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The home health sector offers an attractive investment opportunity, but also comes with challenges. It is poised to benefit from an aging population and the shift toward value-based care, however, it is also influenced by factors such as rising interest rates, reimbursement difficulties and staffing shortages, all of which have affected the M&A market.
“I have observed several cycles in M&A volume and valuations,” Cory Mertz, managing partner at Mertz Taggart, told Home Health Care News. “Volume is still lower compared to the past few years, for various reasons, such as buyers’ limited access and higher cost of debt. Valuations are still historically strong, not reaching the peak levels of 2021, but stronger than any period prior. This is influenced by robust multiples of public companies and demand from private equity.”
Fort Myers, Florida-based Mertz Taggart is a health care M&A advisory firm focused on home health, home care, hospice and behavioral health.
With a valuation of $152.9 billion in 2024 and a projected growth of $253.4 billion by 2030, home health care presents significant growth potential, as indicated by research from Grand View Research.
“Private equity firms that understand health care services appreciate home health because it has the potential to save the health care system money,” Mertz said. “As the aging population grows and technology continues to advance, enabling elderly individuals to stay at home instead of in facilities, home health is seen as a key part of the solution.”
The COVID-19 pandemic raised expectations and led to an influx of capital. This resulted in a prolonged period of low interest rates, which persisted through 2022 and early 2023, significantly affecting valuations. As interest rates rose, the transactional value and number of transactions decreased.
“If companies have to borrow at higher costs, they may not want to take on the debt obligations that they were willing to incur earlier,” Les Levinson, co-chair at Robinson+Cole, told HHCN.
Robinson+Cole is a New York City-based law firm, serving eight states and the District of Columbia.
“If we do see a rate cut that portends to a softening in the interest rate environment, I think we’re going to see a strong pickup in the M&A market,” Levinson said. “If interest rates continue to improve, there’s a likelihood that we’ll start to see a cycle where capital is being returned to investors, allowing them to consider other transactions.”
Aside from interest rates, investors are also concerned about the uncertain regulatory environment.
In the final rule for 2024, the Centers for Medicare & Medicaid Services (CMS) increased reimbursement for home health agencies by 0.8%, which amounts to approximately $140 million more than in 2023. This increase was better than the originally proposed 2.2% cut, but still faced opposition due to concerns about inflation.
“Every year, the proposed new rule for home care comes out and creates uncertainty in the marketplace,” Levinson said. “And that is potentially a valuation ding.”
In addition to CMS reimbursement rates, some states have aggressively regulated transactions. California, Oregon and Indiana are three states that have been active in regulating transactions that they think may not be helpful in their states.
Staffing concerns impact values
In addition to rates, regulation and inflation, staffing shortages continue to plague the industry, causing even more uncertainty.
Levinson said that staffing shortages in the home health care sector affect valuations and raise questions about a company’s ability to grow.
When assessing a home health care agency, it’s essential to consider its capacity to attract and keep employees in a competitive labor market. Elevated labor costs affect profit margins by raising expenses and constraining the company’s ability to care for patients, limiting its growth potential.
“It’s the ability to staff cases and continue staffing those cases,” Levinson said. “[Companies are] competing with other providers in the marketplace, in some cases for the same workers, so that has driven up wages beyond the market norm in some areas.”
EBITDA and technological efficiencies make for unique situations
A company’s valuation is typically based on a multiple of earnings before interest, taxes and amortization (EBITDA). EBITDA removes the company’s cost of selling a product or service and shows how much money is made after deducting all expenses except taxes, interest or amortization. This indicates the quality of the profit that a company makes after expenses.
However, Levinson said valuation is not always strictly based on EBITDA because of adjustments that make companies unique.
“Investors often consider the components of the EBITDA number,” Levinson explained. “Factors such as staffing levels, borrowing costs, market rates and overall market conditions are frequently discussed. They evaluate whether there is an oversupply of providers in the market and if there is competition for staff. All of these factors contribute to dynamic valuations.”
When considering a company’s EBITDA, technology is becoming increasingly important.
Technology is playing a more significant role in M&A than ever before, especially in improving efficiency, according to Levinson. While staffing impacts home health care because it is a person-to-person industry, technology can help address some of the concerns caused by staffing shortages regarding growth and the ability to provide services to clients.
“Technology can be helpful, as some cases can be treated with a phone call or an intervention over Zoom,” Levinson said. “If that’s the case, then perhaps it means a worker doesn’t have to go to a home or spend more time there and can go to another patient in need of care.”
He explained that if caregivers spend less time on paperwork that can be done with AI, it creates efficiencies and allows for more time with patients.
“I believe that technology will continue to improve efficiency and reduce costs while addressing staffing shortages we’ve experienced over the past few years,” he said.
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