The Home Health & Hospice sector is poised for big deals in 2018. As the healthcare industry shifts inexorably toward value-based reimbursement models, this sector has become the “go-to” care protocol to help drive down costs and to keep patients out of institutions.
However, the pressures that existed in 2017 are still present in 2018, and even amplified now. Mark Kulik, managing director at The Braff Group, recently gave us his view of the market. Not only will the rate of M&A activity accelerate, new buyers will enter the market.
“Ten years ago, people stayed in their lane. Today, we’re going out to a wider range of buyers, such as long-term care and hospitals. We’ve reached out to insurers, but haven’t seen much interest. The Humana/Kindred deal may change that.”
In December, Humana (NYSE: HUM) teamed up with two private equity firms, TPG Capital and Welsh, Carson, Anderson, & Stowe, to make the largest home health and hospice acquisition of the year. The target was Kindred Healthcare (NYSE: KND) and its leading home health and hospice business.
The total acquisition was valued at $4.1 billion, with Kindred’s home health and hospice segment valued at $3.1 billion of the total. It will be split off from the rest of Kindred’s business into a separate company with Humana owning 40% with plans to eventually own 100%. It represents the second largest home health and hospice acquisition ever.
Private equity firms are back in force, Kulik said. “There’s no question they’re back in a big way. There’s creativity in the home health market, and they see this as an opportunity to get in while the disruption is occurring.”
In 2017, he said, private equity firms made 22 acquisitions in the home health market, nine of those as platform investments.
This year, expect to see more large-size deals, and more joint ventures among private equity firms. “Scale is the word,” he said. “We’ll continue to see instances of atypical pairings between long-term care and home health agencies. Amedysis (NASDAQ: AMED) is doing this now.”
With the cost of capital still relatively cheap, and some sectors seeing benefits from the tax overhaul bill signed in December, “valuations are increasing, and 2018 is going to be a strong year,” Kulik predicted.
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