Why Amedisys Shares Slumped 24.6% in July

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What happened

Amedisys Inc. (NASDAQ: AMED) shares lost nearly 25% of their value last month, according to S&P Global Market Intelligence. The drop was caused by word that the the federal government's Centers for Medicare and Medicaid Services (CMS) may cut reimbursement for home healthcare by 0.4% next year and redesign its payment scheme altogether in 2019.

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So what

Home healthcare providers rely heavily on Medicare for their revenue, and that means share prices can pop or drop depending on the payment proposals issued by the agency, which operates under the Department of Health and Human Services.

Based on the new proposal from Washington, in 2018, the CMS' home health prospective payment system and wage index rates would reduce payments to home healthcare providers by a combined 0.4%, or $80 million, industry-wide. As one of the largest home healthcare providers in the country, Amedisys would clearly face headwinds from those payment cuts.

The challenge to the company, however, could be even greater in 2019. That's when the CMS plans to change its payments model in a way that could reduce payments for services by up to 4.3%.

Now what

Amedisys provides home health, hospice, and personal care to over 385,000 patients per year in 34 states. Although it generates revenue from other services, home health represents the lion's share of its sales. In the second quarter, for example, home healthcare was responsible for $274 million of its $379 million in total revenue, and about $198 million of that home healthcare revenue came from Medicare.

In Amedisys' Q2 conference call, management had little to say about the proposed changes, other than to note that they mean a total redesign of the payment system, and that the company will model its impact as soon as the CMS provides additional details.

Undeniably, the aging of the baby boomer cohort means there are strong demographic tailwinds supporting home healthcare; however, the risks from Washington are likely to remain, which means this company's share price may be more volatile than one might have previously expected.

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Todd Campbell has no position in any stocks mentioned. His clients may have positions in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.