Why Health System-Home Health Joint Venture Activity Could Heat Up

Rising costs, the return of Medicare sequestration, labor shortages and higher patient acuity levels have all contributed to health systems struggling financially over the past 18 months.

Since the start of the year, at least half a dozen hospitals have either closed or announced plans to close. To stay afloat, many others have opted to shutter or sell off low-margin operating units. All this comes after record losses in 2022, which was the worst financial year for hospitals and health systems since the start of the COVID-19 pandemic, according to health care consulting firm Kaufman Hall.

“Labor costs jumped in April and the costs of goods and services continued to be well above pre-pandemic levels,” the most recent hospital flash report from the firm states. “Though expenses generally fell in April, revenues declined at a faster rate.”

In light of these difficulties, I foresee more joint venture opportunities between home health providers and health systems on the horizon. The ongoing shift to value-based care and home health M&A speed bumps will also fuel more JVs, I believe.

In this week’s exclusive, members-only HHCN+ Update, I provide an overview of the health system-home health joint venture landscape and explore why an increase in activity is likely. Additionally, I touch on why more home health operators should consider JVs as core components of their growth strategies moving forward.

Recent joint venture activity

Several home health companies have made hospital joint ventures strategic priorities.

For years, perhaps the best example of this trend was LHC Group, which is now owned by UnitedHealth Group (NYSE: UNH) subsidiary Optum. LHC Group established its first JV with Opelousas General Hospital in Louisiana in 1998, reaching 82 unique “custom-build” JV partnerships by March 2022.

“We’ve got a long history of doing this,” LHC Group President and CEO Josh Proffitt said last year. “And doing it with excellence.”

University of Maryland Medical System is one of LHC Group’s most recent joint ventures. Others include partnerships with LifePoint Health, Christus Health and Geisinger.

Advent International-backed AccentCare has leveraged an active JV strategy as well. In September 2020, it formed a new post-acute care business with Fairview Health Services, for instance. It has over 30 other JV arrangements with large health system partners such as Baylor Scott & White and Memorial Hermann Health System, too.

“We have a number of these partnerships across the country that are formal, financially aligned joint ventures that allow us to actually be part of the continuum of care for these large partners,” AccentCare CEO Steve Rodgers told me during a February 2022 HHCN+ TALKS conversation.

Nonprofit Bayada Home Health Care is another provider that’s toward the top of the industry’s joint venture leaderboard. Its health system JVs include partnerships with Universal Health Services Inc. (NYSE: UHS), Baptist Health, VCU Health System and Jefferson Health.

“Over the past five years or so, in particular, health systems have been thinking much more strategically about services outside the four walls of the hospital,” Bayada CEO David Baiada told me after the company announced the VCU Health System partnership. “These types of joint venture relationships have become much more prevalent and top of mind for health system CEOs. That has really created the opportunity for us to lean in.”

Amedisys Inc. (Nasdaq: AMED) and its Contessa arm have also had plenty of JV success, with a recent example being a deal with Virginia Mason Franciscan Health.

Compassus – backed by TowerBrook Capital Partners and Ascension Health – has similarly proven to be a successful health system JV partner.

What’s driving deals

Numerous factors motivate health systems to enter into home health joint ventures.

For starters, running a home health business has become increasingly difficult since 2019, with the transition to the Patient-Driven Groupings Model (PDGM) requiring heightened levels of expertise and focus. Nursing shortages and rising home health operating costs have also made running a home health department tricky for hospital chains.

This reality is, in part, why Bay Area Hospital in Coos Bay, Oregon, is closing its home health program by Aug. 17.

“Like many health care providers in Oregon, we are experiencing tremendous financial strain caused by several factors,” Brian Moore, the hospital’s president and CEO, explained earlier in June. “As a result, we have taken steps to improve efficiency and effectiveness, and reduce costs.”

In some cases, a JV can become a lifeline in this scenario. What’s more, instead of offloading valuable home health capabilities entirely with a closure or straight sale, JVs allow health systems to retain some degree of control.

That, in turn, can help maintain a smoother discharge process for hospital patients going on home health services.

