Why Gentiva Health Services Shares Jumped

Why Gentiva Health Services Shares Jumped

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Gentiva Health Services , a home health care and hospice services provider, jumped higher by as much as 11% after announcing the acquisition of privately held Harden Healthcare for $408.8 million.

So what: Under the terms of the deal, Gentiva will pay $355 million in cash and the remaining $53.8 million in Gentiva's shares to acquire Harden's home health, hospice, and community care businesses. Harden's long-term care operations will remain with existing Harden shareholders. To fund the transaction, Gentiva plans to raise $855 million in long-term debt and refinance its existing term loans. More importantly, the deal will allow Gentiva to move its reliance away from Medicare-based payments. The combined company, based on a 2012 revenue breakdown, would have received 72% of its revenue from Medicare as opposed to the 86% received by Gentiva alone in 2012.

Now what: It's great that Gentiva is expanding its presence into 13 states where Harden operates, and that it'll be refinancing its debt to more favorable interest rates. But, let's face it; today's story is wholly about the fact that it's moving its reliance away from Medicare revenue. Although Medicare is a supposed "guaranteed payment" from the government, Gentiva and other home health care companies can no longer count on the Centers for Medicare and Medicaid Services to recommend increases in government health payouts under Medicare. In fact, the Patient Protection and Affordable Care Act combined with ongoing federal budget constraints are working to slowly reduce the Medicare payout going forward. The more that Gentiva can diversify its revenue stream away from Medicare, the better its future prospects.

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