Payers and private equity investors are among the new entrants stepping deeper into the hospice space. This trend has heated up competition and merger and acquisition (M&A) activity, while posing opportunities for strategic growth in an evolving value-based landscape.
The hospice industry has seen a swath of new entrants amid record-level transaction volume and soaring valuations in recent years. Large-scale hospices have increasingly gone up for sale, with price tags in the hundreds-of-millions-of-dollars range in some cases. Meanwhile, smaller hospices have sought sustainable scale and growth through consolidations, affiliations and mergers.
Consolidation trends in hospice may continue to take shape as providers band together to build sustainable scale amid turbulent financial times, according to Zac Long, CEO of Well Care Health. The North Carolina-based hospice also provides home health, private-duty nursing and personal care services.
“There’s going to be a continued push for consolidation across our industry as providers look to achieve greater economies of scale and spread out their costs over a larger revenue base. It’s going to continue to put strain on what’s already a really tough market,” Long said at the National Association for Home Care & Hospice (NAHC) Financial Management Conference in New Orleans.
Private equity investors have increasingly flowed into hospice waters at record-breaking levels during the last few years. Private equity deals represented nearly 22.2% of hospice transactions in 2020, according to an industry transaction report from the M&A firm The Braff Group.
Though private equity M&A activity has somewhat cooled heading into this year, interest in hospice isn’t anticipated to abate anytime soon, according to Dexter Braff, president of The Braff Group. More providers may be coming to the sellers table on the horizon, he indicated.
”Hospice was the fastest growing from an M&A perspective in the period from 2019 to 2022,” Braff said at the NAHC conference. “It does not surprise me that on the heels of that we start seeing articles about people looking to sell.”
Larger hospice providers with geographic scale, financial sustainability, clinical capacity and good quality track records are often targets of these new entrants, according to Braff.
Payers are also gaining momentum in the hospice fold, increasingly recognizing the value proposition of these services in terms of health care cost-savings potential. Payers are increasingly setting strategic focus on larger hospice providers, too.
This is clear through the acquisitions of home health and hospice mammoths Amedisys (NYSE: AMED) and LHC Group by insurance giant UnitedHealth Group (NYSE: UNH) subsidiary Optum, for $3.3 billion and $5.4 billion, respectively.
What the new mix of hospice buyers can lack insight around is the significant reimbursement challenges that hospices face in both existing and evolving payment models, according to Long. This can give hospices a leg up against new competitors, while also posing opportunities to learn about their motives for entering the space, he said.
“One interesting dynamic is as we look at new entrants looking at working into our space, a lot of these groups are value- and risk-naive,” Long said. “[Hospice] organizations are based on a federal benefit, and for better or worse, we need to be very mindful of the fact that our home health and hospice organizations are designed that way. We have baggage in those areas.”
Opportunities in value-based care expansion is among the driving forces for new entrants, Long stated. This is an area where hospices can compete with quality services and also gain insight by observing how new entrants are approaching growth, payer collaborations and revenue models, he said.
“These new organizations that are going directly to payers and that are based on value- and risk-based models, they don’t have those,” Long said. “It’s a classic example of how we need to take those entrants very seriously. We need to study them, we need to learn from them, and we really need to look at where we can translate our core competencies as providers into new revenue models, new care models and see the growing shift towards managed care.”
That might be easier said than done, he suggested, but it will be worth it at the end of the day.
“Yes, there’s challenges. Yes, there’s risk,” Long continued. “There’s also a lot of ‘greenfield’ opportunity for us if we can think differently about our strategic planning. How can we learn from those groups? How can we work with them? How can we evolve in keeping a very long-term investment and strategic horizon?”
Rising competition in the hospice sector may be reshaping how business leaders approach care delivery, according to Texas-based Frontpoint Healthcare CEO Brent Korte.
Providers may increasingly be looking to collaborate or complement one another’s services in order to sustain and grow their patient reach, he added.
“I see a maturification of hospice coming,” Korte said. “Hospice business is meant to be competitive. But we can complement one another’s care without feeling at the end of the day that perhaps we’ve done the wrong thing in the interest of growing our business.”