Last month, we spoke with Andre Ulloa, Partner and Executive Advisor, at M&A Healthcare Advisors for the report, The Durability of the Specialty Pharmacy Market. During that conversation, we touched on the home health and hospice market (HH&H), and decided to return to the topic in a second part of our interview series.
Below is our interview with Andre and his colleague, Mark Thomas.
According to data captured in the LevinPro HC database, in 2022, there were 114 home health and hospice market transactions, and in 2023, so far, there have only been 81. What has caused (or contributed to) this decrease in reported acquisitions?
The increased cost of capital and insolvency of regional banks have kept financial buyers sidelined over the past year. Additionally, the supply of home health agencies for sale has slightly decreased compared to years prior, with many of our prospective clients opting to wait for a future exit.
We’ve seen many big corporations enter the home health and hospice market, like Humana. What’s drawing them to the sector?
Humana has been sniffing around and consolidating home health agencies for some time now. However, in our experience, they are not sensitive to the concerns of lower-middle market sellers. They typically have a boilerplate approach and would prefer to work with sellers who do not have advisors or sell-side representation. Candidly, it has hurt their reputation in the market which is probably why we aren’t hearing about them completing many transactions. Over the years, we have advised healthcare sellers in their transactions with larger corporate acquirers. Within home health, we have sold agencies to Amedisys in years past. In 2023, LHC Group, which was recently acquired by United Health, acquired a home health agency we represented. We also sold a home health agency to Intermountain Health, a larger hospital system in the western states, earlier this year. These large corporations can purchase these agencies from free cash flow and are not subject to the high cost of debt capital like a financial buyer traditionally is. The draw for these strategic acquirers is more operational in scope – one of the main reasons driving these acquisitions is the desire to increase their population of caregivers. The referrals and patients are in supply, but there are shortages of nurses and therapists which these smaller agencies can help to alleviate.
What is appealing to smaller investors about the home health and hospice market?
Lower middle market investors are attracted to the economically defensive aspects of healthcare services. We like to say about healthcare, “when times are good, it’s good; when times are bad, it’s good.” Home health remains highly fragmented across the United States. Financial firms that have consolidated agencies in recent years can now sell their portfolio for a significantly higher multiple and generate a strong return for their limited partners.
Are there any types of investors that have dominated M&A activity? According to our data, 31 transactions this year have been completed by private equity (PE) firms. Is this considered normal activity for PE groups?
The home health market has seen a shift in the investor types through the years. In 2016, we started seeing the entry of private equity groups into the lower-middle market. At that time, the acquirers of smaller agencies were largely strategic operators. Historically, the size of a standard transaction within home health was not large enough to attract financial groups, at least those groups who had committed capital. Then, around 2016, more and more mid-market private equity with funds over $250,000,000 became interested in our opportunities as “bolt-on” acquisitions to their larger platforms. PE groups typically have a “size” criteria based on EBITDA. That EBITDA size criteria usually hovered around $3 to $4 million, meaning the PE group would not dip below that EBITDA threshold for their acquisition targets. But as private equity competed with one another to deploy dollars in healthcare, they began making offers with agencies with between $1 to $3 million of EBITDA.
From 2018 through 2022, the buyer pool shifted to be majority financial firms driving acquisition activity. This included Independent Sponsors, not just Private Equity. Even though financial buyer activity remains in 2023, it has slowed due to the increased cost of capital. We also believe that firms with home health portfolios are taking the time right now to stabilize their assets. 2023, with all its uncertainty, has been an opportunity to internally maintain performance and grow organically.
As geography impacts the market with factors such as different reimbursement rates, are there any cities/markets that are up and coming, or declining?
Geography is not a major factor when we analyze the viability of healthcare services companies generating revenue through reimbursement. Ironically, the larger urban centers, such as New York or Los Angeles, are not targeted for HH acquisition by most buyers. Without getting too detailed, ethical operators find it challenging to grow in these markets. Population density is a benefit, but the marketing practices within these large urban centers are questionable. Let’s leave it at that. Most of our clients are from second-tier cities (i.e. Las Vegas) or adjacent to larger population hubs (i.e. Southern California or outside of Detroit). Regional buyers are interested in expanding their footprint into these areas.
Over the last year or two, has there been a shift in focus to certain types of home health care? For example, in 2023, there have been 19 durable medical equipment/respiratory care home care transactions, compared to 10 acquisitions in 2020.
We are seeing a heavy interest in adjunct services and products in the home health segment. Some of these companies are reimbursed, but a good portion of them generate revenue from cash payors. For instance, the home mobility and modification space is flourishing. Patients are increasingly demanding to heal in the comfort of their own homes. They are supplementing their Medicare with their own investment in equipment which allows them to do so effectively.
Are there any types of home health care that have seen a decrease in M&A activity within the last few years? What factors have contributed to this decline?
Nothing of note to share in this regard. Home health continues to remain one of, if not the most active segment we represent in the market and remains at the top of buyer acquisition criteria.
What valuations look like?
Compared to last year, 2023 valuations are slightly lower but still much higher than pre-Covid valuations. While we try to avoid applying multiple ranges as there are often many nuances to what drives value for an agency, we are typically seeing valuations fall between 5X– 7X depending on a multitude of operational factors.
Is there anything (whether a trend or upcoming transaction) that investors should watch out for?
As I mentioned, home health support equipment and systems have increased demand. This would also include the ancillary services for these companies. For instance, home mobility equipment is on the rise and so are the maintenance technicians who specialize in this equipment (ie elevators, ramps, bathroom modifications, etc).
What do you believe are the biggest challenges and opportunities facing the industry right now? And in the coming months and years?
The most prominent issue we continue to see within the Home Health market is caregiver shortages. We expect this issue to continue for the foreseeable future and as mentioned above, it continues to be a factor driving acquisitions by strategic operators.
What do you foresee happening to the home health and hospice market in 2024 concerning M&A?
Despite what will probably be increased inflation and subsequent interest rate increases, I think the emphasis on getting investor capital to work is greater. I’m not alone in this thesis, but I think massive amounts of capital will begin pouring back into the lower-middle market from financial investors in 2024. In times of great uncertainty, investors will be looking for defensible positions to deploy their capital. Healthcare has been and will continue to be an avenue for that.
Additionally, there have been less sellers in 2023, as well. It may have to do with having the safety of a profitable business at inflationary times. I think because of fewer buyers, sellers are also concerned their multiples will be lower. In any case, we predict that 2024 will be a big year.