We are always interested in hearing the opinion of advisors and other industry experts regarding the Home Health & Hospice (HH&H) market. So, we put out a pulse survey to gain a deeper understanding of the current trends and future outlook. From this survey, we spoke with Andre Ulloa, Partner and Executive Advisor at M&A Healthcare Advisors, to get his perspective on the market.
Q: On a scale of 1-5, how optimistic are you about the future of the HH&H M&A market within the next year or two?
A: “It’s been very difficult to predict markets in the last five years. Initially, volatility due to regulatory changes led to massive consolidations pre-COVID. The home health model shifted towards value-based care with changing coding and reimbursement structures. COVID brought stimulus and government grants, easing the regulatory environment for home-based care, resulting in a record-breaking 2022. In the last 18 months, we’ve seen stagnant or lower reimbursement, much lower than the pace of inflation, immense cost of capital, easing of consolidations and softening of multiples. This roller coaster has made predictions challenging. I believe we’ve hit a baseline now. Demand won’t slow, and multiples won’t soften further. The market could either maintain this pace for the next two years or grow from here. My tepid optimism, rated at a three, reflects this uncertainty but not pessimism.”
Q: Which factors are currently driving the most M&A activity in the home health market?
A: “The need for scale is driving most of the M&A activity. For strategic buyers, acquisitions are the quickest way to grow patient populations and caregiver cores. Although there are challenges with scaling the Medicare Advantage portion, traditional home health acquisitions are beneficial for strategic companies. Most of the transaction activity at present is from strategic buyers. For financial firms, consolidations will come back, particularly with bolt-ons to portfolios. High capital costs has slowed M&A activity for private equity groups. This has caused them to focus on stabilizing and integrating assets while growing organically. Ultimately, acceptable returns can only be attained by exiting fund portfolios. There will be a return to financial firm sales and buyout activity. Interestingly, a good portion of the private equity activity we are seeing currently are groups cashing out limited partners (LP) but holding onto portfolios with a new set of LPs. At some point, they will need to go beyond their internal holdings, grow through acquisitions, and then divest through M&A.”
Q: What is the biggest challenge facing buyers in the HH&H M&A market today?
A: “The cost of capital is the biggest challenge. Debt markets move the market more than equity. Recently, regional banks faced crises, reducing loan originations for smaller transactions. High capital costs preclude investment into acquisitions, as the returns on invested capital are not feasible. Strategic firms, with more free cash flow, benefit from acquisitions. They have debt facilities due to their size and banking relationships. Private equity firms face different, more demanding, return structures, leading to a softening of private equity valuation multiples. Lower costs of money would increase demand and M&A activity significantly.”
Q: On a scale of 1-100, how would you rate private equity’s impact on the HH&H space?
A: “I rated private equity’s impact as 80 out of 100. At some point, private equity groups need a high return for their investors, achievable through selling portfolios. Despite some internal sales between funds, significant exits are necessary for expected returns. Massive consolidation over the last five to seven years will lead to increased activity as these sunset dates for private equity funds approach, especially in the mid-cap healthcare market. This will likely impact the lower middle market positively, as well.”
Q: What could significantly disrupt M&A activity within HH&H in the next 12 months?
A: “Little to no reimbursement increase could significantly disrupt the market. Inflation adversely impacts buying power, and government interventions, like CMS setting reimbursement rates and labor boards pushing for higher wages, also create challenges. Even minor reimbursement increases can’t keep pace with inflation, potentially leading to business closures. Without optimism around reimbursement improvements, buyers may take a wait-and-see approach, affecting M&A activity.”
Q: Will home health valuations go up, down or stay the same in the next 12 months?
A: “Valuations will likely go down due to a trend of softening multiples. However, this doesn’t imply pessimism. The record highs of 2022 have led to current corrections. Although there’s a decline on aggregate, certain buyers may still pay more for businesses due to unique advantages, such as contracts or personnel. While multiples have softened, there are still valuable opportunities for buyers depending on the business specifics. It should also be noted that there usually exists one or two buyers on a transaction that gain significant accretive value and thus can pay a higher amount than the average valuation.”
Q: Would you increase or decrease your holdings in the home health market in the next 12-24 months?
A: “I would increase holdings in the home health market. Home health is the most effective and preferred way to handle patients, offering better outcomes. The Kaiser Permanente model exemplifies this, with healthy reimbursements and efficient operations. Independent providers excel in this space, and even larger strategics try to maintain the appearance of independent agencies. Home health is the future of healthcare, and patient demand and outcomes will support this model.”
To add your own perspective and opinions to our survey, please click here.
