Home health and hospice, which have been consolidating for many years, are in the midst of a surge in acquisition demand. Reimbursement is comparatively stable, and population management and coordinated care initiatives have placed an even greater value on these services. In particular, this has spiked interest in private duty and Medicaid and state funded agencies, segments that had previously been relegated to the sidelines. Private equity has doubled down on the space, and a new breed of non-traditional buyers have entered the fray, with new money – and new reasons – to acquire home health and hospice, setting the stage for another long run of M&A activity.
After such a precipitous slide in deal activity 2015, one may have expected further deterioration in 2016. However, after the initial tumble, we speculated that with risk-return fundamentals largely unchanged – and still attractive – the fall-off was due more to a reduction in supply vs. demand. It was no surprise, then, that the sector regained some of its mojo in 2016, gaining 16%. We suspect that for the foreseeable future, the new normal for Medicare certified home health will be plus/minus 50 transactions.
After an unexpected – and substantial decline – of investment activity in Medicare certified home health in 2015, private equity roared back in 2016. Most notable was the nine market-entry, platform investments completed, the largest number of deals since we began tracking the sector in 2001. This surge in interest reflects expectations that as health care moves to value-based reimbursement, home health will play a critical role in managing spend.
After performing below what the risk-return and utilization fundamentals would suggest, the Medicaid space began to show some life in 2015. The trend continued in 2016, as the sector doubled down on 2015, recording the most deals since 2007. But with the idea of moving to block grant funding gaining momentum in Washington, these gains may be short-lived.
As this chart clearly indicates, the resurgence in Medicaid and state funded deal activity is attributable to new-found love for the sector from private equity. The attention has likely been spurred in no small part by the extraordinary success of Epic Health Services, a largely Medicaid funded and PE sponsored provider that was recently acquired by Bain Capital for a whopping $1.0 billion.
The breakout segment in 2016 was private pay duty home care. With 44 deals, PD rocketed 214% year over year, eclipsing the previous record by 47%. The reason? With CMS aggressively expanding value based reimbursement, it’s becoming clear that the long-term paraprofessional services offered by PD may hold the key to success in these new payment models.
Although health care service sectors move in and out of favor, we cannot recall a scenario quite as profound as the collective and immediate onslaught of PE into private duty in 2016. Most notable were platform deals. In the years between 2007 and 2015, such transaction activity topped out at two. In 2016, that number ballooned to a gaudy 10 deals, as Wall Street bets on the role of these providers to hold down visits to the ER and rehospitalizations, reduce cost, and improve quality – health care’s “triple aim.”
Although down from its lofty heights between 2010 and 2014, after the contraction in 2015, hospice deal flow essentially leveled off in 2016. Quite similar to Medicare certified home health – and for the same reasons – we anticipate that the new normal for hospice will settle in at plus/minus 30 transactions.
The chart looks a little different when we look at the private equity investment trends in hospice. Although private equity sponsored transactions had slid since 2014, the magnitude of the fall-off is far less than the overall sector performance. This would suggest that the decline in activity is disproportionately coming from non-PE buyers (see left).