Defeat of the Entrepreneurial Spirit

Maybe they want to spend more time with their families. Maybe they are enduring mid-life crises and are leaving their posts for greater fulfillment. But this morning two key executives of Amedisys Inc have resigned. They were responsible for much of the company’s tremendous growth and abruptly they are leaving.

Could there be a dark secret inside the company that is causing these executives to leave before the storm breaks? That’s certainly possible. Indeed the market is rattled with shares down over 30% at one point during today’s trading.

But we’d venture another cause: defeat of the entrepreneurial spirit.

Amedisys is a home health care provider. They have profited handsomely from the trend to limit expensive hospital stays. For a fraction of what a day in the hospital costs Amedisys can provide care in a patient’s home.

If this sounds exactly like what our health care system needs to cut costs and become more competitive you’d be sadly mistaken. Amedisys and its competitors are targets rather than solutions because they make fat profits in the health care field.

Over a year ago on August 12, 2008 Citron Research, a short seller that makes bearish arguments against companies it has bets against, issued a detailed report that essentially made the point that Medicare reimbursement would be severely cut stemming the company’s growth. That day the stock priced collapsed 18% on 11MM shares. Consider that at the time the company traded far less than 1MM on any given day. Selling of this magnitude generally sends the stock in question into a significant correction. Amedisys has been no exception.

While the share price has had rallies since that fateful day the trajectory of the stock price has been down. This in spite of the company beating analyst estimates in all four subsequent quarters and raising earnings guidance in three of those four reports. These reports attested to 46 – 64% year over year profit growth.

We can only conclude that the stock price has not been under pressure these last 13 months due to performance, but rather to fear of the future.

We won’t pretend that Amedisys competes in a free market. Rather their market has the hands of the government all over it and lives and dies by arbitrary reimbursement rates the government sets. And we won’t argue that Amedisys’ reimbursement rates shouldn’t be cut. We also won’t argue that the nation’s health care system could use an evaluation.

But clearly Amedisys responded to a need in the system and built a profitable business based on the rules in effect. It is something the government could not have done on its own.

Now, clearly, the prospects for that business have been diminished. No matter the fate of “health care reform” it seems fairly clear that reimbursement rates will be curbed and the company’s growth curve severely curtailed.

With the propects for continuing to build the company compromised we believe key executives are simply leaving in disgust, likely intent on finding fresher opportunities perhaps in a sector where the market rather than the capricious arm of government will dictate their success.

And herein lays the gravest potential impact of “health care reform.”

Contrary to prevailing belief in Washington the amount of money spent on health care cannot be limited while expanding care at the same time. Rather limiting spending will result in less availability of services. More importantly, because the ability to profit will be curtailed it will lead to less innovation. And over time it will lead to more resignations of bright, innovative executives in companies that drive one of the most dynamic sectors of our economy. They will resign out of frustration to pursue “other opportunities.” Worse, they won’t be attracted to the field at all.