LHC Group Doubles Down on Hospice Deals Despite High Valuations

LHC Group (NASDAQ: LHCG) aims to continue growth of its hospice services as this year unfolds with a number of acquisitions in the works. Record-high multiples for hospice acquisitions are not deterring LHC Group from pursuing those transactions. Hospice deals accounted for 71% of the $502.5 million the company currently earmarked for its M&A pipeline.

The home health and hospice provider will remain active this year and expects to deliver or exceed its target of $150 to $200 million in acquired annual revenue, according to Keith Myers, LHC Group’s chairman and CEO, with “several exclusive deals in various stages in negotiations.” The company pushed through pandemic-related headwinds in March and April, giving them “strong confidence to be very bullish on its second quarter trajectory,” with momentum expected to continue for the remainder of the year, per Myers.

Hospice acquisitions are a top strategic focus for LHC Group. Their primary strategy is to build up their hospice footprint in markets where they already have a home health presence, though the company is also looking to expand into other new markets. Transactions currently in their M&A pipeline total more than $300 million in exclusive discussions.

“Hospice is competitive, but we look at it a little bit differently. We’re building out a continuum of care,” said Myers. “We know that we have volume to bring to the table from our home health operations and from hospital partners. Multiples are high, and in some markets we can model out the combination and make it work nicely for us.”

Multiples in the hospice and home care space reached a record 26x, according to a report by PwC’s Health Research Institute. Hospice and home health merger and acquisition activity outpaced the health care services sector at-large last year, which saw a decline in transactions largely due to the fallout from the COVID-19 pandemic.

During the second half of 2020, LHC Group acquired five hospice organizations, including Santa Rita Hospice in Colorado, Grace Hospice in Oklahoma, and East Valley Hospice and East Valley Palliative Care in Arizona. The company also acquired Santa Rosa Hospice in Texas with its joint venture partner CHRISTUS Health.

A sizable portion of future acquisitions by LHC Group will involve private equity sellers.

“Hospices that we have in the pipeline now are more investor-owned or investor-backed. They’ve done quite well to a point in the five- to seven-year window where they’re gonna flip out of it and move on,” Myers said. 

Private equity interest in the hospice sector hit record highs during 2020, according to a recent industry transaction report from M&A advisory firm The Braff Group.

Out of LHC Group’s 120 hospice operations, 81 are co-located with home health, or 68%, up from 77 locations in 2020 and 63 in 2019. The company provides home health and hospice care in 35 states and the District of Columbia, serving roughly 60% of the nation’s 65 and older.

While continuing to focus on hospice expansion, LHC Group is seeing an uptick in the number of potential home health deals under consideration, according to the company’s President Joshua Proffit, who stated the company had seen “impounds on small- to medium-sized home health opportunities that we’re already modeling.” Roughly 80% of the company’s M&A pipeline was weighted toward hospice in Q4 of 2020. Hospice now accounts for about 70%, with about 30% allocated in home health.

Hospice has held a stronghold on the M&A market as buyers backed off from home health during 2020, gauging potential disruption associated with a new payment system, the Patient Driven Groupings Model (PDGM). Medicare began reimbursing home health care providers through PDGM effective Jan. 1, 2020. The model classifies patients into payment categories based on clinical characteristics and other information.

“On the size of the hospice deals, they are a little chunkier, ranging from medium size to a pretty good size,” said Proffitt. “Whereas on the home health side, those are more smaller- to medium-size, as we’re consolidating that for PDGM.”

LHC Group’s organic growth in hospice admissions increased 7.6% in the first quarter of 2021, up 1.3% compared to the prior year’s period. The hospice segment made up 12% of the company’s Q1 revenue, bringing in $62.7 million, a rise from $60.5 million in the first quarter of 2020.