Small Hospices Could Become Prime Targets for PE Buyers

Private equity investors remain bullish on hospice with no signs of slowing down. However, with a number of high-profile transactions completed or in the works during 2020 and 2021, the number of hospices of scale that are likely to come to market is dwindling. During the next few years, PE firms will likely fix their eyes on smaller operations in what remains a highly fragmented industry.

Private equity hospice transactions rose nearly 25% between 2011 to 2020, according to a recent industry transaction report that M&A advisory firm The Braff Group shared with Hospice News. A number of factors are whetting investors’ appetites for hospice, including the increased acceptance of palliative care services, demographic tailwinds, the changing regulatory landscape, and movement towards value-based payment models. 

“[Hospice] is still pretty fragmented compared to some other industries. You still see a fair amount of independence out there with quite a few independent owners,” said Joel Rhoads, partner, business development at the M&A firm Triavo Health. “We’ve got a lot of mom-and-pops — they’re 25-to-40 [average daily census] hospices, and they’re wanting to expand.” 

Triavo recently advised Lumicare Hospice on its sale to Traditions Health, a portfolio company of the family-owned investment firm Dorilton Capital Advisors.

Despite the amount of consolidation taking place in the M&A market, hospice is likely to remain fragmented for years to come. About 4,840 hospices care for 1.6 million Medicare decedents during 2019, according to the Medicare Payment Advisory Commission (MEDPAC). The number of U.S. providers rose 4.3% from the prior year, with freestanding, for-profit companies representing almost all of the net increase.

Those mom-and-pop stores may become prime targets for PE acquisitions given the number of those investors’ deals in recent memory and the limited number of larger assets. 

Generally, private equity firms buy companies, capitalize them to fuel growth and then sell them off at a substantial mark up. Historically, that cycle could take as long as 10 years. That window is getting smaller. The median holding time of private equity assets in 2019 dropped to 4.9 years, according to Pitchbook’s 2019 Annual US PE Breakdown. In 2014 the median holding time was 6.2 years. If the holding times decline slowly or not at all, it may be some time before a large PE-backed provider is up for sale. 

“There’s still a pretty, pretty big appetite for it, if you’re a health care-minded private equity firm. Hospice is an industry where net margins are much larger than a lot of health care,” Rhoads said. “Health care tends to see net margins in the 3-to-5% range. Hospices can reach 15-to-25% if they’re running very well.”

The aggregate 2018 Medicare margin, which is an indicator of the adequacy of Medicare payments relative to providers’ costs, was 12.4 %, according to MEDPAC, which projected a 2021 margin of 13%. Unsurprisingly, large national companies tend to have the larger double-digit margins, whereas the smaller nonprofits are often closer to that 3-to-5% range, impacting the industry-wide average.

One of the largest deals of the past two years was H.I.G. Capital’s purchase of Minnesota-headquartered St. Croix Hospice from the Vistria Group last October for a confidential amount. St. Croix’s approximately 900 employees care for more than 2,500 patients daily out of more than 40 locations in seven Midwestern states. H.I.G. is unlikely to put St. Croix up for sale for several years.

The industry is keeping its eye on one of the few pending large PE transactions, that of Bristol Hospice. Bristol’s backer, Webster Equity Partners, began shopping the company around in February. Bristol is a large 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 PE Hub has reported. Bristol has completed at least 15 acquisitions of its own during the past three years.

Whispers in the hospice space suggest that another PE-firm will likely buy Bristol, with most of the large strategic buyers stepping out of the bidding process after the first round. Bids have reportedly reached $1 billion, according to PE Hub.

High price tags on hospice companies have not scared away buyers, even as multiples in the space reached as high as 26x during 2020. As demand for hospice rises and more avenues for palliative care reimbursement emerge, those multiples are unlikely to come down.

Contingencies that could lead to lower multiples include any kind of Medicare reimbursement cuts, which would mirror trends in the pharmacy industry, according to Jared Rhoads, partner, business strategy, at Triavo. Retail pharmacies used to see 25% gross margins and 10-to-12% net. Today, those margins are in the area of 5%, he told Hospice News. 

While MEDPAC has recommended hospice payment reductions for several years running, lawmakers in Congress have yet to heed those calls and reimbursement levels have mostly stayed firm.

“If there’s a serious decrease in reimbursement on daily rates, I could see that affecting [hospice multiples],” Jared Rhoades said. “But that hasn’t happened, and it’s yet to be seen what goes on there.”

The impact of potential regulatory action also remains to be seen. Policymakers to date have not fired salvos at PE hospice investors, but they are asking questions.

Members of the U.S. Senate Finance Committee recently wrote to Kindred at Home President and CEO David Causby asking for details on the role of its former private equity backers, Welsh, Carson, Anderson & Stowe (WCAS) and TPG Capital.

Those firms bought Kindred at Home in 2018 in partnership with Humana, Inc. (NYSE: HUM). Humana recently bought out the firms to acquire 100% ownership. To date, none of the companies involved have been accused of any wrongdoing, but the Senate investigation signals that lawmakers are taking a sharp look at how PE investment could be affecting care delivery.

“Private equity investment in the U.S. health care system – including the hospice industry – has increased more than twenty-fold since 2000, surpassing $100 billion in deals in 2018,” the senators wrote in the letter. “We are concerned that when applied to hospice care, the private equity model of generating profit on a rapid turnaround can occur at the expense of dying patients and their families.”