Home Health Industry Must Prepare for Costs of Consolidation

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At Home Health Care News, it seems like we’ve been writing about “the rapidly consolidating home health market” for years. Just check out this story from 2015, for example. There are also these more recent pieces from 2018 and 2019, respectively.

In many ways, consolidation — either through agency closures or through M&A activity — has been a way of life in the home health industry. Leading up to 2020 and the launch of the Patient-Driven Groupings Model (PDGM), many home health executives even predicted a new “historic” wave of consolidation, similar to what happened in the 1990s with the start of the old Prospective Payment System (PPS).

At least based on the conversations I had in early 2020, that wave appeared to be materializing.

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“I am getting some calls from agencies who are looking to close at this point,” McBee Associates President Mike Dordick told HHCN at the time. “They were on the edge of organizationally making it through under PPS and this is the final straw.”

In March 2020, however, the tides turned. The COVID-19 crisis began, forcing some prospective sellers to refocus on their response to the pandemic and patient care. Additionally, some of the cash-strapped operators on the brink of leaving the market were able to stick around, thanks to Provider Relief Fund money and advanced payments from the U.S. Centers for Medicare & Medicaid Services (CMS).

The accelerated consolidation simply did not happen.

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“We were starting to see some shakeout in the home health industry,” Amedisys CEO Paul Kusserow said during a presentation at a 2020 investor conference. “We had about 50 deals in front of us. We were able to complete a couple of them, … but then that completely dried up with COVID-19.”

But now, as the pandemic becomes more manageable and COVID-19 relief lessens, M&A activity is starting to pick up. This spring and early summer have seen a flurry of home health deals, with Mission Healthcare’s acquisition of Healthy Living Network being one of the latest examples.

From my HHCN editor’s chair, it feels like we’re finally at that point where the home health industry will substantially contract. If that happens, home health operators must prepare themselves for the positives and negatives of consolidation.

A more efficient market

From 2018 to 2019, the number of home health agencies dropped by about 3.6%, according to the Medicare Payment Advisory Commission (MedPAC). Since 2015, the home health subsector has contracted by more than 8%, with nearly 1,000 agencies exiting the market.

Today, there are more than 11,000 home health agencies operating across the U.S.

From a compliance and program-integrity perspective, there are plenty of potential positives associated with a smaller home health industry. For starters, fewer individual agencies means less ground to cover for CMS and its contractors. A consolidated field likewise means bad actors become easier to spot.

Meanwhile, scale can lead to important efficiencies and improvements in quality of care from an operational standpoint.

If a regional health system is working with just a few home health providers instead of dozens, for instance, that network can perfect a streamlined referral process and minimize care gaps. The same holds true for health insurers contracting with home health providers to care for their members in the home.

“You can really do different things for your employees, too,” Mission CEO Paul VerHoeve told me earlier this week. “You can service geographies that are contiguous, which is something that’s really important to your community partners.”

On top of all that, consolidation in any industry often leads to innovation, with acquiring companies able to blend their intellectual property with that of their peers. Of course, some may debate that claim by arguing it is competition that triggers more innovation.

These are a few potential benefits of home health consolidation, which recent data also suggests is happening at an accelerated pace, by the way.

In Q2 of 2020, the height of the COVID-19 pandemic, there were just seven home health transactions, according to M&A advisory firm Mertz Taggart. That has easily been surpassed in every quarter since, with at least 15 home health deals coming in Q2 of 2021.

Source: Mertz Taggart

Consolidation risk factors

Consolidation could be good for the home health industry. It could also be very, very bad.

In other sectors, increased consolidation has led to higher service costs, though that’s typically when companies bill consumers directly. In Medicare, payment policies somewhat protect the system from increased prices due to horizontal consolidation.

Hospitals are a great example of the issue. One analysis on 25 metro areas with the highest rates of hospital consolidation from 2010 through 2013 found that the price private insurers paid for the average hospital stay increased almost across the board anywhere from 11% to 54% in following years.

And while home health executives say consolidation can boost efficiencies and improve quality of care, that hasn’t always been the case in other areas of health care. One 2013 study found that bigger hospital-based provider groups had higher per beneficiary Medicare spending and readmission rates than smaller groups.

Hospital and health system consolidation has been so problematic that it was a focus point for former California Attorney General Xavier Becerra, who now heads the U.S. Department of Health and Human Services (HHS).

“You have to watch for these systems throwing their weight around,” Becerra previously told The New York Times. “We are looking for cases where consolidation does nothing for efficiency and leads to distortions of the market.”

There are times, too, when larger providers take on a bigger share of the market and overly prioritize operational efficiency to the detriment of patient care. Many home health clinicians are already concerned about that danger, with some even taking the time to email HHCN to express their concerns.

“Studies to date tend to rebut the argument that acquisitions improve efficiencies, reduce costs and lead to better care coordination,” a March piece from The Commonwealth Fund states. “Instead, they show that consolidation increases prices and fails to improve the quality of care.”

Connecting the dots

The purpose of this HHCN article isn’t to defend or attack consolidation. Rather, it’s meant to remind the home health leaders that consolidation needs to be done in a responsible manner, with patient care always at the center.

Frankly, it’s my personal view that some degree of consolidation is probably needed. There weren’t more than 8,000 home health agencies in the U.S. until 2005 — and that number creeped upward every year until about 2013.

If consolidation is carried out too quickly — or if it’s too profit-driven — clinicians will leave, making current staffing challenges even more dire as demand rises.

Furthermore, the home health industry itself has worked incredibly hard over the past decade to improve its reputation. Home-based care is now on a pedestal, and anything that jeopardizes that just isn’t worth it.