Hospice M&A Outpacing Other Sectors Despite Q1 Slump

Despite hitting a brief slump at this year’s start, hospice merger and acquisition activity still managed to outpace other health care sectors. 

Strong hospice and home health consolidation continued during the first quarter of 2022, according to a recent report from Provident Healthcare Partners. Both private equity firms and strategic investors remained “bullish” on home-based and hospice care.

Underlying demographic trends continue to fuel these deals, according to Jake Vesely, senior associate, and Kevin Palamara, managing director at Provident Healthcare Partners.

“There continues to be an aging population, increasing hospice utilization and a rising demand for lower cost care alternatives compared to traditional institutional care settings,” Palamara and Vesely told Hospice News in an email. “As a result, investor interest has remained strong, despite a slowdown in M&A transaction activity.”

Private equity interest in the space is unlikely to slow, spurred by increasing adoption of value-based reimbursement models, Provident found. Contributing to this is the growing number of firms in operation. More than 15 new private equity platforms emerged in the first quarter alone, the Provident report found.

Of the $20.8 billion of private equity and corporate capital invested during Q1 this year, 22% flowed “abundantly” into health care, more than any other industry, the report indicated.

Out of the 160 private equity-backed transactions that took place in health care, 30 were home health and hospice-led transactions, making these segments the “biggest beneficiaries” of investor interest. For comparison, deals in physician service areas such as ophthalmology, gastroenterology and orthopedics reached 17, 14 and 13, respectively.

Value-based care driving investment

Increased adoption of value-based reimbursement models in hospice and home health whet investor appetites for these assets, the Provident report indicated. Investors are increasingly realizing “tremendous synergistic value” in these industries as providers look to diversify services around alternative payment models.

While the models currently available to hospices are limited, many stakeholders expect value-based care to proliferate in coming years.

The U.S. Centers for Medicare and Medicaid Services (CMS) last year began testing the inclusion of hospice in the value-based insurance design demonstration (VBID). A number of hospices are also pursuing participation in the Accountable Care Organizations Realizing Equity, Access, and Community Health (ACO REACH) model and the Medicare Shared Savings Program.

Investors see significant growth potential in providers that are poised to perform well in a value-based environment, according to the Provident report. These can include hospices that feature tech-enabled services to increase care collaboration and patient access.

A side effect of this trend is that smaller organizations may be more inclined to sell to larger players if they lack the resources to invest in new technologies or pursue greater geographic scale.

“Value-based care models and increased requirements for technological innovation are driving M&A activity,” said Vesely and Palamara. “Particularly for smaller organizations that may not have the infrastructure, scale and capital needed to adapt with these changes.”

Market forces at work

A complex web of factors can influenced hospice deal volume in early 2022 and could play a role going forward.

For example, the pandemic delayed some hospice deals during the past two years as providers coped with the outbreak and sought to conserve financial resources, the report indicated.

Additionally, increased regulatory scrutiny in the hospice space caused some concern among investors and may have contributed to slowed M&A activity, Palamara and Vesely told Hospice News.

Another factor in the Q1 cool down was a depleted number of assets coming up for sale after the late 2021 rush to complete deals, driven in part by fears of a possible capital gains tax hike, according to Palamara and Vesely.

However, there is still “a ton of dry powder that needs to be deployed, and existing organizations will continue to aggressively pursue M&A in order to hit growth targets,” they told Hospice News in the email.

Though volume slowed, Q1 did include some massive transactions, which Provident characterized as “transformational.”

UnitedHealth Group’s (NYSE: UHG) $5.5 billion acquisition of Lousianna-based LHC Group (NASDAQ: LHCG) marked the most sizable recent home health and hospice transaction. Valued at roughly $6.4 billion after debt, the deal reached an EBITDA multiple of 18.19x, Provident reported.

Addus HomeCare’s (NASDAQ: ADUS) $85 million acquisition of hospice and palliative care provider JourneyCare also topped the valuation list at 16.62x.

Provident projected “another strong year in health care services M&A” and expects “additional sizable transactions completed by subsequent add-on activity” throughout the remainder of 2022.