At the start of the year, the biggest disruption expected in the Home Health & Hospice sector was the Patient-Driven Groupings Model (PDGM), a reimbursement overhaul introduced by the Centers for Medicare and Medicaid Services (CMS) on January 1, 2020. The impact on small agency owners was expected to be tough, with many industry insiders predicting a wave of bankruptcies, closures, and sales in the first year of PDGM. That would have been disruptive for the M&A market, but it wasn’t expected to last, once companies adjusted to the changes in rates and cash flow.
Now, with the COVID-19 pandemic more than 100 days into its march across America, PDGM seems like the least of the worries. Deal flow was deeply disrupted beginning in mid-March when the pandemic was taking hold in California, New York, and Massachusetts. It hit the skids in April. In the first quarter of 2020, some 20 transactions were announced in the Home Health & Hospice center, comparing favorably with the 21 announced in the first quarter of 2019.
Then came April 2020, with only three deals reported, a 66% drop compared with the 10 announced in April 2019. Deal flow “went from all-go on March 1 to no-go on March 31,” Mark Kulik, managing director at The Braff Group, told us.
After a strong beginning to the year, “The merry-go-round sort of stopped,” said Les Levinson, Robinson & Cole’s lead healthcare transaction attorney.
Some deals that were already in the pipeline went ahead and closed, our sources said. Others were delayed or halted as buyers tried to assess valuations in the new marketplace. They still are.
The hospice segment is the lone bright spot, at the moment. All three of the deals in this sector announced in April had hospice agencies as targets. The largest, based on disclosed prices, was Amedysis, Inc.’s (NASDAQ: AMED) $203 million acquisition of AsceraCare Hospice in Plano, Texas. The company cares for more than 2,100 patients daily and employs more than 1,200 hospice professionals in 44 locations across 14 states. A subsidiary of Golden Living, it generated approximately $117 million in annual revenues.
Also in April, Choice Homecare of Texas, LLC acquired Nextgen Hospice, LLC in Houston and Missouri Home Hospice, LLC acquired HomeCare of Mid Missouri.
The disruption continues. All across the healthcare services sectors, it’s become a buyer’s market. Our sources report delays in financing as lenders ask more questions, especially if the multiples are landing in the higher range, and due diligence is taking even longer than before. “Ninety days have stretched to 150 days,” Rich Tinsley, CEO of Stoneridge Partners, told us. “The biggest hit is on new deals. There’s not as much coming to market.”
It’s anyone’s guess when we’ll reach the “post-pandemic” stage, but most dealmakers expect the third quarter could pick up if the coronavirus stops spreading. They’re hoping all the deals that stalled in March and April will come back to life, giving the third quarter a strong boost. “This is the lost quarter,” said Robinson & Cole’s Levinson, “but things will pick up again.”
“We’re going to see a decent number of tuck-in transactions by strategic buyers,” predicted Cory Mertz, managing director at Mertz Taggart. “Things will move slower for now. Operators are tied up in the field right now and can’t focus on making deals.”
Going forward, nearly everyone agrees that technology will take an even greater role in mergers and acquisitions. Telehealth and remote patient monitoring will be high on buyers’ checklists and sellers will have to make sure they’re keeping up.
Want to learn more about what’s going on in this market? Join us for an interactive webinar, “Home Health & Hospice M&A: The Post-Coronavirus Outlook” on May 14. See you then!
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