It’s the interest rate, stupid.

Home health, home care and hospice industry voices – including myself – have regularly pointed toward internal factors affecting M&A over the last two and a half years. In the end, the overarching, main headwind was always the extremely high interest rates that were put forth by the Federal Reserve to combat inflation.

Those internal factors had an effect on the specific M&A that did occur, and they will have a major effect on the M&A activity that occurs moving forward.

But searching for internal reasons to find out why M&A had cooled since early 2022 was largely a fool’s errand.

In March of 2022, the Fed started moving historically low interest rates up a notch. Specifically, on March 17, 2022, the federal interest rate moved from near-zero to 0.50%. Then, those hikes continued on a consistent basis, up until July 26, 2023, when the federal interest rate hit 5.50%. 

On Wednesday, the Fed announced a half-percentage point cut to the interest rate, in what is expected to be the first of a few cuts as it now turns its eyes toward other problems outside of inflation.

Meanwhile, the trend line for home-based care M&A ran diametrically opposed to the interest rates. As interest rates rose, home-based care M&A fell, besides a few small spikes in a quarter or two.

“I believe the interest rate environment has really been more significant than perhaps people have acknowledged,” Les Levinson, partner and co-chair of the Transactional Health Law Group at Robinson + Cole, told me this week on a webinar. “When you were doing deals in 2021 and 2022 – at what was functionally equivalent to a zero interest rate environment – you needed a lot less equity to do a deal. And the risk in that transaction was being basically covered by debt coverage. That evaporated as interest rates shot up.”

In this week’s exclusive, HHCN+ Update, I’ll dive into the interest rate cut and what it will mean for the home-based care M&A market in the near-term future.

Rate cut kickstart

All signs point to Wednesday’s rate cut being the first of a few, as the Fed begins to focus more on unemployment and less on inflation.

Based on the last couple of years, that would suggest that we’ll see far more transactions in home-based care in the near-term future.

After that first hike in March 2022, things changed in the formerly robust M&A landscape.

In Q3 and Q4 of 2020 alone, there were 95 total transactions in home health, home care and hospice, according to the M&A firm Mertz Taggart. Over the same time period in 2021, there were 106 transactions.

Then, in 2022, after the first rate cut, Q3 and Q4 saw 50 total transactions, an over 50% decrease compared to the year prior.

Outside of a few quarters with modest spikes, M&A has stayed historically down, up until present day.

Private equity-sponsored deal counts, too, were historically low.

Now that the interest rate trend line is on the other side of the mountain, expect home-based care activity – and PE-backed activity – to pick up.

“We’re at the tail end of an almost five-year cycle that started with COVID and the Fed stimulating the economy,” Mertz Taggart Managing Partner Cory Mertz told me on the webinar. “Interest rates went to about zero. Sellers were burned out. They wanted to get out early before the election and a new administration increased the capital gains tax rate. It was really a perfect storm of activity, and it was, quite frankly, a bubble. The Fed raised fund rates at a pretty healthy clip starting in 2022, and that really slowed everything down for a couple of years. But now, we’re starting to see signs of life.”

The Fed was expected to lower rates Wednesday, and most were waiting to see whether it was by a quarter or half of a percentage. Its decision to go the latter route will open things up even further than previously expected.

Over the next year or two, it’s likely the rate will continue to tick down toward around 3%.

During the quiet period, demand for quality home-based care assets has not been down, according to Mertz. Instead, the market conditions have kept transaction levels down. Those market conditions also include the fact that, with near-zero interest rates and a rush toward home-based care during the pandemic, multiples climbed significantly.

Since then, buyers have waited for the multiple expectations to normalize.

“These same buyers have still been hungry for quality deals,” Mertz said. “They don’t want to, and they’re not willing to, pay a premium for deals that don’t warrant a premium [price]. Now, premiums today compared to premiums in 2021 or 2022 are down a little bit, but not a whole lot. For a quality agency, at least. That’s my experience.”

As multiple expectations are balanced out, though, it’s likely that demand finally rises up and brings deals to fruition.

But active, quality home health agencies – in particular – have become more scarce over the last few years.

