Pre-Claim Blamed for Dip in Home Health M&A

After a positive first and second quarter of 2016, home health deals saw a downward trend in the third quarter—and the controversial Pre-Claim Review demonstration may be to blame.

When compared to last quarter, home health and hospice deals went down by 17%, from 12 deals in quarter two to 10 deals in quarter three, according to the latest data from Irving Levin Associates Inc.

There was an even larger decrease when compared to the number of deals from the third quarter of 2015, when there were 13 deals.

Rehabilitation deals also showed a decrease from the second to third quarter of this year, decreasing by 10% from 10 deals in quarter two to 9 deals in quarter three, according to the data.

It is important to note that dealmaking has not ground to a complete halt, Lisa Phillips, editor of Irving Levin’s Health Care Information Source, said in a press release. Still, after two years of record growth—including more than 1,500 deals in 2015—this year is confounding some expectations.

“With the presidential election in November, and the Federal Reserve’s expected increase in interest rates in December, 2016 doesn’t look like the record-beating year some observers expected,” Phillips stated.

As a whole, compared with the second quarter of 2016, health care deal volume fell 11% to 369 transactions. Deal volume this quarter was also lower than the third quarter in 2015, down 10% from 411 transactions at that time, Irving Levin Associates found.

While home health was not the only segment to see a drop in dealmaking, it may not be the election or interest rate concerns constraining deal flow in this particular area of health care. Some are pointing to the Pre-Claim Review (PCR) demonstration, which requires agencies to submit claims essentially for pre-authorization before submitting them for payment. The rollout in Illinois has been a mess by nearly all accounts.

“While the downward trend in the number of deals is not significant, I believe it is being caused by CMS’s prior authorization requirement [Pre-Claim Review Demonstration] that went into effect in Illinois in August and was slated for implementation in four other pilot states including Florida and Texas, until CMS delayed the implementation,” Jim Moskal, leader of the global health care practice for Chicago-based M&A and debt advisory firm Livingstone Partners, told Home Health Care News. “I have spoken to a number of acquires and they slowed down or even halted pursuing acquisitions in these states until they saw the effect of PCRD on agencies.”

However, long-term, the expanded implementation of pre-claim review likely will drive more home health M&A, Moskal believes. This is because PCR can tighten cash flow, creating an environment in which “mom and pop” providers are more likely to sell to larger players that can absorb the effects.

It’s a position also taken by Keith Myers, CEO of LHC Group (Nasdaq: LHCG), one of the largest home health providers in the nation. LHC halted acquisition activity in pre-claim states, Myers disclosed last month—but he expects that the demonstration is likely to drive consolidation over a longer timeframe.

Written by Alana Stramowski