Private equity, venture capital firms and strategic investors have had a strong appetite for hospice assets in recent years. These investment trends fostered both concerns and opportunities within the industry.

Interest in the hospice space has proliferated among nonprofit and for-profit investors alike, according to David DeGumbia, senior vice president and chief development officer at Compassus.

Common threads of sustainability and growth intersect in both of those worlds, DeGumbia said at the Elevate conference in Washington D.C. But reaching the growth potential of a hospice asset has become increasingly difficult in today’s competitive and economic climates, he indicated.

“[Investors] are committed to leaving that health care business in a better place than where they found it,” DeGumbia told Hospice News at the conference. “I see small, single and medium-sized [hospice] agencies and even some big platforms that we have come across that have pulled back, particularly because [they] are not getting the valuations they are looking for. Part of it is the cost of money right now with interest rates high, and so that’s causing folks not to go all in.”

Seeds of opportunity

Nashville-based Compassus provides a continuum of home-based services including home health, home infusion, palliative care and hospice from more than 270 locations across 30 states.

Compassus is a portfolio company of the private equity firm TowerBrook Capital Partners and the nonprofit health system Ascension Health. The companies share equal ownership of Compassus, purchasing the organization in October 2019 at a valuation estimated at $1 billion.

Since then, Compassus has been on a growth trajectory, expanding with a swath of de novos in Indiana, Iowa, Texas and Washington in December 2019. The following year the company grew with new locations in Pennsylvania.

Joint ventures have also been a crux of the company’s strategic growth strategy. Last year Compassus expanded its home health footprint in Tennessee last year through a JV with Ascension Saint Thomas. This February the company entered a JV with Ohio-headquartered Bon Secours Mercy Health (BSMH).

Quality outcomes and staff are two key pieces when it comes to weighing a hospice investment, regardless of whether it’s a for-profit or nonprofit organization, DeGumbia said. 

Hospice News / Merz Photography

Quality is an important element to consider in any hospice transaction – from both the seller and buyer perspectives, according to DeGumbia. A seller must “do their homework” about an investor’s transaction history and outlook, while a buyer should look hard at a hospice’s clinical outcomes and its workforce alongside the financial scope of its business, he stated.

“We’re looking for good agencies in good neighborhoods with great clinical and operational teams in place. That’s the first thing I always ask … because that’s what we’re looking for,” DeGumbia said. “The strength of your team is number one. The second thing is, ‘Where do you see this business in three to five years?’ If you’re selling the business, that’s one thing you should be bringing forth is where you think the runway is and how you think we can help with resources to grow this business. It’s the way we look at it.”

A range of concerns

Private equity interest in the hospice sector has been gaining momentum in recent years, raising the stakes in hospice valuations and stepping up competition for acquisition targets. Hospice and home health valuations hit record highs in 2019 and 2020, reaching 29x and 26x, respectively.

Concern has mounted in the industry as private equity investors increasingly step into the hospice space. For-profit entities provided nearly half of the care delivered to Medicare beneficiaries in 2022 and represented more than three-quarters (77%) of the 5,899 hospice providers that year, according to the Medicare Payment Advisory Commission (MedPAC). MedPAC did not indicate how many of those for-profits were owned by private equity firms in particular.

Ensuring the permanent sustainability of nonprofit hospices is crucial, say industry stakeholders. These providers were essential to the development of the Medicare Hospice Benefit, and remain vital to the communities they serve. Many nonprofits extend their services beyond end-of-life care, including offering bereavement support to anyone suffering a recent loss across their service regions.

But for-profit providers also have an important role in hospice sustainability. Providing quality care and expanding margins is not mutually exclusive to the private equity space, according to Eugene Goldenberg, managing director at Edgemont Partners. Private equity interest in the hospice space is anticipated to continue ramping up, he indicated.

“Private equity investment in hospice is very necessary,” Goldenberg told Hospice News at the conference. “There’s a significant amount of success stories in hospice and private equity, as opposed to any kind of failures or bankruptcies. I’m confident that for the remainder of 2024 and in 2025 [we’re] going to see a significant pickup in private equity activity in the sector.”

Hospice News / Merz Photography

The investment advisory Edgemont Partners provides guidance in hospice, home and behavioral health deals, among others in the health care space. The company in 2020 served as financial advisors to Remita Health during its acquisition by Bristol Hospice, as well as to BrightSpring Health Services Inc. (NASDAQ: BTSG) during its acquisition of Sacred Journey Hospice the same year.

Similar to trends among hospice providers, both poor and good quality investors exist in the space, Goldenberg stated.

Investors need to consider the mechanics of their business growth approaches, he added. Some investors may see short-term growth potential in a hospice business, while others may be seeking a longer return on investment period.

“Not all private equity firms are created equal, just like not all hospice providers are created equal,” Goldenberg said. “[It’s] a very, very different caliber of groups, but they’re all creating a certain amount of value along their respective hold periods. I have a hard time thinking of a hospice business that’s been owned by a private equity firm that emerged smaller than when private equity made the investment.”

Between rising demand and a fairly steady reimbursement projection rate, hospice will remain an attractive space for investors of all walks, according to Tom Lillis, partner at Stoneridge Partners Strategic Consulting.

Hospice providers with the ability to demonstrate quality outcomes will have a leg up on others looking to come to the seller’s table, Lillis said. A common misperception about private equity investors is that a hospice’s bottom line is their sole focus, but quality is key when it comes to the maximum return on investment potential as regulatory oversight heats up in the space, he added.

Buyers will be increasingly eying quality providers that can weather the storm of rising program integrity concerns, Lillis indicated.

“There’s [been] a huge shift over the last 10 years [with] a trend of more than half of hospices now owned by for-profit organizations,” Lillis said at the conference. “But the misconception would be that PE firms wouldn’t want to invest in compliance. Their goals are clearly to increase the value of their investments. If they leave a hole on the compliance side, that’s not beneficial to them from both a compliance, but also an asset perspective.”

Hospice News / Merz Photography

The merger and acquisition advisory firm Stoneridge Partners specializes in the brokerage of home care, home health, hospice and behavioral health agencies. The firm has provided strategic guidance in several of Traditions Health LLC’s transactions, including its purchase of Grace Hospice & Palliative Care and Heritage Hospice in 2021 and when it picked up five entities in California and Nevada the following year. Stoneridge also advised Peace Hospice & Palliative Care during its acquisition by Three Oaks Hospice in 2020.

Investors are increasingly paying attention to a hospice’s quality reporting and outcome trends in addition to their growth potential and financial scalability, according to Lillis. Clinical compliance is a particular area that can make or break a hospice deal, he stated.

“From a buyer’s side, clinical compliance is paramount,” Lillis said at the conference. “If there are issues through a due-diligence process from a compliance side … those deals die and understandably so. It’s that area that you’ll see an impact perhaps on valuation, perhaps on schedule of payout and those types of things, because of the potential liability.”