Despite Headwinds, Home Health Valuations Remain High

The home health sector has faced a few hurdles since the beginning of 2017.

Publicly announced home health M&A activity proved lackluster in the first and second quarter of the year, as the industry continues to reel from regulation overload from the Centers for Medicare & Medicaid Services (CMS).

But despite these challenges, investors are still drawn to the industry, even as valuations for in-home care services providers have reached “all-time highs.”

The sky-high valuations across the in-home care services landscape may be the new normal for the market, marked by big deals on the home care franchise side of the industry and high valuations within home health, according to Jim Moskal, partner and global healthcare practice leader at M&A firm Livingstone Partners. He recently spoke at the Home Health Care News Summit in Chicago.

These platform deals are typically being undertaken by private equity groups purchasing franchisors or are strategic acquisitions on the home health side worth $50 million or more, according to Moskal. Included among them is the acquisition of Infinity HomeCare by Baton Rouge, Louisiana-based Amedisys, Inc. (Nasdaq:AMED) for $63 million early last year.

“You have strategic acquirers really going after these [assets] and it just creates a lot of demand [and] drives valuations higher because people are recognizing that [home health] is the low-cost setting, [as the industry] moves towards value-based reimbursement and more managed care,” said Moskal. “The home is going to be a bigger part of that and acquirers want to gobble up those assets when they’re available.”

A reinvention

Post-acute care providers are better positioned in the market, in part, because the increased use of technology in care coordination has helped reinvent the home health care model, Chris Hendrickson, managing director at Ziegler, said during the Summit. Ziegler is a Chicago-based speciality investment bank, capital markets and wealth management firm.

These advancements in care have paved the way for other entities within the health care sector to realize the true value of home health in their investment strategies.

“A lot of hospitals are rethinking the way they work and partner with home- and community–based services,” said Hendrickson. “We’re seeing meaningful shifts in how contingencies and participants in this home and community base are working together. I think a lot of that melds into why people are so bullish on what home and community based services will mean in the long-term future of our health system.”

As more home health care providers are seeking opportunities with hospitals and health systems in joint venture deals, private equity is avid for franchise-based home care providers.

Included among these deals was private equity firm Linsalata Capital Partners’ purchase of H.H. Franchising Systems, Inc., operator of Cincinnati-based Home Helpers; as well as the purchase of Towson, Maryland-based Senior Helpers by New York-based private equity firm Altaris Capital.

More recent franchisor M&A activity includes New York-based private equity firm The Riverside Company’s acquisition of Bloomfield Hills, Michigan-based ComForCare, as well as Authority Brands’ acquisition of Homewatch International, franchisor of HomeWatch CareGivers.

Acquisitions of home care providers allows private equity firms to not only answer to the growing Baby Boomer demographic trends, but also enables them to play to these trends with minimal reimbursement risk, according to Moskal.

“Some of these businesses have some Medicaid waiver business, but 90% of the payer mix is either long-term care insurance or private duty, and private equity buyers find that very attractive,” he said.

Overall, investment in franchise home health care models can be “very profitable” at 30% to 50% in the EBITDA margins, according to Moskal.

M&A predictions

Going forward, Luke James, chief strategy officer at Encompass Home Health and Hospice, predicts that hospice-related transactions are “going to remain strong in 2018,” in addition to private duty. Based in Dallas, Encompass is one of the largest home health providers nationally.

As home health is currently riddled with regulations, hospice may soon see a boom in M&A activity, particularly following CMS’ proposed rule updating hospice payment rates for fiscal year 2018, with an estimated $180 million overall increase.

However, this proposed payment increase is tempered by proposed new quality measures surrounding CMS’ hospice quality reporting program, as part of the rollout of its Hospice Compare website.

Despite this, both Hendrickson and Moskal agree that hospice could heat up in 2018.

“Hospice multiples and the frothiness of it has existed for a very long time,” said Hendrickson. “I think hospice is a very well-protected space. I think there is going to be a lot of healthy attention into it.”

But in terms of home health M&A activity, the panelists agreed that while there is still heavy interest in the sector, investors’ decisions hinge on impending regulations.

“There is a lot of private equity money that would still like to migrate into [home health] but as you can appreciate, some of that will be stymied as some of these policies get embedded and concluded upon,” said Hendrickson.

Provider’s perspective

In-home care providers continue to lower costs of care, which may be adding to their value in the greater health care system. Large home health care providers are seeking to add value to their portfolios as they align with other providers outside the home.

For Encompass, clinical collaboration activities have improved patient outcomes and cut costs relative to total post acute spending, according James.

Since its acquisition by HealthSouth Corporation (NYSE:HLS) in 2014, James explained that Encompass has had a “three-pronged strategy” around acquisitions: Align home health services with the HealthSouth inpatient rehab portfolio to develop a geographic overlap; create the same cohesion between the home health and hospice portfolios; and build scale and density around these service lines.

Despite its focus on geography, James explained that Encompass also considers the strength of the team that they will onboard as part their as part of its acquisition strategy.

“What makes a successful transaction for us long term, post integration, has a lot less to do about the geography we go to and has a lot more to do with a team that we’re able to acquire and partner with to truly implement some of our best practices and move on and grow from there,” said James. “And when you’re isolating and focusing on a very specific set of geographies, it makes that a little bit more difficult.”

Apart from this aspect, an agency’s payer mix and existing referral source base plays a large role in companies that Encompass looks to acquire, James added.

Written by Carlo Calma

(Featured Image: (From left) Aging Media’s Tim Mullaney moderates the panel M&A Outlook at the 2017 Home Health Care News Summit, featuring Jim Moskal, Livingstone Partners; Chris Hendrickson, Ziegler; and Luke James, Encompass Home Health and Hospice)