With both the height of the COVID-19 pandemic and the start of the Patient-Driven Groupings Model (PDGM) now in the rearview mirror, in-home care buyers and motivated sellers are finding it easier to come together on deals.
There were 44 total home health, hospice and home care transactions completed in the third quarter of 2021, up from the 41 deals that took place in the previous quarter. Over the past three years, the only quarter with more transactions was 2020 Q4.
“All three sub-industries remain strong, but the increased activity has little to do with increased demand,” Mertz Taggart Managing Partner Cory Mertz says. “Demand has been strong for several quarters and continues. This is a supply-driven market.”
Note: Total industry transactions does not necessarily equal the sum of the sub-industries, as many transactions include more than one sub-industry.
There are a few main factors helping drive supply in the back half of 2021.
For starters, there’s the likely increase in the capital gains tax rate. When put in effect, it will diminish a prospective seller’s return or force them to place a bigger price tag on their business, in turn limiting buyer interest. What remains unknown is when this hike will go into effect, and its severity.
“The Biden administration came out of the gate with some pretty draconian targets,” Mertz says. “The current “Build Back Better” reconciliation package is still in negotiations, but it appears to be much less severe than the original targets.”
However, he adds, it’s quite possible that the effective date is already in the rearview mirror, with the current package delayed in congress.
In addition to a capital-gains tax increase, the COVID-19 pandemic is nearly entering its second year, bringing sustained operational difficulties.
“We’ve heard from many owners who are feeling a sense of burnout,” Mertz says. “Maybe they were already thinking about a sale in the next couple of years, but then the ongoing pandemic just accelerated their timelines.”
Looking ahead, home health supply may be bolstered even further by the proposed Home Health Value-Based Purchasing (HHVBP) Model expansion as well.
Franchise deals headline home care M&A activity
There were at least 18 home care-related transactions in Q3 2021, according to Mertz Taggart data. That was on par with the previous quarter, which registered 19 home care deals.
One of the splashiest home care transactions in the third quarter was Honor’s acquisition of Home Instead Senior Care. Combined, the Honor-Home Instead enterprise represents more than $2.1 billion in home care services revenue, according to the companies.
Private equity group Searchlight Capital Partners also acquired a majority stake in Care Advantage in the third quarter. Care Advantage offers a variety of in-home care services to patients across Virginia, Maryland, Washington, D.C., and Delaware.
ModivCare Inc. (NYSE: MODV) closed on a $340 million purchase of CareFinders Total Care early on in Q3, advancing the publicly traded company’s plan to become one of the largest personal care services providers in the country. ModivCare purchased Simplura Health Group in September 2020.
A key theme to the home care M&A landscape throughout this year has been lots of activity around franchisors.
“The third quarter saw another franchisor acquired in Home Instead” Mertz says. “That brings the total number of franchisors who have sold in 2021 to three, compared to just three in the previous five years. Franchisors give financial buyers both immediate scale, which can be leveraged, and the ability to quickly grow EBITDA via acquisition of both existing franchisees and independents. This is a model that has been proven by other PE groups.”
Home health transactions up
The home health sub-sector saw a noticeable spike in dealmaking. Mertz Taggart tracked at least 16 home health-related deals in Q3 2021, on par with Q2.
Home health M&A activity is likely to remain robust moving into 2022, especially if the U.S. Centers for Medicare & Medicaid Services (CMS) finalizes its plan to expand HHVBP to all 50 states.
“As part of its basic framework, the HHVBP proposal exposes home health agencies to a 5% upward or downward payment adjustment,” Mertz says. “Agencies that perform well can take any bonus payments and reinvest in the business or in M&A. Those who don't perform well effectively pay a penalty to those who do."
LHC Group Inc. (Nasdaq: LHCG) made a flurry of deals in August, including the purchase of Alexandria, Virginia-based Cavalier Healthcare Services. Strategically, the acquisition opens up a new service area for LHC Group, allowing it to better leverage its operations in the Washington, D.C., and Maryland markets.
Mertz Taggart provided exclusive transaction advisory services in this transaction, representing the seller.
In July, the Visiting Nurse Association (VNA) — a nonprofit provider in Omaha, Nebraska, and Council Bluffs, Iowa — sold its home health and hospice operations to Amedisys Inc. (Nasdaq; AMED). Under the terms of the transaction, VNA’s home health and hospice services rebranded to “Amedisys Home Health” and “AseraCare Hospice, an Amedisys Company,” respectively.
Mertz Taggart provided buyside advisory services to Amedisys in this transaction.
The biggest home health-related deal in Q3 2021 also came from LHC Group. In September, the company announced it was acquiring 23 home health locations, 11 hospice agencies and 13 therapy businesses from Brookdale Senior Living Inc. (NYSE: BKD) and HCA Healthcare (NYSE: HCA). The transaction represented annualized revenue of about $146 million, according to the company.
Hospice dealmaking takes another leap
There were at least 23 hospice-related deals in Q3 2021, up from 17 transactions in Q2. Since the start of 2018, no quarter has seen more hospice M&A activity apart from the fourth quarter of last year, which tallied 29 hospice-related transactions.
The pure-play hospice transactions in Q3 included Agape Care’s purchase of Integrity Hospice-Dubin, in addition to Charter Healthcare Group’s acquisition of Generations Hospice Care.
“Humana Inc. (NYSE: HUM) additionally completed its $8.1 billion acquisition of Kindred at Home in this previous quarter,” Mertz says. “That’s a deal to keep an eye on from a hospice perspective, as Humana has discussed plans to separate Kindred’s hospice operations.”
Entering the final stretch
Of the 44 home health, hospice and home care transactions in Q3 2021, private equity buyers and their portfolio companies led the way with 25 deals. Public companies like LHC Group, Amedisys and others took part in at least 16 transactions.
“We predicted a very strong finish to an already-strong year,” Mertz says. “The third quarter did not disappoint.”