The Positive Drivers Behind the Home Health M&A Market
Since 2014, valuations for M&A transactions in the home health sector have reached all-time highs.
Driving this trend are a few key factors: Positive industry dynamics including an aging population and longer life expectancy, strategic players’ desire for increased scale in order to achieve operating efficiencies in a declining reimbursement environment, and the expansion of value-based reimbursement initiatives which emphasize the need to improve patient outcomes in a cost effective manner.
With the shift from fee-for-volume to fee-for-value, the home health industry stands to greatly benefit as the home is, by far, the most cost effective and patient-preferred setting as compared to facility-based care.
Two observations on the current state of the M&A market:
First, for smaller agencies (defined as $25M or below in revenue) there continues to be robust M&A volume driven by owners wanting to sell due to a challenging environment caused by decreasing reimbursement, increasing regulatory burden, and the need to meaningfully invest in IT infrastructure to effectively compete. Large strategic acquirers are taking advantage of this environment and purchasing these smaller assets to build density within their current footprints.
Second, while there has been a recent slowdown in the number of platform-sized deals ($50M+ in revenue), these larger agencies are attracting record-high valuations. The slowdown isn’t due to lack of buyer interest, rather, the result of the robust activity for these size deals between 2012 and 2016, leaving a dearth of these assets available for sale. This scarcity of high quality, platform-sized agencies is causing buyers to pay premium valuations. Whether contemplating an M&A transaction or not, home health agencies can create meaningful enterprise value by focusing on three key areas in their operations:
Provide High-Quality Care Resulting in Differentiated Patient Outcomes. Despite the recent pull back by HHS on mandatory reimbursement bundles, value-based reimbursement will continue to expand in home health and the key to thriving in this environment is providing quality care. With increasing frequency, patient outcomes are being tied to reimbursement and, therefore, being able to score in the top quartile of CMS’ patient outcome measures will lead to more patient volume as acute and post-acute providers and payors (i.e. referral sources) seek to partner with agencies that improve patient outcomes resulting in cost savings for all stakeholders.
Taking this concept one step further, home health agencies that (i) create and implement care programs for chronic diseases such as CHF, COPD and diabetes and (ii) are able to demonstrate through patient data these programs reduce re-admissions to acute settings, lower annual on-going care costs, and improve patient functionality, will be highly differentiated from the competition and attractive to potential acquirers.
Strong Compliance Program. With the regulatory burden on the sector at an all-time high and additional requirements in the near future (Conditions of Participation (CoPs) take effect in January 2018), having a comprehensive and robust compliance program will ensure a home health agency is not consumed with compliance/regulatory issues that could ultimately affect the long-term survival of the business.
Embrace Technology. Technology should become a key part of any agency’s strategy for achieving both of the goals mentioned above along with improving operational efficiency. Using technology to capture patient data at the point of care is the first step in providing high quality care and tracking outcome data throughout the patient episode is key in proving care programs are achieving desirable results. Secondly, with all the rules, regulations, and documentation that agencies are now required to address, utilizing technology is the only cost effective method to ensure 100% compliance.
Lastly, employing a comprehensive enterprise software solution leads to (i) a reduced number of back-office staff, (ii) increased utilization of nursing/care personnel, and (iii) higher collection rates. All of these favorable, technology-enabled outcomes will, in turn, drive improved profitability. These recommendations will allow home health care agencies to successfully navigate an ever-changing landscape to become an attractive acquisition for acquirers.
Jim Moskal will discuss the state of the Home Health M&A market at the 1st Annual Home Health Care News Summit held in Chicago, IL on September 14th. To register for the event, click here: http://bit.ly/homehealth0914
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