Recent Deals Suggest 2022 Will Bring a Very Different M&A Market for Home Health, Hospice

Earlier this week, Axios reported that Humana Inc. (NYSE: HUM) is gearing up for a sale of Kindred at Home’s hospice business and seeking a multiple of 12 times EBITDA. Two days later, Encompass Health Corporation (NYSE: EHC) reaffirmed its plan to spin off its home health and hospice segment into a new publicly traded entity.

Add to that a decent-sized home health acquisition announced by Amedisys Inc. (Nasdaq: AMED), also on Wednesday, and you have yourself some interesting M&A tea leaves to read for 2022.

Together, I believe these moves – made by some of the biggest home health and hospice players in the country – reflect how a very different M&A market is shaping up this year. The main difference, in my view, is a heightened focus on home health dealmaking and a somewhat diminished appetite for hospice transactions.

I analyze the recent home health and hospice news – and share my thoughts on 2022’s M&A outlook – in this exclusive, members-only HHCN+ Update. I offer a couple other interesting thoughts along the way.

A hospice dealmaking dip

Over the previous two years, hospice transaction volume has easily kept pace with home health dealmaking activity – even exceeding it during most quarters.

In 2020 and 2021 combined, there were at least 119 home health-related transactions executed, compared to 157 for hospice, data from M&A advisory firm Mertz Taggart shows. Numbers from other firms paint a similar picture.

Along with the impressive volume totals, hospice valuations were likewise hitting record highs. In 2020, for example, multiples in the hospice space reached a record 26 times EBITDA, according to PwC’s Health Research Institute.

This boom period for hospice was driven by three main factors:

– Private equity becoming increasingly active in hospice, with over half of the hospice deals in both 2020 and 2021 pulled off by PE buyers

– General uncertainty in the home health market, largely due to the implementation of the Patient-Driven Groupings Model (PDGM), the Review Choice Demonstration (RCD) and other regulatory changes

– Strategic buyers’ desire to become “one-stop shops” that are able to control the continuum of care, maintaining relationships with patients as their needs change over time

So what’s changed in 2022? Well, for starters, there’s less uncertainty and risk in the home health industry.

Operators have adjusted to PDGM and RCD with relative ease. Meanwhile, the U.S. Centers for Medicare & Medicaid Services (CMS) instituted a market-basket update of 3.1% in this year’s final payment rule.

On top of that, many of the strategic buyers racing to expand into hospice have accomplished their near- to mid-term goals, with Amedisys being the best example. In 2014, Amedisys owned and operated 80 hospice care centers with an average daily census (ADC) of 4,618; as of Sept. 30, 2021, it had 177 hospice locations with an ADC of over 13,000.

Compassionate Care Hospice and AseraCare Hospice were a couple of the headliner acquisitions during that time.

PE certainly still remains interested in end-of-life care. But with the other two dealmaking drivers lessening and the supply of sellers not what it used to be, the “name-your-price market” for hospice appears to be over.

“After such a sharp [dealmaking] rise, … the pool of acquisition candidates becomes depleted,” The Braff Group, another M&A advisory firm, wrote in a recent report. “Add to this the fact that with the impact and management of PDGM becoming clearer, buyers will return to certified home health, siphoning off at least some demand for hospice. Accordingly, we anticipate a modest fall-off of hospice M&A over the next 12-36 months.”

Humana reportedly looking to offload Kindred at Home’s hospice business at 12 times EBITDA – a bargain compared to the 20-something multiples in 2020 and 2021 – is in line with this idea. The Louisville, Kentucky-based company is reportedly conducting the divestiture process with Goldman Sachs, and its leadership team is currently solidifying the hospice line’s ability to stand alone as an independent company.

“We have continued to explore various alternatives for the long-term ownership structure of the business and have initiated steps to reorganize the hospice business for standalone operations, while also making investments to improve clinician recruiting and retention to position the business for further growth,” Humana President and CEO Bruce Broussard said during a fourth quarter earnings call Wednesday.

If the hospice market was still as strong, I’m sure Humana’s rumored asking price would be higher.

To some degree, the same holds true for Encompass Health and its plans to spin off “Enhabit Home Health & Hospice.” If the hospice market still had the same kind of “wow factor,” the Birmingham, Alabama-based company may have opted to sell its hospice components straight up.

The $1.1 billion Enhabit spinoff is expected to take place in the second quarter. Based on today’s numbers, the new business will have 251 home health locations in 34 states, plus 96 hospice locations in 22 states.

Home health outlook

With a possible dip in hospice M&A activity, you can expect a bump in home health dealmaking. Often, transaction volumes in those two spaces are linked.

“We believe there’ll be activity devoted to home health that otherwise would have been remaining focused on hospice,” Mark Kulik, managing partner of home health and hospice at The Braff Group, recently told HHCN sister site Hospice News. “The two sectors have a co-equilibrium or a symbiotic relationship with each other.”

After successfully expanding its hospice footprint, Amedisys is among the strategic buyers that had previously discussed a renewed focus on home health care. And it’s already executing on that mission in early 2022.

Amedisys just announced it’s acquiring Evolution Health, a company that cares for more than 3,300 home health patients daily, employing more than 650 individuals in 15 locations across Texas, Oklahoma and Ohio.

I anticipate Amedisys and like-minded buyers to make similar home health transactions moving forward.

“The purchase of Evolution Health continues our strategy to acquire and integrate high-quality regional home health assets into our home health division,” Amedisys Chairman and CEO Paul Kusserow said in a press release.

In addition to the general refocusing away from hospice and the home health industry’s stable footing in 2022, I also see M&A activity picking up as part of a sector-wide shift of health care services moving into the home.

A McKinsey & Company this week published findings from a survey of physicians who serve predominantly Medicare fee-for-service (FFS) and Medicare Advantage (MA) patients. Based on their feedback, the group projects that up to $265 billion worth of care services could shift from traditional facilities into the home by 2025 without a reduction in quality or access.

“That number represents a three- to fourfold increase in the cost of care being delivered at home today for this population, although how the shift will affect reimbursement rates is not yet clear,” McKinsey & Company authors wrote, noting that the shift to home could create value for payers, health care facilities, physician groups, in-home care providers, technology companies and investors alike.

Findings from the survey don’t hone in on home health care in the traditional sense. Instead, McKinsey & Company looks at in-home primary care, in-home digital health, higher-acuity care in the home and more.

In my experience, though, when “care shifts into the home,” it does so with necessary support from home health providers. Often, in fact, home health agencies serve as the chassis of the newer, more complex care models launched by health care pioneers.

Time will tell, but as more dollars are devoted to “care at home,” that should mean more investment and interest in the existing home health industry.