| President Obama’s 2010 budget proposal for | | | | than Q1 2008 and 22% lower than Q4 2008. Of the |
| home health agencies (HHA) calls for a reduction in | | | | deals that are getting done, both financial and |
| Medicare payments of $13.16 billion spanning 5 years. | | | | strategic buyers have been focusing on home health |
| These reductions include eliminating the annual inflation | | | | agencies that incorporate a private payer aspect to |
| update in 2010 and rebasing payment rates in 2011. | | | | their business model. Due to uncertainty over |
| The cuts also incorporate productivity adjustments | | | | impending government pressure on reimbursement |
| into Medicare payment updates. The proposed | | | | we believe that companies gearing more of their |
| changes are in addition to already scheduled | | | | operations towards a private payer model are well |
| regulatory cuts of $7 billion implemented by the | | | | positioned for continued success and will be |
| Centers for Medicare & Medicaid Services | | | | considered more attractive targets to buyers. As |
| (CMS). The CMS cuts aim to change the case-mix | | | | Wyatt Matas & Associates has stated in |
| adjustment system for home health payment. There | | | | previous reports, the threat of reimbursement cuts |
| will almost certainly be increased government | | | | and lower margins paired with an increasing patient |
| regulation of Medicare home health care, resulting in | | | | demand will turn the industry into a volume game. |
| decreasing margins, but the final cuts to Medicare | | | | While short term valuations remain slightly lower than |
| reimbursement will not be as drastic as the ones | | | | 2007-2008, we expect long-term valuations to |
| proposed by the White House. | | | | continue to decline as small providers are driven out |
| The nationwide shortage of registered nurses is | | | | of the market because of low profitability and |
| driving wages up as evidenced by the fact that | | | | consolidation. |
| nursing wage growth has grown at nearly twice the | | | | The macro environment continues to present a |
| rate of inflation from 2002 to 2005. Helping to blunt | | | | muddy picture but we are cautiously optimistic. |
| the effect of the nursing shortage is the fact that | | | | Orders for durable goods unexpectedly jumped 1.8% |
| many previously inactive nurses are returning to their | | | | in May, defying forecasts that had them pegged for |
| jobs in response to the faltering economy. | | | | a decline of .9%. As a result of positive signs in the |
| The malaise currently affecting mergers and | | | | US economy the Organization for Economic |
| acquisitions as a whole has spread to the home | | | | Cooperation and Development raised its economic |
| health care M&A market. 2009 Q1 M&A | | | | forecast for member countries for the first time in |
| activity in the home health industry is 30% lower | | | | two years. |