Regulatory Pressures Contributing to M&A Slump

Regulatory challenges have contributed to the hospice sector’s current M&A slump, but this year’s volume nevertheless aligns with experts’ forecasts.

In addition to those pressures, the industry is also in a cooling period in which companies focus on integrating the assets that many acquired during flurries of activity in 2021 and 2022, according to Mark Kulik, senior managing director at The Braff Group. Getting those “synergies” to align takes dedicated time and resources, Kulik stated.

Though the slowdown represents a change from prior years, some in the space have seen it coming.

“This year will be the second consecutive year-over-year decline in hospice activity. But if we were to analyze the first half of this year, hospice M&A is actually in line with expectations,” Kulik told Hospice News. “Going back over the last four years there’s been a lot of hospice activity with record valuations and volume. You have to go back six years to get an idea of average annual activity. The last time we had this low-projected level of activity was in 2017, where just 19 hospice deals that year.”

Transactions under pressure

About a dozen transactions have taken place in the hospice space during Q1 and Q2 of this year, Kulik stated. This volume is “well-below” the 40 hospice deals that took place during the same period in 2022, as well as the 67 transactions that occurred in the first half of 2021 — a “record year,” he said.

Some predict a rebound for later in the year, but volume could still fall beneath the 30-deal threshold, Kulik indicated.

The influence of heightened regulation remains a wild card, and the increasing scrutiny could potentially deter some buyers from entering or expanding in the space.

“On the regulatory side hospice is just in an incredibly intense regulatory oversight period with all types of audits and investigations,” Kulik said. “You’ve got a bit of enhanced regulatory scrutiny, and that tends to cool off activity as well. That’s a bit of an eyebrow-raiser for buyers.”

The dynamics of supply and demand are also at play.

The glut of transactions during the prior two years depleted the “supply of acquisition targets” available, Kevin Palamara, managing director of Provident Healthcare Partners LLC, indicated.

However, he too foresees a potential rebound and predicts that interest in the hospice sector will remain high, Palamara said.

“The decline certainly is not due to buyer interest, which remains incredibly strong, but rather a limited number of actionable targets of scale,” Palamara told Hospice News. “Transaction activity is slightly behind where we thought it would be for 2023, particularly the pace of lower middle market add-on activity.”

Large deals making marks

The highlights of this year in M&A have been massive outlier deals, particularly those involving payers.

A significant deal in the hospice space recently unfolded in June when Optum Health, subsidiary of UnitedHealth Group (NYSE: UNH) entered into an agreement to acquire home health and hospice giant Amedisys (NASDAQ: AMED) for $3.3 billion.

This followed a previous attempt to pick up Amedisys by the home infusion company Option Care Health (NASDAQ: OPCH) for $3.6 billion.

Optum previously acquired Lousianna-based hospice and home health care provider LHC Group for $5.4 billion.

Another large-scale hospice transaction came in February with Gentiva’s purchase of ProMedica’s hospice and home-based care services for $710 million.

The acquisition included the nonprofit health system’s Heartland Hospice and other assets, swelling Gentiva’s presence in the hospice, palliative care and personal care spaces. The Atlanta-based provider emerged from the former hospice and personal care segments of Kindred at Home. Gentiva is a portfolio company of the private equity firm Clayton, Dubilier & Rice (CDR).

“The most significant deals so far in 2023 are Gentiva’s acquisition of Heartland Hospice from ProMedica and UnitedHealth Group’s announced acquisition of Amedisys, after Option Care previously announced an agreed upon merger between the two entities,” Provident VP Jake Vesley told Hospice News in an email.

UnitedHealth Group is “leading the charge” of payers increasingly stepping into the hospice provider space, Vesley said. Other large players will likely “follow suit,” he added.

For example, Enhabit Inc. (NYSE: EHAB) has been pushed to sell by one of its minority investors, AREX Capital Management, Vesley stated. The New York-based hedge fund owns 4.5% of the shares of Enhabit and recently urged the home health and hospice company to explore a potential sale.

“I think we all predicted that payers would eventually vertically integrate and own the provider market. However, this is happening quicker than expected,” Vesely said.

I think we all predicted that payers would eventually vertically integrate and own the provider market. However, this is happening quicker than expected.”

— Jake Vesley, vice president, Provident Healthcare Partners

Presently, few large-scale platforms are ripe for a sale, which means that the bulk of 2023’s deals will likely be smaller transactions, Kulik indicated.

“Characteristically, these 12 deals [in Q1 and Q2] have all been relatively small and that’s a different pattern than prior years,” Kulik said. “I think we’re going to have more of these smaller deals being done, as well as tuck-in deals.”

Nonprofit affiliations ticking upward

In tandem with the for-profit transaction slowdown, affiliations among nonprofit hospice providers have been on the rise.

This trend was reflected with the recent affiliation of Capital Caring Health and Chapters Health system. The two organizations joined forces to become one of the nation’s largest nonprofit providers. Their combined organization will serve more than 100,000 patients annually, with a workforce of 4,000 employees and 3,000 volunteers.

Along with improved patient capacity and an expanded footprint, cost-sharing factors also propelled the affiliation forward. The deal brings Capital Caring and Chapters Health under a unified electronic medical records system that allows for more efficient use of staffing time and resources while also driving down overall costs of care delivery and medical supplies.

The ability to pool financial and operational resources is an important part of what’s fueling similar collaborations in the for-profit and nonprofit spaces alike, according to Kulik.

“About a third of all hospice transactions this year have been nonprofits being acquired and that’s another different percentage of what we typically see,” Kulik said. “It’s very indicative of the pressures in the hospice business. It’s very difficult to keep running an efficient and effective hospice in today’s reimbursement and regulatory climates, along with labor pressures. These are environmental forces that transcend for-profit or nonprofit status.”

It’s very difficult to keep running an efficient and effective hospice in today’s reimbursement and regulatory climates, along with labor pressures. These are environmental forces that transcend for-profit or nonprofit status.

— Mark Kulik, senior managing director, The Braff Group