Confessions of an M&A Advisor: Home Health Providers Are ‘Woefully Underprepared’ for PDGM

When it comes to the Patient-Driven Groupings Model (PDGM) and the impact the overhaul will have on the home health industry in 2020, outlook largely varies depending on who you talk to.

On one hand, some industry insiders have told Home Health Care News that PDGM — mandated to be budget neutral by Congress — isn’t nearly as disruptive as transitioning from the Interim Payment System (IPS) to the Prospective Payment System (PPS) during the 1990s and 2000s. Additionally, they say, thousands of administrators and agency leaders have already taken part in widespread educational seminars, giving them a running start heading into Jan. 1, 2020.

Yet at the same time, skeptics point to PDGM’s hard-hitting cash flow pressures, specifically in the first couple of months after implementation. Depending on what happens with PDGM’s widely opposed behavioral adjustments and the phasing out of Requests for Anticipated Payment (RAPs), some agencies may experience cash flow losses as high as 26% moving from December to January and upward of 43% from January to February, according to BlackTree Healthcare Consulting calculations.


For the first installment of our new “Confessions” series, HHCN spoke with a home health M&A advisor to hear a no-filter take on PDGM and its effect on industry wheeling and dealing. The M&A advisor’s responses are below, edited for length and clarity.

The subject of this interview is kept anonymous so he or she can speak without fear of retribution.

HHCN: There’s a lot going on in home health care — PDGM, the Review Choice Demonstration (RCD). There’s also a lot going on in the personal care and hospice spaces. What are you seeing from a dealmaking perspective?

M&A advisor: There’s still a lot of interest.


But I think [home health] valuations are going to have a problem in 2020, just because of PDGM. You’re going to see the publicly traded companies come down, and that’s going to be tough on the ones that aren’t publicly traded.

Valuations have been going up and up for almost a decade — every month. All of a sudden, I think they’re going to decline in 2020. Likely by a lot.

What does that mean? You’re going to see strategics picking things up at a discount. Even good companies that aren’t in trouble after PDGM, their valuations are going to go down because of it.

We recently heard from some people who think 30% of more or home health agencies are going to go out of business because of PDGM. Do you agree?

PDGM is going to have a bigger impact than anybody thinks.

It’s going to hurt cash flow — that’s guaranteed. It’s going to hurt growth. At the same time PDGM kicks in, the Centers for Medicare & Medicaid Services (CMS) is proposing doing away with RAPs, too.

Home health care is one of the few businesses in the world where Uncle Sam floats your startup costs or your growth capital. With every other business, you have to have more capital on the front end to grow. You need to be able to pay for payroll a couple of times through, for example.

But in this business, Uncle Sam will float you 60% of your receivable upfront. And that might go away.

Do you think people are going to go underwater because of that?

Yes. I think the smaller guys will go underwater with RAPs going away. But more broadly, I think the smaller guys will go underwater under PDGM regardless. RAPs going away or being reduced just makes it harder to survive.

We’re not going to see all of that happen overnight. But certainly, over two or three years, looking back, you’ll definitely see the hit.

CMS says there are 11,500 or more home health agencies in the United States. Maybe you say 70% or 80% of those are agencies that do less than $2 million in revenue. I think that category — the under $2 million in revenue category — disappears.

They’ll get gobbled up — or they’ll close.

Can you elaborate on that? That seems like it would drastically reshape the industry.

Well, the number of home health agencies has been relatively stagnant now for a while, even with all the consolidation we’ve been seeing in the space. That tells me that there’s a ton of people starting [home health businesses].

But startups might go away now because of what we just talked about — you can’t start an agency without capital. You need money to pay your workers, and RAPs help with that.

Unless you have funding — private equity backing or probably even just out of your own pocket — starting a home health agency will undoubtedly become more difficult.

What about on the hospice side?

Hospice is so underserved, so I don’t think anything changes. I think you still see a high demand for hospice in 2020. It’s a service that more people want. It’s favorable for families. It’s favorable for payers.

The oldest baby boomers are only 70 or so. As education continues to explain what the hospice benefit actually is and what it affords, they’re going to start using this service more and more, trying to ensure their best quality of life in their final years.

The greatest generation and those above them have this “fight until the end” mentality. Baby boomers don’t really feel that way. They’re more inclined to say, “I want three months of quality rather than nine months of fighting and uncomfortable, painful treatment.”

So the sky-high hospice multiples we’ve been seeing, those are going to continue?

They will. There’s just not enough hospices out there right now. We need more in the system. We need more competition.

What’s the single biggest red flag or common issue you experience in putting home health deals together?

Deal killers are usually payroll-related. Sometimes it’s Department of Labor (DOL) stuff. That could mean agencies not paying windshield time or paying what somebody thinks is the law for hourly wage workers.

On the hospice side, it’s usually cost cap that kills a deal. A lot of hospices have cost-cap problems. In those cases, there’s not much we can do for them.

HHCN was recently at the National Association for Home Care & Hospice Financial Management Conference in Chicago. A trend there was how there’s seemingly endless growth in home care. Do you agree or disagree with that?

On a macro level, you have 10,000 baby boomers turning 65 every day. So, the demand is certainly there. But that wave hasn’t even crashed yet, and the oldest baby boomers are still 10 years away roughly. I think that the “endless growth” stage really comes 10 years from now.

Then it’ll last 20 or 30 years, where growth is unbelievable because of demographics.

What’s your take in the assumption-based behavioral adjustments baked into PDGM? It’s approximately an 8% cut that might happen if agencies don’t upcode or meet LUPA benchmarks.

That’s going to be huge. If you’re not already preparing for that 8% cut possibly remaining, you’re going to be in trouble. You can’t just adjust to that overnight.

If you’re a home health agency operating with 2% margins, you have a big problem. No matter what CMS says, PDGM is not budget neutral — not if those assumption-based behavioral adjustments are in there.

Has private equity interest in home health dampened because of PDGM?

Private equity interest is still through the roof. I get calls multiple times per week. People saying, “I have however many millions of dollars that I’m looking to put into home care and hospice.”

But personally, if I had more hospice inventory, I could retire.

You talk to home health administrators and owners on a daily basis. From an operations standpoint, how well prepared do you think people are for PDGM?

For PDGM? Woefully underprepared. I think nobody truly understands how devasting PDGM can be for cash flow, though folks in the industry are really trying to get that point across.

And remember, even the somewhat conservation cash flow estimates assume financial intermediaries get PDGM right from right out of the gate. They’ve had hiccups after major changes like this in the past. If they have a hiccup after Jan. 1, 2020, PDGM becomes even more impactful to cash flow.

What’s the final message you’d like to leave our readers? Your last word as part of this Confessions piece?

It’s been a seller’s market for so long. In 2020, you’re going to see that become more balanced — or even a buyer’s market. I think sellers are going to feel a little bit confused about that, wondering where all their control went.

Know someone who’d want the opportunity to speak freely about the current state of home health or home care — or want to connect yourself? Reach out to for consideration.

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