While private equity interest in the hospice space remains hot, some players have abandoned or postponed plans to bring their holdings to the acquisitions market during the COVID-19 pandemic. While many expect the market to rebound by the third or fourth quarter of the year, nothing is certain as COVID cases continue to spike throughout the United States.
A number of factors have whetted the appetites of private equity firms for hospice in recent years, including the fragmented nature of the industry, increased acceptance of palliative care services, demographic tailwinds, the changing regulatory landscape, and movement towards value-based payment models.
In the long term, these investors are unlikely to lose interest, though specific transactions may see further delays due to the COVID outbreak.
“There were a number of larger hospice providers that are in the hands of private equity. Coming into the year, those private equity sponsors had indicated they might be looking to take those properties to the market and sell,” said Doug Coltharp, executive vice president and CFO of Encompass Health (NYSE: EHC), at the BMO 2020 Prescriptions for Success Healthcare Conference. “For the most part they’ve elected to defer on those transactions in the overall environment — both in terms of the disruption to the business and some of the volatility — so that may be delayed by six months or a year.”
The pandemic has thrown a monkey wrench into what was generally expected to be a banner year in hospice deals as 2020 rolled in, though some disruption was expected late in the year due to the potential impact of new payment models set to begin in 2021, such as the carve-in of hospice into Medicare Advantage.
Changes in payment create uncertainties, as evidenced by disruption in the home health care space due to this year’s implementation of the patient-driven grouping model (PDGM). PDGM led some large companies that provide both hospice and home health to lean more heavily towards hospice transactions as they waited to gauge the model’s impact.
While similar disruption to some degree is possible for hospice, it would likely not be to the same extent that PDGM impacted home health — given that the carve-in is still in a demonstration phase and participation is voluntary.
The strength of demographic tailwinds and the availability of capital in the hospice space likely makes an M&A rebound a matter of “when” rather than “if.” In another key trend, service diversification among hospices is also attracting investors. Hospices nationwide have been expanding their suite of services to include home health care, palliative care, adult day care, and home-based primary care, among others, and investors are watching this activity.
Players in the market clearly hope for a late 2020 rebound, but the pandemic clouds the industry’s vision for at least the remainder of this year; 2021 may come before private equity returns to peak velocity.
“We would expect those [hospice companies to be sold by private equity] to be available at least in 2021,” Coltharp said. “Ultimately, we think both home health and hospice remain prime candidates for consolidation, and it is our intent to build the scale of both of those businesses.”