Deal activity in the Home Health & Hospice (HH&H) space has slowed dramatically over the course of the year. The break-neck pace set during the first quarter of 2022, when 32 HH&H transactions were announced, didn’t last. During the fourth quarter, HH&H deals are barely trickling in. There have been just 15 deals announced during this quarter as of December 5th, a 62% decrease from Q4’s total in the previous year, when there were 39 deals announced. We will see where we end up on January 1, but a decline seems likely.
Despite the slow market, M&A advisors are optimistic. We spoke with Al Veach and Jason Harrison of Agenda Health about their outlook on the home health market and the impact of headwinds on the industry causing the slowdown in M&A.
Founded in 2008, Agenda Health is a faith-based mergers and acquisition advisory firm headquartered in Austin, Texas. The firm provides M&A and valuation services to hospice, home health and home care businesses across the United States.
When asked about labor shortages impacting just about every healthcare sector, Mr. Veach, CEO and founder of Agenda Health, spoke about home health’s ability to withstand the challenge compared to other healthcare markets. Home health’s technology-enabled nature, born out of necessity during the COVID-19 pandemic, gives it a fighting chance in the battle against labor issues.
“Home health has been more enabled from the telemedicine perspective than many of the other verticals.” Mr. Veach said, “Home health is, well, delivered at the home. Necessity is the mother of invention and the cost and time of delivering home services drives innovation, which has resulted in that vertical coming a long way in terms of being able to do some of the job remotely, and maybe that has stemmed the tide a little bit.”
But even with the use of technology, the labor issues are still a difficult thing for many home health providers to navigate, especially for those who haven’t switched to telemedicine. Labor represents the majority of home health’s expenses, so any increase in costs would significantly impact their bottom line.
Government programs, like COVID-19-related economic relief, have been a contributing factor regarding the shortage in the workforce, especially on the lower end of the pay scale.
Mr. Veach said, “A lot of it has to do with a lot of these programs that the government has initiated to try to bridge the gap as it relates to COVID-19 and all these other things, but what it ends up doing is leading somebody that’s making $15 an hour to look at that and realize they can make pretty close to the same wage through a government-funded program. So, as long as I’ve got that, why would I do this,” Mr. Veach said.
Labor doesn’t seem to be impacting the value of home health businesses as much as other headwinds.
“Most of our buyers are in a position where their infrastructure is strong and the values of the businesses seem to be more centered around the revenue and the referrals,” Said Mr. Veach. “I haven’t seen [labor issues] impacting values much in home health. What’s really impacting values is the threat of CMS continuing to cut reimbursements.”
Centers for Medicare & Medicaid Services (CMS) finalized a rule imposing a nearly 4.5% across the-board cut for providers next year, which is causing unease among doctors and other providers who say the reductions don’t account for increased labor costs and inflation. While federal budget neutrality requirements prompted the scheduled payment cuts, CMS uses flawed methodology to calculate payment rates. Providers are looking to Congress for support.
On November 2nd, 46 senators called on the chamber’s party leaders “to work with members on a bipartisan basis to address these imminent payment cuts,” or risk “reduced staffing levels and office closures, jeopardizing patient access to care.” And in the House, H.R. 8800, introduced by Reps. Ami Bera (D-Calif.) and Larry Bucshon (R-Ind.), would also stop the cuts from taking effect on January 1st, 2023. The CMS final rule indicates the agency will also begin efforts in 2024 to recoup $2.1 billion in apparent overpayments from 2020 and 2021.
The conversation soon turned to the impact of large retailers in the home health space. There has been an influx of retailers entering health care, especially home health. With giants like CVS Health (NYSE: CVS) making multi-billion acquisitions, and even Best Buy (NYSE: BBY) focusing its energy on providing care at home, we asked Mr. Veach if this would create more problems for the nonretailers already in the space.
“Everything makes it harder on the small mom and pop with 100 patients. All these cuts, all this increased regulatory scrutiny, it hurts the smallest the most because they don’t have the infrastructure to support it,” said Mr. Veach. While large retailers like CVS Health have the cash reserves to deal with regulation and reimbursement cuts, small, family-owned providers will struggle to stay in the market.
However, small, private providers have an advantage over their large competitors: the trust of the community.
“Those firmly established, community-based agencies that focus on community outreach and have a strong relationship with the surrounding community, they take great care of those patients and therefore have a very low chance of losing them. CVS and large consolidators of the world want to buy them because they know it’s tough to beat them,” said Mr. Veach. And that means more M&A.
Jason Harrison, director of administration at Agenda Health, discussed geographic areas of focus for home health acquisitions. “When it comes to regional concentration of interest, especially in hospice, the Southeast and the Midwest are picking up in traction as far as buyer interest goes.”
Mr. Veach offered his perspective, “What I’m hearing from buyers is they want to be in states that are business friendly, and so if the government is getting involved and trying to control too much, they’re not going to want to be there. And if there’s encouragement to try to assist and help businesses thrive, then why wouldn’t they want to be there.”
While the Southeast and Midwest are experiencing a strong M&A market, states on the West Coast are seeing a significant decline. California produced just nine HH&H deals this year, with only three of those announced in the second half of the year, and we don’t expect that number to dramatically increase in the few weeks remaining this year.
“With California, some aspects such as the regulations on business and the tax environment are making it a turnoff for new buyers entering the market,” said Mr. Harrison. “Hospice has new rules as well that are making it an unattractive and sometimes impossible state to enter into.”
Mr. Veach added, “California and the individuals that govern that area have decided that they want to conduct themselves as if they have their own rules separate from every other state in the country.”
The California-specific regulations make it an unappealing state for buyers to navigate in. California also has its own low-income health coverage program, Medi-Cal, which is another obstacle providers must face to bring affordable care to low-income individuals. Why start a business in California, where regulations and the tax environments will haunt you every step of the way, when you can more easily start one in Texas or Florida? At the same time, California is also the biggest market in the country, so for some, the pros are worth the risk.
Even with the M&A reduction, large deals continue to occur. There have been several multibillion-dollar transactions from large private equity firms and retailers like CVS Health seeking to expand their home health services, especially in the later half of the year when deal activity was lagging. This gives us optimism that the home health market will perform well even through this slowdown, as there’s still plenty of money and interest flooding into the space, in addition to distress.
