Amedisys Inc. (Nasdaq: AMED) is executing an industry-shaping deal with one of the country’s largest hospice providers, adding further fuel to a white-hot M&A market.
Home health, hospice and personal care powerhouse Amedisys announced Wednesday that is has signed a definitive agreement to acquire Parsippany, New Jersey-based Compassionate Care Hospice for a fixed price of $340 million, inclusive of $50 million in payments related to a tax asset and working capital.
As a result of the deal, expected to close by Feb. 1 of 2019, Baton Rouge, Louisiana-based Amedisys becomes the third-largest hospice provider in the United States. The largest hospice provider was created earlier this year, when insurance giant Humana (NYSE: HUM) and two private equity firms acquired Curo Health Services, combining it with Kindred Healthcare’s hospice business. The second-largest provider is Vitas Healthcare, a division of Chemed Corporation (NYSE: CHE).
Compassionate Care Hospice is the eighth-biggest hospice provider in the nation, according to most estimates.
Despite the deal’s magnitude, Amedisys’ acquisition bucks the trend of record-breaking valuations and double-digit multiples that the hospice industry has been seeing of late. While recent hospice deals have been placed between 16 and 19 times EBITDA, Amedisys was able to land Compassionate Care Hospice for a far smaller multiple, Paul Kusserow, the company’s CEO and president, told Home Health Care News shortly after the deal was announced.
“We bought it for 8 times [EBITDA],” Kusserow said. “That’s half of what everybody else is paying.”
Amedisys’ stock value has climbed by more than 130% on a year-to-date basis, according to data from M&A advisory firm Stoneridge Partners. At least on the hospice side, much of that growth has been achieved organically, as Amedisys has typically shied away from deals that its leadership has viewed as overpriced.
Amedisys was able to acquire Compassionate Care Hospice for below the market norm because of its legwork in sourcing and securing the deal internally, Kusserow said.
“We built our own proprietary M&A function that can find these assets,” he said. “We bought [Compassionate Care Hospice] way below what the market has been trading at for these assets. Hopefully this will start a trend where people are not overpaying for these things because some of the prices that have been out there are ridiculous.”
There are a few reasons for the relative-high hospice valuations, including interest from private equity groups.
Since the start of 2018, there have been at least 20 hospice transactions, with a dozen being PE-backed, according to proprietary data from The Braff Group, another M&A advisory firm.
“Private equity is very bullish on the space, continuing to pursue it and make investments,” Mark Kulik, managing director at The Braff Group, told HHCN. “We’re seeing hospices being acquired under all sorts of different circumstances.”
Deal offers scale, ‘geographic synergies’
Founded in 1993, Compassionate Care Hospice currently provides services for about 3,300 patients daily across 53 locations in 24 states, generating roughly $188 million in annual revenues in the process.
Post-closing, the companies’ combined hospice operations will include 136 care centers in 34 states with an average daily census of about 11,000 patients.
Amedisys’ existing hospice business has “very little overlap” geographically with Compassionate Care Hospice’s operations, meaning consolidation likely won’t be a concern, Kusserow said. Meanwhile, “very good” adjacencies exist for Amedisys home health and personal care business lines, he added.
“There’s a lot of geographic synergy and expansion [opportunity] with our home health assets and our personal care assets,” Kusserow said. “This will give us opportunities to build home health in some of these states or to supply home health.”
Acquiring Compassionate Care Hospice propels Amedisys companywide into the new markets of Michigan, South Dakota, Minnesota and Nebraska, while also expanding its presence in Texas.
“We really like Texas, and this gives us a nice footprint,” Kusserow said. “It also allows us to offer a full continuum of care in Florida, so we’ll have six hospices now in Florida, where previously we had none.”
Compassionate Care Hospice currently has about 2,300 employees, according to the company.
Amedisys plans to initially add to the sales department to help bring Compassionate Care Hospice closer to its growth and margin levels, Kusserow said. Amedisys also plans on adding Compassionate Care to the Homecare Homebase platform, he said.
“Because we were able to do this for such an attractive price, we’re going to take thing slowly,” Kusserow said. “It’s a really well-run hospice, but this is going to give us some opportunities to bring it up to our standards. From a quality perspective, too, we think we can improve.”
Even with room for improvement, Compassionate Care Hospice already has “very high quality scores,” he said.
PDGM, managed care opportunities
In addition to propelling Amedisys into new markets and strengthening its hospice presence, the acquisition of Compassionate Care Hospice also gives the home health giant breathing room by further diversifying its portfolio in advance of the Patient-Driven Groupings Model (PDGM).
The Centers for Medicare & Medicaid Services (CMS) describes PDGM as budget-neutral, but some agencies face potential reimbursement cuts, depending on their therapy usage, referral source mix and other factors.
“We wanted to go out and balance any ill effective there may be — or may not be — with PDGM,” Kusserow said. “We wanted to bulk up on hospice, which has a very near-term, rosy regulatory future, so we believe this should offset any of the PDGM chop that could occur.”
The behavioral adjustment aspect of PDGM, in particular, could represent a 6.42% payment cut to the home health industry, industry stakeholders caution.
The home health industry has experienced a cumulative payment cut of about 12% since 2009, according to Kulik. The hospice industry, in comparison, has seen a more than 18% increase during that time.
“Home health has certainly seen cuts under the last 10, 11 or 12 years,” Kulik said. “The proposed Medicare increase this year was the first that I’ve seen, I think, in the past 11 years. Hospice has gotten increases in 10 out of the last 11 years.”
Rounding out Amedisys’ continuum of care will also boost the company’s standing to work with managed care partners, Kusserow said.
This is largely why other home health companies have also been adding hospice services, and why Humana bought a stake in Kindred at Home and Curo. The idea is that by better managing beneficiary populations as they age and reach the end of life, these integrated providers can keep costs down and quality high.
From a financial perspective, Amedisys was well-positioned to execute on the Compassionate Care Hospice deal. Even post-deal, Amedisys will only be levered 1.5 times, with its maximum leverage being about 4 times, Kusserow said.
“We’re still going to be doing [tuck-in deals] and de novos,” he said. “We’re finding we have some very good deals in the pipeline, and again, we’ve sourced these on our own. We’re not dealing with crazy pricing. We believe there’s more assets to be bought, and we’re going to go out and buy them.”
Amedisys also recently announced that its subsidiary, Associated Home Care, closed a separate personal care acquisition for Bring Care Home.
Written by Robert Holly