The release of the home health proposed payment rule in June brought M&A activity to a screeching halt. With the release of the final rule back in October, an uptick in dealmaking might be here.
Even as it slowed down, though, retailers, insurers and other players outside the Medicare-certified home health industry continued to make home-focused deals. Activity in both areas will be interesting to watch heading into 2023.
In home health care, there’s no doubt that the proposed payment rule introduced more uncertainty into the sector, Eugene Goldenberg, a managing director for health care investment bank Edgemont Partners, told Home Health Care News.
“The market just cannot bear uncertainty,” he said. “Deals get done in good markets and deals get done in bad markets, but you need clarity and certain reimbursement in order for that to happen. The proposed rule took the industry quite a bit by surprise.”
Now that the final rule has been released, deals have slowly begun to pick back up again. However, there hasn’t been enough time for M&A activity to return at full speed.
“With the rule being released in October, realistically, you’re not going to see much acceleration in the back half of this year because it’s already very late in the year,” Goldenberg said. “What you are going to see is a pickup of activity. A lot of the deals that were put on pause, given the uncertainty from the proposed rule, are going to come to market over the course of 2023.”
Historically, it’s common to see an acceleration in M&A activity roughly 12 to 18 months after a large reimbursement change, according to Goldenberg.
In general, home health stakeholders should expect these deals to come in various shapes and sizes. This means that in 2023, several local, multi-state, regional and national companies will come to market. Buyers will also be looking to take advantage of carve-out opportunities.
When it comes to the type of buyers that will be active next year, it’s likely that both strategic and private equity buyers will present in the market.
“I think where the difference is, given some of the credit market conditions, and the availability of and cost of leverage, some of the strategic buyers are going to be preferred groups to reach out to for a lot of these processes,” Goldenberg said.
Home health stakeholders should also keep an eye out for possible development on the home health reimbursement front, as any positive change could be a catalyst for M&A activity.
“I do think the industry is not done with their lobbying efforts,” Goldenberg said.
As far as potential headwinds that could lead to a decrease in dealmaking, Goldenberg believes that the credit market could create roadblocks.
“Where the challenge could be is if the credit market continues to deteriorate further,” he said. “Some folks have admittedly said that we’re kind of already in a recession. That’s been happening for the better part of six months, so the credit market conditions, to me, are probably the biggest driver of this. As the availability of debt decreases, and the cost of debt increases, that impacts returns, particularly for private equity firms or private equity-backed platforms.”
Retailers, insurers and primary care
Home health buyers haven’t been the only players making waves when it comes to M&A activity.
Many large retailers and insurers have cemented their spots on the primary care, home-based care and broader health care spaces through acquisitions of late.
CVS Health’s (NYSE: CVS) $8 billion deal to acquire Signify Health (NYSE: SGFY) was one of the standouts in this respect, with UnitedHealth Group’s (NYSE: UNH) deal to buy Change Healthcare (Nasdaq: CHNG) being another, according to Michael Abrams, managing partner of Numerof & Associates.
“Those are a couple [of deals] that let you know there’s quite a bit of interest in both primary care and home health,” he told HHCN. “It’s also significant these transactions were driven by payers.”
Additionally, UnitedHealth Group’s acquisition of LHC Group Inc. (Nasdaq: LHCG) will supposedly close sometime soon.
Abrams noted that payers are perhaps the only segment of the health care industry that came out of the pandemic looking better than they went in.
“The cash that they had set aside to spend on clinical utilization didn’t get spent during the pandemic,” he said. “The pent-up demand that there was concern would materialize when the pandemic kind of faded never really materialized. They were left with, you could say, a windfall profit, which they have been using to buy their way into elements of the health care delivery system vertical integration.”
This positions payers to potentially gain more control over where and how clinical user utilization takes place. Additionally, it broadens these organizations’ revenue base. This is a trend that Abrams expects to continue throughout 2023.
Moving forward, retailers will likely set their sights on the broader clinical market and not just home health care, according to Abrams.
In July, retail giant Amazon (Nasdaq: AMZN) announced plans to acquire the primary care membership service One Medical (Nasdaq: ONEM) for $3.9 billion.
While primary care is not the most lucrative part of health care, it does offer buyers like Amazon the ability to lean into synergistic opportunities.
“If they’re successful in creating a relationship with the patient, and that remains a question mark, they are in a position to direct the patient to other caregivers and other health care services that they may own,” Abrams said. “[For example], if they have primary care and home care, particularly for the elderly population, there is clear cut synergy and an opportunity.”
One edge that retailers entering the health care market often have is an understanding of consumer satisfaction.
“Retailers have a deeper understanding of consumer satisfaction,” Abrams said. “Retail organizations understand the importance of access and convenience.”
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