Pandemic Slows Hospice M&A, but Resurgence Is on the Horizon

The hospice mergers and acquisitions market continued to be robust early in the first quarter of 2020 but took a sharp dive as companies shifted their attention towards responding to the COVID-19 pandemic and its economic fallout. A number of transactions, large and small, have occurred in May, which could signal a resurgence.

The outlook of hospice M&A for 2020 prior to the pandemic was rosy, with most observers expecting another strong year. However, the number of transactions took a nosedive beginning mid-March as the pandemic reached the United States, and providers nationwide struggled to protect patients and staff amid increased costs such as those for personal protective equipment (PPE) and paid leave for staff.

“We’ve seen a bit of decline in March and April, primarily due to the fact that buyers and their banks were very distracted,” said Cory Mertz, managing partner of the post-acute M&A advisory firm Mertz Taggart. “Buyers had their own operations to focus on, including securing PPE and getting access to patients. Many of the banks were panicked and stopped lending altogether in mid- to late-March. Some deals got put on ice. I think we’ll see a little bit of a slowdown in Q2, and a strong Q3 and Q4.”

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Hospice led the charge on mergers and acquisitions in the post-acute space during 2019. Strong demographic tailwinds were among the contributing factors, as well as greater awareness and acceptance of hospice care among the public. These continue to drive M&A in 2020 as hospice utilization continues to rise, exceeding 50% among Medicare decedents for the first time in 2018.

“There were more hospice transactions done last year than there were home health care deals, and I think that trend was continuing this year,” said Les Levinson, partner and co-chair of the Transactional Health Law Group at Robinson+Cole. “If you look at the figures and at what the public companies like [Amedisys, Inc. (NASDAQ: AMED)], the [LHC Group (NASDAQ: LHCG)] and [Encompass Health (NYSE EHC)] and what some of the other ones, they have all expressed a continuing interest in hospice. There have been some large deals announced and completed.”

Experts predicted that the COVID-19 pandemic would have little impact on hospice mergers and acquisitions, at least in the short term. Despite taking hits, the M&A hospice market flourished early in Q1 and transactions continued taking place into May. While most of those transactions took place among large companies, an overall resurgence is possible on the pandemic’s horizon as states reopen and hospices begin to stabilize PPE supplies. Quality end-of-life care remains vital for the nation’s most vulnerable populations and those that care for them in hospice.

“If we can continue on or near our current recovery trajectory, I think we’ll look at this period as a short-term blip,” said Mertz. “Hospice deals are still in high demand. We have seen census levels recover to pre-crisis numbers in much of the country, so structurally the industry is doing well.”

Buyers through 2020 will likely have their eyes fixed on smaller transactions and tuck-ins in the middle market, as fewer large companies are likely to be up for sale. Small and mid size organizations that saw financial hardship due to the pandemic are more likely to be picked up as the industry consolidates.

“I think you’re going to see that the headwinds will pick up a little bit, and we’ll see more volume,” said Levinson. “It’s hard to know exactly what the size of those transactions will be, but more than likely there will be a lot of tuck-ins and not so many platform acquisitions, mostly because I think a lot of the platforms have already been acquired. Given the fragmentation in the hospice space, there aren’t that many larger companies still around — larger being $100 million in revenue or more. I think the deals announced by [The Pennant Group (NASDAQ: PNTG)] are probably somewhat representative, as they are kind of in the mid-market and maybe even in the lower- to mid-market. There are a lot of hospice companies still around that are in this space and have a smaller census, but who also maybe generate several million dollars of revenue a year or more and could be prime acquisition targets to be acquired by other players.”

Hospice valuations reached record highs during 2019. The pandemic’s lasting impact on hospice valuations will continue to unfold in 2020 as prospective buyers keep a watchful eye on how organizations handle the uptick in costs during the crisis. Hospices with the most promise will demonstrate sustainability and longevity to buyers as they weather the storms of COVID-19, showing continued growth potential, according to Mark Kulik, managing director of The Braff Group, a health care merger and acquisitions advisory firm in Pittsburgh.

“One important thing to stress with any hospice owner is the importance of documenting their activity during the pandemic’s events,” Kulik told Hospice News. “If you’re thinking about selling your agency, having that documentation to show your suitors is going to be critically important. Your revenues may have declined, but why? Your expenses may have increased, but how did you take advantage of telehealth care and telemonitoring during this timeframe? What staffing issues did you face and how did you overcome them? Keeping track of your agency’s performance and the metrics of your business is even more important now than in prior years to show how you handled a pandemic.”

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