How Proposed Cuts to Home Health Payments Could Impact Hospice M&A

Disruption in home health reimbursement has an influence on the hospice mergers and acquisitions market, particularly among the rising number of companies offering both services.

The most recent example is the 2020 implementation of the Patient-driven Groupings Model (PDGM). Uncertain about how this new payment system would impact their businesses, a number of strategic buyers shifted their 2020-2021 M&A pipelines towards their hospice segments.

“At the time, on a national level, no one knew how 2020 reimbursement was going to shake out and, specifically, what the behavioral adjustment would ultimately be. Then there was uncertainty at the agency level, with those agencies doing heavy therapy projected to lose 10-20% of their reimbursement for the same work,” Cory Mertz, managing partner of the M&A advisory firm Mertz Taggart, told Hospice News. “This created uncertainty over a somewhat protracted period of time. So many industry consolidators paused all but the most strategic deals and pivoted to hospice.”

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This disruption contributed to soaring deal volume in the hospice space from 2019 through 2021, which reached record highs. This started to level off late last year and in early 2022. Buyers began regaining their appetites for home health assets as the dust began to settle around PDGM.

Companies like LHC Group (NASDAQ: LHCG), Amedisys Inc. (NASDAQ: AMED), and Addus Homecare (NASDAQ: ADUS) indicated that they would prioritize home health deals this year.

But now further disruption is looming in the home health space, raising the question of whether buyers will again lean towards hospice as events unfold.

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The U.S. Centers for Medicare & Medicaid Services (CMS) in June released its proposed home health reimbursement rule for 2023, which included a 7.69% reduction in the base payment rate.

Through these cuts, the agency seeks to reconcile a total of nearly $2.02 billion in overpayments to home health providers during 2020 and 2021, as well as adjustments related to PDGM. Many home health providers have decried the proposal, with some calling it a “declaration of war” that threatens their sustainability.

Even if this changes before proposed rule becomes final, home health providers will likely not see a payment increase high enough to offset rising wages, lingering COVID headwinds, and rampant inflation.

Some level of disruption is probable, but the impact on hospice M&A remains uncertain.

“This will affect home health M&A volume in Q3 and Q4, for sure, but I’m not sure the period of uncertainty is long enough for buyers to shift their focus significantly towards hospice,” Mertz said. “We’re going to need to see how this is going to get reconciled. I would imagine we’ll have more clarity around 2023-2025 reimbursement by late this year or early next year. Depending on how draconian it appears it will be at that point, buyer demand could certainly shift significantly towards hospice.”

A few factors come into play here. For one, CMS may make changes to the proposed payment rates when the rule is finalized. Also, lawmakers have introduced a bill in the U.S. Senate that would prevent CMS from reducing home health rates before 2026.

Secondly, demographic tailwinds are keeping demand aloft as more health care continues to move into the home setting, a trend that accelerated during the pandemic.

Some stakeholders have suggested that if the reductions do occur as proposed, it could drive further consolidation as smaller providers struggle to absorb the financial left hook.

“One of the biggest impacts that could happen is consolidation could continue to accelerate. You can look at all the things that home health has been dealing with, and then you put wage inflation on top of it and gas prices,” Barbara Jacobsmeyer, CEO of Enhabit Home Health and Hospice (NYSE: EHAB), told Hospice News. “If the proposed rule does become final like it is written today, I just don’t know how some of those smaller agencies can stay in business.”

In this uncertain environment — and with another big reimbursement change coming in 2023 through the Home Health Value-Based Purchasing (HHVBP) model — the operators who offer both home health and hospice may be the best positioned to weather the storm.

In terms of deals, the greatest impact is being felt in small transactions involving pure-play home health agencies, according to Al Veach, founder and CEO of M&A advisory firm Agenda Health.

“Where there’s a larger deal, and especially where it has a hospice component, it’s not hurting as much,” Veach told Hospice News. “Home health is not only looked at as its own business. It’s also looked at as a referral engine for the hospice, so it tends to have less of an impact.”

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