“A quality home health asset, I think, is the premium in post-acute care,” Choice Health at Home CEO David Jackson told me on the webinar. “Hospices have a really nice base. Home care [agencies] have really steady valuations, much more steady than the others. They don’t go up and down as much as a premium home health care asset that is doing well from a compliance, quality and financial perspective. Those are becoming more and more rare every day, and that’s because it’s a very difficult industry.”

Based in Tyler, Texas, Choice Health at Home provides a wide range of services in the home, including home health care, home care and hospice. Backed by Coltala Holdings and Trive Capital, the company has executed over 20 transactions in the last four years. In addition to Texas, it has a presence in Nevada, Utah, Colorado, Arizona, Oklahoma and Kansas.

In home health care, buyers generally prefer executing deals in the back half of the year anyway, and particularly in Q4. That’s because, after the Centers for Medicare & Medicaid Services (CMS) releases the final home health rule in October or November, there’s generally more certainty around payment.

A lot has changed

While deals have been put on ice, a lot has changed under the surface.

As buyers and sellers get back to the table, they’ll be discussing home-based care sectors that don’t look like they did three to four years ago.

In home health care, CMS has proposed three cuts to payment, and finalized two. More than 50% of Medicare beneficiaries are now underneath a Medicare Advantage (MA) plan, too. MA plans tend to be far less for home health services than traditional Medicare.

Home health providers – even the quality ones – are struggling to adjust to a world with a less certain payer landscape. They are dealing with CMS cuts to traditional Medicare, while also vying for higher rates from MA plans. Some have even cut ties with MA plans to prove a point, and also to allocate their resources to better payers.

In home care, the finalized Medicaid Access Rule included the 80-20 provision, which would mandate that 80% of reimbursement for home- and community-based services (HCBS) go to workers. That provision won’t be implemented for another nearly six years, but it is still likely to affect M&A.

For instance, on one end, many providers believe that scale is necessary to sustain business performance under such a provision. Addus Homecare Corp. (Nasdaq: ADUS) has stated this regularly and has also been a very active acquirer of late.

Outside parties, however, may see the provision as a reason to avoid HCBS – for now.

Addus has also benefited from the M&A downturn itself. While interest rates have been high, Addus has significantly expanded its home health and home care footprints.

“Realistically, over the last 12 to 18 months, we’ve not seen a lot of competition out there,” Addus CEO Dirk Allison recently said. “There’s been the occasional smaller strategic player that’s bought a few deals on a localized basis. From a PE standpoint, it’s really been very slow as far as competition for the last bit. Now, obviously, if rates come down in September, as everybody’s expecting, there’ll be a point where PE will come back in and that’s fine. It’s been a market in which up until the last year or so, we’ve always operated with competition from those folks.”

VitalCaring President Luke James also told me earlier this year that there were advantages to growing during an M&A and payment downturn. His company also recently agreed to acquire divested assets of Amedisys (Nasdaq: AMED), but that deal is contingent on the Optum-Amedisys deal closing first.

Either way, if the Fed continues on the path it set out on this week, times are changing.

When M&A ticks back up, buyers will have different factors to consider. But the buyers – the formerly dormant strategics and private equity players – will be back.

The home health and home care sectors have been labeled as ripe for consolidation over the last decade. But consolidation has not come as quickly as many believed it would.

Now that the dust is settling, however, M&A has the chance – again – to reshape the face of home-based care.

The post ‘Signs Of Life’: With Interest Rates Ticking Downward, Home-Based Care M&A Is Looking Up appeared first on Home Health Care News.

There are certain headwinds affecting all home-based care providers right now, whether it be in payment, staffing or otherwise. Amid those challenges, the largest companies are all taking slightly different approaches to growth.

Enhabit Inc. (NYSE: EHAB), for instance, grabbed the attention of home health providers everywhere last week when it announced that it had terminated its contract with UnitedHealth Group’s (NYSE: UNH) UnitedHealthcare. That move fell in line with its overarching “payer innovation” strategy.

Aveanna Healthcare Holdings Inc. (Nasdaq: AVAH) is also focusing on its “preferred-payer” strategy, which includes drawing a hard line on rates – as Enhabit is doing – but also advocating for proper reimbursement from states in home- and community-based services (HCBS).

Leaders from Amedisys Inc. (Nasdaq: AMED) have been quiet over the last year, given the pending UnitedHealth Group acquisition. But, when it comes to its payer strategy, the company’s numbers tell a story worth paying attention to.

