Home Health Players Line Up for Hospice Deals in 2018

The strong role hospice plays in the post-acute care continuum is being realized more and more by consumers, driving a surge in mergers and acquisitions (M&A) activity and overall interest in the space by home health providers.

In fact, during Amedisys, Inc.’s (Nasdaq: AMED) third-quarter earnings call, CEO Paul Kusserow declared the company’s focus on larger hospice assets, based on significant growth in recent years.

But Amedisys isn’t the only big-name player throwing its hat in the proverbial hospice ring—Brentwood, Tennessee-based Brookdale Senior Living (NYSE: BKD) and Dallas-based Encompass Home Health and Hospice are also implementing aggressive strategies in growing their hospice segments.

This heavy interest in hospice is not uncommon among home health players, according to Mark Kulik, managing director of Pittsburgh, Pennsylvania-based health care M&A advisory firm The Braff Group.

“I don’t know of any [provider] looking to remain exclusively as a home health provider,” Kulik told Home Health Care News. “If you’re a provider of Medicare-certified services, traditional episodic home care, I can’t think of anybody of size that’s not trying to also provide hospice services, as well.”

A bigger piece

Consumer demand in hospice is among the driving forces behind the growth in the segment—and payer sources are taking notice, according to Rich Tinsley, CEO and partner at Louisville, Kentucky-based M&A advisory firm Stoneridge Partners.

“Payer sources like [hospice] because there’s a huge savings to the cost in the last six months of life, so everybody is betting on the fact that hospice will be a bigger piece of that bundled payment when someone has a terminal disease or illness,” Tinsley told HHCN. “Demand is high because I think people are seeing that it’s a fraction of the normal cost of the last six months of life.”

Another driving force is the sector’s steady reimbursement rates from the Centers for Medicare & Medicaid Services (CMS), according to Jim Moskal, partner and global health care practice leader at Chicago-based M&A firm Livingstone Partners.

“Hospice is [seeing] pretty stable reimbursements,” Moskal said. “Hospice has [seen] no real, meaningful rate cuts, but [rather] slight increases.”

In early August, CMS issued a final rule increasing Medicare hospice payment rates for fiscal year 2018 by 1%, or $180 million.

“Unlike other sectors of health care, hospice has been receiving increasing reimbursement every year,” Kulik said. “Collectively, since 2009, it has cumulatively received about a 16% increase over time.”

And while home health has been challenged by various regulations in the past year, hospice has seen “relatively benign regulatory risk,” particularly from a reimbursement perspective, according to Cory Mertz, managing partner at Fort Meyers, Florida-based healthcare M&A firm Mertz Taggart.

The vetting process

In terms of what investors are looking for in an ideal hospice agency, analysts agreed compliance is a big factor.

“Assuming you can structure the right deal in terms of price, we’re seeing more emphasis than ever on patient care and compliance, and appropriate average lengths of stay,” Mertz told HHCN.

Kulik agreed and also acknowledged the increased focus by investors on hospice agency’s adherence to compliance.

“Every buyer is looking for a pristine acquisition to make, and as a result of the risks inherent with reimbursement by Medicare and Medicaid, you want to have an agency that has got as a low a risk of any sort of compliance issues, as possible,” Kulik said. “When [buyers find them], I think they’re more encouraged to pay a premium for the very clean agency.”

In terms of valuations, an agency’s average daily census plays a big factor, according to Tinsley.

“It’s the one business in health care today that truly trades on average daily census,” he said. “There are multiples on the bottom line, but you typically can get it based upon their average daily census [which can be] $50,000 to $60,000 per head.”

Steady growth

In 2015, The Braff Group tracked a total of 30 M&A transactions in the hospice sector; in 2016, the firm saw a total of 29 transactions. Through the first three quarters of 2017, the group has tabulated a total of 13 deals, according to Kulik.

“I think fourth quarter typically has a surge and there’s a lot of catch-up activity in reporting, as well, because we have public but also private sources for the numbers,” he said. “I think [the 2017 total is] going to be in that high 20s, 30s range, and I would predict that it would be the same thing for next year, as well.”

While publicly traded companies carry on with their hospice growth strategies, private equity firms are also following suit, according to Moskal. One such transaction includes the sale of Salt Lake City-based Bristol Hospice to Waltham, Massachusetts-based private equity firm Webster Capital, he explained.

Kulik acknowledged the “extremely active” presence of private equity in the hospice sector.

In fact, in 2015, a third of the 30 transactions the group tracked comprised of private equity M&A activity; in 2016 43% of the 29 transactions were private buyers, according to Kulik.

“You’ve got private equity players that are chasing pretty heavy after this space, as well,” he said. “If you’re a strategic player, that’s also another factor you’re contending with, which is competition as a buyer from private equity.”

Written by Carlo Calma