Changing M&A Trends Make Home Health a Hotter Acquisition Target
Transformative mergers and acquisitions took place in health care last year, and the types of deals suggest that a more diverse set of buyers could be on the hunt for home health and hospice acquisitions in 2018.
In 2017, there were 115 M&A transactions involving hospitals and health systems, marking the highest level of activity in at least 17 years, according to a new report from Kaufman Hall, a business advisory and management consulting firm based in Skokie, Illinois.
But the larger story might be that dealmaking has gone from being motivated by “a heavy financial rationale” to more strategic plays.
“As organizations look at what they lack and select strategies for closing the gaps, the response has been strategic partnerships to create broader, richer, and more complementary portfolios,” the report states. “While the old business model of economies of scale and synergies may still matter, accessing and capitalizing on intangible asset investments and reducing susceptibility to commoditization through network formation have brought an entirely new echelon of leading edge partnerships.”
In other words, hospitals and health systems are now looking to diversify their business lines, compelled by a broad range of objectives. These include building a stronger brand and presence, network infrastructure, risk-bearing capabilities, care continuum, and diversified operations, according to the report.
In 2018, this could mean “continued momentum in transactions along the continuum of care,” it noted.
All of this suggests that hospitals and health systems could turn their attention to buying home health or hospice businesses. And hospitals indeed are among interested buyers at the moment, confirmed Mark Kulik, managing director for the Braff Group, an M&A advisory firm with a specialty in home health and hospice.
In the past few years, deal flow was largely driven by home health providers acquiring other home health providers to build scale and volume, he said. Now, while the traditional strategic and financial buyers are still active, other types of organizations—not only hospitals but long-term care providers as well—are also vying for deals. They’re pursuing M&A strategies that are strategic, yes, but that also are motivated by financial considerations.
“I think it’s a ‘follow the money’ situation,” Kulik told Home Health Care News. “A few years ago it was that volume was generating money. Now you’ve got bundling and ACOs [accountable care organizations] and risk-sharing scenarios and the pilot program for hospice called Medicare Care Choices…I would say all these pilot or experimental programs have encouraged collaboration and blurring across the traditional payor lines, so care is no longer defined by traditional payor rules, but is more about, how can I get this patient better, less expensively, and keep this patient from needing more care?”
One instance of a “blurring of the lines” deal occurred near the end of 2017, when insurance giant Humana (NYSE: HUM) acquired a 40% stake in Kindred at Home, the largest home health provider in the nation. The idea is that the acquisition will allow Humana to better manage its Medicare Advantage population, preventing unnecessary hospitalizations.
The Kindred deal is a prime example of how so-called strategic acquisitions also must have significant financial upside, emphasized Cory Mertz, managing partner at health care mergers and acquisitions advisory firm Mertz Taggart.
“To be clear, the ‘strategic’ deals are still primarily being done for financial purposes,” Mertz told HHCN. “For Humana, the extra billion dollars in revenue they are going to generate (for their 40% of $2.5 billion of Kindred at Home), doesn’t excite them a whole lot. What I’m sure does excite them is the billions that they will save in a short period of time as a result of having more control of their patient network and keeping them at home and out of the hospital.”
Written by Tim Mullaney
- Kaufman Hall M&A Data: Kaufman Hall