CRH Medical Corp.
(CRH-T) C$7.15
The Reimbursement Question - What to Expect Event
Questions regarding the sustainability of CRH's reimbursement rates have contributed to a two-month slide in CRH's stock. We expect some answers within the next 30 days, when the U.S. Center for Medicare and Medicaid Services (CMS) publishes its proposed rules for the 2018 Physician Fee Schedule. The schedule will include proposed terms for the "00810" Current Procedural Terminology (CPT) code that covers anesthesiology used in conjunction with endoscopy. The physician fee schedule is an annual publication that itemizes reimbursement terms for thousands of procedures for the upcoming year.
Impact: MIXED
We expect a relatively benign outcome to the 2018 fee schedule, partly because of CRH's limited exposure to CMS funding. Our sensitivity analysis indicates that a 5% cut in the Medicare reimbursement fee could cost CRH ~1% in Adjusted EBITDA. On a separate note, we are reducing our target price to reflect the low likelihood of a quick reversal of CRH's recalibrated valuation multiples. Additionally, we are cautioning that CMS' decision-making process is relatively closed, and difficult to predict.
CMS' Annual Review — Medicare has reimbursed monitored anesthesia care (MAC) in conjunction with colonoscopy at $122-$127 on average for the last four years. In 2016, 00810 was among several high-use procedures flagged by CMS for re-evaluation. However, the agency left 00810 unchanged, deferring a final decision.
CRH has Limited Exposure to Medicare — We expect CRH's operating performance to be largely insulated from CMS for two reasons. First, Medicare only represents an estimated 10-15% of CRH's revenues. Second, CRH's dominant payers (the private insurers) employ different reimbursement protocols from Medicare. We estimate that commercial payers reimburse the 00810 code at 3x-4x the rate of government payers.
TD Investment Conclusion
We are maintaining our BUY rating, but reducing our target price to C$10.50. Our rating is based on three key considerations: 1) leadership in a defensive, growing segment of the U.S. healthcare services market; 2) high-margin cash flow streams; and 3) expansion opportunities within CRH's core anesthesiology market.