The in-home care industry is seeing record-breaking valuations and a historic pace for mergers and acquisitions. Heavy investment from private equity firms is among the dominant drivers of that action, and not just for in-home care, but for the U.S. health care sector more broadly.
As private equity becomes increasingly involved in the health care world, skeptics are starting to question the intentions of these firms and their ability to balance profits with the responsibility of providing high-quality, affordable care.
Home health is not immune from concerns, though providers, PE firms and M&A advisors in the industry largely agree the outside investment has been overwhelmingly beneficial, allowing companies to scale and achieve operational efficiencies in the midst of sweeping regulatory change.
PE ‘in it for profit,’ critics argue
Skeptics of private equity in health care include James Carey, the executive director of Association of Independent Doctors, who outlined his concerns in a recent MarketWatch report.
“They are in it for the profit,” Carey told MarketWatch. “And Americans are going to pay for it, either with their health or their finances or both.”
Real estate investment trust Welltower Inc. (NYSE: WELL) CEO Tom DeRosa is also among those who have voiced criticism, blaming private equity for problems in the skilled nursing facility (SNF) industry, particularly in the case of major SNF chain HCR ManorCare, which had been owned by The Carlyle Group since 2007.
“Anyone who knows the ManorCare real estate knows it’s really good-quality real estate in really good markets,” DeRosa said during an April conference call with investors. “It was just capital-starved because the skilled nursing industry had been taken private by private equity firms, and what does a private equity firm do? They over-lever businesses in order to [take] cash out of them.”
While some are concerned about private equity investment diminishing quality of care, others are concerned about what it means for caregivers and staff. Ultimately, a private equity firm’s commitment is to its investors, critics argue, not necessarily a home health or home care agency’s workers, meaning they might not always be given the resources needed to do their jobs if a firm has to trim operational budgets.
The rising wave of private equity investment is something PHI, a direct care workforce advocacy group, plans to closely monitor, Robert Espinoza, the organization’s vice president of policy, told Home Health Care News.
“Right now, we have less to say about this trend, but it’s an area we probably want to study in the future and become more involved in,” Espinoza said. “But whether we’re talking about private equity or other ownership formations … the broader picture for us is still to make sure we’re developing measures to improve the quality of jobs and the care that’s being received.”
Before and after: Senior Helpers, Home Helpers weigh in
Peter Ross—CEO and co-founder of Senior Helpers, an in-home care franchise company with hundreds of locations scattered across the country—is an expert when it comes to the pros and cons of private equity.
After launching Senior Helpers in 2002 and guiding the business through a decade of explosive growth, Ross and co-founder Tony Bonacuse decided to to “take a few chips off the table” and seek outside investment, Ross told HHCN. After several management meetings, the pair struck a deal in 2012 to sell a majority stake in the company to Beverly Hills, California-based Levine Leichtman Capital Partners (LLCP), a large investment firm that has managed about $9.8 billion of institutional capital since inception.
“They brought a lot to the table, especially from a financial perspective,” Ross, who also serves as president of the Home Care Association of America, said. “They really kind of helped guide us through the next four years, really helped us continue to maximize franchise growth, franchise profitability.”
In 2016, right around when the M&A landscape really began to pick up, Senior Helpers was acquired a second time, by Altaris Capital Partners, a health care-focused New York City-based investment firm that actively manages $2.4 billion of equity capital. Altaris Capital Partners also acquired Bonacuse’s equity in the deal.
“Talk about a hot private equity market,” Ross said. “We had 31 initial bids.”
LLCP and Altaris have both helped Senior Helpers grow and achieve operational efficiencies, according to Ross. During LLCP’s four years with Senior Helpers, for example, the home care franchise company roughly doubled in size. Altaris, meanwhile, has allowed Senior Helpers to enter into innovative partnerships, such as its agreement to team up with George G. Glenner Alzheimer’s Family Centers and staff its Town Square adult day care center.
For the most part, the private equity involvement has been positive, but that’s not always the case for every business that’s acquired, Ross said.
Senior Helpers has always hit on its financial goals, so LLCP and Altaris have never pressured the franchisor to cut costs. Likewise, both LLCP and Altaris have let Ross run Senior Helpers without interfering or appointing their own handpicked operator.
