Three Trends Driving M&A in Home Health, Home Care and Hospice
Mergers and acquisitions “M&A” have become a major strategy for health care companies seeking to succeed in a rapidly evolving marketplace, with payment systems rewarding value more than volume.
That’s especially true when it comes to the home health, home care, and hospice industries, which have all seen record-breaking M&A action, along with skyrocketing valuations. Hospice, buoyed by higher margins, has been particularly hot—and that’s not likely to change any time soon.
“This is, in fact, the first time in more than a decade that home health, home care, and hospice are all selling at relatively high valuations,” says Cory Mertz, co-founder and managing partner of health care M&A firm Mertz Taggart. There have been several drivers behind the increased M&A activity.
There have been several drivers behind the increased M&A activity.
On a broad level, home-based services have only grown—and will continue to grow—in demand as baby boomers age and seek to age in place. Policymakers, too, have come around to placing a heightened value on in-home care, widely seen as the lowest-cost setting. The overall strong state of the U.S. economy—still with low borrowing rates—has likewise had a noticeable impact.
“It’s still a strong environment for borrowing,” Mertz says. “Interest rates are low, though they’re creeping up a bit. But money is still cheap.”
A robust infusion of private equity investment has even played a significant part, with PE firms interested in platform deals that have size and scale. Of the more than 70 home health and hospice transactions that have taken place in the first eight months of 2018, at least 36 have involved private equity groups looking to make strategic- or platform-style deals, according to proprietary Mertz Taggart data.
Private equity investors played major roles in transactions in 2017 and 2016 as well, data show.
The three-way mega-merger between Great Lakes Caring, Jordan Health Services, and National Home Health, led by private equity firms Blue Wolf Capital Partners and Kelso & Company, is one example of this trend. TPG Capital and Welsh, Carson, Anderson & Stowe teaming up with insurance giant Humana in separate deals for Kindred At Home and Curo Health Services is another example.
Perhaps the three biggest factors shaping the M&A landscape, however, have been companies’ desire to diversify their offering, turning their businesses into “one-stop shops” for payors and consumers alike, and strengthen care coordination in preparation of value-based care models.
“We’re seeing further integration of care across the continuum as a result of this M&A activity,” Mertz, whose firm has completed more than 70 home health and hospice business transactions, says. “2018 is on track to be a record year in terms of a number of transactions, so we’re really seeing the home health, home care, and hospice industries kind of all coming together as one.”
Diversity is key
The success of home health, home care, and hospice businesses are closely tied to the broader regulatory environment and the moves that policymakers carry out. For that reason, it’s important for providers to diversify their businesses, insulating themselves from adverse changes directed toward any one line.
Having diverse revenue streams similarly allows providers to branch out in finding different referral partners. In some cases, diversification also means melding the strengths of different organizations, especially when a smaller company may not have the resources needed to succeed in a competitive market.
“Strong capital markets and private equity interest, attractive demographics, and recent legislative regulatory developments that provided clarity around reimbursement have all aided in fueling a strong year in-home health and hospice M&A,” Morris Estes, managing director of Capital One Healthcare, says. “Increased regulatory requirements are also driving consolidation. Unable to meet the increased data requirements, many smaller companies are looking to sell or merge with larger businesses with more resources.”
Diversity is also key for sellers, as strategic buyers and private equity investors will undoubtedly be looking for well-rounded businesses that they can easily buy and gradually add on to overtime.
Becoming a ‘One-Stop Shop’
M&A activity is also being driven by companies looking to become one-stop shops with different subsidiaries and integrated brands operating across the continuum in any given market. It’s an approach that has been shown to be beneficial for attracting both payors and consumers.
For many home health and personal care operators, it’s become a strategic goal to have a hospice presence wherever they already have a strong foothold. In doing so, companies are able to care for in-home patient populations during various stages of life and provide a foundation able to effectively weather any possible regulatory or economic hurdles.
“Creating a core home health strategy benefits payors, as the home is the least expensive site of care,” Estes says. “Therefore, we’re seeing a lot of vertical integration consolidation driving M&A activity. Additionally, consumers have continually shown a strong preference for home health in their post-acute recovery plans. By offering hospice services as well, providers certainly have a greater opportunity to work with that patient throughout their healthcare journey.”
Citing high margins and the prospects of complementing its existing personal care offerings, Addus HomeCare recently made its first serious foray into hospice through a $40 million acquisition of Ambercare.
Furthermore, becoming a one-stop-shop gives providers a convenience advantage when it comes to managed care organizations, alternative payment models, and leveraging future Medicare Advantage opportunities.
