Hospices that Excel During COVID More Attractive to Buyers

Hospice acquisition volumes and price tags have hit record highs for several years running. Now, the companies that performed well under the pandemic’s pressure may be drawing more interest from buyers.

While a sizzling hospice market saw a cooled start this year, merger and acquisition activity is still outpacing other health care sectors. Demographic tailwinds, favorable interest rates, disruption in other health businesses like home health and a host of other factors have kept investors and strategic buyers hungry for hospice assets, according to Mark Kulik, managing director at M&A advisory firm The Braff Group.

Hospice News recently sat down with Kulik at the National Association for Home Care & Hospice (NAHC) Financial Management Conference in Las Vegas to discuss what’s ahead in hospice M&A.

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What are the largest bumps in the road that might deter investor interest in the space? Did COVID have an influence?

If you’re acquiring somebody, you want to find an agency or company that has survival as part of their DNA. Their leadership is used to adjusting, and they’re used to adapting. They have ideas and they have creativity. 

COVID is just one proof of how well a company did versus how well others did during the pandemic. The ones that kept their employees, kept up their revenues, and have also kept up the referral sources — that speaks volumes to me about the leadership of that company and how they were adapting, changing and monitoring every day.

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You couldn’t do that if you weren’t on top of your game. I think COVID is just another hallmark of the industry. There were certain agencies that just excelled, and those are the ones that strategic or private equity investors want to buy.

How has the hospice market been shaping up this year compared to others?

Deal volume is definitely down this year over the past few record-setting years. There were roughly 66 hospice transactions in 2020 and 67 in 2021. It’s down a bit by about 10% to 11% in the first half of this year compared to the same period in 2021 as some of the investor focus shifts to home health. Because of the [Patient-Driven Groupings Model (PDGM)], things got garbled and murky in home health as investors waited to see what happened.

COVID-19 was also a major marketplace distraction as well, but buyers are looking at that home health service line more again this year.

What are some of the forces propelling investor interest in hospice?

There was definitely a perfect storm the past couple years with hospice. A lot of that went to interest rates being very, very low, which means the cost of borrowing and the ability to afford something has become easier. Every major either strategic or private equity group took advantage of that lower cost of capital.

But then the other part of that, too, is just the certainty. Private equity, specifically, is seeing that hospice is a guarantee. Baby boomers like myself are turning 65 at [a rate of] around 10,000 to 12,000 a day. Ultimately, there’s going to be more demand for hospice as more people get older, but the utilization of the benefit is approaching around 50%. You can double utilization on top of the growth of the baby boomers getting older; it’s a guarantee to have that extra volume come into the system.

I’m also anxious to see the results coming out with the Medicare Advantage hospice carve-in.

Having the ability to integrate another service level into the care plan for the patient and to do it seamlessly. I’ve seen some preliminary things I think have all been promising relative to hospice utilization.

Many hospices have begun offering palliative care, in part in response to value-based payment opportunities. How has offering this service influenced buyer decisions? Does offering palliative care make a hospice a more attractive asset?

If you look at the larger hospice programs, they’ve got a lot of home health and acute care needs. When the time comes for palliative care, they obviously want to be the agency that is selected and set up the ease of transition into hospice.

But there’s also a missing link in that of having some sort of a house call business. When you’ve got house calls practice, it allows providers to build a relationship with patients and care for them in the home. As people get older and the time comes that they’re appropriate for palliative, they maintain that relationship and then ultimately they enter hospice.

The transition is moving from the level of service being determined by the payer and payment rules to now what is the appropriate type of care that a patient deserves and wants. There aren’t these silos of payment rules that prevent seamless care. It’s pulling down those silos in Medicare Advantage and value-based payment.

Deals like UnitedHealth Group’s (NYSE: UNH) acquisition of LHC Group Inc. (NASDAQ: LHC) and Encompass Health’s (NYSE: EHC) spin off of Enhabit Home Health & Hospice (NYSE: EHAB) have made waves in the space. Do you foresee other large transactions taking place?

Who would have thought five years ago when HealthSouth bought Encompass that it would spin off into Enhabit? They bought it; they had it for a while and then slid it back out again.

I [also] didn’t see the LHC deal coming. I was stunned. I thought if anyone was going to go ahead and be the last standing entity it would be LHC for a whole host of reasons, but obviously that’s not the case. This past week, we saw [Amazon.com Inc., (NASDAQ: AMZN)] buy a large physician clinic and telehealth doctor practice. And that’s disruptive.

That’s another component of taking care of patients and I absolutely see more large, disruptive types of transactions taking place and occurring both in the hospice industry and those adjacent to it, like pharmaceuticals.

When [CVS Health (NYSE: CVS)] bought Aetna, that was disruptive — a pharmacy buying an insurance company. But they’re going to use that to put more direct care components in the various retail locations they have across the country.

More deals are coming down the path. There’ll be large newsmakers, for sure.

Who are some of the big players to watch for in the M&A space heading into 2022 and 2023?

There could be several. Big players are out there that are private-equity backed. AccentCare is one. BrightSpring Health Service is another large player that’s in the market, and they have multiple lines of service as well.

There are also a number of other large providers that will probably go to market sometime here in the foreseeable future. I expect to see some major announcements tied to one, all, or most of those.

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