Hospices seeking to sell their business to a larger provider or a private equity firm can attract potential buyers by leveraging their outcomes, scale and staffing. These factors dovetail with strategies that can help providers excel in payer negotiations within value-based payment structures.
The hospice M&A market has been the most active in the health care sector, with valuations and the number of transactions frequently exceeding those of hospitals, home health agencies and other providers. The industry expects this trend to continue into 2021, and the market may pick up even more steam as hospice moves into programs such as the Primary Care First Serious Illness Population model, direct contracting programs or the value-based insurance design demonstration project, commonly known as the Medicare Advantage hospice carve-in.
“Private equity consolidation, along with some of the new entry to the sector, has really created a very robust atmosphere for M&A. Medicare Advantage is potentially coming into play here as we move into 2021 for the hospice benefit. I think that’ll really help bolster growth as well,” said Kevin Palamara, managing director for Provident Healthcare Partners, in a recent webinar. “As we transition to a value-based care environment, groups that have diverse service lines and the ability to show cost savings through their outcomes are going to command a premium multiple in the marketplace. But to accomplish this requires pretty significant investment in company infrastructure.“
Whether working with payers or potential buyers, geographic scale is increasingly important. This is one of the driving forces behind the widespread consolidation in the hospice space, as providers work to build up their footprints in anticipation of the forthcoming value-based programs.
Scale is also a major consideration for companies and private equity investors that hope to capitalize on new-to-hospice payment models through hospice acquisitions, but density in a particular region is also important.
“We find that sometimes groups try to expand quickly into other states to try to cover a larger footprint rather than building that density within their geography. And when you think about private equity establishing a platform or an existing platform looking for a regional expansion, they’re going to put more value on geographic density rather than simply spread assets throughout multiple states,” said Senior Analyst Jake Vesely from Provident. “I think what is most important is whether the business has the size and scale to become a true platform and to support future growth. Ultimately, size will drive valuation.”
Private equity interest in the hospice market is driven by multiple factors, according to Vesely, such as the fragmented nature of the industry, increased acceptance of palliative care services, the aging population, the changing regulatory landscape, and the transition towards a value-based care model.
A solid management team as well as clinical staff will also make hospices more attractive to prospective buyers, as evidenced by the organization’s financial health as well as patient outcomes and satisfaction scores.
Reducing turnover is a key consideration.The hospice and palliative care workforce has been declining in numbers in recent years due to staff retirement, burnout and limited opportunities for specialized training.
Hospice leaders identified staffing shortages as their top concern for 2020 on a Hospice News survey done in collaboration with Dallas-based tech company Homecare Homebase. More than 26% of 300 respondents anticipated staffing as their greatest challenge, outweighing concerns over increased competition in the hospice space and new payment models.
Shortages are expected to worsen during the next 25 years, with research indicating that supply of a hospice and palliative care specialized workforce will be exceeded by demand of a growing senior and seriously ill population.
“The ability to retain caregiver talent is one of the biggest issues in the industry right now, [staff] retention and clinical turnover,” Vesely said. “Groups that can demonstrate a lower turnover rate will be more highly competitive amongst their peers in a transaction process.”