PDGM Changing Home Health M&A Landscape

With a number of upcoming regulatory changes sure to shake up the home health industry — including the Patient-Driven Groupings Model (PDGM), the Review Choice Demonstration (RCD) and a phaseout of Requests for Anticipated Payments (RAPs) — a provider’s future isn’t exactly clear.

As a result, questions surrounding how and when to best approach mergers-and-acquisitions opportunities loom large.

While that’s particularly true for home health providers, it’s a concept that applies to hospice and home care operations as well. Hospice and home care have both been hot M&A targets for many buyers, meaning the time may never be better to sell.


“One of the most common questions I get is, ‘When is the best time to think about selling my home health or hospice business?’” Brian Bruenderman, a partner at M&A advisory firm Stoneridge Partners, said during a presentation at the 2019 National Association for Home Care & Hospice (NAHC) conference in Seattle. “My response is the day you started it. Sometimes, it’s when uncertainty is moving in.”

Specifically, home health, hospice and home care companies that have traditionally stayed in their individual lanes should start to explore M&A opportunities, according to Bruenderman.

That could mean a Medicare-certified home health company that hasn’t yet branched off into personal care services aimed at activities of daily living (ADLs), for example. It could similarly mean a provider of any type that hasn’t developed robust cross-continuum partnerships, he said.


Additionally, in terms of scale, it’s the smaller or mid-sized agencies that should be on the lookout for strategic M&A opportunities.

“We are getting to a point where I think it’s becoming more difficult to be a smaller or mid-sized agency than it has been in the past,” Bruenderman said.

Founded in 2001, Stoneridge Partners is a health care M&A advisory firm that specializes in mid-market home care, behavioral health and hospice deals. As part of its business, the firm also releases a monthly index of the largest publicly traded home health companies in the U.S.

PDGM’s impact

In general, industry experts have forewarned that the impact of PDGM will hit smaller home health agencies the hardest. Coding and revenue cycle management are singled out as potential pain points, thanks to PDGM’s more complex groupings mechanism and new 30-day billing periods.

In turn, the industry will likely see fewer smaller add-on transactions, according to Bruenderman.

“[PDGM] will disproportionally affect smaller agencies,” he said. “Unless there is something unusually strategic or interesting about the business, I just don’t see those small add-on transactions that have been a big piece of the puzzle happening. I think this favors larger operations.”

In the final few months before the implementation of PDGM, providers should remember that the Centers for Medicare & Medicaid Services (CMS) wants consolidation, according to Amedisys Inc. (Nasdaq: AMED) Vice President of Mergers & Acquisitions Kris Novak.

“I definitely think it will consolidate the industry,” Novak said at the NAHC event. “If there are folks that are struggling, anxious and just don’t want to live in that environment, we see ourselves as a buyer.”

Amedisys provided an update on its ongoing M&A strategy Wednesday morning during the Baton Rouge, Louisiana-based company’s third-quarter earnings call.

Home health consolidation

Even with PDGM on the horizon, those expecting to see the wave of home health consolidation crash will have to wait a little longer than Jan. 1, according to Mike Dordick, president of McBee Associates.

“Right now, you are going to see people move into that process,” Dordick told Home Health Care News. “You are going to start seeing it when the cashflow implications are there and people start to see their financials, which may not happen right away.”

Wayne, Pennsylvania-based McBee offers financial, operational and clinical consulting services to health care providers across the continuum of care.

While PDGM hasn’t triggered any new M&A trends that are easily observed, it has slowed down the markets, according to Dordick.

“There are people that are a little more conservative waiting to see what happens,” Dordick said. “The trend you may see, once it’s 2020, is that some of the bigger players may reengage and that the valuations may change. Right now, it’s very ‘wait and see,’ and people are being strategic about what they buy instead of just going after everything.”

Alternately, some experts believe that we are already seeing the effects of PDGM on M&A.

“Generally speaking, we have seen fewer Medicare home health transactions than we’ve seen in the past, and that’s because it’s difficult to put together a transaction when the buyer looks at a set of financials and projections next year and they see an 8% cut,” Cory Mertz, managing partner at Mertz Taggart, told HHCN.

Mertz Taggart is an M&A advisory firm dedicated to the home health, home care, hospice and behavioral health spaces.

Overall, home health, home care and hospice M&A transaction activity for Q2 was largely dominated by hospice demand, according to data from Mertz Taggart. In total, there were roughly 14 hospice related transactions in Q2 2019, an increase over the eight deals that took place in Q2 2018.

That said, the transactions that took place on the home health side were often more strategic than what the industry has seen in the past, according to Mertz.

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