HealthSouth buys home health operator as U.S. population ages

(Reuters) - Hospital operator HealthSouth Corp bought the owner of Encompass Home Health and Hospice, the latest deal in an industry that looks poised to grow as the U.S. population ages. HealthSouth, whose shares were up 3.8 percent at $39.72 in afternoon trading on Monday, said it was looking for further acquisitions in the fragmented sector. The company bought Encompass' owner, EHHI Holdings Inc, for about $750 million from healthcare-focused private investment firm Cressey & Co LP, expanding its home health business by adding 140 locations across 13 U.S. states. Federal budget spending cuts and lower Medicare insurance reimbursement rates in the home healthcare sector are also boosting consolidation in the industry. Kindred Healthcare Inc bought Gentiva Health Services Inc last month for $1.8 billion in a cash-and-stock deal. "(The deal) allows HealthSouth to expand into a separate post-acute care vertical with a leading provider to participate in the coming bundled payments regime that Centers for Medicare and Medicaid Services (CMS) plans on implementing," Obsidian Research Group analyst Toby Wann wrote in a note. Traditionally, Medicare makes separate payments to providers for each individual service over the course of treatment. The "bundled payments" initiative aims to link payments for multiple services during an episode of care. HealthSouth said it has had its eye on Encompass – the fifth largest provider of Medicare-focused, skilled home health services in the United States – for four years. "We will target home health acquisitions in the remaining HealthSouth markets," Chief Executive Jay Grinney said on a conference call. Company executives said in a conference call that the home health industry was characterized by a lot of "mom-and-pop operators". It includes over 12,000 providers, many of which rake in revenue of less than $5 million, they said. HealthSouth said it expected the deal to close at end of the year and to add to earnings in 2015. J.P. Morgan Securities LLC acted as exclusive financial adviser to HealthSouth, while Skadden, Arps, Slate, Meagher & Flom LLP acted as legal adviser to HealthSouth. (Reporting by Anjali Rao Koppala and Natalie Grover in Bangalore; Editing by Saumyadeb Chakrabarty and Sriraj Kalluvila)