Encompass Home Health and Hospice and HealthSouth (NYSE: HLS)—soon to be known as Encompass Health—plowed through recent regulatory challenges and is looking to add more hospice deals in its future.
Home Health Care News recently caught up with Cliff Blessing, senior vice president of development at Encompass, to find out more about the organization’s M&A strategy and trends in 2017 transactions.
Encompass, based in Dallas, is one of the nation’s largest home health care providers, while HealthSouth is the nation’s largest inpatient rehab facility (IRF) provider. While the company was bullish on acquisition activity during its third quarter earnings report, Encompass had completed $26 million in acquisition investments in the third quarter—while the company’s acquisition goals for 2017 were between $50 million to $100 million.
After staving off any uncertainties from the proposed home health groupings model (HHGM)—which was not finalized by the Centers for Medicare & Medicaid Services (CMS) in its prospective payment system (PPS) 2018 update—Encompass is looking to continue acquiring, rounding out its investment goals, and keeping an eye on the hospice sector.
The sweet spot for Encompass’ deals—which Blessing says are unique like “snowflakes”—centers on acquisitions of operations with roughly $5 million to $20 million in revenue, he said.
“In general, 2017 has been a competitive year on the acquisition front,” Blessing told HHCN. “We’ve seen home health EBITDA multiples and hospice multiples remain relatively constant throughout the year, although there has been a lot of competition on some of the deals we’ve looked at.”
However, “at least half” of Encompass’ deals in 2017 have been proprietary deals in which either Encompass called on the provider or the provider reached out directly to Encompass.
“Sometimes they weren’t even selling,” he said. “We convinced them now is a good time to sell, or we planted the seed and the relationship developed over time, and ultimately that led to a conversation that resulted in a closed acquisition.”
Looking ahead, hospice will likely continue to be a hot sector, with higher valuations and less regulation compared to home health care. Encompass has an ambitious goal to add hospice care everywhere it has a home health location, Blessing said. Encompass will also continue to focus on the company’s vertical growth by adding home health care locations where there are overlaps with HealthSouth IRFs.
“We will continue to focus on markets where we do not currently have a home health agency where there is a HealthSouth inpatient rehabilitation facility,” Blessing said. “That’s our No. 1 focus. Our second focus is to continue to expand our hospice service line. We want to have 100% geographic overlap between our home health and hospice operations.”
The hospice opportunity is huge, he said, pointing out Encompass has around 35 hospice locations compared to about 200 home health locations.
“The runway is just so much longer on hospice,” he said.
Hospice has recently seen an uptick in interest, as its higher margins and fewer regulatory pressures have made it an increasingly attractive sector. In contrast, there are increasing regulatory pressures and threats—such as HHGM, the new CoPs and consistent reimbursement cuts from CMS—on the home health side.
“Because of the reimbursement problems in home health, I think organizations are looking more to hospice as an investment opportunity, especially as some other non-strategic buyers will want to get into that space as they see more consolidation opportunities there,” Blessing said.
Written by Amy Baxter