Entering agreements with management service organizations (MSOs) may be an alternate route to joint ventures, mergers and acquisitions for hospices seeking to build scale and sustainability than in today’s regulatory and financial climates.
A slew of regulatory moves have taken place in 2023 that can have an impact on future deal-making in the hospice space, mainly those focusing on rules around ownership, according to Adam Royal, health care attorney at the law firm Husch Blackwell.
Heightened regulatory attention to hospice management and ownership has traditional transactions coming under tighter scrutiny, Royal said in a recent Husch Blackwell podcast.
“[It’s] just a lot of scrutiny around traditional transactions and M&A. We’ve seen changes and generally greater attention to how hospices report management and ownership,” Royal said.
The U.S. Centers for Medicare & Medicaid Services (CMS) has rolled out a swath of new measures to reduce fraud, waste and abuse in the space.
CMS ramped up program integrity oversight measures in its finalized 2024 home health rule, which prohibits any change in majority ownership during the 36 months after initial Medicare enrollment, including acquisitions, stock transactions or mergers. Other regulatory changes were included in the agency’s 2024 final hospice rule.
The 36-month rule signals that CMS is keeping a close watch on hospice ownership to curb hospice license flipping.The rule is currently targeted in four states that have seen a plethora of new hospices entering the market: Arizona, California, Nevada and Texas. CMS has signaled plans to expand the rule to cover other states.
This was one of several regulatory moves impacting hospice transactions.
The Biden Administration earlier this year proposed changes to a new set of rules and guidelines for mergers and acquisitions designed to address antitrust concerns in a range of industries, including health care. The newly proposed consolidation rules include changes to pre-acquisition filing procedures required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as well as revised federal guidelines for regulatory approvals.
These regulatory trends may have hospices thinking outside of the box in terms of their strategic growth plans, including seeking out partnerships with MSOs to increase operational efficiencies, according to Royal.
MSOs are organizations that consolidate the management and administrative operations of multiple health care providers, including billing, financial and non-clinical aspects of hospice business. Forming an MSO can help providers facing staffing and financial headwinds navigating a competitive landscape, Royal indicated.
“When you have multiple hospices that are sort of doing the same thing, that’s where we see MSOs being an appealing option,” Royal said. “They see another hospice that they’re aligned with either operationally or culturally, to some respect. What if we can consolidate this in an MSO, streamline operations and still allow the hospices to focus on the clinical aspects of care, but the administrative and management aspects could be consolidated to reduce a lot of duplication.”
Billing and compliance represent large areas of administrative burden for hospices amid sparse staffing resources and rising regulatory activity – main reasons providers have leaned toward developing MSOs, according to Meg Pekarske, partner at Husch Blackwell.
Developing an MSO takes thoughtful consideration in terms of management, entity governance, operational structures, among other factors, she said. Though some hospices view the creation process as daunting, MSOs can be formed in a variety of ways that uniquely fit the needs of organizations involved, making them a growing alternative to forming consolidations, Pekarske said.
“It doesn’t mean [hospices] can’t do a deal, but it’s ‘eyes wide open’ if you’re going to do this,” Pekarske said. “Why do people need alternatives to transactions? Some clients that are coming to us considering an MSO [are] nonprofits saying, ‘I’m not there yet, but I understand the need to create administrative efficiencies to reduce my cost of care. I’m not ready to integrate with other people right now, but I do want to be able to reduce some of the duplication.”