Honor Faces Scrutiny Over Growing Partnership Model

It’s been a little more than a year since San Francisco-based startup Honor launched a new strategy focused on partnering with existing home care providers. The partnership approach has so far helped Honor shift to a more sustainable business model and expand its market presence, company leaders say, but it has generated persistent rumors and pointed criticism from skeptics throughout the home care industry.

While it’s true that partnering with Honor or any startup company has its share of unknowns for an agency, some of the concerns about the oft-questioned home care startup may be inaccurate or overblown, an in-depth Home Health Care News review suggests. The review was based on an analysis of what one home care agency owner claimed to be a template version of Honor’s partnership agreement, as well as several on-the-record and on-background interviews with a variety of stakeholders.

Citing the company’s policy not to comment on confidential information, Honor declined to authenticate the agreement.

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The possible cause of the Honor backlash: the fact that it came out of the gate aggressively promising industry disruption and has now made a very dramatic shift in tone and strategy.

“They started as a home care competitor using technology to disrupt,” Peter Ross, CEO and co-founder of Senior Helpers, told HHCN. “The industry was freaking out that these folks were going to come in and turn things upside down.”

Honor rose to prominence in 2015, when it announced it had raised $20 million in venture capital and aimed to be a new type of home care provider, gaining efficiencies through technology to offer a better experience for clients and caregivers. In its revamped model, Honor partners with independently owned agencies by taking over caregiver recruiting, onboarding and training, plus day-to-day logistics, billing and other back-office responsibilities.

Honor holds most of its key financial and performance figures close to its chest, so gauging the new model’s success is somewhat complicated. Recently released statistics from the company, which has raised $115 million in total since launching, do provide some level of insight, however.

Under Honor’s new business model, formally known as the “Honor Care Network,” the startup has expanded services into more than 600 cities and towns across California, New Mexico and Texas, roughly tripling its number of hours of care provided in the process. The company also expects to expand into at least one additional state in early 2019, Honor President Nita Sommers told HHCN.

More than 225 full-time employees currently work in Honor’s headquarters.

“We’ve kind of, essentially, rolled out the program even faster than expected, taking advantage of interest we’ve seen in the market,” Sommers said. “After launching it in the Bay Area, we quickly rolled it out to our other states and markets.”

Honor doubters have specifically raised concerns over the company’s revenue sharing approach and exit policies with independently owned home care agency partners. They’ve done so in unsolicited emails sent to HHCN, during conversations with HHCN reporters and through anonymous comments published elsewhere online.

“When you look at the model, you wonder about it being unproven,” one owner of a home care agency that does about $6 million in revenues told HHCN. “It’s a company that has raised several millions in revenue, but they’ve pivoted their model a couple of different times. In my opinion, the people signed up to the Honor Care Network are the ones who are just tired of being in the business.”

Rise of the Honor Care Network

Honor was not the only tech-enabled direct-to-consumer platform to launch with VC backing in the last several years. Similar startups have included Hometeam and HomeHero, which has since ceased its operations.

When it closed its doors, HomeHero cited a change in labor law that forced it to move away from the use of independent contractors as caregivers. Honor also had to address this issue, shifting its workforce to W-2 status in January 2016.

Honor has moved away from its original plan in other key ways as well. Today, Honor maintains its initial approach in a handful of key markets to test and pilot new ideas and device integrations.

Naysayers have perceived the shift as a pivot after a failed endeavor, but Honor views it more as an evolution, a way to best capitalize on its tech roots and strengths to solve issues tied to industry fragmentation, Sommers said.

There are about 14,000 or more home care agencies actively operating in the United States, according to industry estimates.

“The core opportunity Honor has really seen is that there’s a very high degree of fragmentation in the current home care market, and that does create a lot of challenges for clients to navigate, for [caregivers] to get vested, so we’ve had a very, you know, relatively simple mission — to create a national platform to address a lot of those issues that fragmentation has created,” Sommers said. “As we were thinking about how to do that — sort of build a national presence quickly — this idea of the Honor Care Network started to emerge.”

The move from home care provider to technology vendor and back-office booster didn’t come easily. Indeed, it was “a big internal decision,” especially when it came to making a lot of the things its developers had built available to others in the industry, Sommers said.

Growing its partnership model is now the company’s predominant focus.

In general, the Honor Care Network works by finding and signing small to mid-sized independent home care organizations — not franchised agencies — as partners. In exchange for Honor’s back-office capabilities, along with its expertise in handling staffing, compliance and regulatory challenges, the independent home care organization shares a negotiated portion of its revenue with Honor. The partnership also calls for the independent agency and Honor to co-brand their product.

Meanwhile, once it joins the Honor Care Network, the home care agencies become responsible for client outreach, identifying prospective clients, assessments, contracting, billing authorization, client relationship management and maintaining any licensure requirements.

“What you find when you talk with [owners] is a lot of them got into the business for a bunch of reasons around helping seniors, and they find that their days get spent, frankly, in this hamster wheel of dealing with a lot of issues that are operational,” Sommers said. “Our value proposition to them can be about taking on some of those responsibilities — not all of those responsibilities — off their shoulders so they can leverage our capabilities to do that well and get the effects of scale.”

Although Honor’s partnership model is new to the home care industry, comparable business strategies exist in other health care spaces.

An independent physician association, for example, is a business entity organized and owned by a network of independent physician practices for the purpose of reducing overhead or chasing business ventures that a single practice couldn’t pursue alone. McKesson, which brings independent pharmacies together in a network and offers shared services to help them compete with powerhouses Walgreens and CVS, is another example.

Fundamentally, the basic concept of building a network to quickly ramp up distribution is not altogether different than what traditional home care franchisors are doing, experts say. There are, of course, major dissimilarities and a strikingly different pros-and-cons list to each.