Elsewhere, Addus Homecare Corp. (Nasdaq: ADUS) is taking advantage of the headwinds. High interest rates and payment uncertainty across home-based care has led to a slow M&A market, allowing the company to pounce on acquisition targets with little competition.

The Pennant Group (Nasdaq: PNTG) has done the same.

All of the aforementioned companies’ strategies differ to some extent, and yet all are in place to achieve growth during a somewhat turbulent time for home-based care.

What’s behind those strategies is the topic of this week’s exclusive, members-only HHCN+ Update.

Finding the right payers

Aveanna and Enhabit are both trying to turn around their businesses. Each saw their share price tumble after going public, and each has addressed that issue – at least in part – by revamping their payer strategies.

Enhabit’s payer innovation strategy has been well documented, and I covered its decision to walk away from UnitedHealthcare in last week’s HHCN+ Update.

“After over nine months of unsuccessful negotiations with UnitedHealthcare, we submitted our termination notice on August 1,” Enhabit CEO Barb Jacobsmeyer said last week. “We will dedicate our clinical resources to fee-for-service Medicare patients, and those members of the 68 favorable contracts. We remain committed to providing our strong quality of care to UnitedHealthcare members, if at some point they decide to contract with acceptable rates.”

Similar to Enhabit, Aveanna is taking back its most vital resource: frontline workers.

“By focusing our clinical clinical capacity on our preferred payers, we achieve solid year-to-year growth in revenue and adjusted EBITDA,” Aveanna CEO Jeff Shaner said on the company’s second-quarter earnings call. “We also experienced improvement in our caregiver hiring and retention trends by aligning our efforts to those payers willing to engage with us on enhanced reimbursement rates and value-based agreements. While we continue to operate in a challenging labor and inflation environment, our preferred payer strategy allows us to return to a more normalized growth rate in our business segments.”

Aveanna posted solid year-over-year growth in all three of its segments – private-duty services, home health and hospice, and medical solutions – in the second quarter.

Enhabit has touted its 68 “favorable” non-Medicare agreements. Aveanna, too, is taking stock of the payers and states that are willing to pay it an adequate rate for home-based care services.

Aveanna said that no single payer makes up more than 10% of its business, which lends itself to a healthy business. At the same time, that means work is cut out for the company when it comes to renegotiating higher rates for services.

As seen above, Aveanna is set to triple and nearly triple its preferred payers and value-based care arrangements, respectively, by the end of 2024.

Traditionally, one concern in home-based care has been that at least one provider will be willing to accept substandard rates, making negotiations for the rest of providers tougher.

Now, though, the larger companies are leading by example.

“As we continue to grow, we are accelerating our preferred payer strategy and medical solutions by aligning our capacity with those payers that value our services and appropriately reimburse us for the care we provide,” Aveanna CFO Matt Buckhalter said on the call. “We continue to fight through a difficult labor environment while keeping our patients’ care at the center of everything we do. It is clear to us that shifting caregiver capacity to those preferred payers who value our partnership is a path forward.”

Amedisys is likely to be joining a payer itself by year end. But it has clearly been focused on winning better MA business over the last couple of years. In the second quarter, its non-Medicare home health revenue grew by 24% year over year.

Another study published this week suggested that MA members utilize home health care less than their traditional Medicare counterparts. While there’s likely a lot of reasons for that, it’s probably not a good long-term strategy for MA plans to cheap out on home health care, an essential and less costly service.

‘Bold’ M&A

One of the other most enlightening admissions of this past earnings season came from Addus, which suggested its recent M&A activity was partly made possible by less competition – particularly of the private equity variety.

Last year, Addus acquired Tennessee Quality Care for $106 million, enhancing its value-based care capabilities in the state. This year, it agreed to acquire Gentiva’s personal care assets for $350 million, allowing it to enter multiple new states.

Over the past two to three years, M&A has reached historical lows in the home-based care space. Activity across home health care, home care and hospice has fallen off a cliff since there was the flurry of activity in 2020 and 2021.

