Why M&A Activity Will Redefine The Home Health Industry In 2023

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One of the most fascinating questions surrounding the Centers for Medicare & Medicaid Services’ (CMS) home health proposed payment rule is what effect it will have on M&A.

I’ve heard that it will stymie acquisitions. I’ve heard it will drive them.

Both make sense, too. Some companies may not be allocating more resources and money to the home health side of the house – assuming they have more than one service line – while other, larger companies may take advantage of the margin squeeze that cuts put on smaller operators.

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On the other end, some sellers may want to get out of the space given the lack of earnings power they may have moving forward. At the same time, they may not want to sell their businesses when valuations are lower than they have been of late.

This is all contingent on what actually comes in the final rule in October, of course.

But once the rule is finalized, things could move quickly at the end of the year. We may enter 2023 with a completely different home health landscape than we did when we entered 2022.

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In this week’s exclusive, members-only HHCN+ Update, I examine what the M&A environment may look like post-final rule, and what companies are saying about their own strategies as the final rule nears.

Industry bifurcation

In July 2021, the Biden administration released a sprawling executive order on “promoting competition in the American economy.”

“For decades, corporate consolidation has been accelerating,” the executive order’s fact sheet read. “In over 75% of U.S. industries, a smaller number of large companies now control more of the business than they did twenty years ago. This is true across health care, financial services, agriculture and more.”

Juxtaposed with that is CMS’ proposed payment rule for home health care – released less than a year later – which would undoubtedly drive consolidation of a traditionally fragmented industry moving forward, if finalized as written.

“I suspect we’ll see a bifurcation if the rule stays as is,” Mertz Taggart Managing Partner Cory Mertz told me. “Smaller, lower-margin agencies will be more inclined to sell versus trying to restructure.”

Barb Jacobsmeyer, Enhabit’s CEO, told me the same just last week.

“It is helpful to be the size that we are,” she said. “Because I do think, unfortunately, one of the biggest impacts that could happen is consolidation could continue to accelerate. … If the proposed rule does become final like it is written today, I just don’t know how some of those smaller agencies can stay in business.”

An M&A firm, Mertz Taggart is not expecting demand to slow down, no matter the final result of the rule for CY 2023.

Despite all of this, it remains a sellers’ market, according to Mertz.

“The larger, more profitable agency owners may be inclined to delay their exits a year or two before they sell as buyers will be pricing agencies based on the rates,” he said. “From the buyers’ perspective, I don’t expect demand to slow down.”

Furthermore, Mertz is expecting a number of “under-the-radar transactions.”

What that could mean is competing agencies swallowing each other in certain geographic markets. In many of those cases, the announcements won’t be grandiose, but instead, more tight-lipped before and after the papers are signed.

If private equity interest temporarily wanes, outside of managed care companies swooping in, other home health agencies could be sellers’ best bet on who will be offering up the right price for their businesses.

Even for the larger-scale companies that have a nationwide footprint, a sale to a competitor in the home health landscape may make the most sense. Despite any rate cuts, increasing footprint and staff is still top of mind for larger agencies. They also may be more likely to pay a fair price than an entity looking at the home health industry from the outside.

What public companies are saying

Recent comments from each of the largest home health companies is a good indication of where all of their respective heads are at.

On its end, Enhabit is focusing mostly on hospice for now.

“For home health, we look at opportunities that allow us to have those tuck-ins,” Jacobsmeyer said on the company’s second-quarter earnings call. “If there are markets that could benefit our productivity and optimization by adding home health locations to build out a territory, then that’s a continued focus for us. But at this point, we are seeing a little bit more of hospice than home health in the pipeline.”

Amedisys Inc. (Nasdaq: AMED) CFO Scott Ginn also expects M&A to slow down for the company during this period.

“Our pipeline remains full with both home health and hospice acquisitions, and we will look to deploy capital opportunistically throughout the remainder of the year,” Ginn said on the company’s second-quarter earnings call. “That said, until we have better line of sight to 2023 home health reimbursement, I’d expect home health M&A to be slower to materialize.”

Based on home health leaders’ comments, it seems as if they are not necessarily getting off home health deals, but just waiting to acquire when they know what the right price will be, given the rate environment.

Addus Homecare Corporation (Nasdaq: ADUS) is following the same line of thinking, reporting an “overhang related to differing price expectations from buyers and sellers” in home health, according to CEO Dirk Allison.

Still, Addus – which could be in a better position than its peers, given its payer diversification and focus in personal care – is expecting “larger transactions” to be made at the end of 2022 and early on in 2023.

Given Addus’ desire to get further into home health care over recent years, and also considering its makeup, they could be one of the providers that is willing and able to make large home health deals to build out the third leg of its stool in certain markets.

Thus, Addus is a provider to watch, in my estimation, as one of the organizations that could significantly change the home health landscape later in the year or early on next year.

“We continue to have conversations with brokers and other third parties, and based on the feedback we’ve received, we expect to see an increase in potentially larger transactions in late 2022 and early 2023,” Allison said specifically.

Despite the slowdown, there were a couple of decent-sized deals made in home health care this week.

LHC Group Inc. (Nasdaq: LHCG) – which remains quiet given its pending deal with UnitedHealth Group (NYSE: UNH) – announced the acquisition of the Georgia-based home health provider Three Rivers Home Health.

On the same day, The Pennant Group (Nasdaq: PNTG) announced that it had acquired Ardent Hospice and Palliative Care, which also provides home health care.

Pennant touts its home health acquisition strategy as different from the rest. Once it acquires agencies, it allows their owners to continue running the show. Rate cuts, then, could offer up an opportunity for those sorts of providers to exit without completely getting out of their businesses.

“When evaluating potential home health and hospice acquisitions, we look for small- to medium-sized agencies with strong clinical and operational reputations that provide a platform for organic census growth and expense management,” Pennant CEO Brent Guerisoli said during the company’s second-quarter earnings call.

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