Projecting The Most Impactful Home-Based Care M&A In Near-Term Future

Over the next 12-18 months, the mergers and acquisitions that do or do not take place in home-based care will tell a story worth listening to about the future of the space.

The context has become monotonous to tell at this point: high interest rates are affecting dealmaking across the country; Medicare Advantage (MA) penetration is causing payment issues for most providers; home health agencies, specifically, are navigating fee-for-service rate cuts; and valuation expectations have been too high after a whitehot 2020 and 2021.

There’s a general expectation that interest rates will come down at some point this year. Potential buyers have also signaled that seller expectations around pricing have started to come down, helping both parties start negotiations with more reasonable expectations.

The rest of the aforementioned context points remain the same. MA penetration is likely to continue, and there is no sign the Centers for Medicare & Medicaid Services (CMS) will back off home health rate cuts in traditional Medicare.

Of course, home-based care M&A could tick up in 2024, and one sector could still have a down year. For instance, Medicaid home- and community-based services deals had a strong fourth quarter, but traditional home care and home health care did not.

But what may be more interesting is how the market responds in each section of each sector. There’s the large providers, those in the middle and the mom-and-pops.

In this week’s exclusive, members-only HHCN+ Update, I take a stab at projecting how M&A will play out over the next 12-18 months in each part of the market.

The largest players

In Home Health Care News’ trends piece at the beginning of 2023, we predicted that “there was a good chance that 2023 [passed] without another monster, jaw-dropping mega deal anywhere close to UnitedHealth Group’s LHC Group buy.”

We got egg on our face almost immediately, as UnitedHealth Group agreed to purchase Amedisys Inc. (Nasdaq: AMED) a few months later.

We’re most likely in the third year in a row where a mega-home health deal will be agreed to, at the very least. Enhabit Inc. (NYSE: EHAB) has a fourth-quarter earnings call in early March – which is later than usual – and I expect their strategic review to be completed by that time.

I also expect that to wind up in a sale, but Enhabit is being affected by just about everything that’s currently affecting the home health market, whether macro or micro.

For one, many buyers that may have jumped at the opportunity to buy Enhabit just a few years ago could be out of the game, for one reason or another. They may have already purchased another entity, or have decided to stay out of home health care entirely until the MA and fee-for-service rate questions get cleared up.

In my estimation, though, Enhabit would have a large, willing buyer right in front of it right now if it wasn’t for the current M&A environment. On Monday, I wrote briefly about the impact that the Biden administration’s attitude toward health care dealmaking is having on the market.

Currently, regulators and lawmakers are taking a hard stance against major consolidation and private equity involvement in dealmaking.

If that weren’t the case – and it obviously may not be the case following this fall’s election – I believe UnitedHealth Group (NYSE: UNH) would be happy to add Enhabit to its home health repertoire, which would then include Enhabit, LHC Group and Amedisys Inc. (Nasdaq: AMED), if the Amedisys deal went through.

UnitedHealth Group’s Optum would still own just about 15% – or less – of the home health market, not a huge number in other industries. But the juice may not be worth the squeeze for the company at this point, as they are under the spotlight for pending acquisitions in other sectors, too.

Where Enhabit goes is of note for the entire industry, as they are basically the only pure home health and hospice player left on the public market. They are also one of the only large home-based care companies likely to sell in the year ahead.

The others that could sell include companies nearing the end of their private equity sponsorship, like Elara Caring or Help at Home, for example.

Help at Home, specifically, could reap the benefits of a couple of better-than-average years in the HCBS space, which is its bread and butter. A report surfaced in December suggesting that the PE firms The Vistria Group and Centerbridge Partners were weighing a Help at Home sale.

My guess would be that a sale wouldn’t go final until CMS finalized its “80-20” rule, which is likely to come to fruition in the spring.

There may not be a flurry of big-time deals in the next 12-18 months at the top, but the ones that are finalized will say a lot about their respective sectors within home-based care.

Middle market

M&A experts have repeatedly told me that there has never been a dip in demand for quality home-based care agencies over the last two years, despite a lull in activity.

In the next 12-18 months, that lasting demand will likely finally come to the surface in the middle of the home-based care market.

Think providers that have multiple locations covering a significant footprint in one state or more.

Most leaders I have spoken with over the last month expect for M&A in this area to pick up sooner rather than later. Nautic Partners helped kick things off with the acquisition of Texas-based Angels of Care this week.

“The big question mark right now is what multiples are going to look like,” VitalCaring President Luke James recently told me. “I think we’re going to see a couple of deals that reset the market, especially for sizable transactions.”

New Day Healthcare CEO G. Scott Herman told me in January that his company is not only expecting home health M&A to open up this year, but also banking on that for growth.

I cautiously expect the largest companies to revamp their M&A strategies, and I expect growing, regional providers like New Day to continue on their growth paths in this area of the market. That’s without even mentioning more robust PE activity.

The only question will be around how many quality targets are left. Herman also mentioned straying away from “fixer-uppers” moving forward.

Others have echoed that sentiment over recent years, suggesting that fixer-uppers are not worth the time, resources and effort at this stage of the game.

“We don’t want to do another fixer-upper, period,” Traditions Health CEO David Klementz told me last year.

Mom-and-pops, smaller providers

There are likely going to be a lot of fixer-uppers in this category over the next 12-18 months, even if they weren’t before. MA penetration, and fee-for-service rate reductions, will likely be too much for smaller providers to handle.

While smaller businesses do have the flexibility to change course quicker than larger organizations at times, they also don’t have the financial capacity to handle multiple blows over a five-year period.

That’s, essentially, what’s occurring with MA penetration and a less stable fee-for-service leg to stand on.

Now, the quality ones could obviously outlast that, and some backing provided by a PE firm or strategic could pay off if the bottom falls out of the middle market. In other words, if not much is left in the middle of the market, I believe small, quality agencies will begin to be bought up in bunches.

The ones that aren’t so lucky will still provide opportunities for the larger providers in it for the long haul, but mostly through the absorption of staff.