‘The Fittest Survive’: HHVBP Expansion Could Drive Home Health Consolidation

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In the U.S. Centers for Medicare & Medicaid Services’ (CMS) proposed payment rule for 2022, the attention-grabber was the expansion of the Home Health Value-Based Purchasing (HHVBP) Model, the details of which excited some providers and left others concerned.

While the specifics of the expansion plan were being discussed during the public comment period, however, one aspect of HHVBP went under the radar: the effect it may have on the M&A landscape.

With HHVBP, by its nature, there will be winners and losers. Those who perform better will be reimbursed better and vice versa, with “losers” effectively paying “winners.” Which side a provider lands on could affect whether it wants to sell — and what its valuation would be if it does sell.

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“Any losing agency, so to speak, that has a reduction in its reimbursement is going to have a reduction in profitability,” Mark Kulik, the managing director of M&A advisory firm The Braff Group, told Home Health Care News. “And that reduction in profitability will absolutely impact the value of that business. Conversely, any agency that does well is going to see an increase in reimbursement and if it’s managed properly, that increase should fall to the bottom line, making the agency more profitable and more attractive to buyers.”

As such, HHVBP expansion could mean opportunities for both buyers and sellers. While buyers could poach lower-level agencies struggling to survive under HHVBP, potential seller agencies that do well could make out with a higher asking price.

It’s not dissimilar to what industry insiders thought may happen once the Patient-Driven Groupings Model (PDGM) arrived.

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“I think that it’s going to make businesses sharper, which is ultimately going to put a higher-valued business in the market, and then now you’ve got more buyers that are after these types of transactions,” Andre Ulloa, a partner and executive advisor of M&A Healthcare Advisors, told HHCN.

The home health M&A market is currently robust. At least 15 home health deals have been completed in Q2 of 2021, according to the M&A advisory firm Mertz Taggart.

Still, “winners” and “losers” could be a bit too binary when it comes to HHVBP. After all, a granular difference in level of performance could separate the 45th-percentile and 55th-percentile agencies.

Additionally, HHVBP itself doesn’t offer extremely-high upside, as high-performing agencies in the nine demonstration states have said it’s nearly impossible to achieve the maximum bonus. CMS proposed a maximum payment adjustment of 5% as part of its nationwide expansion.

But more clarity is offered through value-based care models, and it will be easier for buyers to sniff out a provider’s worth either way.

“Something like this only makes operators better,” Ulloa said. “But in some cases with these things, some don’t make it, and the fittest survive. On the other end of that, you’ve got buyers in the financial sector and private equity firms who are now dipping below what they would have previously for add-on companies. Now they’re competing with strategic buyers to come in and buy out these lower- to middle-market home health businesses.”

Whether a provider views itself as a seller has also changed drastically over the years in home health.

The compelling reasons for a provider to sell aren’t just about a couple percentage points here or there to the bottom line. There are far more considerations at hand in the contemporary M&A environment, and even owners of larger agencies have had to come to grips with whether they can — or want — to last alone or not.

“If you look at it lately — relative to 10, 15 or 20 years ago — you’re seeing much larger agencies selling now that used to think they were fine,” Kulik said. “They were big enough to withstand any sort of issues in the industry, and now I think those current owners are re-evaluating what used to be a safe size before, and seeing that it is no longer safe relative to the various pressures of reimbursement, competition, changing rules of oversight and profitability.”

HHVBP’s effect on consolidation

Many insiders believe that HHVBP expansion could contribute significantly to industry consolidation.

“I think consolidation is already underway right now,” Kulik said. “And I’ve seen nothing to abate the forces of consolidation. I do believe that if there was anybody that’s on the fence about selling, especially if they’re on the losing side of that reimbursement formula, then that’s one more compelling reason to sell sooner rather than later.”

Just as HHVBP could phase out struggling agencies, it will also bolster the bottom lines of the top-tier performing agencies that could be buyers.

The Pennant Group’s (Nasdaq: PNTG) COO John Gochnour told HHCN exactly that recently.

We also see that the expansion of this program could contribute to the consolidation of providers across the industry, as those that have the clinical expertise to perform well under HHVBP will likely have access to additional funds for M&A opportunities,” Gochnour said. “Overall, we view the model as a positive for the industry and welcome the opportunity to more closely align value and payment.”

Based in Eagle, Idaho, Pennant is a holding company of affiliated home health, hospice and senior living companies. Included in its network are 86 home health and hospice agencies, and 54 senior living communities, located throughout 14 states.

Even though consolidation is already in some ways underway, it doesn’t mean that HHVBP will be the nail in the coffin for small- to mid-sized agencies.

In fact, there’s still a chance HHVBP may not have much of an effect on consolidation at all.

“Initially, when HHVBP was demonstrated in nine states in 2016, it really didn’t have a huge impact on providers in those states, at least from our perspective in terms of the transactional market,” Ulloa said. “In fact, I recently had a conversation with a large provider that’s headquartered in Tennessee, which was one of the states, and [they said] the model didn’t have much of an impact.”

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