Home-based care’s acquirers have become more disciplined. And it’s not just because of rate cuts or higher inflation, either.
It’s also because, after the M&A rush of 2021, outside investors are more aware of the compliance issues that can come along with small- to mid-sized sellers. Strategic buyers are also tired of dealing with “fixer-uppers.”
Even as a drop in transaction volume at the high end of the market has cleared a path for smaller agency sales, compliance issues are holding up deals.
“You’re seeing more deals fall through for compliance issues,” David Berman, managing principal at SimiTree, said during Home Health Care News’ Capital + Strategy event. “It doesn’t mean providers are any less compliant, but buyers are more disciplined. They’re not willing to take the same risk that they were before.”
In 2020 and 2021 especially, multiples for home-based care companies were inflated. Private equity firms, in particular, were eager to pull off deals. They had capital to deploy and believed home-based care offered room for growth and return on investment.
In 2021, there were at least 166 home health, home care and hospice deals, according to Pitchbook. In 2022, that number was slightly above 100, which was in line with pre-pandemic levels.
Today, buyers don’t want to put resources into a company with outstanding compliance issues. They also don’t want to invest time in a deal discussion that may fall through.
“It costs money to fix compliance issues, and it’s not a short-term fix,” Berman said. “There are fundamental process issues that can be broken. It takes time and money and that eats into the ROI. The cost of debt is higher, you already have that pressure on the ROI and you factor in the additional costs or capital you have to put into a provider to fix that compliance, it’s just sometimes too much cost, too much capital going in to get the return that’s needed.”
Shoring up compliance
When fostering a culture at an agency, it’s important to have high compliance standards.
“I believe very much in the implementation of a true compliance program,” Valerie Cornett, chief of strategy and innovation at MAC Legacy, told HHCN. “It helps assure that you have all the guidelines in place, and the best practices become a part of your agency identity. It’s not just a one-and-done sort of exercise. It’s an ongoing activity that should be started at hire and then going forward.”
MAC Legacy is a Denton, Texas-based home health and hospice coding and consulting company that offers a number of different services for agencies all across the country. Its bread and butter is clinical and operational due diligence.
Among the compliance issues that Cornett has seen tank deals: eligibility criteria, medical necessity, homebound status, appropriate billing practices and face-to-face documentation.
“Those are the high points that we’re obviously going to be looking at which provide the most risk,” Cornett said. “Through more thorough review, we often see some compliance issues that come out of a failure in operational procedures that might be leading to unintended or unknown violations.”
That’s where audits will dig up areas of risk that buyers may not have considered, Cornett said. More recently, MAC Legacy has uncovered a number of human resource-related problems.
“Those operational procedures – that we see that lead to violations lately – have fallen under some HR and employment issues,” Cornett said. “Was the employee verified or qualified for positions? Especially a key position? Those have come up quite a bit.”
Andreas Apostolatos, managing director of health care services investment banking at Bank of America, believes most buyers can almost immediately tell if the compliance culture of an agency is awry.
He said so at the McGuireWoods’ 19th Annual Healthcare Private Equity and Finance Conference last month.
“Right now, the thing that’s going to destroy a deal faster than anything else is compliance,” Apostolatos said. “As we’ve said many times, compliance is maybe a gray area, and it is because different buyers hold different standards. It’s always been a big deal, but it’s become an even bigger deal now.”
What agencies should do
Investing in a full compliance program is expensive. However, doing the leg work before going to market is likely to yield long-term returns.
One simple compliance measure any agency can implement is to have the entire staff on the same page about potential violations.
“When providing due diligence services, it’s more evident to us when we’re reviewing that an agency has taken the time to implement training programs, continuing education and transparency,” Cornett said. “In those agencies, employees have an awareness of the significance of violations. They have an awareness of fraudulent practices. Their compliance plan elevates the communication in their agency and so when you have everyone involved and your employees are engaged, they offer more buy-in and they ensure that deficient practices are identified and corrected.”
Engaging with a third party for a pre-sale audit can also be beneficial. That gives sellers a more objective look at what concerns a potential buyer may have.
“I can’t tell you how many times I’ve heard a potential seller say, ‘Oh, we just had our state survey, we’re clean. We had no deficiencies,’” Cornett said. “And then they did terribly in due diligence. You can’t just make the assumption that everything’s fine. It never hurts, if you’re thinking of selling, to bring someone in just to take a closer look at what’s really going on.”
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