“There are businesses that … may not be the most profitable service lines, but those that are actually important to the care continuum. [Health systems] can’t get rid of those,” Michael Tierney, executive director of H2C Securities, said during a recent webinar on post-acute care joint ventures. “This is something that allows you to kind of still have control of your care continuum, and there are different ways that you can structure that and make sure that your needs are being met.”

If a hospital system is struggling financially, a home health joint venture can additionally bring cash to the table, with the amount of capital varying based on each partner’s ownership stake.

“A lot of times, these JVs actually can produce cash,” Chaz Bauer, a director with H2C Securities, said during the same webinar. “You can partner with somebody who brings cash and capital to the table to lighten the load on the health system.”

Related to the health system financial struggles of 2022 and 2023 is acuity creep and longer hospital stays, which can be extremely costly.

Case mix index, a measure reflecting the diversity, complexity and severity of patient illnesses, is up 5% since 2019, according to Sg2’s recently published Impact of Change Forecast. At the same time, average length of stay for patients admitted to a hospital has risen 10%.

Exacerbating longer stays is the fact that roughly 30,000 inpatient beds disappeared between 2019 and 2022. Hospital systems have sicker patients requiring longer stays, but not enough beds to keep them, which necessitates faster home health discharges.

This trend will only accelerate, I believe, making it a driver of home health joint ventures.

The home health motivation

JVs offer plenty for home health providers as well.

Forming a joint venture with a health system can give a provider relatively turn-key market entry, especially in certificate of need (CON) states. Having existing hospital-based resources can also speed up new-market entry, giving home health companies something to build off.

Even in markets a home health provider is already in, teaming up with a health system can lead to greater economies of scale and efficiency, which could improve operating margin. Furthermore, doing a JV with a health system – even in an existing market – can serve as a foot in the door with managed care.

With fee-for-service Medicare enrollment decreasing and Medicare Advantage (MA) becoming a bigger payer source, I see this as a major motivator for future home health joint venture activity that more executives should consider.

When LHC Group has done JVs with health systems in the past, it often kept the same branding. This approach can also prove beneficial to home health providers, which can then capitalize off of the health system’s reputation and name recognition in the local community.

Yet another motivation for home health providers: the chance to buy into a struggling business, turning it around and unlocking value. Improving care coordination, capturing more patient volume, adjusting payer mix and improving staff retention are all ways a home health provider can improve a poorly managed hospital service line.

“There’s a lot of business out there to be had that they’re just not executing on,” William Teague, a director with VMG Health, said during the JV webinar.

Going a different direction

There are reasons for going a different direction, however – both for health systems and home health providers.

From the home health perspective, buying into a struggling hospital-based business could mean near-term financial losses. That could be a hard pill to swallow in today’s operating environment, especially with possible and additional Medicare cuts coming in 2024.

Additionally, teaming up with a health system could mean having to accept a larger share of MA patients compared to what a provider historically has done. With MA rates significantly lower than fee-for-service Medicare rates, that can likewise lead to financial losses.

Lastly, I’ve heard from executives that JVs can potentially lead to messy situations, where partnering hospitals and home health organizations have to compete for internal resources, including labor.

Meanwhile, health systems may want to avoid joint ventures because they want to keep full control of their care continuum.

Some may even look at their peers that have built successful home health businesses of their own and ask, “Why can’t I do the same?” Examples of successful organically developed home health businesses include Kaiser Permanente’s Care at Home segment, along with Trinity Health’s Trinity Health At Home arm.

Emerging trends

Home health transaction volume has dropped in 2023, with this year’s annualized volume down 32% compared to 2022, according to The Braff Group. Rising interest rates, inflation and banking uncertainty have all added hurdles to the dealmaking process.

When the home health industry’s regular acquirers aren’t able to convert on M&A, I believe they’ll turn to joint ventures.

Another emerging trend that I see fueling JV activity is value-based care.

To perform well under value-based care arrangements, providers need to have a complete care continuum and the ability to quickly respond to their patients’ needs. Partnering with an innovative health system can check those boxes for a home health provider.

Additionally, health systems generally have more experience with value-based care, whether that experience comes in the form of taking upside/downside risk themselves or engaging with Accountable Care Organizations (ACOs). A joint venture with a health system that’s a value-based care veteran could give home health providers a leg up.