Hospice M&A to Stay Hot as Home Health Picks Up Steam

Mergers-and-acquisition activity continues to boom in the hospice space this year. Deal volume may exceed the record number from the prior two years.

As many as 61% of the 203 hospice care professionals who responded to a recent Hospice News Outlook Survey and Report said they anticipate that hospice M&A activity will increase during 2022.

The last two years have seen a record number of hospice transactions, according to Mark Kulik, managing director of M&A advisory firm The Braff Group. The firm tracked data of roughly 67 deals in the hospice market during 2020 and about 68 2021. 

“In hospice specifically, these are all-time high levels of transactions, and I don’t see anything evidencing a decline in closed transactions,” Kulik told Hospice News. “Relative to valuations, I have not seen anything discernible in the reduction of valuations or anything relative to the demand for hospice declining.”

Interest in the hospice market has surged despite record-high price tags for acquisitions. Hospice and home care sector multiples have reached record highs in recent years.

A recent report reflected amounts reaching upwards of 29x in 2020, beating 2019’s record high of 26x, according to PwC’s Health Research Institute. Acquisition activity in both sectors has outpaced other health care markets.

Some hospices, including St. Croix Hospice, expect to see acquisition activity either maintain or increase from previous levels. A portfolio company of the private equity firm H.I.G. Capital, the Minnesota-based hospice provider in 2021 completed two acquisitions in its core markets across the Midwest. 

According to St. Croix President and CFO Stephen Phenneger, the company “established a strategic and growing presence” in Illinois and Michigan markets through the acquisition of Silverado Hospice and purchase of CNS Hospice, respectively.

“We continue to see a steady stream of opportunities for acquisitions throughout the remainder of 2022,” said Phenneger. “We are intentional about our M&A, targeting markets where we can provide the highest quality of care at the community level. We are not interested in acquiring ‘dots on a map,’ but truly becoming a part of the communities we serve.”

In addition to assessing a community’s health care needs, St. Croix places a premium on quality data and a strong track record on regulatory compliance when selecting acquisition targets, Phenneger told Hospice News.

Though interest in the hospice space doesn’t appear to be abating anytime soon, some of the large strategic buyers may be shifting their attention to the home health space. Meanwhile the appetite for hospice among private equity firms continues to be voracious.

Smaller hospices have increasingly been snatched up by peaked private equity interest in the sector. During the last decade, the proportion of deals completed in home health and hospice by private equity swelled from 30% to 50%, a recent report from The Braff Group indicated.

“There is a much more elevated interest level and talk today in 2022 regarding home health, which may be interpreted as less interest in hospice,” said Kulik.

Last year also saw a record number of deals for home health transactions, according to Kulik.

The Braff Group recorded an estimated 81 home health deals completed that year. This was a jump from roughly 57 transactions during 2020, about 60 in 2019 and nearly 62 in 2018.

Interest in the home health space quieted during the past two years, partially due to a shifting payment landscape, according to Kulik.

Implemented in 2020, the Patient-Driven Groupings Model (PDGM) took the home health sector by storm. PDGM classifies patients into payment categories based on clinical characteristics and other information.

Some companies that offer both services reoriented their M&A strategies around hospice as they waited for the dust to settle from the payment transition.

Amedisys Inc. (NASDAQ: AMED) was among these. The company in December 2021 indicated that it would refocus its acquisition pipeline towards the home health space this year after a period of focusing more heavily on hospice deals.

Amedisys built on this strategy with the recent purchase of Dallas-based Evolution Health LLC, a provider of hospice, home health and infusion therapy. Evolution provides care out of 15 locations in Texas, Oklahoma and Ohio.

Other recent deals have signaled that payers are increasingly interested in owning and operating health care providers, including some large-scale hospice and home health companies.

Hospice and home health provider LHC Group (NASDAQ: LHCG) is in the process of being acquired by UnitedHealth Group (NYSE: UNH) for a reported $5.5 billion. Through the deal, the insurance company will integrate Louisiana-based LHC Group with its existing home health asset, Optum Health.

This followed last year’s acquisition of Kindred at Home by Humana Inc. (NYSE: HUM) in an $8.1 billion transaction. The price tag included Humana’s equity value of $2.4 billion from existing 40% ownership of the business acquired in 2018, plus an additional $5.7 million when it obtained the remaining 60% stake from private equity firms Welsh, Carson, Anderson & Stowe (WCAS) and TPG Capital. 

Humana is exploring divestiture strategies in either a spin off or sale of the hospice segment, while retaining the home health component of Kindred.

Lower price tags in the home health sector compared to hospice could also be contributing to this trend, according to Alex Veach, director of operations at M&A firm Agenda Health.

The firm recently advised Traditions Health LLC earlier this month when it purchased Kansas-based hospice and home health provider Serenity Health Management. Though Traditions already offers hospice in the state, the transaction marked its entry into the Kansas home health market.

“Home health is an excellent opportunity because it’s more buyer-friendly,” said Veach. “Hospice is still at a premium. Home health is more in alignment with multiples against EBITDA, [though] still at a higher level, but not as high as hospice. You can get in at much more cost-effective multiples in home health, so it’s a good buy.”

The flow of hospice deals could rise up a “staggering” 22.2% this year over 2020, Kulik previously told Hospice News.

Though hospice has held the investor spotlight for years running, and likely still will, this interest could appear in a different shape, according to Kulik.

“I don’t see as myopic of a focus on hospice going forward as it has been, but more of a balanced focus,” said Kulik. “Whether that translates into less valuation for those hospices remains to be seen, but nothing today is saying it’s going to be lesser value. But there may be fewer transactions because fewer targets are left out there in the marketplace. Some of the major buyers may shift some of their dollars over to the home health side versus the hospice side.”