Regulatory changes and industry-wide consolidation are keeping home-based care providers on their toes, especially when it comes to merger and acquisition (M&A) activity.
Many predict the M&A landscape in the year ahead will be filled with high highs and low lows, thanks largely in part to the pending implementation of the Patient-Driven Groupings Model (PDGM).
For Jim Moskal, who has served as an advisor for dozens of post-acute care companies in the completion of more than 60 deals, it’s all part of the job. Moskal leads the health care practice at Livingstone Partners LLC, a global M&A and debt advisory firm where he is a partner. In particular, he focuses on home health, hospice and post-acute pediatric services.
Home Health Care News recently caught up with Moskal to discuss the impact PDGM could have on purchasing activity and M&A trends in home health. Beyond an M&A roller coaster in the months to come, he predicts a future filled with creative home care partnerships, home health financial struggles and more.
These and other highlights are below, edited for length and clarity.
HHCN: Can you talk about some of the trends that you are seeing in regards to home health care M&A activity?
Moskal: It has kind of slowed a little bit, but overall you can say it’s been strong. [There’s been] a lot of consolidation driven by the big guys, like when Almost Family and LHC Group merged. Plus the private equity-backed platforms were doing a lot of consolidations, as well.
With all the consolidation that’s happening [the industry is] kind of lacking in decent-sized, $10 million EBITDA and up, independently owned home health agencies. They’re still out there, but there’s a lot less of them out there than five or six years ago. All of this consolidation, at some point, takes a toll on the supply of good quality agencies of size to buy.
PDGM is just causing parties to pause. It’s a meaningful change to reimbursement, probably the biggest one in home health in 20 years. I think people want to see it in action first, so that absolutely has slowed down the M&A activity. What I think will happen after [PDGM] is implemented in January: Give it six months, and then you will see M&A activity pick up again.
It seems like people are going after hospice instead while they’re waiting to see how things shake out. For example, several large providers have said they’re planning to hold off on home health deals in the short-term. Is hospice becoming a more attractive asset comparatively?
If you go by valuations it has been, and it probably has been for four or five years.
Why? Because hospice hasn’t had the reimbursement challenges that we see in home health.
Hospice, relatively speaking, has been pretty steady. Hospice businesses have higher margins than home health businesses.
At HHCN, we have reported a lot about how CMS is proposing to phase out Requests for Anticipated Payment (RAPs) and replace it with a new notice of admission requirement. Some think it will knock small mom-and-pop home health providers out of business.
I agree with that because it’s a working capital issue. The small agencies [and] the mom-and-pops … that are in a good financial position will be able to survive, but there is no doubt that there are going to be some number that take a hit.
This is the one part of health care where you actually get a pre-payment on services. You don’t see that in other parts of health care really. There’s no doubt that some of these agencies are going to be thrown in financial distress and potentially go out of business because of it.
We recently saw Amedisys (Nasdaq: AMED) and ClearCare partner to create a network of personal care agencies. Since big home care deals seem to be becoming harder to come by, do you think deals like this will become more common?
The predominant business model in [home] care is the franchise model –even to encounter a $50-million-in-revenue, private pay, personal care agency is rare.
The franchise model doesn’t lend itself to big agencies. It lends itself to a lot of smaller franchisees. That’s just how that industry has developed over the last 20 years. That’s one of the reasons you don’t see this as much on the personal care side of the business.
Will this lead to creativity in partnerships? Absolutely. I’ve heard talks of companies potentially partnering with franchise owners and franchise systems that can be a personal care arm for them.