Health care is getting more expensive by the minute putting a great deal of stress on an already overworked system. On average, health care spending for those 75 and older is five times the amount spent on 40 year-olds. However, some economists feel the problem is not from the demand side of health care (those 75+) but from the supply side, where unnecessary innovation has led to excessive costs and little additional benefit.
It all seems so hopeless, yet some businesses seem to be able to thrive in this uncertain environment. One such company is LHC Group (Nasdaq:LHCG) of Lafeyette, Louisiana.
There’s Gold in Them There Hills
If I want to count the number of hospitals within a 30-minute drive of my home, I’d need more than two hands. Yet in some of the small towns across the country, you’re lucky to count one. According to the American Public Health Association (APHA), rural areas have more people over 65 than urban areas; have fewer physicians than the population warrants, and more health problems than those living in urban areas.
LHC Group’s post-acute service is a solution for an underserved rural population. Most of the services it provides are in the home although they do have facility care as well. Its business objective is to become the largest non-urban post-acute service provider to Medicare beneficiaries in the U.S. To do this it will need to generate internal growth in its existing markets, manage expenses, expand into new markets and make strategic acquisitions that make financial sense. If it does all of these, chances are good it will continue to grow. (For more on Medicare, read What Does Medicare Cover? and What's The Difference Between Medicare And Medicaid?)
Still a Baby
The company's history dates back to 1994 as St. Landry Home Health Inc. in Palmetto, Louisiana. CEO and co-founder Keith Myers owns 17.2% of the stock. Assets include 144 home nursing locations, nine hospices, a diabetes management company, a private duty agency, four long-term acute care hospitals, an outpatient rehabilitation clinic, two medical equipment locations and a family health center. I’m unaware of any company providing the kind of services it does to rural markets, and so far, that’s translating into increased revenues and profits.
Sales in the last four years have grown from $68.5 million in 2003 to $298 million in 2007 with pre-tax operating income increasing from $9.8 million in 2003 to $38.7 million in 2007. In 2007, Forbes named it number seven on its list of Best Small Companies. Yet in the last 13-months, LHCG stock is down 10% while three of its competitors, Amedisys (Nasdaq:AMED), Almost Family (Nasdaq:AFAM) and Gentiva Health Services (Nasdaq:GTIV) are up 72%, 77% and 13% respectively.
It’s Made a Comeback
Those 13-month returns were to July 24 2008, prior to releasing its second quarter numbers. Its net service revenue was $90.1 million, up 27.7% from the second quarter in 2007 and income from continuing operations was $6.4 million, up $5.4 million from 2007. It increased guidance for the year to revenues of $350-$370 million and earnings per share (EPS) between $1.35 and $1.45. Its shares rose more than 20% on July 31, 2008 to $28 and change.
Bottom Line
LHC Group does business in underserved markets in a field that is experiencing substantial growth. According to MedPac, an advisory body to the Federal government about Medicare issues, 33% of general acute care hospital patients require additional care after leaving the hospital. With 198 service locations in 13 states, it cares for 60,000+ patients annually. Its customer’s median age is 79, providing a cost effective healthcare solution for the elderly. The Center for Medicare (CMS) estimates there are 8,813 Medicare-certified nursing home agencies in the U.S., most operated by small providers.
In May, LHC Group bought Nashville-based Home Care Solutions, a home nursing company operating in Tennessee and Virginia. Industry consolidation will continue and it will be a direct beneficiary. At 13%, its operating margins are strong, and overall, there’s not much to dislike about its stock.
For more on health insurance, read Medicaid Versus LTC Insurance.
