Hospice M&A Takes Downturn in Early 2023, May Rebound in Second Half of the Year

Hospice merger and acquisition activity has taken a downturn in 2023, which is in line with projections from M&A experts.

Approximately 14 hospice, home care and home health transactions were reported during the first quarter of 2023, according to recent data from Mertz Taggart. Less than a handful (about 4 or 5) of these were hospice deals.

This represents a “record-low start” in terms of M&A activity across these sectors, with hospice seeing the steepest decline, according to the firm. One contributing factor is that — following a glut of activity in 2021 and 2022 — fewer quality hospices are left on the market, the Mertz Taggart report indicated.

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“To command the premium multiples, [hospices] really need to check the boxes from a clinical, compliance and cash flow perspective. Buyers are getting more disciplined,” Mertz Taggart Managing Partner Cory Mertz stated in the report.

The current state of hospice M&A

The downward trend started to emerge in late 2022, when deal volumes and valuations dipped from the record highs of the preceding years. Deal flow in the industry last year remained historically strong despite lingering COVID and labor headwinds, but began to fall behind the levels seen during 2019 through early 2022.

Among the reasons for the downturn are resurgent interest in home health assets, as well as spiking operational and labor costs, according to Les Levinson, partner and co-chair of the Transactional Healthcare Practice Group at Robinson+Cole LLP. But a rebound could be on the horizon.

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“As we get deeper into Q2 and beyond, parties needing or wanting to deploy capital in this space will likely become more visible, leading to more transactions being completed before year-end, albeit with some adjustment in pricing as buyers factor in their increased cost of capital and strategies to deal with labor recruitment and retention — both of which will remain issues at least in the near term,” Levison told Hospice News in an email. “[However,] hospice prices and multiples continued to rise for many properties, and remain stable for others, even if they experienced some operational or other challenges.”

Looking at historical trends can provide a good sense of where interest in the industry is headed in 2023, according to Levinson. For instance, some buyers and sellers held off on deals during the pandemic, which might fuel “pent up demand” in a post-COVID landscape, he said.

Among these trends is private equity activity in the space.

In 2022, roughly 60 home care, home health and hospice private equity deals took place across the United States and Canada. This was down from nearly 100 in 2021, but was in line with 2020’s volume, according to a Q4 2022 PitchBook report.

But in the first quarter of 2023, fewer than 10 private equity transactions occurred in home health, home care and hospice during the first quarter of 2023, PitchBook reported more recently.

This was out of an estimated 200 private equity deals across all health care sectors in both countries in Q1, representing five consecutive quarters of decline. However, deal volumes are still 20.4% above average compared to the same periods in 2018 and 2019, according to the report.

Hospices who took a “wait-and-see approach” to selling off their programs during the pandemic may be “growing tired” as headwinds loom in the near term, including signs of a potential recession and the financial impact of COVID-19, according to report contributors Rebecca Springer, senior analyst and health care lead at PitchBook, and Collin Anderson, data analyst.

Private equity’s recent “on again, off again interest in the space” is in part driven by “macroeconomic conditions” such as inflation, an end to the COVID-19 outbreak, and cuts to home health reimbursement, Dexter Braff, managing partner and president of The Braff Group, indicated in a report shared with Hospice News

Private equity interest in hospice, though slowed, is not anticipated to end any time soon, he said. But sellers may need to be slower on the draw to accept offers, Braff added.

“If you’re a prospective seller, step away from the ledge,” Braff said. “Reasons buyers were interested in the space largely remain the same. The simple fact is you can’t have such a frantic 2021 without a sedate 2022 and 2023. And that’s before you add the external macroeconomic conditions. Moreover, it’s just the first quarter, and there are sound reasons to anticipate an increase in activity toward the back end of the third quarter through the fourth quarter.”

Questions outstanding on valuations, sellers’ scale

Despite the slump, the deals that have occurred in the hospice have been significant, including some involving payers or other massive health care companies, according to data from Provident Healthcare Partners. This includes the $5.4 billion purchase of LHC Group by the UnitedHealth Group (NYSE: UNH) subsidiary Optum Health.

Also of interest to home-based care industries is the sale of Signify Health (NYSE: SGFY) to CVS Health (NYSE: CVS) for $8 billion.

These transactions signal larger trends as more payers to step into the provider space alongside private equity and other large-scale investors, according to Provident Vice President Jake Vesely, Managing Director Kevin Palamara, and Director AJ Shekar.

“Both acquisitions exemplify the trend of payors and large cap health care companies acquiring home-based care providers to broaden their range of services into the home, improve patient outcomes, and better manage costs, which is becoming increasingly important in a value-based care environment,” they said in a recent report. “In addition to the growing interest from payors and large cap health care and tech companies, private equity investors continue to seek acquisition opportunities in the home-based care space, with a growing interest in the private pay sector. The growing investor interest in the private pay sector is attributed to uncertainties around reimbursement seen in 2022, lower levels of turnover and the highly fragmented nature of the space.”

As far as the hospice and home health deal outlook for the remainder of the year, “the key question is whether we have reached the nadir yet,” in terms of available large-platform assets and whether private equity deal activity and valuations will rebound, PitchBook’s Springer indicated.

Case in point, Gentiva’s acquisition of ProMedica health system’s Heartland Hospice, valued at $710 million, was a deal that was “notably low” for a national-scale hospice provider, which could imply “some degree of stress,” Springer indicated.

Gentiva is a portfolio company of the private equity firm Clayton, Dubilier & Rice (CDR). The Atlanta-based provider emerged from the former hospice and personal care segments of Kindred at Home. CDR last year purchased a 60% stake from the insurance mammoth Humana, Inc., (NYSE: HUM) for $2.8 billion.

“We will also see more distress-driven deals play out as the year continues. Putting more pieces together, our expectation is for a flat-to-slightly up Q2 and second half of 2023,” she wrote. “The uptick in larger deals at the end of the quarter may be a glimmer of things shaking loose. In this new normal, buyer-seller valuation gaps will wear down with time.”

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