Encompass Health (NYSE: EHC) will be targeting large acquisitions in the home health and hospice space during 2020 with an emphasis on hospice, due to disruption in the home health sector resulting from the Patient Driving Groupings Model (PDGM).
Effective Jan. 1, 2020 Medicare began reimbursing home health care providers through PDGM, which classifies patients into payment categories based on clinical characteristics and other patient information, and shifts the home health payment model to a 30-day payment period rather than the current 60-day episode.
Despite record high multiples in the hospice sector, Encompass will be in the market for new opportunities, particularly for companies that are backed by private equity firms.
“As we’ve demonstrated over the last several years, we anticipate that it will probably be a few larger transactions, predominantly companies that are private equity-backed that may come to market in the course of 2020. It’s our anticipation, just given the potential volatility associated with the transition to PDGM that those private equity properties bought to market may be more heavily skewed toward hospice than home health,” Doug Coltharp, executive vice president and CFO, said in an earnings conference call. “We will certainly be a candidate to look at those and we recognize that industry multiples are higher right now than they have been even recently and that’s off at relatively high levels, but we’re going to be a very disciplined acquirer as we’ve demonstrated in the past.”
Home health care providers have been concerned about the transition amid predictions of increased bankruptcies, the use of behavioral assumptions in patient grouping methods, increased regulatory scrutiny, and potential payment cuts, leading some companies that provide both home health care and hospice to pivot towards the hospice side of their businesses.
The company’s home health and hospice segment also got a boost from its July 2019 acquisition of the privately owned Alacare Home Health & Hospice for $217.5 million, which made Encompass Health the 10th largest hospice provider in the United States.
Through the acquisition of Birmingham, Ala.-based Alacare, Encompass Health gained 23 hospice and 23 home health locations in Alabama.This acquisition, funded with cash on hand and borrowings under its revolving credit facility, marked the entry of Encompass Health into the Alabama hospice and home health market.
Encompass Health’s Home Health and Hospice segment saw a 14.9% rise coupled with a 12.5% increase in adjusted EBITDA, driven largely by revenue growth from the Alacare transaction. Hospice admissions rose 41.2% in Q4, including 10.1% in same-store growth. One the home health side, the company saw an 18.9% rise in admissions.
All signs point to continued investment in hospice and home health during 2020 and beyond.
“In home health and hospice, we expect to invest $50 million to $100 million in growth opportunities. The potential disruption caused by the implementation of PDGM within the Home Health industry may create some appealing opportunities for us,” President and CEO Mark Tarr said. “These opportunities will likely present themselves in the back three quarters of the year. We may pursue larger scale acquisitions opportunistically as we have done so in the past few years.”