Hospices Capitalizing on Industry Consolidation

Consolidation is a growing trend in the hospice market, leading to a shrinking number of providers nationwide as smaller hospices get absorbed by larger organizations.

Hospice topped other health care sectors in merger and acquisition activity this year, despite economic downturn during the COVID-19 pandemic. While M&A transactions slowed significantly early in 2020 as providers swung against the pandemic’s financial hits, industry professionals anticipate growth to surge in the hospice space.

“Hospice continues to be the most sought after area within the post-acute care sector,” said Kevin Palamara, managing director of investment firm Provident Healthcare Partners in a recent webinar. “I think there’s a lot of blue sky in terms of consolidation activity. Private equity consolidation, along with some of the new entrances to the sectors of home health and hospice has really created a very robust atmosphere for M&A. In the hospice space, there’s going to be some big things on the horizon, with some large-scale acquisitions in the next quarter or two.” 

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Larger hospice providers have increasingly joined forces with smaller companies to expand reach and gain a competitive edge. In one of the largest deals to date in 2020, Amedisys, Inc. (NASDAQ: AMED) acquired AseraCare Hospice for $235 million in June this summer, projecting to generate $117 million in revenue annually with the transaction. A merger between Foothills Visiting Nurse & Home Care, Salisbury Visiting Nurse Association (VNA) and VNA Northwest earlier this week linked the three Connecticut providers in a combined effort to expand service areas and preserve financial health. M&A activity will be full speed ahead as hospice providers continue to capitalize on consolidation.

A transition to value-based care is a key driver towards increased consolidation, according to Jake Vesley, a senior analyst at Provident.

“As we transition to a value-based care environment, groups that have diverse service lies and the ability to show cost savings through the outcomes are going to command a premium multiple in the marketplace,” said Vesley. “Given the consolidation activity we’ve seen throughout the past few years, there’s a limited number of groups remaining that can qualify as a true platform. There’s a tremendous amount of competition and increased valuations for these organizations.”

Beginning January 2021, the U.S. Centers for Medicare & Medicaid Services (CMS) will add a hospice component to the Medicare Advantage Value-Based Insurance Design (VBID) Model, commonly called the Medicare Advantage hospice carve-in.

Leveraging larger organization resources provides a competitive advantage for smaller hospices looking to demonstrate their value to payers in the VBID environment. The ability to show data outcomes to payers will be a necessary investment into technology for hospices looking to expand. With cost reductions and higher quality of care key in a value-based design, providers will need to ramp up data tracking processes to gain an edge over competitors.

“Can the organization pull unilevel economic detail from their [electronic medical record (EMR)] for investors that evaluate the operational statistics of the business?” said Vesley. “Quality of earnings firms will require this to conduct their analysis of the revenue and earnings of the business. It’s important to connect with your EMR provider to ensure that this information will be readily available before you start a transaction process.”

Consolidating with interdisciplinary health care sectors allows hospices to branch out further upstream in reaching patients, stemming new referral sources through service diversification.

“If you’re a potential seller, what’s especially important is what creates the value and your revenue streams,” said Ted Cuppet, industry consultant and CPA at The Health Group. “We’re really looking for consistency and diversity so that we’re not necessarily too reliant on one source of revenue or another when it comes to referral places where patients are coming from.”

As leading providers in the industry continue to spread roots through mergers and acquisitions with their counterparts, the potential for end-of-life care to grow largely rests on aging demographics as the population moves through the untapped areas of health care.

“There’s still a ton of regional and multi-regional players out there that have not gone through a [consolidation] process,” said Palamara. “In terms of some of the macro-tailwinds that you’re seeing, some of them are pretty common sense. Look at the demographics and the acceleration of growth of that 75+ year old population, the folks that are eligible for hospice and home health care, the increased utilization of hospice and the education that’s being provided. That’s really driving folks to the end-of-life care setting. Both of these areas are hugely fragmented. The top 10 players in both home health and hospice probably only account for 15 to 25% of the overall market.” 

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