“Realistically, over the last 12 to 18 months, we’ve not seen a lot of competition out there,” Addus CEO Dirk Allison said on the company’s second-quarter earnings call. “There’s been the occasional smaller strategic player that’s bought a few deals on a localized basis. From a PE standpoint, it’s really been very slow as far as competition for the last bit. Now, obviously, if rates come down in September, as everybody’s expecting, there’ll be a point where PE will come back in and that’s fine. It’s been a market in which up until the last year or so, we’ve always operated with competition from those folks.”

The Pennant Group (Nasdaq: PNTG) has joined Addus in bucking the downward M&A trend. It has executed a slew of transactions over the past couple of years, including a large deal for Signature Healthcare assets in its current footprint, as well as a deal that will place it on the East Coast for the first time.

“This period of expansion provides insight into our potential as a provider of choice in our local communities, a best-in-class operator across our industries and a disciplined – yet bold – growth company with the sophistication and adaptability to become a key solution in the health care continuum,” Pennant Group CEO Brent Guerisoli said on the company’s second-quarter earnings call. “Since the beginning of the year, we have entered into the Muir Home Health joint venture; closed an additional two home health and two hospice transactions; initiated a management agreement with Hartford HealthCare; announced the largest acquisition in our history with the Signature transaction; and completed three senior living deals.”

Most of the largest home-based care providers recognize the need for two things in this market: better contracts with all managed care partners, and scale that will allow them to sustain success in the face of stroke-of-the-pen risk.

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The main reasons behind a more aggressive acquisition strategy are the Medicaid Access Rule and value-based care opportunities, according to Addus CEO Dirk Allison.

“We believe it is important that personal care providers have scale and broad geographic coverage in states where they operate to be successful, particularly in managed Medicaid states and as a result of the final Medicaid Access Rule,” Allison said on the company’s second-quarter earnings call Tuesday. “This scale and coverage helps facilitate the development of value-based contracting arrangements that allows these providers to spread costs over a bigger revenue base and provides more opportunity for meaningful advocacy with the states in which they operate, while also promoting a more favorable hiring and retention dynamic. This belief led us to pursue this acquisition with Gentiva.”

The Frisco, Texas-based Addus provides home care, home health and hospice services to approximately 49,500 consumers through 214 locations across 22 states.

Addus agreed in June to acquire Gentiva’s personal care assets for $350 million. Gentiva is made up of the personal care and hospice assets of what used to be Kindred at Home. When Humana Inc (NYSE: HUM) fully acquired Kindred at Home, it kept the home health assets, and divested the personal care and hospice assets.

Now, Gentiva is moving more toward home-based palliative and hospice care, which allowed Addus to step in and further grow its personal care footprint.

When the deal is completed, Addus will enter into multiple new states, and will also become the largest home- and community-based services (HCBS) provider in Texas.

Addus has also set the stage for more deals in the future after its recent secondary stock offering, which it completed at the end of June.

“With the help of both Bank of America and Jefferies, along with other of our investment banking partners, we were able to complete a successful stock offering which resulted in our raising net cash proceeds of approximately $176 million after the expenses of the stock offering,” Allison said. “It is our intention, as we have done previously following similar stock offerings, to utilize these funds over the next 12 to 24 months to allow us to continue sourcing acquisitions of the size and type that will bring additional value to our shareholders.”

In the quarter, Addus pulled in net service revenues of $286.9 million, an over 9% year-over-year increase. Personal care revenue was responsible for $212.8 million of that, increasing in its own right by 7.3% year over year.

Home health revenues increased to over $18 million, representing a 57% year-over-year increase. Hospice revenue, meanwhile, increased by over 11% year over year, to $56 million.

“Once the [Gentiva deal] is closed, Addus will be the number one provider of personal care services in the state of Texas, which is primarily a managed Medicaid market,” Allison said. “In addition, this transaction gives us a larger presence in Arkansas, strengthens our California and Arizona private pay and Veterans Affairs businesses, adds a location in Eastern Tennessee to our existing operations in the state, and provides entry into both Missouri and North Carolina.”

Striking while the iron’s hot

Hiring in Addus’ personal care segment continues to improve. In the second quarter, the company said that it set a record, averaging 86 hires per business day. It also said that turnover has remained at “historically low” levels.

Clinical hiring, on the other hand, has lagged behind personal care hiring since the height of COVID-19. But that area, too, has returned to a more “normalized, pre-COVID hiring environment,” Allison said.

