The third quarter of 2023 was another slow quarter for home-based care M&A, with only 18 reported deals.
“Two factors drove the low deal volume,” Mertz Taggart Managing Partner Cory Mertz commented, “We saw a spike in deal count in Q2, but some of those transactions could just as easily have closed in Q1 or Q3, which would have smoothed out the lumpiness in deal volume. On the home health side, CMS’ proposed rule certainly delayed some deals.
The final rule, published November 1, wasn’t a negative surprise, and will give Q4 a lift. Barring anything unforeseen, we will likely end 2023 with just short of 100 transactions. Still down ~10-15% from pre-pandemic norms of 110-120 deals a year.”
On the supply side of the M&A world, the industry is still reverting to the mean in terms of agencies going to market. Agency owners rushed to the exits during the 2021 boom due to concerns around the capital gains tax rate and burnout, meaning sellers that would have exited in 2022 or 2023 were gone sooner, leaving fewer agencies going to market this year. This dynamic is not unique to home-based care.
Additionally, many owners believe they have missed their window to sell for a premium, and have instead opted to hold and grow. That is likely the best decision for many owners. For others, there may be a little bit of a misunderstanding of the current M&A climate. “While the valuation curve has shifted a bit, a clean, lower middle market agency with strong cash flow will still command premium multiples, in line with 2021 numbers,” according to Mertz Taggart Managing Partner Cory Mertz, “For the agencies that have some work to do to command a premium in today’s environment, this is an opportunity to take stock. How would a critical buyer view the company in terms of valuation and its drivers? The answers to these questions should feed into a seller’s ultimate exit strategy.”
Some transactions were in ‘wait and see mode’ regarding the final rule, which was released November 1. That will be a catalyst to more activity in the fourth quarter of this year or the first quarter of 2024.
The other proposed rule that has changed the dynamics is the home- and community-based services (HCBS) proposal from CMS that would mandate that 80% of reimbursement be put toward caregiver salaries. “Industry buyers we’ve had conversations with vary in how they are factoring the proposed rule into their models going forward,” Mertz said,” Everyone in the industry is curious to see how this develops, but at the moment there is quite a bit of variation in how buyers are modelling HCBS businesses.”
Home Health M&A
While the hospice sector had just two transactions in the third quarter, skilled home health only had four — also a new record low.
As always, quality small- to mid-sized home health agencies remain in high demand.
“The proposed rule put a temporary delay on some deals,” says Mertz. “Given the final rule, I expect we’ll see those transactions those transactions close in Q4, providing some lift.” Among the home health deals in the third quarter:
New Day Healthcare’s acquisition of Advantage Care Home Health
Amber Personal Care’s acquisition of Healing Hearts Home Health
Intermountain Health’s acquisition of Advent Home Health
Home care deals led the way in the third quarter. There were 12, seven of which were of the HCBS variety.
The aforementioned proposed Medicaid rule — with the mandated 80% of reimbursement going to caregivers — doesn’t seem to be significantly slowing buyer interest.
There are likely a few reasons for that. To start, the rule is still just proposed, and it’s difficult to predict what a final version will look like. Most industry leaders, while concerned about the proposal, expect to see a final version that won’t be as draconian.
Finally, rates for HCBS are far better than they were prior to the pandemic. Even private-pay home care providers are beginning to diversify into Medicaid, especially as billing rates rise.
“Despite the proposed 80/20 rule, there is still strong demand, and transactions are happening across the map,” says Mertz.
Among the notable home care deals in the quarter:
New Day Healthcare acquired three Texas providers as it continued to build out its presence in the state.
Vistria-backed Help at Home, the largest in-home personal care provider in the country, continued to execute on its growth strategy, with two transactions, Berkshire Home Care and My Care at Home. Help at Home Chief Development Officer Rich Tinsley told Mertz Taggart, “We’re continuing to identify small, medium and large-scale home care partners that can add to our differentiated value proposition for our caregivers, clients, partners and payers. Adding scale and density deepens our ability to connect home care to the health care ecosystem and provide innovative programs and services that can positively impact cost and quality.”
Hospice saw a record low two transactions. That has to do less with demand and more with a lack of quality agencies going to market, Mertz says.
“There just are not a lot of squeaky-clean, profitable hospices going to market,” he says. “Those that do will still attract strong attention. Buyers have gotten much more disciplined, and the increased regulatory scrutiny is causing more deals to fail diligence. For a hospice agency to transact today, it really needs to be buttoned up, especially on the clinical and compliance fronts.”
Stricter buyer discipline
In the end, buyers, especially on the hospice side, are becoming more disciplined around the following:
Narrow acquisition criteria. Buyers are tightening their acquisition criteria, with harder rules around geography, payer mix/service line and profitability, to name a few.
Stricter due diligence. Buyers are exhibiting stricter diligence, which is eliminating more deals. A clinical issue or earnings shortfall that would have previously been swept under the rug or worked around will now cause the deal to not close. We are now seeing this more on the hospice side than anything, given the increased regulatory scrutiny in general.
Tighter economics. Banks have tightened their lending standards, which then causes buyers to tighten their standards. Meanwhile, many newer PE-backed platforms are feeling the weight of their debt service and are not as able to pay a premium. Buyers that are more established platforms with plenty of cash and little or no debt are still able to pay a premium for the right opportunity. However, they are also aware that there will be less competition for deals.
In the hospice world specifically, hospices with poor cash flow that would have previously commanded premium valuations based on ADC and admission trends, no longer command those premiums.
“Buyers are having a harder time justifying paying for a hospice based on average daily census, and what they think they will do with the agency in the twelve-month period post-close,” Mertz says. “Their PE investors and the debt providers won’t let them. So, those transactions have slowed significantly.”