The pace hasn’t been as aggressive as some expected, but the home health industry has been undergoing a wave of consolidation over the past several years, with the number of freestanding agencies decreasing annually since at least 2015.
While consolidation can certainly bring added stresses for existing operators, experts in the mergers-and-acquisitions field note there are also positives for proactive buyers and sellers. Consolidation, in fact, can be an effective and valuable tool for the home health industry as a whole, they say.
Three M&A experts shared their insights on the topic during a panel at Home Health Care News’ Capital+Strategy event in Washington, D.C., last week. In addition to offering their outlook for 2022, the panelists also gave advice on what buyers and sellers should focus on when considering a deal, while highlighting the most important aspects of the post-transaction period.
Additionally, the experts identified the “easy mistakes” that sellers need to keep on their radar.
Making sure legislators and policymakers understand the value of consolidation in the home health space is critical to the future of the industry, Bruce Vanderlaan, managing director with M&A advisory firm Mertz Taggart, said.
“We need to be proactive and let our government, our representatives know the value of home-based care,” Vanderlaan said. “This is not a Gordon Gekko-type situation where private equity comes and is cutting staff. You can’t cut your way into profitability in the home-based care industry.”
Vanderlaan also made it a point to mention that a vast majority of home-based care agency owners have only one asset – and that asset is their agency.
“This is their retirement,” he said. “So when we’re talking about limiting any transactions or consolidation, we do take those people into account, and I think that’s an important consideration.”
A unique position
In 2015, there were at least 10,554 freestanding Medicare-certified home health agencies, according to the Alliance for Home Health Quality and Innovation. By 2019, that figure had plummeted to 9,864.
Like Vanderlaan, Vice President of M&A at Amedisys Inc. (Nasdaq: AMED) Kris Novak said he expects an aggressive push for several consolidation efforts in the industry. Even so, he admitted the home health space is in a unique position.
“It’s certainly an interesting point in time, with the intersection around both regulatory reimbursement and where technology will play into that,” Novak said at the Capital+Strategy event. “I do think we’ll see some pretty aggressive consolidation in the space, and I think that’s what CMS (U.S. Centers for Medicare & Medicaid Services) is trying to achieve.”
Private equity acquisitions broke a record in the home health care industry in 2021. Many experts believe the momentum won’t slow down, despite some worries the Biden administration’s crackdown on PE involvement in the nursing home industry may trickle over to the home health space.
“It is an exciting time because it’s a very busy time,” Vanderlaan said. “I think we’ll continue to see it excelerate, and I think we’ll see more in the next year or two years.”
From a buyer’s perspective, Novak said value-based purchasing is a “more significant” consolidation activity or catalyst in the near future. The Home Health Value-Based Purchasing (HHVBP) Model will be expanded to all 50 states next year.
“Just given that we’re going to reward quality, that’s the way it probably should be,” Novak said. “There should be winners and losers in that regard. I think the larger, more sophisticated providers leveraging technology, leveraging their information, their data, clinical programming and other pieces of that holistic approach to the care model are going to win. They’re ultimately going to be the consolidators.”
Echoing that idea, Vanderlaan said buyers are looking for clean books and clean data.
“For us, it’s primarily the financial data and then the compliance data,” he said. “We’re looking at the PnLs and the balance sheets, and if there’s something amiss there, that can be overcome. If we’re looking at a compliance issue, it simply cannot be overcome. The data is the key.”
Once the deal is done
What happens after a transaction is done is critical for the long-term success for both providers and patients, Amedisys’ Novak said. Technological integration will happen by necessity, but cultural integration can be equally as important.
Baton Rouge, Louisiana-based Amedisys delivers home health, hospice, personal care and high-acuity care in the home across 30 care centers in 38 states, plus the District of Columbia.
“It’s mission-driven work,” Novak said. “That’s our greatest asset, is these employees of these organizations providing excellent care to our patients. We have to prove to them — to some extent — we’re going to give them the tools and the opportunities to do even better things from a career development perspective or ways to provide better care to our patients moving forward.”
Integration after a deal should have three components, Novak said: the people, the process and the systems. Vanderlaan agreed.
“Culture is key,” Vanderlaan said. “Both the buyer and seller have to get comfortable with each other. It is true in almost every case that the agency owner really cares about what happens to their employees.”
Oftentimes, inquisitive buyers will have a plan and opportunities for those employees.
“That’s the story that needs to be told [in the negotiating process],” Vanderlaan said. “If you could tell a good story, then you make the transaction or the transition much more smooth.”
Key advice moving forward
Longtime health care attorney and shareholder at Polsinelli Ross Sallade told the panel that doing as much leg work as possible in the beginning will make for an easier process for a potential seller.
“Clean up before you go to market,” Sallade said. “Find those low-hanging fruit, those things that people like myself, Kris and Bruce are going to find right out of the gates. Deal with them. Bring your counsel in early.”
Novak and Vanderlaan reinforced much of what Sallade said. Getting attorneys and CPAs in the building as early as possible will be beneficial for everyone.
“I would highly encourage every provider to do a pre-bill audit process,” Novak said. “I think every deal we’ve diligenced that did have some level of a pre-bill review has passed with flying colors. A lot of that risk we’re talking about is technical in nature and can be caught before you ever bill.”
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