“I’ve not had that experience, but I’ve seen it, and it’s hard to have too many chefs in the kitchen,” Ross said. “Most private equity firms know how to stay in their lane and they know what they are. Ones that want to branch out, I think, might have challenges if they don’t know the industry, don’t know the background.”
Home Helpers, acquired by Ohio-based Linsalata Capital Partners in 2016, has had a similarly positive experience with private equity, though the initial ownership change and new operational processes did take a while to get used to, CEO Emma Dickison told HHCN.
“Working with Linsalata, we’ve made a number of investments into the organization to help us scale and manage the business, including things like an upgraded customer relations management system, new mapping software,” Dickison said. “We’ve invested in staff. We’ve invested in marketing for both franchise development and the consumer side.”
What’s behind the PE boom?
Senior Helps and Home Helpers are part of a wave of PE investment in the in-home care industry.
“There is probably an all-time high of private equity interest in home health,” Jim Moskal, partner and head of Livingstone’s health care practice, told HHCN.
There have been at least three dozen market-entry private equity sponsored platform deals in home health, home care and hospice since 2015, according to proprietary data from The Braff Group. Looking at platform and follow-on investments combined, there have been at least 42 private equity led transactions in just the home health industry, including a whopping 19 in 2016 alone.
The list of deals is long and includes Altaris Capital Partners’ acquisition for a majority stake in Senior Helpers, Linsalata Capital Partners’ acquisition of Home Helpers and the moves by Humana Inc. (NYSE: HUM) and two private equity firms—TPG Capital and Welsh, Carson, Anderson & Stowe—to buy the home health operations of Kindred Healthcare (NYSE: KND), then the hospice company Curo Health Services. The list also includes the three-way mega merger of Great Lakes Caring, National Home Health Care and Jordan Health Services, a deal spearheaded by private equity firms Blue Wolf Capital Partners and Kelso & Company to create one of the largest home-based care providers in the United States.
There are several reasons for the increased private equity activities in the in-home care industry in recent years, Mark Kulik, managing partner at The Braff Group, told HHCN.
The biggest, of course, is the expected demand of home-based services going forward, buoyed by aging baby boomers, Kulik said.
Additionally, as a rule, private equity is attracted to industries undergoing major marketplace disruptions, such as the shift toward value-based care, he said.
“Private equity likes disruption in the marketplace because it presents opportunities,” Kulik said. “They have the reimbursement changes going on with various sorts of payment models, building things. That poses an opportunity for [private equity firms] to come in and figure out a better way of doing things. They can bring in technology and they can bring in capital.”
In fact, new opportunities linked to overarching regulatory changes were among the reasons Blue Wolf Capital Partners decided to follow through with the Great Lakes Caring, National Home Health Care and Jordan Health Services combination, Adam Blumenthal, founder and managing parter of the PE firm, told HHCN. That outlook was only strengthened when the Centers for Medicare & Medicaid Services (CMS) announced it would allow non-skilled in-home care services as a supplemental benefit for Medicare Advantage (MA) plans in 2019.
“The broad industry changes, I think, call out for the kind of investment and operational expertise that we try to bring to the situation,” Blumenthal said. “In order to do well … you need scale, you need investment in infrastructure and technology, and you need investment in data and analytics.”
Firms investing in in-home care businesses still want to make sure providers are delivering the best care possible because, as in any industry, quality is closely correlated to profitability, according to Blumenthal. That’s even truer for health care, as payment models are more frequently based on value than on volume, he said, also noting that “culture and values” instilled from the top down have more impact on an organization’s ability to provide quality care than specific ownership type.
“Every ownership system, whether it’s public company ownership [or] private equity ownership, every system has strengths and weakness,” Blumenthal said. “There are not-for-profit hospitals that deliver the best care in the world, and there are not-for-profit hospitals that are challenged.”
Questions surrounding PE’s role in home health aren’t likely to go away any time soon, as M&A activity to projected to remain strong throughout the next several years.
“This is an industry that is undergoing a significant amount of change and scrutiny, and it’s not going to be the same next year as it was this year,” Blumenthal said. “At some point, home health will have gone through a level of consolidation and the regulatory system will be more stable. … At that point, I would say, you know, the role of private equity will probably be less.”
Written by Robert Holly