Allison also mentioned that he believes the Medicare home health payment environment will “moderate over the next few years.” The Centers for Medicare & Medicaid Services (CMS) has implemented cuts to home health payment in each of the last two years, and has proposed another cut for 2025.

Outside of gaining scale post-Medicaid Access Rule, and increasing value-based care capabilities, Addus sees now as a time to acquire given the lack of competition for assets.

M&A has been down since 2021 in home-based care, particularly due to high interest rates.

“Realistically, over the last 12 to 18 months, we’ve not seen a lot of competition out there,” Allison said. “There’s been the occasional smaller strategic player that’s bought a few deals on a localized basis. From a PE standpoint, it’s really been very slow as far as competition for the last bit. Now, obviously, if rates come down in September, as everybody’s expecting, there’ll be a point where PE will come back in and that’s fine. It’s been a market in which up until the last year or so, we’ve always operated with competition from those folks.”

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The Centers for Medicare & Medicaid Services (CMS) isn’t letting up on cuts to home health payments, but its recent rulemaking in Medicare Advantage (MA) may end up benefiting home health providers indirectly.

As MA plans become more scrutinized by regulators and lawmakers – and payment updates come with more meager increases – MA penetration is likely to plateau, or at least slow down in its rate of increase.

CMS finalized a 3.7%, or $16 billion, increase to payments for MA plans in 2025, in an update that will likely end up being a cut to “core” rates by 0.16%, according to the investment banking company Stephens.

That will be the second cut to core rates in a row for MA plans, a change in direction from the positive payment rulemaking they had previously been experiencing.

As a result, some of the largest MA plans have pulled back from expanding, and some have even exited markets. BCBS of Kansas City announced that it would be exiting the MA market in Kansas City by the end of 2024, for instance. Humana Inc. (NYSE: HUM) leaders said the company would exit certain markets in MA in 2025 and instead “prioritize profitability.”

Last year was the first year in which there were more MA beneficiaries than traditional Medicare beneficiaries, according to Kaiser Family Foundation. Just a decade prior, in 2013, only 29% of Medicare beneficiaries were underneath an MA plan.

Such trends resulted in the belief that MA penetration would continue unabated over the next decade. MA plans took over 50% of market share much quicker than most believed, so the theory held that penetration would continue at the same rapid pace moving forward.

Anecdotal signs suggest that may not be the case, however. In addition to the MA plans that have announced their departure from certain markets, home health providers have also suggested that MA share has been plateauing in their own markets, as far as they can tell.

“Anecdotally, we’re sort of seeing the limits of managed care penetration,” The Pennant Group President and COO John Gochnour recently told me. “I think we are seeing – and will see – some leveling off.”

MA’s headwinds, and how they will affect home health providers, is the topic of this week’s exclusive, members-only HHCN+ Update.

MA penetration

When it comes to factors that affect home health providers state by state, there are few that display more variability than Medicare Advantage penetration.

“That is probably the largest variability we see at a state level, of maybe any data point we have – MA penetration rates,” Research Institute for Home Care Executive Director Jennifer Schiller told me.

For instance, some states are far above a 50% penetration rate, and some states still have a penetration rate from 20% to 30%.

But that wouldn’t be a reason why some providers are seeing a slowed increase in penetration right now. Schiller explained that, no matter what penetration rates are currently in each state, they all follow a similar trend line.

“Despite where they start – with some states being much lower in terms of penetration – if you were to look at the year-over-year data, it has the same trajectory line,” Schiller said. “There’s a different starting and ending point, but the same curve from one point to the other.”

That makes the comments from The Pennant Group Inc. (Nasdaq: PNTG) and similar comments from Addus HomeCare Corp. (Nasdaq: ADUS) more interesting.

Earlier this year, on Addus’ first-quarter earnings call, CEO Dirk Allison said that he and his leadership team believe MA penetration is leveling off in the company’s markets.

“We continue to be affected by the movement of Medicare beneficiaries from Medicare fee-for-service to Medicare Advantage, but we feel we may be seeing a leveling off of this shift in the markets we currently serve,” Allison said. “We are continuing to work with our Medicare Advantage payers to obtain higher rates.”

