November 3, 2017
CRH Medical Corp
Final CMS Physician Fee Schedule - a surprise cut to 3.0 units for 8X2
Our view: CMS released its finalized 2018 Physician Fee Schedule yesterday after the release of the proposed schedule in July. As expected, CMS cut base units for 8X1 codes from 5.0 to 4.0 units. However, in a somewhat unexpected move, base units for 8X2 codes were cut from 5.0 to 3.0 units. Below, we explore the impacts of the CMS changes on our forecasts.
Key points:
CMS cuts 8X1/8X2 base units. After releasing proposed changes to the 2018 Physician Fee Schedule in July (see our original note here), the CMS released the finalized schedule yesterday evening. As expected, base units for 8X1 codes (diagnostic colonoscopies; 32% of CRH-AM cases), were cut from 5.0 units to 4.0 units. However, base units for 8X2 codes (screening colonoscopies; 32% of CRH-AM cases) were cut from 5.0 to 3.0 - greater than the 1.0 unit decline that most were expecting. The company expects the changes to come into effect January 1, 2018 with the new base unit values to be adopted by all commercial and federal payors on the same date. Additionally, CRH estimated the impact the changes will have on operations: a ~12% decline in anesthesia revenues, a ~10.5% decline in total revenues and a ~20% decline in total adjusted operating EBITDA.
Forecast already incorporated 8X2 cut in 2019. We note that our forecasts were conservative and assumed CMS cuts in both 2018 and 2019. More specifically, we factored in a cut from 5.0 units to 4.0 units for both 8X1 and 8X2 codes in 2018, with an additional cut to 8X2 codes (to 3.0 units) coming into effect in 2019. As such, the only changes to our forecast are in 2018. After factoring in the additional 8X2 cut that will come into effect next year, we are lowering our 2018E anesthesia revenue estimate to $81.2MM (from $83.9MM) and total company revenue to $93.5MM (from $96.2MM). The revisions also result in EBITDA to SH falling from $28.0MM to $27.3MM. We note that our estimates take into account incremental revenues from 2017 acquisitions already announced, but adjusting for these add-ons puts our forecasts in line with the guidance management has provided.
Our take: Overall, we view the changes negatively for CRH given the exposure to it has to 8X2 procedures. Additonally, the changes may make the company's recent acquisitions appear to be more expensive (completed at an estimated 4.5-5.0x EBITDA). To our knowledge, we may have been the only group factoring in any additional cuts to 8X2 codes and thus the news could come as a surprise to the Street. As a result, CRH shares could come under a little more pressure today as investors digest the news. The revisions to our forecast - which already incorporated the cut to 3 units for 8X2 starting in 2019 - resulted in only modest changes to our model and we maintain our target (C$4.50) and outlook on the company.