicitation contracts for all the employees of acquired agencies.  If you question the new way things are done – you lose your job or your hours get cut.

One recently-fired former employee who spoke with us was instructed by her manager to alter a file that was being audited by Medicare.  She called the Amedisys “harassment hotline” to express her concern that she was being ordered to do something illegal.  What happened?  She was promptly “let go” by the company. This seems to be consistent with the many complaints we see from former employees posted in public forums:

Citron will not publish the emails we’ve received — we intend to protect the privacy of nurse practitioners and clinical managers around the country.  But the correspondence all has the same message:  Amedisys manipulates treatment plans and patient assessments to maximize Medicare reimbursement rates.

Red Flag #3:  The Significance Of Alice Schwartz’s resignation to Amedisys

Why is the departure of a Chief Information Officer relevant to Amedisys shareholders?   For most companies, the CIO isn’t even on investors’ radar, so what’s the deal here?

The answer lies in the recipe for Amedisys’s  “secret sauce” —  their proprietary laptop-based Point of Care information system.  Former employees have consistently reported to Citron that the laptop-based Point Of Care program, in which every healthcare staffer records every patient visit, is specifically designed to prompt workers to skew their Oasis scoring for higher reimbursement.  It is Citron’s opinion that this explains why Amedisys’s margins are the highest in the industry, not that their patients are “sicker” than their competitors’.

Numerous employees have told Citron that they feel pressured by the continuous automatic computer prompts in Amedisys’s POC system to change their scores on the Oasis reports they submit.

It is going to be interesting once auditors realize it is the POC system’s rule-base which exerts influence on thousands of health-care practitioners, who are bound by onerous employee contracts and subject to being fired if they “cause trouble”.
So who knows the design and architecture of the rule-base better than anyone?  Who oversaw its system specifications, development, implementation, training, scalability and all the “enhancements” over the last eleven years?  That would be the Chief Information Officer, who resigned as described above.  Considering the intensified fraud audits the company is now subjected to, investors should wonder: Is it just getting too hot in the kitchen?  It should be noted that Alice Schwartz did not leave for a new job and her compensation at Amedisys was not of a scale to put her on the fast track to retirement.

Red Flag #4:  Coding Managers Backstop the System

If the system isn’t enough, patient records and billing data are then routed to Amedisys’s Quality Care Coordinators (QCC).  These 200 employees mainly work from home and review every Oasis record, ostensibly to verify that it is recorded correctly.

Citron believes that each case that doesn’t meet the optimum billing and reimbursement profile as defined by the POC system is kicked out for “special attention” by the QCC’s. It is common practice for QCC’s to send an OASIS correction form to the clinical manager, which requires the clinician to sign off on the revised re-coding.  For fear of being labeled a “troublemaker” and losing their jobs, nurses routinely just sign off on these without even reading them.

What is The Future Of Amedisys?

Citron predicts that Amedisys is at risk of joining the ranks of Tenet Healthcare and Wellcare Health Plans.  While both companies were respective leaders in their space, the stocks of both companies collapsed over 80%, their margins gutted after being charged with Medicare and Medicaid fraud.  Neither was able to fully recover.  And it must be noted that both of those companies were able to survive their crises by having clean and well-capitalized balance sheets.  As a debt-laden roll-up, Amedisys will not be so sturdy in the face of a similar challenge.

To see a possible motive for the resignations at Amedisys, look at this SEC release from June 2007:   SEC Charges Tenet Healthcare Corporation and Four Former Senior Executives With Concealing Scheme to Meet Earnings Targets by Exploiting Medicare System

Or this story in USA today :
Tenet accused of $1 billion Medicare fraud

Wellcare Execs Faced the Same Problems:
WellCare’s former chiefs to be charged

Citron also notes Pfizer was recently fined $2.3 billion dollars.  Part of the settlement is going into a whistleblower fund to entice more people to come forward to report Medicare fraud in Florida.
Pfizer Fraud Settlement Money Will Fund Whistleblower Plan


Citron has revisited the Amedisys story because of the timeliness of the executive resignations in the face of mounting pressure to wring fraudulent overpayments out of Medicare.  It believes the company’s overly aggressive billing policies, managed through its Point of Care information system will become the target of the Recovery Audit Contractors or a government agency.

The potential risks here are not incremental – run afoul of Medicare, and you’ve bitten the hand that pays 87% of your revenue.   That would be devastating to Amedisys’s financial performance, and slash gross and net margins permanently.  Add the risks of multi-million dollar sanctions, plus exposure to employee qui tam lawsuits, and you have a more believable rationale for why the former company President dropped his Amedisys stock like a hot potato and exited stage left, than the “no harm — no foul” fairytale told by its analyst cheerleaders.

The Citron Challenge

Citron asks:  Have we got this right or wrong?  Citron invites all current and former Amedisys employees to post their experiences on public forums or communicate with us.  All communications will be held in confidence.

Cautious investing to all.