Chemed Corporation (CHE), Amedisys Inc (AMED): For-Profit Hospices, Is Their Reliance on Medicare Funding a Liability?

Editor’s Note: This article has been amended to better reflect the legislative environment for Chemed Corporation (NYSE:CHE). Motley Fool apologizes for the error.

Should you as an investor be giving for-profit hospices more than a casual glance? Some statistics indicate that might be a smart move: In 1983, less than 1% of all Medicare — certified Hospice Providers were run on a for-profit basis, but by 2011, that figure had ballooned to 60%; this clearly is a growing industry.

And then, there is the fact that Medicare paid for more than 87% of all hospice expenses during 2010 and 2011, providing a secured cash flow that should inspire confidence in investors. But a hitch makes this “happy” scenario less sanguine than might originally appear to be the case.

Relying upon this governmental funding has left many hospice chains vulnerable to allegations of Medicaid fraud, accusations that can prove costly even if they are eventually found to be unsubstantiated. Three companies which are leaders in that field – Chemed Corporation (NYSE:CHE), Amedisys Inc (NASDAQ:AMED), and Gentiva Health Services, Inc. (NASDAQ:GTIV) – have learned this lesson all too well.

Chemed Corporation (NYSE:CHE): A possible double jeopardy

Phrases such as “end of life care” and “palliative” medicine are only now becoming part of our national lexicon. But VITAS, a division of Chemed Corporation (NYSE:CHE), first entered the hospice movement during 1978. And since that point, it has become the nation’s largest provider of hospice services; it currently operates 52 facilities and employs 9,000 professionals.

Its record has, however, been blemished by allegations of Medicare fraud related to its billing strategies and other practices. And Chemed Corporation (NYSE:CHE) shareholders seemingly find themselves to be the real “losers” in this legal fisticuffs when that company’s stock plunged 7% during one trading day after the Department of Justice sued Chemed Corporation (NYSE:CHE) for what it claimed were improprieties.

But wait, the situation gets even murkier and more twisted. As noted, VITAS remains a division of Chemed Corporation (NYSE:CHE). And in addition to being the parent company of VITAS, Chemed also has a division that provides drain and plumbing cleaning services, Roto-Rooter, which has faced numerous class action law suits both from customers and from employees.

If you want to invest in VITAS, you can only do that by purchasing Chemed Stock, adding Roto-Rooter and any liabilities it might bring in its wake into your portfolio. Is that necessarily what you want?