Hospice M&A Riding High on Demographic Tailwinds, but Staff Shortages Threaten Growth

The hospice mergers and acquisitions market has been burgeoning for the last several years and continues to accelerate. Hospice leads the health care sector in terms of investor interest and valuations, but providers may hit some walls if workforce shortages worsen.

Among the driving forces behind this continued acceleration include demographic tailwinds, rising demand and the opportunity for substantial return on investment for private equity buyers that plan to sell off those assets within a few years.

Nearly 1,304 transactions occurred in the health care sector during the 12-month period ending May 15, 2021. Of those, 95 involved a hospice or home health asset, up 16% from the prior year, according to a report from PricewaterhouseCoopers (PwC). The collective price tag on these deals exceeded $11.8 billion, reflecting record-high enterprise value to EBITDA multiples for hospice assets. During the 12-month period in PwC’s analysis, hospice and home health multiples reached 26.2x compared to 16.1x for the overall health care sector.

The COVID-19 pandemic is playing a role in these trends on multiple fronts. One factor that can’t be ignored is that hospices suffered financially due to COVID.

About 60% of hospices anticipated drops in annual revenues stemming from the pandemic, according to May 2020 research by the National Association for Home Care & Hospice. Nealy 30% indicated that they expected revenue declines of 15% or more during calendar year 2020. Hospices saw increased demand for personal protective equipment (PPE) and other scarce resources even as prices of those products skyrocketed.

Many providers also saw reduced referrals and admissions from hospitals, skilled nursing facilities and senior living operators due to pandemic-related disruption

While many providers are seeing signs of recovery as those issues start to subside due to vaccinations and falling infection rates, for some hospices the damage was already done. A contingent of smaller organizations that tend to see slight margins were unable to take these punches. This moved many of them to sell their businesses to larger companies or private equity firms hungry for a hospice.

But the effects of COVID on hospice M&A were not completely negative. The disruption to facility-based care organizations drove more health care into the home setting during the pandemic, boosting already rising demand and making buyers’ mouthes water.

Even in the face of a pandemic, it almost goes without saying that demographics may be giving the market its biggest push.

About 10,000 people in the United States become Medicare eligible every day, a trend that began in 2011 and is expected to last through 2030, according to the Medicare Payment Advisory Commission (MEDPAC). Close to 80% of older adults have at least one chronic disease and 77% have at least two, according to the National Council on Aging. Chronic disease accounts for approximately 75% of U.S. health care expenditures.

This aging boom is fueling rising demand for hospice and palliative care. Hospice utilization has been rising incrementally each year, reaching 51.6% among Medicare decedents in 2019, up from 50.3% in 2018, MEDPAC reported. More than 1.6 million Medicare beneficiaries received hospice care from 4,840 providers. Median length of stay rose to 92.6 days in 2019, compared to 90.3 in 2018.

Length of stay will likely see a drop when 2020 numbers become available due to COVID. The number of referrals from facility-based providers fell during the pandemic, and those patients tend to experience the longest lengths of stay. This will likely stabilize in the long term.

As for who is buying these hospices, it runs the gamut. The industry is seeing deal volume rise among large strategic buyers, including the publicly traded entities. Private equity firms are buying hospices left and right due to this anticipated growth and the ability to capitalize on high valuations when they eventually sell those companies. More non-traditional buyers are eyeing up hospice assets, including family offices, search funds and special purpose acquisition companies (SPACs).

Private equity hospice transactions rose nearly 25% between 2011 to 2020, according to a recent data that M&A advisory firm The Braff Group shared with Hospice News.

Last year the Chicago-based private equity firm The Vistria Group completed the sale of St. Croix Hospice to affiliate investment company H.I.G. Capital for an undisclosed amount. H.I.G. Capital’s portfolio includes more than 100 companies with combined sales in excess of $30 billion.

Headquartered in Minnesota, St. Croix Hospice has a substantial Midwestern footprint across six states. The company is on a strong growth trajectory through a number of its own acquisitions during 2019 and 2020, as well as several de novos.

In a hotly anticipated transaction, private equity firm Webster Equity Partners is shopping around Bristol Hospice. The company is an expanding multi-regional player that has grown seven times larger since Webster purchased the company in 2017. The hospice operates 35 locations across 10 states, and its EBITDA exceeds $70 million, according to PE Hub. Bids in the ongoing sales process are rumored to exceed $1 billion.

