Addus Poised for Hospice, Home Health Acquisitions

Addus HomeCare Corporation (NASDAQ: ADUS) has more acquisitions in the works, some of which are expected to occur within the next few months. The company continues to pursue hospice and home health operations located in areas where they already established a presence with their personal care business.

Addus launched as a personal care company, and those services still represent about 80% of Addus’ business. Shortly after CEO Dirk Allison came on board in 2016, the company began building up its clinical services, including hospice and home health. The national company has locations for all three business lines in the New Mexico and Ohio markets, with plans to grow that number in the coming years.

“With our strong liquidity position, we continue to believe that we have the ability to close additional acquisitions during the next few months.” Allison said in an earnings call. “While purchase multiples for clinical services remain high, we will continue to pursue transactions which are created while bringing both revenue and operating synergies to Addus.”

Multiples in the hospice and home care space reached a record 26x, according to a research report by PwC’s Health Research Institute. Hospice and home health merger and acquisition activity buoyed the larger health care services sector last year, which saw a decline in transactions largely due to the fallout from the COVID-19 pandemic. Overall health care sector multiples hovered near 13.9x, up slightly from 13.8x the prior year, according to PwC.

Partially because of these high valuations, Addus is leaning towards home health in its M&A plans for this year. Strategic buyers are turning their attention back towards home health transactions in 2021. For the past two years, hospice has dominated the M&A market as buyers backed away from home health as they gauged potential disruption associated with a a new payment system, the Patient Driven Groupings Model (PDGM).

Effective Jan. 1, 2020, Medicare began reimbursing home health care providers through PDGM, which classifies patients into payment categories based on clinical characteristics and other patient information, and shifts the home health payment model to a 30-day payment period rather than the current 60-day episode. Home health providers were wringing their hands last year as the model took effect, causing the M&A market to temporarily slow.

Addus is nearly finished with its integration of its Queen City Hospice purchase in Ohio last year. In December 2020, the company bought Queen City and its affiliate Miracle City Hospice from the private equity firm Stonehenge Partners for a cash purchase price of $192.0 million.

The Queen City transaction was one of the larger hospice deals to occur last year. Also in December, Addus acquired personal care provider SunLife HomeCare in Tucson, Ariz., for an undisclosed amount. During 2019 and 2020, acquired companies brought in more than a total $214 million for Addus.

Addus provides hospice, home health, and personal care services to nearly 44,000 patients through 215 locations in 25 states. The company’s acquisition strategy hinges largely on building density in markets where it already has a presence, though plans exist to move into new states as opportunities arise.

“We remain confident that we will have opportunities to achieve or exceed our stated goal of adding a minimum of $100 million in annual revenue through acquisition this year,” CFO Brian Poff said. “Hospice has been very expensive. At this point in time we also feel it is very important to add the home health service to our lines.” 

Addus saw net service revenues of $205.3 million during the first quarter of 2021, a 7.9% increase from $190.2 million for the first quarter of 2020.

Adjusted EBITDA increased 8.9% to $19.3 million for the first quarter of 2021 from $17.7 million in the first quarter of 2020. The company’s hospice segment brought in nearly $36.1 million, up from $25.2 million in the prior year’s period.

Like many organizations, Addus has seen some declines in hospice average daily census and length of stay. The COVID-19 pandemic has impacted hospice length of stay industry-wide. During the outbreak many patients have tried to avoid institutional care such as hospitals and skilled nursing facilities for fear of contracting the virus. This resulted in decreased referrals from those sources, accompanied by a rise in referrals from outpatient settings such as physician offices.

While there are benefits to the shifting referral mix, one side effect is decreased length of stay, as patients who come to hospice from inpatient settings tend to receive services for a longer period of time.

Lengths of stay may rebound through 2021 as the availability of COVID vaccines and other factors bring patients back to hospitals and skilled nursing.

“With the accelerating growth in vaccinations across the country and increasing facility access, we expect that we will begin to see a return to higher volume trends in our hospice business,” Allison said. “Ultimately, we believe Addus is well positioned to meet expected demand in all our operating segments as overall conditions improve and more restrictions are lifted.”