Hospice Fee-For-Service Model Attractive to Investors

Favorable demographics and rising demand are attracting a range of investors to the hospice space, with private equity leading the way in terms of deal volume. However, the fee-for-service payment model within the Medicare Hospice Benefit is also a key driver of buyers’ interest.

Value-based payment programs have opened up to hospices in 2021. This year, hospices have the opportunity to participate in demonstrations of Medicare Advantage, the Primary Care First initiative and direct contracting payment models. These models include a mix of risk-based and performance-based payment structures, concepts that will be new to many in the hospice industry.

While assuming more financial risk through a value-based approach can pay off for a provider, investors like the stability offered by the hospice benefit’s per diem reimbursement.

“Hospice is still one of the remaining true fee-for-service businesses that’s out there in health care. When you give a lot of capital to people, you’re looking for things that are attractive, simple and proven. Hospice checks a lot of those boxes,” David Schuppan, senior partner at the PE firm The Vistria Group, said at the Hospice News Elevate conference. “We use the phrase ‘value-based care’ pretty generically, but it effectively means that your payment and the kind of care you’re offering is probably going to change.”

Vistria Group is a long-time investor in the hospice space. The firm currently owns hospice provider Mission Healthcare in California, as well as the home-based care provider Help at Home. Earlier this month, Vistria sold hospice provider Agape Care Group to Ridgemont Equity Partners. Financial terms were not disclosed.

In one of the largest private equity deals in the industry last year, Vistria sold St. Croix Hospice to an affiliate of the investment company H.I.G. Capital for a confidential amount.

Private equity interest in the hospice sector has been gaining momentum. These transactions and an influx of new deals during 2021 could drive up hospice valuations that have already reached record highs, with multiples reaching 26x in 2020.

The volume of PE hospice acquisitions rose nearly 25% between 2011 to 2020, according to a report the M&A advisory firm The Braff Group shared with Hospice News.

Relationships with private equity backers can propel hospice growth and give providers access to advisors with extensive financial expertise and experience.

“As an entrepreneurial provider, I started my business with three credit cards, my life savings, and a very small credit line. That creates a great deal of respect for access to capital,” David Jackson, CEO of Choice Health at Home, said at the conference. “When you partner with someone whose business is acquisitions, you have an expert in the field of M&A, and we need to be the expert in the delivery of hospice.”

Jackson founded Tyler, Texas-based Choice in 2008 as a rehabilitation services provider. The company entered the home health space in 2012 and moved into hospice in 2018. The company currently operates more than 40 locations throughout Texas, Louisiana and Oklahoma and employs 800 clinicians.

Choice currently receives backing from two private equity firms Coltala Holdings and Trive Capital. These relationships have boosted the company’s expansion efforts, which include a series of acquisitions in the southwestern United States with plans for more in late 2021 and throughout 2022.

Investors are unlikely to turn away from hospice anytime soon, but a transition away from fee-for-service toward value-based models could make the space seem like less of a sure bet.

Risk-bearing programs operate on a total cost of care basis. They’re paid typically some form of a capitated per member, per month payment. Then they’re responsible for the full cost of care and quality of all the members that are enrolled with them.

Providers can take longitudinal risk, which means risk spread over a long period of time. Risk can also be episodic, in which a provider might be responsible for a particular episode of care and a time period that follows. These organizations, whether they’re involved in taking longitudinal risk or episodic risk, are responsible typically for a total cost of care and quality for beneficiaries

With performance-based methodologies like Medicare Advantage, hospices receive full payment if they achieve quality and patient outcome benchmarks, particularly if they compare well against other providers in their area. This will also be true of the Geographic Direct Contracting Model. A hospice’s full or partial reimbursement for services depends largely on how their performance metrics measure up to local competition, receiving full payment as a reward and partial payment if they don’t.

“The outcomes will be driving the reimbursement, and the business inputs are dramatically different,” Schuppan said. “It’s an unknown book by segment. Hospice has had a pretty standard reimbursement system since the Medicare benefit was created in 1980.”