Home Health Consolidators Juggle Build-Versus-Buy Strategies in Increasingly Competitive Market

After multiple years of record-breaking M&A activity, home health consolidators are now starting to show an increased interest in organic growth.

While the approach to growing a home health business through building existing infrastructure may take longer, the environment in 2022 is more friendly to organic growth than it was during the COVID-19 pandemic.

“We believe we have significant prospects for continued organic growth in our current markets as well as by entering new markets through selective acquisitions,” Dirk Allison, the CEO and chairman of Addus HomeCare Corporation (Nasdaq: ADUS), said during the company’s most recent earnings call.

Acquisitions have set the pace for how home health providers have grown over the last several years. And while some providers are prioritizing de novos and organic growth, the M&A landscape continues to be healthy when considering deals like UnitedHealth Group (NYSE: UNH) buying aging-in-place giant LHC Group Inc. (Nasdaq: LHCG) for $5.2 billion.

Another example of ongoing M&A is Choice Health at Home closing three of the industry’s 26 transactions in Q1, with the provider’s most recent purchase being Abiding Home Health’s Texas assets in April.

“These agencies and the employees will strengthen our ability to serve one of the fastest-growing regions in the nation,” Choice CEO David Jackson said at the time. “The Texas Hill Country specifically has experienced substantial population surge before and throughout the pandemic.”

It’s a more challenging endeavor to build what already exists compared to buying, but with slightly improved labor markets and a more predictable environment post-COVID, providers are seeing new paths to organic growth while also keeping an eye on acquisition opportunities.

The ‘build-versus-buy question’

Despite a renewed desire from some providers to build versus buy, one option is inarguably more difficult to do, M&A experts told Home Health Care News.

“We’re still very much a buy-versus-build mentality, for good reason,” Brian Bruenderman, partner and managing director of M&A advisory firm Stoneridge Partners, told HHCN. “It’s hard to build these businesses. It’s not like McDonald’s. You can’t just open a McHealthcare anywhere.”

If home health providers have the financial equity, buying a sustainable and healthy business is an easier way to grow, Bruenderman said. It offers providers a path to grow quickly and into other areas.

With labor challenges, dealmaking also allows buyers to secure additional clinical staff or caregivers, a strategy sometimes referred to as “acqui-hiring.”

With those advantages in mind, home health providers like Aveanna Healthcare Holdings (Nasdaq: AVAH) have stayed the course on M&A. Aveanna completed its $345 million purchase of Comfort Care at the end of last year, which provides hospice and home health care in Alabama and Tennessee.

“We are proud of the density of home health and hospice services Comfort Care delivered to Aveanna in both Alabama and Tennessee,” Aveanna COO Jeff Shaner said in the company’s Q1 earnings call. “The Comfort Care acquisition demonstrates our commitment to acquiring high quality assets that complement our geographic expansion plans.”

On the other hand, building also has its perks.

“Building gives you the ability to leverage some geography,” Bruenderman said. “There’s a standard of control. I’ve talked to folks that have said, ‘I don’t necessarily need to buy somebody 60 miles away. I have a rock star manager over here. I just need to base a business over there and need one of my good folks to go over there and run it.’”

That does tend to work better in adjacent communities, he noted. It’s difficult to travel long distances to build and leverage existing infrastructure and control. However, if providers are able to build density in a controlled geography, there’s a good chance they’ll succeed, Bruenderman explained.

Along with home health executives, home care operators have had to contemplate the build-versus-buy question as well. The private-duty home care provider AccordCare hopes to grow in a more organic fashion in the coming years.

“We’ll continue to look for markets adjacent to ours to continue to leverage and start brand new locations, but I really want to get organic growth back and growing again,” Brandon Ballew, the CEO of AccordCare, recently told HHCN. “It’s been a very difficult environment given COVID and given employee shortages. It’ll be nice to turn around and let the world get back to pre-COVID levels of [occupancy] so we can focus on organic growth.”

In order to handle the aging population and to take care of seniors where they want to be taken care of, Ballew said home care providers need to adapt and diversify service lines in order to give patients what they need.

“Their needs are going to get more intense as they age in place,” Ballew said. “We want to be able to help them live their best life in their homes and make a difference for them. That will lead to organic growth.”

Additionally, Brian Poff, executive vice president and CFO of Addus, said in his company’s Q1 earnings call he expects 2022 to include more volume-based growth as opposed to rate-based growth. That will hopefully lead to more organic growth.

“I think if you look [at] the last couple of years, particularly with rate increases we’ve gotten from some of our larger markets like Illinois and New Mexico, it has been more rate than volume,” Poff said. “We still feel that 3% to 5% in personal care growth, as an organic growth rate, is a good metric for us going forward.”

Amedisys Inc. (Nasdaq: AMED) is hoping the joint ventures Contessa has formed over the last year or so will lead to a more build-centric strategy.

“That relationship with their joint venture partners — that does have some trickle-down effect, whereby we become a preferred provider on the home health and hospice side, which helps drive some organic growth for us as well,” Kris Novak, vice president of mergers and acquisitions at Amedisys, recently told HHCN.

‘It’s a balancing act’

A robust M&A market with willing buyers and sellers swung the tides to the buy side in the home health space before 2022. The COVID-19 pandemic made it very difficult for providers to grow organically while navigating a new normal and staffing challenges.

Yet choosing one growth strategy over another and sticking with it isn’t the path to success for most providers, M&A experts say.

“Certainly the public companies and the larger providers that are owned by private equity, they have to do a combination of the two,” Mark Kulik, managing director at the M&A advisory firm The Braff Group, told HHCN. “The marketplace is growing, so you’ve got to grow just to maintain your market share. That’s organic growth.”

Relying just on organic growth is hard, Kulik said, because everyone is trying to naturally grow and build their footprint. That’s where acquisitions come into play.

“To really go ahead and excel and accelerate past your competition, you’ve got to maintain that organic growth,” he said. “But in order to really gain on and separate yourself from your competition, you have to acquire. That’s why it’s a balancing act.”

The first quarter of 2022 saw 26 home health, home care and hospice deals, according to another M&A advisory firm, Mertz Taggart. That number was a dramatic decline from over 50 transactions in both the third and fourth quarters of 2021.

That trend would have buyers and sellers assume providers are shifting from a buy to build strategy. It’s true that many providers like Addus, Amedisys, Pennant Group, AccordCare and others have a new sense of how to organically grow in today’s environment.

“To simply just do acquisitions, it’s too expensive,” Kulik said. “It’s too expensive to keep on buying companies and consolidating them. If you want to do it only organic, it’s too slow. It’s less expensive, but you can’t keep pace with the marketplace or certainly with your competition. You’ve got to do a combination of both.”