“I think we’re going to continue to see more bundled programs and other alternative payment models evolve,” Mertz says. “But [providers] are at least positioning themselves properly so they can take advantage.”
In the current M&A climate, the integration of hospice services has proven to be the costliest in terms of transactions and valuations.
“One the M&A front, our strategy is unchanged,” Amedisys CEO and President Paul Kusserow said during a Q2 2018 earnings call. “We remain very interested in hospice assets, though market pricing has been relatively unattractive, and we have seen some recent deals get done at very lofty multiples.”
The one-stop-shop strategy includes entities on the peripherals of home health, home care, and hospice, too. CVS and Aetna, for instance, have joined forces with the goal of transforming CVS pharmacies into one-stop shops where seniors could do their errands, pick up medication and receive health care services all in one place—all the while helping them manage chronic conditions, avoid hospitalizations and cut costs for Aetna’s Medicare Advantage business.
“Together with CVS Health, we will better understand our members’ health goals, guide them through the health care system and help them achieve their best health,” Mark T. Bertolini, Aetna chairman, and CEO said in a statement released when CVS and Aetna merged. “Aetna has a proud tradition of continually innovating to address unmet consumer needs and providing leading products and services to the marketplace.”
Put simply: The value of becoming a one-stop-shop means payors and consumers don’t need to leave a business in order to find what they’re looking for.
Prioritizing Value Over Volume
M&A activity often picks up in the face of significant change. Home health has seen major changes in the past two years, with more yet to come. Specifically, the changes for the home health, personal care, and hospice industries are setting the stage for the shift from volume- to value-based care.
The Centers for Medicare & Medicaid Services (CMS) currently has a home health value-based purchasing demonstration in nine states, in which home health providers see their reimbursement tied to how well they do on certain quality measures. It proposed refinements to that model in July for the calendar year 2019, including changes to how agencies’ achievement and improvement are weighted in calculating reimbursement rewards or penalties.
Industry insiders view fine-tuning as a step toward taking value-based purchasing nationwide, an idea that home health executives widely support.
“We again encourage CMS to expand the value-based purchasing program nationwide,” Kusserow said during a Q1 2018 earnings call. “If quality is important, those who deliver it should be rewarded.”
In respect to value-based care, ample opportunities exist for companies providing services for patients with chronic conditions and multiple illnesses. The better positioned a company is to care for an individual as they age and, ultimately, near the end of their life, the likelier the company is to do well with new methods of payment under Medicare and Medicaid.
“We’re seeing both buyers and sellers position themselves to succeed under value-based purchasing, alternative-payment models,” Mertz says. “Buyers are looking to become providers that operate across the continuum of care, while sellers are realizing they might not be ready to participate or compete in such models as currently structured.”
Multiple studies have highlighted how personal care, palliative care, and home health services all work to reduce costly hospital readmissions. For the chronically ill, especially, routine home care services can make a big difference, research has shown.
“On the home care side, home health operators are getting into that in a big way,” Mertz says. “You look at Amedisys, for example … They continue to make strategic personal care acquisitions that align with their home health service areas so that they can continue to monitor patients and keep them out of the hospital.”
Indeed, one of the latest examples of that strategy was when Baton Rouge, Louisiana-based Amedisys acquired Bring Care Home, which provides skilled and non-skilled home care, at the beginning of August.
“As providers increasingly take on a greater share of risk, it is likely that industry consolidation will continue as efficient providers or those that are able to scale will have a definite advantage in a fragmented market,” Estes says. “There are many different strategies being explored in this new value-based [and] accountable care environment, and home health is a central provider setting that appears to be part of many of them.”
Although the M&A landscape has certainly hit a new all-time high, there’s still room for even more action in the next few years. In its most recent proposed payment rule, CMS suggested increasing Medicare payments to home health agencies by 2.1%, or $400 million, in the calendar year 2019.
Doing so may afford providers even more financial wiggle room to make deals happen, as they’re able to operate with a somewhat heightened sense of financial certainty compared to years past.
The proposed payment rule, of course, also came with potential barriers to home health providers, namely the Patient-Driven Groupings Model, an updated version of the widely opposed Home Health Groupings Model introduced in 2017. In all likelihood, M&A will be the quickest route for growth for existing players.
“Nobody has a crystal ball or knows just how everything will play out,” Mertz says. “But I think we’re going to continue to see more risk-sharing, rewarding those operators that are able to position themselves to properly take advantage of opportunities.”
With demand projected to remain strong for the next several years and the shift from volume to value not going away, the industry should continue to have the right elements aligned for continued M&A activity.