Mergers-and-acquisition activity in the hospice market has run hot in recent years, with valuations reaching another year of record-highs in 2021. Meanwhile, private equity activity hit record levels as well, with an affluence of investors that flowed into hospice waters during 2021.
Despite these factors, the market may be cooling down this year as investors increasingly turn focus to the home health sector.
The past year is anticipated to be record-breaking in terms of transaction volume in the home health and hospice spaces. The flow of hospice deals will be up a “staggering” 22.2% over 2020, according to a recent industry transaction report that the M&A firm The Braff Group shared with Hospice News.
The report contained data collected and analyzed through the third quarter of 2021, with the firm predicting a “modest fall-off” in hospice M&A activity over the next 12 to 36 months as the big players in the space resume picking up home health acquisitions.
This was largely due to the “substantial and growing role” of private equity investment in home health and hospice M&A. During the last decade, the proportion of deals completed in home health and hospice by private equity swelled from 30% to 50%, the report indicated. At this pace, private equity activity will set a new record in 2021 with a “feverish pace,” rising up to 16.3% from the all-time high record set the previous year, according to firm projections.
“I foresee dominant transactions completed by private equity sponsors going forward,” Mark Kulik, managing partner of home health and hospice at The Braff Group, told Hospice News. “They have absolutely stepped up and have aggressively gone after the hospice market. As an industry, it’s grown significantly, [and] there’s just so much growth left that opportunity is very attractive to private equity.”
Of the estimated 60-plus transactions during 2021, at least 39, or 65%, were private-equity based, a rise from 56% in 2020, said Kulik.
Private equity activity during Q3 of 2021 surpassed that of the previous year in both deal volume and value, according to The Braff Group’s report. Private equity hospice transactions rose nearly 25% between 2011 to 2020, The Braff Group previously reported last year.
Valuations in the hospice market have hit record highs right along with the jump in activity. Multiples in the hospice and home care spaces, for example, hit a record 26x in 2020, according to a report by PwC’s Health Research Institute. They generally stayed inflated last year.
A banner year for mergers and acquisitions in 2021 across many industries can be tied to factors such as pandemic-related headwinds continuing to billow, pent-up acquisition demand, the re-opening of the nation’s economy and potential tax incentives, among others, The Braff Group indicated in its recent report.
For hospice in particular, tailwinds driving interest in the market include rising utilization and demand of a growing aging population, elevated consumer interest in home health and hospice, along with evolving value-based payment models, according to Kulik.
Hospices stepped into a new payment arena for the first time during 2021 as the direct-contracting program and the value-based insurance design (VBID), or Medicare Advantage hospice carve-in, opened up to the sector. Hospices navigating a broader base of payers and new reimbursement parameters could have investor eyes widening, according to Kulik.
“There’s a ton more headroom of beneficiary utilization of the hospice benefit,” said Kulik. “Baby boomers are still going to be generating increased levels of Medicare beneficiaries. Keeping an eye on this Medicare carve-in pilot program is something that certainly is going to drive demand for quality hospices and keep the valuations high as well. Hospice is a sizable market, and private equity loves all those conditions.”
In 2019, more than 1.6 million Medicare beneficiaries elected the hospice benefit, receiving care from 4,840 providers, according to the Medicare Payment Advisory Commission (MedPAC). The percentage of Medicare decedents who elected hospice rose to 51.6% in that year, up from 50.6% in 2018, according to MedPAC.
Nearly one in four Americans will be 65 and older by 2060, according to U.S. Census Bureau projections, a rise from 17% reported in 2020.
Rising demand may be driving much of the volume in hospice, but labor capacity is becoming a major challenge for operators. Many of WellSky’s clients, for example, report an inability to accept new patients due to staffing shortages, according to Bill Miller, the post-acute technology company’s chairman and CEO.
“Our clients — including our hospice clients — are seeing referral volume like they’ve never seen, particularly in home health, but they can’t get to it because they don’t have the bodies,” said Miller. “These [health care] deals represent what people see as an opportunity in something that has to get fixed. Solutions in workforce availability and staff augmentation are going to be a trend to keep an eye on, not just specific to hospice.”
To help boost clinical capacity, technology companies like WellSky are working on ways to “augment” in-person services with virtual care and other solutions. They’re also trying to help hospice agencies and their post-acute peers by coming up with a “pipeline” of labor reinforcements, according to Miller.
“It’s a potential business opportunity to the extent that we could see a bit of an avalanche and shift of some dollars from pure-play hospice or pure-play home health,” Miller said. “Private equity investors, they can put resources to whoever is in need of them. It’s going to be where you see some dollars flow, along with all the ways the money bounces and follows it. There is room for these models of hospice at home to really root in consumer demand.”
On the horizon, climbing interest rates, rising regulatory scrutiny, stronger oversight in the industry and a potential 20% reduction to the hospice aggregate cap could dampen valuations and make it more expensive and challenging to invest in the space, according to Kulik. That confluence of factors is creating a “Rubik’s cube combination” that could impact multiples, he explained.
A renewed interest in home health could be pulling attention from the hospice market, according to Kulik, especially as the dust settles from the implementation of the Patient-Driving Groupings Model (PDGM), the biggest reimbursement overhaul for that setting in two decades. Some companies temporarily steered away from home health deals during 2020 and 2021 due to anticipated disruption from PDGM, shifting focus on hospice.
Now that the model is firmly established, providers are ready to pick up the pace on home health acquisitions.
“We believe there’ll be activity devoted to home health that otherwise would have been remaining focused on hospice,” Kulik said. “The two sectors have a co-equilibrium or a symbiotic relationship with each other. There’s a correlation there if you look at the curve of reimbursement. Because home health was going through this radical reimbursement change with PDGM, it anticipated diverted attention to hospice. Uncertainty led to a dramatic dip in home health. That’s why we think that there’ll be increased activity on the home health side with the stability that’s been put in place the past two years, and a bit less attention focused on hospice.”
Despite potential slowdowns, optimism in a swinging hospice market remains as this year unfolds. Consolidation may be the name of the game in 2022, along with vertical integration as payers and Medicare Advantage plans look to acquire capabilities in the hospice space, according to Jim Seymour, head of health care and technology, media and telecommunications for Capital One’s Corporate Bank.
“Folks are expecting a better 2022. It doesn’t mean things are rosy and fantastic, but it means that things are going in the right direction,” said Seymour. “Hospice has been one of the areas of substantial investor interest. I think investors still view the long-term tailwinds in the sector as attractive.”
Service diversification — or providers wanting to become one-stop shops for their patients — will additionally drive dealmaking activity, according to Seymour.
“That seems to be a trend that we think will continue. Also, continued vertical integration,” Seymour said. “If we look at some of the payers and the Medicare Advantage plans looking to acquire capabilities in the space, you’ll see some more of that. When I look at the private equity investors and some of the strategics, I don’t really see a dramatic drop off in interest or activity level. There’s a plenty of factors that should drive interest.”
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