The raw data suggests that home health merger and acquisition activity has been largely consistent for nearly a decade, with deal volume holding relatively steady from year to year. But a closer analysis reveals that the M&A playing field looks different today than in the recent past, with senior living and long-term care providers being major new players.
Going back to 2008, there have been roughly 100 home health M&A deals each year involving Medicare-certified agencies, according to data from The Braff Group, a health care M&A company specializing in home health, among other areas.
Although deal volume was slightly higher between 2008 and 2010, following the financial crisis, these deals largely involved distressed businesses; companies then had incentive to sell in 2011 and 2012 prior to changes in the capital gains tax, Braff Group Managing Director Mark Kulik tells HHCN.
Now, with the economy on surer footing, stronger home health businesses are being acquired for higher valuations by a greater variety of strategic buyers, Kulik says.
“In the last three years, we’ve seen the long-term care companies come in,” he says. “Private equity players were in, got out, and now are looking to get back in again. Interest from different types of buyers makes for a strong market.”
A significant driver for long-term care is the shifting U.S. health care system, which increasingly is pressuring — and rewarding — providers for better managing patient populations across the continuum of care.
Seeking synergies across the post-acute spectrum, Kindred Healthcare (NYSE: KND) aggressively pursued an acquisition of one of the nation’s largest home health companies in 2014, and ultimately succeeded in closing a blockbuster deal. The purchase of Gentiva Health Service Inc. came in at $1.8 billion. Already, Kindred says its integration of Gentiva is paying off.
Another major post-acute player, HealthSouth (NYSE: HLS), also got into the home health game in 2014 in a big way, acquiring Encompass Home Health and Hospice for $750 million.
Indeed, with other post-acute providers pursuing similar acquisition strategies as Kindred and HealthSouth, “the pool of potential buyers has never been greater,” according to Braff’s Spring 2015 analysis of M&A activity. And other large, “marquee deals” could be in the offing, Kulik says.
Yet, deal volume could trend down in the short-term, the firm cautions. That’s in part because these deals disrupt the acquisition activity that the purchased companies had underway, and because with some of the prime acquisition targets now off the market, potential buyers must take time to look further downstream.
The first quarter of 2015 did see fewer home health and hospice deals than the same period a year earlier, according to Braff data, as well as figures recently released by PricewaterhouseCoopers.
Senior Living Gets in on the Action
Both Kindred and HealthSouth have a strong focus on Medicare-driven post-acute rehabilitation, so it makes sense that they would grow by acquiring Medicare-certified home health providers. However, private pay senior living operators also are getting in on the action.
“We’re seeing increased interest from various senior living companies, both skilled nursing and assisted living facilities, across the country,” Kulik says. “I think they’re viewing the home care component as an extension of their services.”
One high-profile acquisition in the assisted living space came in 2012, when Emeritus Corporation purchased Nurse on Call for $102 million. Emeritus then was itself acquired by Brookdale Senior Living (NYSE: BKD), the nation’s largest senior living company.
Despite deals like these, assisted living has up to this point been involved to a lesser degree in mergers and acquistions than SNFs, Kulik notes. But AL companies have been investigating private duty home care providers, which are not Medicare-certified and offer assistance with daily living activities rather than skilled nursing; currently, acquisitions in this part of the market have fallen off and may be in a holding pattern due to unresolved questions hovering over the industry.
One of these questions is whether the courts ultimately will uphold a federal push to expand minimum wage and overtime rules to home care workers. Another is what the impact of the so-called employer mandate will be; this is the Affordable Care Act provision requiring small- and medium-sized businesses to offer a minimum level of insurance coverage for workers.
Depending on how these issues play out, home care providers might have to charge more to cover costs.
“How far can you raise your rates and pass your costs on to the consumer before they cut back on demand?” Kulik says. “That’s tapped the brakes on activity in the private duty sector, because buyers want to see how it unfolds.”
However, when discussing private duty home care, it’s important to note that in addition to private pay, Medicaid reimburses some of these providers, Kulik emphasizes.
As managed Medicaid continues to catch on, the organizations administering these benefits likely will see value in high-quality home care that can help prevent expensive hospitalizations, Kulik surmises. The Medicaid-reimbursed private duty sector could be an increasingly important player in the health care continuum and an emerging focal point for M&A activity, he says.
“Look at success stories like Addus, a public company that does Medicaid. Their stock has skyrocketed,” Kulik notes. “I expect we’d see more activity in that area going forward.”
Written by Tim Mullaney