Nonprofit Hospices Selling to For-Profit Providers, Trend May Accelerate

Industry consolidation has been robust in the hospice space, with deal volume and valuations outpacing other health care industry sectors. Most of these transactions involve one for-profit company buying another. However, more instances are cropping up in which a for-profit agency purchases a nonprofit hospice.

While individual nonprofits have grown in recent years, in aggregate for-profits are outpacing them. In 2019, 4,840 hospices provided care to Medicare beneficiaries, up 4.3% from the prior year, according to the Medicare Payment Advisory Commission (MEDPAC). For-profit hospices represented the bulk of that increase. The number of for-profits rose by 6.3% that year, compared to 0.2% for nonprofits. The number of government-owned hospices declined 5.7%.

For-profit hospices cared for 51% of all hospice patients in 2019, compared to 45% for nonprofits and 4% for government agencies.

While the causes for these trends are multifaceted, they often boil down to the challenge of staying competitive in a marketplace that increasingly rewards geographic scale, heavy investment in technology and the ability to take pay cuts in some value-based payment programs.

“The sophistication and the maturity of the industry is causing a lot of agencies to kind of self assess,” Mark Kulik, managing director with the M&A advisory firm The Braff Group, told Hospice News. “They are asking if they have the size, the resources and the sophistication to handle this continuing evolution and changes both in regulatory oversight and reimbursement pressures.”

Among the largest such deals to date was the acquisition of JourneyCare by Addus HomeCare (NASDAQ: ADUS) for $85 million. JourneyCare, a nonprofit, is one of the largest hospice providers in Illinois, serving 750 patients daily in 13 counties.

Also in 2021, Care Hospice acquired the assets of Tennessee-based nonprofit Hospice of Chattanooga and its parent organization, Alleo Health System. As a result of the transaction, Chattanooga and Alleo will transition to for-profit status. Financial terms were undisclosed.

Alleo and its affiliates care for patients in Tennessee, Georgia, North Carolina and Alabama. Care Hospice offers care in 19 states under more than 20 brands. 

BrightSpring Health Services, which recently announced an initial public offering, last year purchased Dare County Home Health and Hospice in North Carolina, a government-operated agency. Dare County officials told Hospice News that the sale price was $2.9 million.

Last May, home health and hospice giant Amedisys (NASDAQ: AMED) bought out the hospice and home health operations of the Nebraska-based nonprofit Visiting Nurse Association (VNA).

“When a not-for-profit sells, it is usually due to headwinds, or anticipated headwinds of some kind. The pandemic could certainly be a factor,” Cory Mertz, managing partner with the M&A advisory firm Mertz Taggart, told Hospice News. “In most cases, the board of directors is looking toward the future and have determined that their mission may be better carried out another way. In other words, they recognize it’s getting harder to compete and remain financially viable long-term.”

Hospices have taken some financial punches during the pandemic, often brought on by declining referrals, reduced access to facility-bound patients and skyrocketing costs for personal protective equipment and expenses for telehealth and employee paid leave.

But even prior to the pandemic, substantial gaps existed between for-profit and nonprofit margins. 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%. Large national companies tend to have the larger double-digit margins, whereas the smaller nonprofits are often closer to that 3-to-5% range.

These trends are unlikely to reverse in the near term.

“I expect it to continue and perhaps accelerate as it becomes more difficult to compete as a standalone entity,” Mertz said.

Another factor in some nonprofits’ decision to sell is the changing payment environment as hospices inches towards value-based payment models. Participation in the hospice component of the value-based insurance design (VBID) demonstration, known as the Medicare Advantage hospice carve-in, doubled between 2021 and 2022. The demo got off to a small start in 2021, but its influence on the industry will likely prove more substantial as the four-year test progresses.

The carve-in represents the most significant step to date in moving hospice towards value-based payment models. While the carve-in could give providers access to more patients who wish to elect hospice but prefer not to leave their MA plans, it also comes with greater financial risk.

Many providers have voiced concerns about the carve-in, particularly that reimbursement dollar amounts will almost certainly fall for patients enrolled in MA.

VBID requires plans to pay rates comparable to the per diems providers receive through the traditional Medicare benefit during the first year, but allows plans to negotiate for lower rates in subsequent periods. In these arrangements, MA plans will seek rate concessions in exchange for higher patient volume. Plans will also likely offer to pay for other services such as palliative care and incentive payments tied to quality or cost savings.

“The hospice carve-in will affect the hospice side of the picture,” Kulik said. “Under traditional Medicare a beneficiary would have a richer reimbursement to providers than a Medicare Advantage. That squeezes the margins of the provider accordingly and also typically adds other administrative burdens too.”

Of course, exceptions occur. Androscoggin Home Health Care + Hospice, a nonprofit in Maine, last week acquired the for-profit provider Care & Comfort for an undisclosed sum. Care & Comfort opted to sell upon the retirement of its founder, and the deal is slated to close Feb. 1. Post-acquisition, Care & Comfort will move forward as an Androscoggin brand with nonprofit status. 

This is likely not the last time that the industry will see such a deal.

“It certainly happens. We have had several not-for-profits reach out to us in the past 12 months to let us know they are acquiring,” Mertz said. “In just about every case, these are large (say, greater than 500 ADC) organizations that are performing well.”