Home Health Industry Likely Headed for M&A Rollercoaster

If there’s one thing home health care providers can agree on when it comes to the Patient-Driven Groupings Model (PDGM), it’s that the new model is shrouded in uncertainty.

Despite attempting to predict expected reimbursement changes and adapting operations accordingly, agencies won’t know exactly how PDGM will affect them until well after its Jan. 1 implementation.

As a result, PDGM will likely lead to a drop in merger and acquisition (M&A) activity in the home health space over the next year, followed by a spike soon thereafter, experts predict. In other words: It’ll look a little bit like an M&A rollercoaster.


“[PDGM] definitely is causing buyers to tap their brakes,” Mark Kulik, managing director at Pittsburg, Pennsylvania-based M&A advisory firm The Braff Group, told Home Health Care News.

Buyers have been slowing their rolls for months.

In the first quarter of 2018, there were 20 M&A transactions in the Medicare-certified home health space, Braff Group data shows. A year later in Q1 2019, there were 15, following a Q4 filled with just 11 deals in the space.


The deceleration comes after a record-breaking 2018, when the home health and hospice sectors combined closed at least 82 deals, according to Norwalk, Connecticut-based market intelligence firm Irving Levin & Associates, which collects and studies M&A data.

But now home health care’s hot M&A landscape is cooling — at least temporarily.

“Even though there are models out there, no one really knows what’s going to happen relative to profitability post implementation of [PDGM],” Kulik said.

That’s a problem for buyers because when they purchase an agency, they’re acquiring future cash flow. However, ahead of PDGM, those figures are currently somewhat unpredictable, according to Cory Mertz, managing partner at Atlanta-based Mertz Taggart, another M&A advisory firm.

“Most buyers are forced to be much more selective about what they will actually consider, focusing much more on those acquisition opportunities that really fit into their strategic plans,” Mertz previously told HHCN.

Hospice, home care in 2020

While PDGM is expected to slow M&A activity on the home health front, it could have the opposite effect in other home-based care sectors.

“If you’re a large strategic buyer, or even if you’re on the private equity side, you still have to maintain growth goals,” Kulik said. “I think we’ll see a strong remainder of the year for hospice, private duty and even Medicaid private duty.”

That’s good news for other hospice and personal care companies, which some buyers have already announced plans to go after in light of PDGM.

Take Amedisys Inc. (Nasdaq: AMED), for example.

In Q1 of 2019, home health made up about 66% of the Baton Rouge, Louisiana-based company’s net service revenue, with hospice and personal care accounting for about 29% and 4%, respectively.

Still, when it comes to M&A, leadership has its eyes set on hospice.

“We are really going to feed the beast in hospice,” CEO Paul Kusserow said last month in a presentation at the RBC Capital Markets Global Healthcare Conference. “Right now, from an M&A perspective … we are pushing hospice.

Kusserow went on to credit PDGM for the shift: “This time next year, we will understand the effects of PDGM, and we believe we will have the potential to get back into the home health business.”

Addus HomeCare Corporation (Nasdaq: ADUS), on the other hand, will continue to go big on personal care — with marginally increased interest in hospice and home care.

“I think our pipeline profile remains pretty consistent in what we’ve seen over the last, say, year and a half,” CFO Brian Poff said on the Frisco, Texas-based company’s 2019 Q1 earnings call. “I think with us moving into hospice and little bit into home health with Ambercare last year, those are assets that we’re interested in at the right price as well.”

Less than 2% of Addus’s 2019 Q1 net service revenue came from its home health segment. Meanwhile, about 6% came from hospice, and about 92% came from personal care.

Post-PDGM spike

Lafayette, Louisiana-based LHC Group (Nasdaq: LHCG) is looking at the upside of PDGM.

For the post-acute giant — whose home health segment brought in 72% of its 2019 Q1 net service revenues — PDGM could eventually mean a more robust acquisition pipeline.

New M&A opportunities are likely to arise after PDGM has been in effect for several months, as smaller agencies might not be able to stay afloat under the new payment model.

“We believe the changes this new model will bring will open up many consolidation opportunities in the industry,” CEO Keith Myers previously said during a 2018 Q3 earnings call. “We plan to take full advantage of those opportunities — once again.”

Those opportunities will likely come at a very attractive price, Stoneridge Partners President Rich Tinsley told HHCN earlier this year.

He pointed to the transition to the 2000 rollout of the Prospective Payment System (PPS) — the current payment model used for Medicare home health services.

“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.”

However, it will likely be Q3 before home health M&A heats back up, Kulik predicts.

“I can’t think of a time where a change like this occurred and there wasn’t a snafu or a delay or an inconsistency in processing claims,” he said. “I believe it’s going to be a couple of quarters — at least Q1, Q2 of 2020 — before there’s any real clarity in the financials and before we see acquisition activity in the M&A space for certified health picking back up again.”

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