Home Health M&A Activity Expected to Climb Following PDGM, Bankruptcies

Cash flow interruptions and operational changes caused by the Patient-Driven Groupings Model (PDGM) may lead to a spike in the number of home health providers in the U.S. filing for bankruptcy, some experts predict.

If the forecast is accurate, that may also mean more initial M&A action as well.

“I agree with the premise that some home health companies will struggle through the [PDGM] change and will probably either face bankruptcy or a fairly quick acquisition, needing to sell themselves,” Stoneridge Partners President Rich Tinsley told Home Health Care News. “But I don’t think that’s a long-term result.”

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Louisville, Kentucky based Stoneridge is a mergers-and-acquisitions advisory firm that exclusively works with mid-market home care, hospice and behavioral health companies.

While market disruption generally tends to lead to a rise in bankruptcies within any industry, PDGM poses a particularly potent shift due to its expected impact on home health providers’ cash flow immediately following the overhaul’s Jan. 1, 2020, implementation date.

Specifically, providers will see their cash-flow levels drop by double digits in January and February under PDGM, before they pick back up in March, according to early analyses.

“I think you’ll see smaller providers or the ones that aren’t prepared for PDGM struggling with cash flow, with some of that ultimately being a good thing for more stable companies looking to make acquisitions,” Tinsley said. “Probably at very attractive valuations.”

Although home health bankruptcies are relatively rare in today’s economic climate, they were far more common directly before and after the rollout of the Prospective Payment System (PPS) in 2000, an HHCN review of electronically filed court records found.

PPS — the current payment model for Medicare home health services — replaced the Interim Payment System (IPS) as mandated by the 1997 Balanced Budget Act.

“Back from 1997 to 2001, when you went from cost reimbursement to interim payment system to prospective payment system, providers went months and up to a year losing money, so some of them just couldn’t adjust,” Tinsley said. “We were founded around that time and there was M&A activity out there, with everything being bought on the cheap because companies were losing from a cash flow and [profit] perspective.”

Odds are that PDGM likely won’t be as hard-hitting as PPS, Tinsley noted. That means if M&A opportunities are to be had, they’ll likely come toward the beginning of next year as providers navigate the early cash flow obstacles.

Overall, the home health and hospice industries are both expected to see significantly more merges and acquisitions in 2019 compared to years past. On the home health sides, major deals so far include Birmingham, Alabama-based Encompass Health Corporation’s (NYSE: EHC) $217.5 million play for Alacare Home Health & Hospice.

There were nearly 60 deals involving Medicare-certified home health providers in 2018, according to Pittsburg-based The Braff Group, another M&A advisory firm.

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