Hospice merger and acquisition (M&A) activity tapered off in 2023 and early 2024 compared to the flurry of prior years, due in part to regulatory and economic pressures.

Hospice deal volume and valuations have trended down from record-high levels during 2019 through 2022. The cool down began last year as hospice transaction activity lulled.

This year’s start is showing similar trends. A total of 13 home health and hospice transactions occurred in Q1 of 2024, according to a Mertz Taggart report. This represents a new low point that has not been seen in years.

The decrease in hospice M&A may be more noticeable compared to trends in other health care spheres, mainly as the industry had a higher peak to fall from, according to Co​​ry Mertz, managing partner at Mertz Taggart.

“Transaction volume for hospices has fallen more dramatically than we’ve seen in home health and home care,” Mertz emailed Hospice News. “The two factors unique to hospice are: 1) Hospice was the hottest … in terms of M&A activity during the 2020–2022 peak, so it had the furthest to fall, and 2) The increased regulatory scrutiny. It’s getting harder to get deals closed. Increased regulatory scrutiny drives increased diligence activity, especially in states of enhanced oversight.”

Signs of a slump

Hospice deals will come as a “slow trickle” for the foreseeable future, according to Rebecca Springer, lead research analyst of health care at PitchBook. Alongside lagging reimbursement rates, the hospice regulatory environment may be a deterrent, she stated.

Program integrity concerns have heated up due to reports of fraud, waste and abuse. Regulators have taken greater steps to curb maleficence, such as the new 36-month ownership rule CMS imposed that prohibits the sale of a hospice within the first three years of its Medcare certification.

Recently ramped up auditing activity is also giving some investors pause when it comes to entering or expanding into the hospice space, Springer said.

Unified Program Integrity Contractor (UPIC) and Targeted Probe and Educate (TPE) audits are among the most common types proliferating in hospice. This has led some buyers to turn their attention toward other post-acute care industries, according to Springer. The results of these audits can make or break a hospice deal in some cases, she added.

“A UPIC audit can significantly alter the course of a deal,” Springer told Hospice News in an email. “Some sponsors will avoid the space altogether as a result of these risks. Others will conduct thorough due diligence and invest in rigorous compliance processes at the portfolio company level. Sponsors will likely walk away from any hospice deals where they perceive risk.”

Regulatory, economic and reimbursement pressures are among the factors dampening hospice deals, according to Mark Kulik, senior managing director at The Braff Group. Hospices are facing a turbulent financial climate and reimbursement rates are not keeping pace, he stated.

The 2.6% reimbursement rate increase in the U.S. Centers for Medicare & Medicaid Services’ (CMS) included in its proposed 2025 hospice payment rule is insufficient to help providers grow and sustain their operations, Kulik said.

“Economic issues like sustained high inflation are making it that much harder just to run a hospice business,” Kulik told Hospice News. “Interest rates have not come down to what have been hoped for, so everyone on both the buyer and seller sides is looking for an indication from the government as to the trendline. The 2.6% rate proposed by CMS for next year [is] far below the inflation rate. So you’ve got buyers finding a way to manage the business while only receiving a reimbursement rate that’s less than the current rate of inflation.”

The first quarter of 2024 saw four hospice transactions take place, according to recent data The Braff Group shared with Hospice News. If the trend continues, a projected 16 total hospice deals will occur by the year’s end, Kulik said.

This year’s activity dips below the 23 hospice deals that occurred in 2023, which was a significant decrease from prior year’s total of 40 transactions, according to The Braff Group data.

A notable difference in recent trends is the drop off in private equity interest, Kulik indicated. Only two of the hospice deals that have taken place to date in 2024 were private equity-related, he stated. This is a “dramatic drop off” compared to the volume of private equity deals in 2022 that represented nearly half of all hospice transactions that year, Kulik said.

Much investment opportunity still exists in hospice, but buyers are giving careful consideration to price tags, according to Springer.

Hospice multiples that broke records at 29x in 2020, 2021 and 2022, are not anticipated to reach similar levels anytime soon.

“Overall, PE buyers continue to be very disciplined on price,” Springer said. “For any hospice provider considering a sale, they need to understand that they are not going to attract the same multiples that similar providers received in 2021, nor are they going to be granted the same level of EBITDA adjustment.”

Private equity buyers were a large force driving up both volume and valuation, according to Kulik. But they weren’t the only source of hospice activity. 

More nonprofits are increasingly joining forces or have stepped into the buyer role. Affiliations and transactions have gained speed in recent years. 

“Something that is starting to become quite clear is the not-for-profit transaction activity,” Kulik said. “We’re seeing a lot more activity where at least one, if not two, community-based nonprofit hospices are involved in a transaction.”