A recent inquiry by the U.S. Senate Finance Committee alleges that the na-tion’s three largest home health companies, Amedisys, Inc., LHC Group, Inc. and Gentiva Health Services, Inc. were more focused on maximizing their reimbursement under the Medicare payment system than on the med-ical requirements of patients. The Committee reported some Medicare patients received a high number of the most profitable home therapy visits but few of the least profitable ones. The report also faulted the Centers for Medicare and Medicaid Services for using the number of therapy visits as a payment gauge, rather than individual patient care requirements and health characteristics.

Medicare reimbursements for home health care are determined in part by the number of therapy visits each patient receives with an extra fee triggered as soon as a patient hits a certain number of visits. For instance, the report cited that by one of the company’s increasing the number of visits its nurses made to a patient’s home to 14 to match the Medicare reimbursement system, the company stood to earn $880 more per patient.

This report came on the heels of significant reductions in home health agency reimbursement included in the March 2010 Health Reform Legislation. Moreover, on October 31, 2011 Centers for Medicare & Medicaid Services (“CMS”) finalized a 2.31% cut in Medicare payments to home health agencies for 2012. Not surprisingly, the stock of the largest publicly-traded home health companies have suffered in the last year. Amedisys shares are down by approximately two-thirds from their high, and the stock of Gentiva and LHC has taken similar hits.

However, the $500 billion home health industry continues to be viewed as a cost-effective care approach keeping patients out of more costly facility-based care settings such as hospitals and nursing homes. Industry experts have questioned whether policy makers have lost sight of home health’s role in the larger health care delivery system. And, the Health Reform Legislation calls for the Medicare Payment Advisory Commission to conduct a study on the impact of reimbursement reductions on Medicare beneficiaries’ access to care, patient quality outcomes, as well as the affect on the number of for-profit and not-for-profit home health agencies.

Notwithstanding the Medicare cuts, home health care is expected to remain one of the fastest growing areas of health care spending. The companies cited in the report are trading at 5 year lows, and the carnage has spread to other home health companies. While investors must tread into these waters carefully, the low valuations may present private equity investors with attractive investment opportunities. Careful evaluation of health care regulatory and government payment issues is a very important piece of conducting due diligence when looking at this sector of the health care provider industry.