Going forward into 2013, health care reform is expected to be a big factor in merger and acquisition activity in the home health care industry as providers seek to improve margins and expand and increase services along the care continuum by partnering with or acquiring other companies.
“It’s a very active market right now in home health,” says Cory Mertz, a partner at Stoneridge Partners, a merger and acquisition firm specializing in the home health and hospice industries. “I believe we’re going to continue seeing robust M&A activity for 2013 and possibly beyond.”
Last year, home health and hospice industry deal volume rose 20.7% and the dollar volume of the deals skyrocketed more than 1,800% to about $5.72 billion, according to Irving Levin Associates, Inc.
The increase in deals had two drivers: Profits falling as Medicare margins tightened, and the increase on the capital gains tax that went into effect this January, says Don Cummins, president of the Fort Myers, Fla.-based Stoneridge Partners.
“There was a bubble of acquisitions in the fourth quarter as companies were trying to get out [of the business] before the increase in taxes,” he says.
The majority of the acquisitions were bigger companies acquiring regional, smaller players, along with some senior living companies making forays into the market.
“Over time, the smaller companies are going to have a hard time surviving on their own and operating in a silo, and they’ll have to align themselves with much bigger players to help leverage some of the back end,” say Mertz. “It’s also other providers in the Accountable Care Organization/bundled payment world we’re entering into—it’s going to be difficult for the individual providers to stand alone.”
Much of the activity is being driven by health care reform.
“The incentive in the Affordable Care Act requires provider groups to work together, whereas in the past you had a silo mentality, with nursing homes here, hospitals there, home health agencies over there, and ‘ne’er the twain shall meet,'” says Val Halamandaris, president of the National Association for Home Care and Hospice (NAHC).
This will likely continue to spur acquisitions from senior living companies and hospitals, even though many providers have tended to look at managed care as something that was “anathema,” says Halamandaris, generalizing that this model didn’t pay a fair reimbursement relevant to Medicare or private pay.
“What I see more of these days are people saying, ‘Maybe I can work with managed care—we can collaborate with other acute and post-acute care providers, we can persuade them they’re the best ally they can find in the healthcare spectrum, and help them become more efficient.'”
Another reason for buyers to want continued expansion are margins that are becoming more compressed. While the Centers for Medicare & Medicaid Services (CMS) announced that payments to home health agencies would stay mostly flat, decreasing by an estimated $10 million or approximately 0.01% in 2013 compared to the previous year, MedPAC has recommended rebasing reimbursement rates to the industry, which could result in substantially lower payments.
“They need to do acquisitions to grow and keep shareholders happy,” says Mertz. “They need to align with larger post-acute care providers.”
What’s been happening is that the strategic buyers and larger-platform companies in the home care industry have been watching their margins deteriorate from Medicare reimbursements getting cut in the past couple of years, says Cummins.
While there have been cuts, senior living operators are used to working off even slimmer margins and they’re looking at home care as a way to increase their business.
“That’s why we’re seeing more activity from the traditional senior living companies,” says Mertz, naming Emeritus’s 2012 acquisition of 91% of home care company Nurse on Call’s equity for $102.5 million and Kindred Healthcare’s $71 million purchase of IntegraCare, a home health and hospice provider, as examples.
While senior living companies are adding home health and home care services as they continue to grow, there’s been a relative lack of activity or growth among the four major, publicly-traded companies in the home health industry.
“The public companies are pretty well-stepped out of doing acquisitions,” says Cummins. The total current annual revenue run rate for the four largest—Amedisys, LHC Group, Gentiva, and Almost Family—is about $4.2 billion, and sales have been flat over the last year with stock prices decreasing in the last few months, he says.
What’s happening, he says, is that prospective sellers are selling for a higher price than what companies who would be interested in acquiring them are selling for in the public market. Almost Family, for example, hasn’t done “a single acquisition of any consequence” since August 2011.
“They’re being forced to stand on the sidelines now unless acquisitions can come in at the price range that [their stock] is selling for,” he says. “It’s a bit of a puzzle right now, and this hasn’t been in the case in the past.”
Senior living companies, hospitals, and larger home health care platforms are picking up the slack, though, but despite continued consolidation—specifically the “little fish” agencies being “eaten by the big fish” companies, according to Cummins—the number of home health agencies will continue to grow.
“I would posit that the great majority will be private duty home care agencies, rather than Medicare or Medicaid-reimbursed ones,” Halamandaris predicts. “That’s the biggest growth trend we’ve seen.”
Written by Alyssa Gerace
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