While hospice and home health M&A continue to burgeon, non-medical home care is starting to slip out from under their shadows.
Deal volume for non-medical home care companies outstripped that for hospice or home health during the first half of the year. As of the end of Q2, this included 23 deals compared to 17 each for Medicare-certified home health and for hospice, according to a report by M&A advisory firm Mertz Taggart.
“When it comes to dealmaking, non-medical home care long seemed like the younger sibling compared to its home health and hospice counterparts,” the firm indicated in the report. “That’s changing though, as the home care value proposition is more apparent amid the COVID-19 emergency.”
The pandemic did raise the profile of an already growing home-based care sector, and that trend continues to accelerate. Companies ranging from large health systems and private equity firms are eagerly pursuing investments in the space, and long-time players are working to diversify their services to include a broader care continuum.
This includes a growing interest in palliative care, hospital-at-home, skilled nursing-at-home, home-based primary care, and non-medical home care, as well as hospice and home health.
The focus on care in the home is manifesting through the emergence of new business lines, acquisitions, and a spate of joint venture partnerships.
Case in point, Mt. Sinai Health System in New York City recently expanded its joint venture with home-based care provider Contessa Health, a subsidiary of Amedisys (NASDAQ: AMED), to enhance the partnership’s range of service.
“The pandemic forced health care into the home, and it is a trend that is only growing,” Mount Sinai Health System President and COO Margaret Pastuszko said in a statement. “Mount Sinai at Home builds upon this momentum and offers consolidated opportunities for patients and physicians, decreasing the fragmentation that often plagues the health care industry. It’s exciting to be creating a care model that is blazing the trail for advanced care at home.”
The case for non-medical home care investment
The growing level of investment in non-medical home care makes sense for a number of reasons. For starters, it adds another layer to the suite of services designed to help seniors age in place. Even if an individual’s medical needs are addressed, difficulties with everyday tasks like bathing or preparing meals could still lead them to a skilled nursing facility or other high-acuity setting.
The ability to offer a higher-touch service in which patients receive more frequent visits can also alert providers to changes in patients’ conditions and head off potential hospitalizations. Also, amid labor shortages, non-medical services may have an edge. While those companies are not immune to workforce pressures, their labor pool is not limited to licensed clinicians.
Another factor drawing buyers is the emergence of more diversified avenues for reimbursement for these services.
Historically, private pay was the primary source of reimbursement for non-medical home care. But during the past three years or so, other payers, including Medicaid, veterans programs, and managed care organizations, have become more involved in the space.
Medicare Advantage is a clear example. As of 2019, the U.S. Centers for Medicare & Medicaid Services (CMS) allowed Medicare Advantage (MA) plans to offer non-skilled home care services as a supplemental benefit. In 2022, close to 15% of all MA plans – about 1,000 in total – offer in-home support services, according to Washington, D.C.-based research and advisory firm ATI Advisory.
Generally speaking, a company reimbursed through private pay will generate higher valuations than a primarily Medicaid-funded agency. That’s partly because agencies that can set their own pricing have more control over their margins and immediate future – a financial advantage that some prospective buyers may find appealing.
This is not as straightforward as it sounds. Medicaid-funded agencies tend to be larger than those supported by private pay, and those bigger companies tend to be located near urban centers that have a larger pool of Medicaid beneficiaries. Nevertheless, the opportunity for multiple avenues of reimbursement is an attractor for investors.
These factors are among the main drivers of the surge in non-medical home care M&A. These businesses accounted for 48% of all home-based care transactions during the first two quarters of 2022, up from 42% during the last half of 2021, according to Mertz Taggart.
Hospice market to stay mighty
While non-medical home care is a rising star, that does not mean the sky is falling for hospice M&A.
Deal volume in the hospice space did slow during the first two quarters of 2022 compared to the prior year, but not because investors saw less earning potential in those businesses.
One consideration is the glut of transactions that occurred in hospice during late 2021, driven by fears of potential capital gains increases and completion of deals that were delayed due to the pandemic.
This meant that several of the large strategic buyers were focused on integrating their newly purchased assets rather than pursuing new ones early in the year.
Also, buyers renewed their interest in home health as the dust began to settle from the implementation of the Patient-Driven Groupings Model (PDGM) reimbursement system for those services.
Unsure of what to expect in that new payment model, a number of companies pivoted their deal pipelines toward hospice as they absorbed the changes. Now, many of those operators are regaining their appetites for home health. Addus Homecare (NASDAQ: ADUS), Amedisys, LHC Group (NASDAQ: LHCG) each made statements to that effect early in the year.
Despite these shifts in the market, hospices still sell like hotcakes and private equity firms remain hungry for those assets.
In 2021, private equity completed 136 health care services deals compared to 114 for the strategic buyers, with the home health and hospice sectors seeing the most activity, M&A firm Provident Healthcare Partners reported. Investment dollars in health care remain high, and deal volume has stayed close to level among PE firms.
“Following a record year for M&A activity in the home health and hospice sector, investor appetite continues to remain strong,” Provident indicated. “Not surprisingly, transaction activity has trended lower compared to 2021, but overall, home health and hospice M&A activity still outpaces the broader market.”