Record-high valuations in the hospice mergers and acquisitions market are leading VITAS Healthcare, a subsidiary of Chemed Corp. (NYSE: CHEM), to target growth through de novos and same-store admissions rather than purchasing smaller hospices.
Multiples in the home care and hospice space reached as high as 26x EBITDA during 2019, the most significant rise for any health care sector. The space also saw positive growth in market capitalization, according to PwC’s Health Research Institute.
Overall, the hospice M&A market continues to go strong despite declines in the number of deals in the overall health care space, as well as a decline in the total value of health care transactions. Observers of M&A activity in the hospice space anticipate that this trend will continue during 2020.
While not ruling out the possibility of acquisitions, the company appears to be focusing on other avenues to expand its reach.
“As you see out in the marketplace, pricing and premiums on hospice businesses from an acquisition still continue to trade at a very large premium. So absent an additional strategic alignment — we are still evaluating all of them — but as you hear from everyone else pricing is very high,” VITAS CEO Nick Westfall said in an earnings conference call. “That’s why in certain markets de novo — if we want to enter that market — may be the best market entry strategy.”
The company in January expanded its Texas footprint with a new location in San Marcos, just outside of San Antonio. VITAS operates 48 hospice programs in 14 states, with a total average daily census of 19,137 as of the end of the third quarter 2018.
VITAS net revenue was $340 million in the fourth quarter of 2019, up 10.7% from the prior-year period. The boost in revenue occurred largely due to a geographically weighted average Medicare reimbursement rate increase of approximately 5.5%, and a 6.1% increase in days-of-care.
A rise in same-store admissions strongly contributed to these results. The company’s average daily census rose 6.1% to 19,258 during Q4, while admissions were up 5.4%. VITAS’ net income reached $50.1 million, a 24.5% increase over the prior year’s fourth quarter.
Looking ahead through 2020, VITAS expects revenue growth in the range of 8.5% to 9.5%, prior to the Medicare payment cap. The company expects both admissions and average daily census to rise approximately 3.5% to 4.5% this year.
“We are continuing to see the ongoing swell of appreciation and desire to understand that value proposition of hospice. Upstream health care entities, more and more of their reimbursements get folded into value-based and total cost-based reimbursement as opposed to fee for service,” Westfall said. “There is that recognition around the desire and appetite to appropriately identify hospice-appropriate patients and transition them while providing right of choice to the best quality hospice that can keep them on the benefit as appropriate. That ongoing trend is blending well into our internal improvements we’re making towards VITAS continuing to differentiate itself.”
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