CFA-LEVEL-II practice question 6 of 10
Richard Grass is the healthcare analyst for Furrnon Investments and is reviewing the investment merits of the developing hospice industry. The…
Choose your answer, then check it against the explanation.
Richard Grass is the healthcare analyst for Furrnon Investments and is reviewing the investment
merits of the developing hospice industry. The hospice industry has a short history in the public
market, as several companies have recently completed their initial public offering. Hospice services
are provided to patients diagnosed with terminal illness as an alternative to aggressive medical
management. The use of hospice services at skilled nursing facilities and assisted-living facilities is
forecasted to continue its recent growth. Medicare is the primary payer for hospice services,
accounting for 85% of the approximately $7 billion in industry's revenues. Hospice providers offer
symptom and pain management to patients diagnosed with a terminal illness by their physician. The
program was added to the Medicare benefit package in the early 1980s. Growth in the sector has
only recently. accelerated due to the emergence of a number of for-profit companies. The caregiver
provides a plan for each admitted patient and care is given in any number of healthcare
environments, including the patient's home.
Grass's analysis of the hospice industry has uncovered several facts that are outlined below:
• The industry's revenue annual growth rate has increased from 14% in the late 1990s to 25% in
2008.
• The average length of stay at facilities for hospice patients is increasing.
• Labor costs account for 75% of total expenses, drugs 15% of total expenses, and medical supplies
10%.
• More than 80% of hospice patients are above 65 years old and 30% are above 85 years old.
• Based on the U.S. Census Bureau's statistics, over the next six years (2009-2015), the number of
people in the 65 and older age group will increase annually by 1.4%.
• The Medicare hospice benefit is still underutilized by the terminally ill population, according to
MedPac (an independent advisory committee for the U.S. Congress on healthcare issues).
• Only 30% of Medicare beneficiaries enroll in the hospice benefit before they die.
• In recent years, the U.S. government has approved rate increases for the sector compared to flat or
declining rate trends for other healthcare services.
• The Medicare hospice program has a beneficiary cap which cannot exceed approximately $18,000
annually per person.
• The top six for-profit providers account for about half of the segment's sales.
• The overall hospice provider market is roughly divided into 55% non-profit, 10% U.S. government,
and 35% for-profit.
Grass's analysis has narrowed his search to Hope Company. Hope controls about 7% of the total
hospice service market or 20% of the for-profit market. The company has the only regulator
approved for-profit certificate for the state of Florida, one of the most attractive markets in the
United States. In addition to a strong market share in Florida, Hope has a strong presence in urban
markets like Dallas and San Francisco. Hope has a more diversified revenue base than other publicly
traded for-profit providers.
Grass's research report on Hope Company is positive on its investment merits. Grass's report states,
"Hope is uniquely positioned in the hospice industry" Which of the following best supports his
comment?
Question 6 of 10
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