“Most of the people we work with today have been in business already for 10 to 15 years,” said Ross, whose Senior Helpers has more than 300 global franchised locations. “Franchisers have a lot of value for somebody coming from a different [industry] who don’t know anything about home care.”

Revenue sharing and exit strategies

Most of the negative rumors swirling around Honor hone in on how much revenue the company takes for providing its services and how flexible the company is when independent home care agency owners want to, perhaps, sell their businesses.

When it comes to revenue sharing, recent industry reporting has described Honor’s cut as extremely steep. In an October piece, the Home Care Technology Report, for instance, stated that Honor takes 80% to 90% of agency revenues, depending on how well agency owners negotiate.

That’s inaccurate, at least based on its current partnerships, Sommers said.

Instead, Honor’s business arrangement with agencies is more closely split down the middle, according to Sommers. Greg McCarthy, CEO of California-based TheraCare, also described Honor’s revenue sharing stance as a 50-50 split.

Founded in 2011, TheraCare had been in talks with Honor about joining its network for more than a year. It finally did so in August, McCarthy told HHCN.

“This was kind of my baby, so it was something I wanted to evaluate seriously,” McCarthy said. “My net profit is going to look very similar with Honor as it did without them, and now I think the door opens more to growth because of Honor’s economics of scale and ability to run the back-end tightly.”

On average, agencies that have participated in the Honor Care Network have seen their overall revenues grow by about 30% in the short time the model has been up and running, according to Honor. For TheraCare, Honor has helped by filling shorter shifts it would have otherwise had to turn away due to a lack of caregiver resources, McCarthy said.

“Whenever there’s someone changing a space, there’s going to be inaccuracies and misconceptions,” he said. “The people who are part of the partnership aren’t really talking too many details, so I think there’s a lot of misinformation out there.”

Critics have also voiced concerns that, through its partnership model, Honor is effectively buying independent home care agencies and financing the acquisition with the owner’s revenue share, leaving owners trapped in a one-sided relationship.

Honor’s standard agreement terms give agency owners two overarching exit strategies, according to Sommers.

In the first scenario, owners may choose to exit their business by finding a new owner who also wants to maintain a partnership with Honor. If that was the case, Honor would “be very heavily involved” in finding the new partner to take on the original owner’s business, Sommers said. In the second scenario, owners could “pull of of the model, take all of their clients back and sort of go back to operating as a standalone company,” she said.

Despite those outs, over time, all partnerships inevitably develop dependencies, particularly when there is ample integration. In practicality, unwinding a partnership with Honor may present challenges in a sale or upon terminating the relationship due to an agency’s dependence on Honor for all the services it provides.

Interviews and the supposed template agreement shared with HHCN suggest Honor may include various provisions that could further complicate agency exits. The purported agreement provides rights for the Agency and for Honor on exiting the business if either fails to stand up to its commitments within the agreement.

Honor declined to comment on any specific provisions.

“With any company, at some point, you want to make sure you have a safe exit,” McCarthy said. “Either Honor will facilitate another partner to purchase my book of business, and Honor will facilitate that, [and] if not, I can look to the open market — after they have the first crack at it to make a fair [play] to buy that business.”

Currently, Honor has three common partner profiles. It caters to the smaller agency owner who might be feeling overwhelmed and distressed, plus the mid-sized owner that does between $3 million and $6 million in revenue and who is looking to grow quickly. Recently, Honor has also found interest in larger platform home-based care organizations that provide a range of services and specifically need help managing just their home care business line.

Besides TheraCare, other newer Honor partners include Help Unlimited, Indecare and 4Ever Young Living.

The big takeaway

Even if many of the rumors related to Honor are unfounded or misconstrued, that doesn’t make questions any less important or valid, industry insiders say. The reality is that Honor is a new, potentially disruptive force in the home care sector, meaning there’s bound to be inherent unknowns.

“I think it’s still new,” Ross said. “I think Honor pivoted to something that could leverage their technology. They’ve had multiple rounds of investments into that business, and I think they’re trying to find a role that they can go in and find an opportunity.”

Any home care agency interested in partnering with Honor “really needs to vet out the process and do their due diligence,” Ross said.

That should include weighing the decision to sell outright, as a market exists for home care agencies of varying sizes and profiles. The last few years have brought an uptick in acquisitions of private duty home care agencies, according to Mark Kulik, managing director at The Braff Group, an Atlanta-based sell-side transaction advisory services firm.

Even a small agency could find an interested buyer, particularly a strategic acquirer that wants to pick up the clients and employees of a market rival, Kulik said. An under-managed or financially distressed agency cannot expect a premium valuation, of course, but he believes even these companies can attract a buyer.

Other M&A professionals strike a different note.

The market for agencies that pull in $1 million to $3 million annually currently is not robust, according to Jim Moskal, leader of the health care practice at Chicago-based Livingstone Partners, an M&A advisory firm. Still, franchisers might buy an agency of that size and convert it to a franchise location or a company-owned store, he told HHCN. The market is not much more robust even for larger agencies that bring in $3 million to $6 million annually, he added.

Putting questions and concerns aside, Honor critics need to remember that Honor isn’t trying to become a one-size-fits-all solution for home care agencies, Sommers said. While its business model may seem unattractive to some, it also presents significant upside to others.

“I think when we started the network, we probably skewed more to some of the smaller business owners because they’re the kind of folks who were, frankly, about to sell their business because they were struggling so much,” Sommers said. “As we’ve matured and gathered a ton of proof around how we’ve built our business and the success we’re having with early partners, we’re certainly seeing more of these bigger entities, I would say.”

“This model, I will be the first to admit, is not for everybody,” she added. “It doesn’t need to be and that’s not our intention.”

Written by Robert Holly

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