Staffing, Workplace Culture a Deciding Factor in Hospice M&A Deals

Merger and acquisition activity in the hospice and home health care space has been exploding in recent years as investors from all walks dive into these markets. Hospice deals have been moving forward at a record pace. As providers contend with widespread workforce shortages, buyers are paying close attention to leadership teams, staffing levels and workplace culture.

The number of transactions involving a hospice or home health company rose 16% during a 12-month period ending May 15, 2021, according to a report from PricewaterhouseCoopers (PwC). Out of the roughly 1,300 health care transactions during that time frame, 95 were hospice acquisitions that totalled more than $11.8 billion collectively.

Hospice and home health multiples have reached as high as a record 26.2x in 2021 compared to 16.1x for the overall health care sector, according to PwC.

Despite high price tags, hospice has become a seller-friendly and fast-moving market, according to Ross Sallade, shareholder at Polsinelli PC.

“I expect we’ll see hospice continue to pick up pace with multiples being very high, and that seems to develop a very pressure-packed and a very seller-friendly market,” said Sallade during a recent WellSky webinar. “Sellers are in very fast-paced bidding processes, with diligent pressure to get through it quickly at a high level. Sellers seem to be more willing to dump what they consider to be a problematic buyer to someone who really is going to dig in on the diligence.”

Rising demand and demographic tailwinds are among the factors driving up investor interest in the hospice sector. The national average for hospice utilization among Medicare decedents tipped up to 51% in 2019, the Medicare Payment Advisory Commission reported. The amount of seniors 65 and older is expected to almost double by 2060, rising from 16% of the nation’s overall population in 2018 at 52 million up to 23% at 95 million, according to U.S. Census Bureau projections.

Demand may be outpacing supply as widespread workforce shortages have forced some hospices to shut down their programs or sell off their operations, unable to recruit or retain ample employees to care for a rising tide of patients.

The struggle to fill their ranks is among the factors driving hospices to the sellers’ table, according to Linda Murphy, co-founder and chief operating officer of Concierge Home Care, a Florida-based home health and palliative care provider.

“Staffing is at a critical point for a lot of folks,” said Murphy. “You’ve got to put programs together where you’re being a lot more creative to even try to hire the small population of staff that are available out there. A lot of folks look at some of these acquisitions and asset deals just as an opportunity to gain more people so that you can service more areas.”

An already strained workforce has come under further pressure from the coronavirus pandemic. A little more than 20% of health care workers have thought about 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. Hospices have been growing increasingly concerned as emerging variants of the virus threaten to impact their workforce and operations.

While the pandemic delayed some deals or complicated the diligence process, hospice M&A rebounded by summer 2020 and since has gained momentum. The many challenges that providers have faced during the outbreak are rippling into the acquisitions market to some extent, according to Sallade.

“COVID pressures could put challenges on hospice operations and could present future challenges to the acquisition market if those pressures prove too much or provide too much operational uncertainty,” Sallade told Hospice News. “Should those staffing shortages or increased staffing costs continue, that would put pressure on the ability of hospices to expand care and could be seen as an operational challenge stemming from COVID that could cause some uncertainty in the market.”

As investors zero in on staffing, a hospice’s leadership team and workplace culture can either seal or kill a deal. An organizational culture in which staff feel supported can be a key differentiator for buyers as well as prospective employees.

What a leadership team brings to the table in terms of experience and culture can be important pieces of the acquisition process, according to Preston Brice, partner at Grant Avenue Capital.

“It is not just numbers. It is who we partner with and go to market with. We really spend a lot of time looking at who the people are at the table,” said Brice. “Who’s leading the organization? What is that culture that exists there? We may have our own culture that we’re trying to bring to the table, and maybe it’s a shift from where they are. The cultures that are underlying in these organizations will drive so many of the other things.”

One factor that could influence the market is Biden administration’s proposal to raise the tax rate on long-term capital gains to 43.4%, up from the current 23.8%. This may even be accelerating 2021 hospice acquisitions as companies try to close deals before a potential increase takes effect.

The Internal Revenue Service (IRS) applies capital gains taxes to the proceeds generated by selling investments. Historically, capital gains tax rates have been lower than those for income on wages and salaries. “Long-term” capital gains are those that come from investments sold after being held for longer than one year.

Legislative action would be necessary to enact the proposal, which to date has not occurred. Republicans have indicated that they intend to fight the move, which would roll back Trump-era tax cuts. If enacted as proposed, the tax hike would be retroactive to April 28, 2021.

“We hear from a lot of folks that they’re looking to accelerate their timelines this year because there’s a chance that capital gains taxes are going to increase,” Douglas Wicklund, Jr., executive director of health care investment banking at Oppenheimer & Co., told Hospice News. “There’s even concerns about them being retroactive. That possibility has got sellers concerned. It’s been one of the most common responses when we ask business owners why they are contemplating a sale now.