As bullish as private equity has been on hospice, strategic buyers are not being left behind. Almost every large publicly traded hospice provider has signaled their intention to leverage hospice acquisitions to fuel their growth. This includes such as Amedisys (NASDAQ: AMED), LHC Group (NASDAQ: LHCG), Addus (NASDAQ: ADUS), Encompass Health (NYSE: EHC), and The Pennant Group (PNTG). Each of these companies has completed multiple acquisitions during the past 12 months, with more transactions reportedly in their pipeline.

Perhaps the two largest transactions in recent months involved Brookdale Senior Living’s (NYSE: BKD) and Humana (NYSE: HUM). Brookdale sold an 80% stake in its hospice and home health segment to HCA Healthcare (NYSE: HCA) for $400 million.

Humana (NYSE: HUM) in April announced plans to acquire the remaining 60% stake in Kindred at Home, valued at $8.1 billion. This includes Humana’s existing equity value of $2.4 billion from its existing 40% ownership of the business. Humana acquired the 40% stake in 2018, with private equity firms Welsh, Carson, Anderson & Stowe and TPG Capital holding the remaining 60%.

Following the close of the Kindred at Home acquisition in the third quarter, Humana plans to spin off and sell the company’s hospice business to capitalize on high valuations in what promises to be a massive deal.

With Kindred’s scale, Humana stands to gain significantly from divesting its hospice segment, likely seeking a substantial price for the asset. Across all three of its service lines, Kindred at Home cares for 550,000 patients in their residences each year, employing nearly 43,000 clinical staff in locations throughout 40 states.

One interesting consideration is that these massive companies and super-capitalized investors are not the only entities that are chasing deals. Smaller and mid-size companies, including some nonprofits are also making deals.

Texas-based Choice Health at Home completed three acquisitions during the first half of 2020 with more reportedly on the way. Choice, headquartered in Tyler, Texas, was established in 2008 as a rehabilitation services provider. The company entered the home health arena in 2012 and launched its hospice business in 2018. It operates locations throughout Texas, Louisiana and Oklahoma.

Companies such as Silverstone Hospice, also based in Texas, and Alleo Health System in Tennessee are among the small to mid-sized providers that have made acquisitions during 2020 and 2021 without private equity backing.

Even in light of these financial victories, the industry faces a looming threat — a diminishing workforce.

More than 35% of hospice leaders surveyed by Hospice News earlier this year cited staffing shortages as a top concern for their organizations, along with regaining access to patients in facilities. Many hospice providers have seen staff turnover rise during the pandemic, as have organizations in other health care settings. The shortage is occurring across a range of disciplines, including nurses, licensed independent practitioners, case managers and aides.

COVID isn’t helping. Slightly more than 20% of health care workers have considered leaving the field due to stress brought on by the pandemic, and 30% have considered reducing their hours, according to a recent study published in JAMA Network Open.

Earlier this month the Dare County Board of Commissioners in North Carolina approved the sale of its local home health and hospice agency to BrightSpring Health Services for $2.9 million. They decided to sell because they couldn’t recruit or retain enough staff to meet the community’s needs, county officials told Hospice News.

Oregon-based Grande Ronde Hospital and Clinics in early June completely shut down its community-based hospice program due to staffing shortages.

The need to build up the hospice workforce has providers of all stripes losing sleep. Hospices have increasingly sought ways to boost staffing recruitment and retention.

Amedisys is embracing data analytics to reduce staff turnover amid staffing shortages exacerbated by the pandemic. The company’s system predicts with 80% accuracy whether an employee may be leaving their positions, allowing opportunities for intervention.

LHC Group is stepping up efforts to recruit clinical staff to match the home health and hospice provider’s rate of expansion, foreseeing rising demand of clinicians amid an 8% growth in same-store hospice admissions during 2021. The company recently invested $20 million in the University of Louisiana at Lafayette College of Nursing and Allied Health Professions to help bring new clinicians into the hospice space.

Hospice leaders are confronting the question of whether they will have a sufficient pool of workers to meet the ever increasing demand, creating a potential barrier that could slow their growth