LHC Group to Pull Back Reins on Hospice Acquisitions in 2022

LHC Group (NASDAQ: LHCG) executives today announced a slowed, albeit continued, focus on hospice growth heading into 2022.

The company has been bullish on the hospice market in recent years, with hospices deals making up a little more than 60% of in cash flow set aside to further boost its M&A pipeline last quarter. Heading into next year, hospice will be less of a focus for LHC Group, according to CEO Keith Myers.

“On M&A, when we look forward to hospice activity that you’ve seen from us this year, [it] will not be at the same level next year,” said Myers during today’s earnings call. “This year, because of all of the delay in pipeline activity for home health related to COVID we chose to take this opportunity to build out our hospice footprint. Going forward, we’ll still be adding hospice, but it’ll be at a much lower percentage and we’ll be filling in markets where we already have home health.”

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A national hospice, home health and facility- and community-based care provider, LHC Group has locations across 37 states and the District of Columbia, reaching 60% of the country’s 65 and older population. The company anticipates a total revenue of roughly $2.2 billion in 2021.

LHC Group’s merger and acquisition activity hit an all-time high this year. Hospice acquisitions have been a key strategic focus for the company as it grows its footprint in markets where it already has a home health presence, as well as expanding into new markets. The company doubled down on hospice deals heading in the first half of 2021. Continuing this momentum in the third quarter, LHC Group completed its acquisition of South Carolina-based Heart of Hospice.

In one of the year’s most significant deals, the company acquired home health and hospice operations in 22 states from the joint venture between Brookdale Senior Living (NYSE: BKD) and hospital system HCA Healthcare (NYSE: HCA).

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The transaction marked the company’s initial entry into Minnesota and New Mexico and expanded its existing footprint across 20 states where the LHC Group already operates. The transaction includes 11 hospice, 23 home health and 13 therapy locations. LHC Group expects these assets to generate nearly $146 million annually, though the sale price was not disclosed.

The company’s 2021 joint ventures and acquisitions added an estimated $300 million to the company’s bottom line. All told, LHC Group brought in $565 million in revenue during the third quarter, a 6.6% increase from $530.7 million in Q3 last year. Hospice segment revenue accounted for $82.7 million — a 38.2% jump from the prior year’s period.

The Brookdale deal will be a large contributor to growth in coming years, according to LHC Group President Joshua Proffitt.

“From a margin perspective, this is going to take 12 to 18 months to get there, but we’re going to see progression quarter over quarter for next year,” said Proffitt. “As we continue to get in and dig deeper, there’s some really good growth upside in this asset as well. All in all, this is a good transaction for us that’s going to contribute in 2022 and be part of that bridge. We’ll see a lot of operational opportunity around that asset.”

Hospital joint ventures will be the prime focus for the company’s growth strategy ahead, according to Myers. The company is a joint venture partner with more than 400 hospitals and health systems nationwide.

“We’re really refocused on hospital joint ventures — that is our sweet spot and always has been, and even more so now that we’re moving into advanced care in the home and being able to move higher acuity patients downstream,” said Myers. “As of now in our pipeline, more than 75% is hospital joint venture activity.”

Filling its ranks with enough staff to support growth has been top of mind for LHC Group, which has 30,000 employees delivering services across its regions. Staffing shortages have threatened growth of many hospice providers during the pandemic. In March the company invested $20 million in nursing school funding to boost the hospice and home health workforce over the next decade in collaboration with the University of Louisiana at Lafayette College of Nursing and Allied Health Professionals.

LHC Group earlier that month stepped up clinical staff recruitment efforts to match its rate of expansion, taking a regional approach to hiring in specific geographic areas where their acquisition activity was booming.

The company’s new hires across home health and hospice numbered at roughly 5,000 during Q3, up from an estimated 4,200 during Q1, a record number of hires according to Proffitt.

“Although there is a contraction in the nursing labor market across health care, due to our flexible scheduling and some other benefits of the home health industry in general and just care in the home, we’re seeing an uptick in the number of applicants and the number of hires we’ve made,” said Proffitt. “We’re always staying tempered about the labor environment that we’re facing. While we’re working on those improvements we’re also dealing with some headwinds that just slow it down a little bit.”

Labor costs, along with personal protective equipment (PPE), will be among those headwinds. LHC Group expects $25 to $30 million in pandemic-related expenses. Last year the company incurred $53 million in COVID-19 costs, with this year’s anticipated total reaching $45 million.

Labor represented the “largest component” of the company’s anticipated COVID-19 costs heading into 2022, or about 45%, according to Eric Elliott, senior vice president of finance at LHC Group. This includes tipends, bonuses, hazard pay and related expenses. About 35% of the costs come from COVID-related health care expenses for employees and their dependents.

“The remaining pocket of [COVID cost] is the PPE, [but] the PPE is becoming less of a cost for us, because we did a really nice job inventorying up plenty of PPE so we have adequate supply for any uncertainties going forward,” Elliott said. “We would expect the health care component to come down some, and we would expect the labor component also to come down, but the heaviest components are still going to be labor and health care.”

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