Quality, compliance and financial stability are top of mind in hospice merger and acquisitions (M&A) as this year comes to an end. Stakeholders are projecting a more frothy market in 2025, though regulatory concerns could sway buying decisions.

Growing demand is among the constants driving investor interest in the hospice space, according to Tom Lillis, partner at the Kentucky-based firm Stoneridge Partners Strategic Consulting. But buyers have been relatively cautious and more selective when it comes to picking up hospice assets amid high interest rates, rising care delivery costs and regulatory scrutiny, Lillis stated.

Quality is a leading factor steering investors, according to Lillis. High quality ratings will be crucial to transactions going forward, with buyers willing to pay top dollar for well-performing assets, he added.

“I think we’ll see 2025 actually be a very good year for hospice,” Lillis told Hospice News. “There’s a tremendous amount of dry powder out there that needs to be deployed. Investors may have been holding on to assets longer than they planned. Now with an improved environment they are going to see if they can realize the value of their investments and redeploy the money elsewhere. Investors’ expectations are particularly on quality and what a hospice has to deliver. If a hospice doesn’t have good quality ratings, that ultimately will cheapen the value of their investment, regardless of whether it’s a for-profit or nonprofit tax status.”

Reimbursement, regulatory trends

Hospice valuations and M&A activity burgeoned in previous years, reaching record highs in 2019 and 2020. The hospice space has since seen a cooling period that began in 2022, with investment ebbing further in 2023 and into this year.

Though hospice deal volume has grown quarter-by-quarter in 2024, the market has largely slumped due to various factors, some still rooted in the COVID-19 outbreak, according to Lillis. Pandemic-related headwinds had many investors holding off on hospice investments as providers worked to rebound, he stated.

In the midst of this, hospice assets are still seeing strong valuation trends, Lillis indicated.

“There was a brief moment where people were trying to capture anything that moved in the market, but in 2024 things have settled back down and stabilized. Hospice is still worth more than it was,” he said.

A private equity rebound

Private equity firms have been among the most prolific hospice buyers, but their deal volume has seen both sequential and year-over-year declines during the third quarter, according to a PitchBook report. The total amount of PE transactions in health care are projected to be 15% lower in 2024 compared to 2023 volumes.

However, private equity activity is anticipated to ramp back up by the end of this year and beginning of next, according to Rebecca Springer, lead analyst in health care for Pitchbook. Yet, regulatory trends remain a concern amid investors, Springer indicated.  

“We wrote earlier this year that hospice was ripe for an uptick in deal activity after a somewhat unjustified cooling off spurred by concerns around reimbursement and compliance risk,” Springer said in the report. “Both buyers and sellers have become more optimistic and active in the second half of the year.”

‘Positive momentum’

Despite macroeconomic pressures, home-based care M&A showed “signs of life” in Q3 in what has otherwise been a relatively quiet year thus far, according to a report from M&A advisory firm Mertz Taggart. Amid the factors was a decline in interest rates, which lowered for the first time since March 2020 and made for a more favorable financial climate among buyers.

An estimated six hospice deals took place in Q3, with six home health and 11 home care also completed, Mertz Taggart reported. Private equity transactions represented half of these deals.

A total of 30 hospice transactions were completed in 2023, compared to 19 deals as of the end of this year’s third quarter, the report found. While hospice M&A transaction volume remained low, it was not a reflection of buyer sentiment, but rather of market conditions, said Cory Mertz, the firm’s managing director. Hospice reimbursement rate increases have not kept pace with inflation.

The fourth quarter may bring “positive momentum” to the home health and hospice M&A landscapes as buyers hold optimism about downward trends in interest rates, Mertz stated. However, heightened regulatory scrutiny in the hospice space may be dampening investment, he indicated.

“Hospice still commands the highest multiples, and it’s largely a reflection of a historically stable reimbursement environment,” Mertz said in the report. “However, we are seeing, and expect to see, more regulatory scrutiny in hospice. This has forced the buyer universe to become much more discerning about which opportunities they will pursue and, ultimately, close on.”

Indeed, investors are keeping a close eye on compliance as regulators seek to curb fraudulent activity in the hospice industry, according to Mark Kulik, senior managing director of the advisory firm The Braff Group. Buyers want to ensure they are picking up quality assets without hidden red flags, Kulik stated at the National Association for Home Care & Hospice’s (NAHC) Financial Management Conference in Las Vegas.

Program integrity issues have come to the forefront for investors as hospices come under a tighter regulatory microscope, Kulik indicated. Buyers are paying attention to quality metrics and areas of potential or historic compliance risk, with some passing on a hospice investment amid concern of regulatory attention, he stated.

“There is absolutely a heightened level of effort to ensure compliance, and a lot of that is generated by a few bad actors that have gotten into the industry and taken advantage of it,” Kulik told Hospice News at the conference. “[The U.S. Centers for Medicare & Medicaid Services (CMS)] has put a broad brush on every provider to make sure no one gets overlooked in the process. Anybody who is buying is looking at whether Conditions of Payment and Conditions of Participation are being met. The level of scrutiny that transactions are under now is high, and not meeting these standards can cause buyers to back away and say they’re not going to go further.”