Hospice Multiples Likely to Fall Under Medicare Advantage

Emerging payment models such as the forthcoming Medicare Advantage carve-in demonstration may start to bring down record-high hospice multiples in what continues to be a burgeoning mergers and acquisitions market, but falling multiples are unlikely to curtail widespread industry consolidation in the long term, hospice CEOs said at the Home Health Care News Summit conference in Chicago. 

Demographic tailwinds and availability of capital have been driving a robust market for companies looking to acquire hospice and palliative care companies. From 2016 to 2018, the space saw more than 10 transactions of $250 million or higher in total enterprise value, with at least five transactions individually exceeding $700 million of value, the highest ever in the industry, according to the M&A advisory firm Cain Brothers.

Eight hospice acquisitions took place during the first quarter of 2019, up from seven transactions during Q1 2018 as well as Q4 2018, which also saw seven transactions, M&A advisory firm Mertz Taggart reported.

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“You have very high multiples right now with the demographics that are trending; those multiples have to come down over time if you look at historical averages,” Larry Graham, founder and CEO of hospice and home health provider Curo Health Services said at Summit. “Private equity is very interested in the home care and hospice space which is driving up multiples at this point in time. I think the future changes to reimbursement, such as the [Medicare Advantage carve-in] will have an impact on multiples coming down.”

The U.S. Centers for Medicare & Medicaid Services (CMS) earlier this year announced that it would test coverage of hospice care through Medicare Advantage plans beginning in 2021. The carve-in, according to CMS, is intended to increase access to hospice services and facilitate better coordination between patients’ hospice providers and their other clinicians. Reactions to the carve-in demo have been mixed, with many lauding the CMS action and others expressing concern.

The carve-in will likely become a key factor that companies consider when making M&A decisions.

“Multiples currently are at all time highs for the hospice industry. Those multiples are projected around the value proposition that hospice provides, and is projected to provide, to the overall health care system,” Nick Westfall, CEO of VITAS Healthcare, a subsidiary of Chemed (NYSE: CHEM), told Hospice News. “There is a willingness to pay to enter into the hospice space, and for those of us who have been in the hospice space and see a bunch of acquisitive opportunities over time, we are constantly balancing out whether [a transaction] makes sense. Does it offer a strategic market or a strategic platform? I think that is going to continue to evolve.”

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VITAS CEO Nick Westfall, Curo CEO Larry Graham, and WellSky Senior Vice President and General Manager Ben Chapman discuss the state of hospice at Summit.

Medicare Advantage plans are offered by private insurance companies approved by the U.S. Centers for Medicare & Medicaid Services (CMS), and include HMO, PPO, and fee-for-service plans among other options. The program represents an integrated care model that promotes coordination of services and provides incentives for quality and patient satisfaction. Beginning in 2020, the program will be available in all 50 states as well as U.S. territories.

Unlike the flat rate per diem that hospices currently receive through the Medicare Hospice Benefit, Medicare Advantage plans typically negotiate with health care providers to secure lower rates. The potential for lower payments will likely impact hospice multiples.

“When we talk about multiples as they relates to valuations in health care services, that multiple is mostly a function of risk, and in health care services — especially in same payer health care services like hospice — that risk is typically reimbursement risk,” Cory Mertz, managing partner of Mertz Taggart told Hospice News. “The risk of Medicare Advantage is the risk of lower reimbursement, so buyers are going to make less money than what they are currently buying into because they are buying into a revenue stream.”

If multiples fall, the currently robust hospice M&A market will be unlikely to falter, according to Westfall. In a Medicare Advantage carve-in, hospice providers will need to leverage scale in order to successfully negotiate rates.

“The reality is there is a big land grab, let’s call it, related to patient populations and how you manage them in the last 18 to 36 months of life. If it is done right it will dramatically improve outcomes, and there are going to be business opportunities as well,” Westfall told the crowd at Summit. “I think the market has to determine how that is going to happen, and the consolidation approach is going to continue to occur because without scale it’s going to be difficult to operate at those levels. You have to go in and negotiate with insurance companies; absent scale it’s going to be a difficult negotiation.”

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