Citron Research was first drawn to research Arthrocare because one division was running margins that wildly outperformed all their competitors. After working countless hours with private investigators and reviewing hundreds of documents, we were able to draw a line to what we believe explained the extreme outperformance: fraud on the insurance reimbursement system. Well… here we go again.
(Citron notes that within the last month alone, two companies — ARTC and BWTR both formerly reported by Citron — were forced to restate previous earnings, and their shares were cut in half.)
Amedisys has been getting a lot of attention on Wall Street recently. Its provides services in the relatively low-tech field of home health care services – hospice, wound care, diabetes and heart disease care, surgery recovery, stroke recovery and various specific rehabilitative programs. This business model is basically a massive temp agency for health care workers making home visits. The company has been on an aggressive acquisition strategy, while claiming their proprietary software to be their competitive edge. Its stock has doubled since March.
It is the opinion of Citron that this “proprietary software” or, as we will refer to it, their “secret sauce”, is the tool Amedisys relies upon to out-earn their competition in a traditionally low margin, non-sexy business; or at least that’s how they justify their competitive edge to Wall Street.
Amedisys has been growing fast — rolling up competitors, growing revenues rapidly through acquisition. All the while it’s been growing margins, too. Amedisys claims its computer systems for submitting and tracking claims gives it a huge competitive advantage in its business. Considering nearly 90% of their business is Medicare reimbursement, it is really hard to “out-Medicare” your competition – its kinda like selling to Wal-Mart.
Questions, Questions and Questions
Amedisys recently reported and filed a 10-Q, which left many unanswered questions for those trying to assess the long term viability of their business model.
1) Within the last year, the company began reserving for uncollectible receivables. Unless managed with great transparency, reserves against receivables opens a huge can of worms from an accounting standpoint – creating an irresistible potential for “cookie jar” accounting. (Citron is very familiar with the pitfalls of receivables reserves from the IIG era.)
2) Amedisys is running huge receivables, which have grown 20% in the last year. However, Amedisys’s receivable reserves have been varying widely since they started declaring them. In the most recent quarter, while receivables aging (measured by DSO) actually increased, the company reduced its reserve percentage by over 20%, without explanation. This stroke of the pen alone was responsible for .12 to .15c of the company’s earnings for the quarter – which was the difference between their reported “blowout” quarter, and a very tepid, inline one.
3) Amedisys does not break out what part of their business is internal growth and what is growth by acquisition. If the growth is better than everyone else’s then the stock is typically awarded a better multiple. In this case, in the second quarter, for example, AMED had about the same growth in admissions, slightly better growth in revenue per episode but TWICE the growth in total internal revenue as everyone else. We believe that is because their revenue per admission soared…which might be explained lower in the report.
4) The unavailability of growth metrics raises concerns that Medicare reimbursement for current work may be falling, cloaked by the growth in revenues from acquisitions.
All of that leaves plenty of reason to wonder just how Amedisys maintains gross profit margins that run way ahead of everyone else in the industry?
But here is where it gets interesting…
Who Knows Best?
Citron has been interviewing Amedisys’s former employees in an attempt to confirm or disprove the implications of these accounting red flags. (All of the interviews conducted were done by a licensed private investigator who asked a standardized series of questions to former employees. The interviewees did not know why they were being asked the questions, nor did any of them have a position in the stock.
These individuals were found because Amedisys appears in their employment histories. The power of the internet makes many of these individuals locatable on websites like HotJobs.com and Monster.com.
The results were startling. These are some points that were consistently reported by former employees:
Amedisys pressured employees to manipulate OASIS scores in order to increase billings
Local offices would receive calls from headquarters to influence the scores on Medicare patients. (to justify higher billing)
According to one former management employee, who left the company in 2008 and was interviewed on August 4th : “Our old receivables were real high and were a real mess. But no one at corporate would let us try and straighten up the mess. The billing system is set up for failure and there are no checks and balances. “
Of equivalent concern was the consistency of these findings. Our survey didn’t find any former employees who didn’t mirror these concerns in their interview.
Citron wants to emphasize that it is not yet concluding that Amedisys is committing Medicare fraud, but there are many indications that this inquiry needs deeper scrutiny. (Further documentation is anticipated.) Due to these concerns, Amedisys’s near total dependence upon Medicare for its revenues has to be factored as a business risk.
So Why Now?
Because Amedisys is a roll up strategy, there are an increasing number of former employees who know the workings of the company.
There is an additional built-in business risk when relying on Medicare as a primary payer. Because it is an agency of the government, reporting of intentional misconduct is subject to various whistleblower protections including the legal principle of Qui Tam – whistleblowers are able to sue Government contractors and payees on behalf of the government, and participate financially in the recoveries of funds fraudulently billed. The government has been aggressive in pursuing these cases and in 2006 alone these actions resulted in $140 million awards to whistleblowers.
A key point of concern is what we would call the “management paranoia factor”. This in retrospect was among the most glaring red flags at HealthSouth. If management tries to control employees who believe something is amiss, look out.
This is why the following quote from an Amedisys former employee commands our attention:
“if you questioned Amedisys about anything, they would push you out and label you as a troublemaker…” – former Amedisys employee
Would Amedisys management do such a thing ?
Fair question. Especially considering the accounting uncertainties described above, management’s credibility has to be considered in creating an objective assessment of the company’s value. Arthrocare had a case of “seven-year itch” with accounting issues — its current problems can be seen in the context of overly aggressive accounting and restatements by the same management a number of years ago.
This brings us back to the “secret sauce”. What portion of Amedisys’s margins can be attributed to legitimate efficiencies from its proprietary information system ? And how much of its margins come from increasing management pressure to push the envelope harder and harder to game the Medicare billing system?
Much like Arthrocare wanted Wall St. to believe that Discocare had a proprietary model of billing (remember the much-touted “algorithm”) that gave it a strategic advantage, so too does Amedisys. In this company’s case, however, that is all predicated on being able to out-Medicare the next guy.
As the company grows by acquisition and in turn puts the acquired companies on their proprietary billing system, they create many more “weak links in the chain” who can potentially come forward and blow the whistle on questionable business practices. Medicare moves slowly, but when they move, it is with an iron fist.