A turbulent economy and slight cool-down in deal activity early in the year have led some to question whether the record-high valuations for hospice assets will start to tumble.
Like most business sectors, health care has felt the aftershocks of global economic trends such as rising inflation, supply chain disruption, and the continued effects of the COVID-19 pandemic and Russia’s invasion of Ukraine. According to reports and prognosticators, the nation’s crystal balls are swirling with images of a looming recession.
In the midst of this, hospice and home health M&A continues to outpace other health care sectors in deal volume despite the large price tags, propelled by favorable demographics, rising demand for care in the home, and the promise of cost savings.
Thus, these assets have come at a premium in recent years, with hospice multiples reaching as high as 29x in 2020. While a range of publicly traded companies and private equity firms have nevertheless snapped up hospices in record numbers, the skyrocketing valuations have led some to wait it out for a price drop.
Among these is VITAS Healthcare, a subsidiary of Chemed Corp. (NYSE: CHEM), and the nation’s largest hospice company by market share, according to LexisNexis.
“The last several years, you’ve heard me specifically state that the probability that we do any acquisitions in the health care arena [is] exceptionally low, based upon valuations,” Chemed CFO David Williams said in a first-quarter earnings call this year. “Now that landscape is shifting — and shifting rapidly — it will create opportunity again.”
Williams indicated that VITAS would consider any prospective deals on a case-by-case basis, and to date, the company has not announced any acquisitions.
But others in the space have voiced similar expectations in regard to hospice valuations, including some of those who have stayed acquisitive.
“With multiples being where they are in the [hospice] sector compared to last year, we are starting to see a little bit of compression,” Addus HomeCare Corp. (NASDAQ: ADUS) CFO Brian Poff said in March. “It might take a little bit of time for sellers to come around to the rationalization that they are a little bit lower, but early on this year, we are seeing a little bit of compression and expectations on multiples.”
In February, Addus completed its $85 million acquisition of Illinois-based hospice provider JourneyCare Inc. The company last year acquired Armada Hospice of New Mexico and Armada Hospice of Santa Fe for $29 million. The transaction also included the affiliated Armada Skilled Home Health of New Mexico.
Likewise, Enhabit Home Health & Hospice (NYSE: EHAB), the recent spinoff from Encompass Health (NYSE: EHC), has seen some signs that hospice prices are easing, according to CEO Barbara Jacobsmeyer.
“We’re starting to see multiples both for home health and hospice come down a little bit, pretty much in line with what the markets are doing,” Jacobsmeyer told Hospice News.
Enhabit is going all in on growth during its first year as a stand-alone company. The company has multiple de novos in the works as well as a robust pipeline of potential acquisitions, with about 60% to 70% currently weighted towards hospice, Jacobsmeyer said.
But other indicators suggest that hospice multiples may be a candle in the headwinds.
Industry-wide, deal volume in the hospice and home health markets slipped during the first quarter of 2022 after a late 2021 blitz in transactions. Nevertheless, these sectors remained more active than the broader health care acquisitions market, according to a second-quarter report from the M&A advisory firm Provident.
Valuations throughout the health care space have “remained consistent,” as strategic buyers and private equity investors wrestle for market share, according to Provident.
The differing views on what’s happening with multiples are par for the course considering the stakeholders’ competing interests, according to Al Veach, CEO of the M&A firm Agenda Health, which typically advises the seller side in transactions.
“You are going to hear mixed messages. The buyers are going to say it’s coming down because they want it to come down, and the seller will say otherwise,” Veach told Hospice News. “I have not seen multiples go down.”
As the year progresses and 2023 begins, one potential wild card will be interest rates.
The U.S. Federal Reserve has signaled its intent to continue raising interest rates to achieve greater “price stability,” according to remarks by Chairman Jerome Powell. In the minds of many in the economics world, rate increases signal an impending recession — though this is not necessarily the case, according to a recent Deloitte Global Economist Network analysis.
Rising interest rates can have a dampening effect on company valuations.
Acquisition trends are inextricably linked with the cost of borrowing. Companies use debt leverage to fund between 30% and 60% of platform deals, the M&A firm Mertz Taggart recently reported.
”Interest rate increases result in lower asset values,” Mertz Taggart Managing Partner Cory Mertz said.
In a nutshell, interest rates drive up business costs, resulting in lower stock values among publicly traded companies at a time when consumers may also be pulling back spending. This results in lower multiples for those companies, which “trickles down” to private equity investors, according to the Mertz Taggart report.
“When rates rise, the borrowing costs for private equity firms increase, lowering returns, if all else remains static,” the report indicated. “Since lower [return on investment] is not in the private equity playbook, something has to give, and it’s usually purchase price.”
Nevertheless, a confluence of factors could mitigate some of these effects when it comes to hospice.
For one, investors seeking to maximize returns in a recession often turn to safe-harbor industries that may better withstand the economic downturn. Typically, health care is one of those industries. Particularly among the senior population, demand is not going to slump anytime soon.
Favorable demographics are a key reason that some in the space have called hospice a “recession-proof” business.
About 142 home health and hospice deals occurred during the 12-month period that ended May 15, according to PriceWaterhouseCooper. These reflected a 19% increase in value from the prior year. UnitedHealth Group’s (NYSE: UNH) pending $5.4 billion (plus debt) acquisition of LHC Group (NASDAQ: LHCG) drove much of that increase.
Also despite the increases, interest rates remain low relative to historical levels. Borrowing is getting more expensive, but not prohibitively so.
Factors such as geography, cash flow, and demographic trends remain more significant considerations for potential buyers, according to Agenda Health’s Veach.
“The increase in reimbursement for hospice is at least keeping up with what everybody else is getting. I think it’s as viable as anything out there,” Veach told Hospice News. “Even though interest rates are going up, the money’s still cheap. There’s no reason why the values wouldn’t continue.”
Companies featured in this article:
Addus Homecare, Agenda Health, Armada Hospice of New Mexico, Armada Hospice of Sante Fe, Armada Skilled Home Health of New Mexico, Chemed Corp., Deloitte Global Economist Network, Encompass Health Corp., Enhabit Home Health & Hospice, JourneyCare, LHC Group, Mertz Taggart, Provident Healthcare Partners, UnitedHealth Group, VITAS Healthcare