When it comes to hospice M&A, both buyers and sellers must have their eyes out for warning signs that could kill a potential deal.
Consolidation remains widespread in the hospice space, though transaction volume has slipped in 2023 compared to prior years. During Q1 of this year, about 14 hospice, home care and home health acquisitions were announced, according to data from the M&A advisory firm Mertz Taggart. Only about four or five were hospice deals, though some stakeholders foresee an upswing later in the year.
Nevertheless, transactions are still taking place. And both buyers and sellers need to be mindful of factors that can kill an acquisition before it has a chance to close.
Billing and coding audit
Regulators have been zeroing in on hospice eligibility and improper billing, and so have potential buyers.
A buyer will likely decide not to pursue a sale if billing and coding audits during the diligence phase show a high error or discrepancy rate, according to David Cox, member of the law firm Bass, Berry & Sims.
“It essentially comes down to error rate and whether or not the billing and coding audit shows that the seller is documenting and substantiating and verifying all of the necessary elements for payment for hospice services from Medicare,” Cox told Hospice News. “That can be as specific as the appropriate signatures from physicians to very specific disclosures that have to be made to patients.”
The question of hospice eligibility is one of the most frequently targeted issues in regulatory enforcement. Hospice organizations are under increasing legal and regulatory scrutiny related to medical necessity complaints under the False Claims Act and the closely related anti-kickback statute.
The U.S. Department of Health & Human Services Office of the Inspector General (OIG) is planning a nationwide audit of hospice eligibility. The audit will focus on patients who did not have a hospitalization or emergency department visit prior to electing hospice.
Accurate determination — and documentation — of patient eligibility is critical not only to clinical care and regulatory compliance but also to managing hospices as a business, from revenue cycle management to potential mergers and acquisitions.
“It starts with having appropriate documentation to show that eligibility has been assessed and met, and then, to some extent, that eligibility has to be assessed on an ongoing basis,” Cox said. “So all the things that go under a bucket of assessing billing, and coding for payment — underlying all of that is really documenting patient eligibility.”
The hospice payment cap
Likewise, if a hospice hasn’t meticulously accounted for the aggregate payment cap, it can affect its ability to sell.
Hospices are familiar with payment caps, upper limits to the amount of funds a hospice can collect from Medicare for a patient in a single fiscal year. Hospices that exceed either the inpatient or aggregate payment cap must refund that amount to the U.S. Centers for Medicare & Medicaid Services (CMS).
CMS requires each hospice provider to self-report its aggregate cap calculations annually to its Medicare Administrative Contractor (MAC). These data are submitted in January and February for the previous year through September 30.
The MAC assesses the data, a process that generally takes several months, and sends a “cap letter” to notify hospices when they have gone over the limit. This year, CMS set the cap at $32,486.92.
If CMS’ 2024 proposed hospice rule is finalized as written, the payment cap will rise to $33,396.55 next year.
“If you take a transaction that closes mid-year, the seller is responsible for the operations up until closing, but the buyer is responsible after closing, and then a full-year period is assessed,” Cox explained. “So things that the buyer does after closing can actually have an impact on the entire year of hospice cap liability.”
During 2020, about 18.6% of hospices exceeded the cap, MedPAC estimated. This percentage has been rising steadily for several years. In 2015, the commission reported that 12.5% exceeded the cap.
Most of the above-cap hospices had relatively high average lengths of stay and live discharge rates. They also tended to be freestanding for-profits that operate predominantly in urban areas, MedPAC found.
The methods that CMS uses to calculate the cap are complex, and this can carry over into M&A decisions as buyers and sellers try to determine the degree of potential liability.
“You’ve got a buyer trying to assess where you’re at in the year and what hospice cap liability trend looks like. And a seller — even if they recognize that they potentially should be responsible for the hospice cap — may have concerns that the liability could ultimately be larger, depending on things that happen outside of its control, post-closing,” Cox said. “So trying to assess what that liability is and who could be who should be responsible for it all gets thrown into the discussion. And to the extent that you can’t get a meeting of the mind on that, or if a buyer determines that the potential exposure is too large, or too unknown, that can impact a transaction.”