Home health agencies face a challenging Medicare reimbursement environment, but that has not slowed down merger and acquisition activity. Transactions in fact have increased significantly after a sluggish start to the year, and the high volume is expected to continue in 2016, industry professionals said during a recent webinar.
“Several years ago, we predicted that home health on the Medicare side was going to flatten and decline from an M&A standpoint,” said panelist Dexter Braff, a health care mergers and acquisitions firm with a specialized focus on home health.
Even though the Centers for Medicare & Medicaid Services (CMS) has pursued a rebasing policy that cut reimbursements to home health providers, the clarity of the policy reassured buyers and actually has contributed to the current transaction levels, Braff said during the webinar, which was produced by Irving Levin Associates Inc.
“Actually, a negative aspect of reimbursement led to increased activity,” he said.
Panelist David Berman, principal at Simione Healthcare Consultants LLC, concurred.
“The one thing the market hates is uncertainty,” he said. “We see transactions starting to increase exponentially over last quarter, and that should continue into 2016 as we consolidation in both home care and hospice.”
Transaction volumes usually decline somewhat during the summer months, but that does not appear to have occurred this year, said moderator Leslie J. Levinson, partner and co-chair of the Transactional Health Care Group at legal services and business strategies firm Robinson & Cole LLP.
The hot market is owing not only the certainty around reimbursement, but also the low cost of capital and overall health care policies—at both the federal and state level—that are putting increased emphasis on care coordination across the acute and post-acute spectrum, the panelists said.
And buyers of all sorts are eyeing the opportunity in the sector, with some surprising parties looking to invest.
Many large, strategic buyers are on the sidelines at the moment as they tackle internal reorganizations, said Braff. But this is not true across the board. Major provider Amedisys, for instance, is looking to dramatically ramp up its M&A activity, noted Darby Anderson, chief business and development officer at Addus HomeCare Inc., which operates in-home personal care in 21 states.
Private equity players are getting back in the game, including some that successfully divested in the mid-2000s, Braff said. Skilled nursing facilities also are increasingly active, seeking to extend their capabilities to other parts of the post-acute continuum as they vie to be more valuable in the more integrated health care system.
As for hospitals, CEOs have begun to come around to the idea that post-acute care is not their strong suit, and rather than acquire home health agencies, they are looking at joint ventures and other creative partnerships, Braff and Berman said.
In fact, JVs and mergers are occurring at levels not seen in more than a decade, Berman explained.
“The mergers are almost outpacing the acquisitions in some areas,” he said. “You’re seeing two companies, two systems, regional players, local players, merging together, knowing they need capital, economies of scale, so they’re coming together. More in the last year than the last 15 years.”
As for who is selling, many are organizations that are not willing or able to strategically change their business to meet the evolving health care system, Anderson said. And, particularly if they are a mom-and-pop operation, they may not be concerned with fetching the highest possible price but rather having a smooth transaction and handing off their company to a buyer they feel will be the best fit operationally.
That’s not the case for larger organizations with constituencies who have valuation expectations, particularly those with private equity sponsorship, said Braff and Levinson.
“If we’re talking about larger companies, north of $20 million, if they go through a process and are looking at a variety of different opportunities, you’re looking at a valuation in the plus or minus 8-times EBITDA,” Braff said, providing ballpark figures for valuations. “For smaller sellers, valuations are solid mid-5, 6 times EBITDA for a quality provider. They were looking at 4 to low 5s two or three years ago, so those valuations have gone up.”
While these numbers may reflect general trends, Berman emphasized that providers who are contemplating a sale shouldn’t make assumptions because each transaction is unique.
“The danger with throwing out multiples is people take that, apply it to their business, and it’s not that simple,” he said. “If it were, there wouldn’t be a need for valuations. There’s a lot that goes into it.”
Written by Tim Mullaney