It’s of note, too, that Pennant and Addus do not have similar footprints. Like Pennant, Addus has a presence up the West Coast. But it also has a very large footprint in the Midwest and the Rust Belt.

Because payment rates have only been unsatisfactory – from the MA plan perspective – for two years in a row, there could be lagging indicators, too.

If home health providers are noticing signs of a penetration stall now, and MA plans are announcing market departures here and there, it may take a couple of years for real data to prove out that reduced penetration rate.

What this means for home health care

It’d be hard to find a home health provider that’s fond of MA penetration. MA plans pay less than traditional Medicare does for home health services.

“It’s frustrating to see where Medicare is going with their rates, and what they’re trying to do with clawbacks,” VitalCaring CEO April Anthony said last year. “But, if one of our managed care partners came to us with those [traditional Medicare] rates, we would be jumping for joy. We’d be saying, ‘This is the greatest contract we could possibly hope for.’”

Given the more cumbersome back-office requirements MA payment requires, and the lower rates, it takes providers time to adjust. They need to adjust systems and drive efficiencies to make taking on MA patients viable.

Enhabit Inc. (NYSE: EHAB), for instance, has been in the process of adjusting its revenue mix for the last two years to adjust to shifting market trends. After it spun off of Encompass Health (NYSE: EHC), its revenue mix was dominated by traditional Medicare – at close to 80%. Now, it’s gotten that number down to closer to 60% – in order to be a better referral partner – but not without speed bumps.

Since it began on that initiative via its payer innovation team, it has financially underperformed. It underwent a strategic review, and now is in a battle with an activist investor – AREX Capital Management – which has been dissatisfied with its strategic course.

And that’s for a large, at-scale provider with a nationwide presence. Consider, then, what such an undertaking may do to a less resource-rich provider.

So, if penetration does wane, home health providers would likely welcome that. But it doesn’t mean that providers should stop fighting for higher rates from MA plans, or stop planning for a future dominated by MA plans.

“Our focus is on the things that we can control,” Gochnour said. “The things that we can control are delivering great care, being the solution for the community that we serve and for the referral sources who help patients get care. Then, we worry about whether we have the best contracted rates that are possible out there, so that we can take volume, in whatever form it comes. If we control the things that we can control, we feel confident we can be successful. Even in an environment where there’s dislocation or change.”

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On Monday, Addus HomeCare Corp. (Nasdaq: ADUS) announced what would be the biggest transaction of 2024 thus far. Its $350 million deal for Gentiva’s personal care business could reflect a tide change in the recently slow home-based care M&A market. It’s also reflective of Addus’ impressive ability to deliver on its strategic vision.

Though the Medicaid Access Rule was recently finalized – including the 80/20 provision – personal care is still insulated from the larger stroke-of-the-pen risks that exist in Medicare-certified home health care.

Perhaps it’s unsurprising, then, that the largest transactions in 2024 have been in personal care. Waud Capital acquired the home care franchise Senior Helpers for an undisclosed sum earlier this year. HouseWorks acquired AccordCare’s personal care business in Connecticut. Addus offloaded its New York personal care locations to HCS-Girling, and now has agreed to acquire Gentiva’s personal care business.

Addus’ two biggest deals of the year also reflect its strategy. It wants to expand its personal care footprint, which is its bread and butter, but not at all costs. It left a New York market fraught with regulatory landmines, and is now set to become the largest personal care provider in Texas – a state where it previously only operated hospice locations.

While highly saturated, Texas is also a home health market that providers like operating in. That means, in addition to a few other states, it could represent another value-based care market for Addus down the road. Addus sees value-based care opportunities in large personal care markets where it can operate its three service lines: personal care, home health care and hospice. It now has the first and third in that equation in Texas.

“We are optimistic that we will see additional attractive acquisition opportunities in 2024,” Addus CEO Dirk Allison said on the company’s fourth-quarter earnings call in February. “We are currently in the process of looking at personal care opportunities, which would give us a larger presence in a number of our current states. We are also looking for opportunities where we can enter new states in a material way.”

After laying out a very specific vision over the last two years, Addus has put its money where its mouth is. And halfway through 2024, it has given life to an M&A market that it may continue contributing to in the near-term future.

That’s the topic of this week’s exclusive, members-only HHCN+ Update.

Strategic prowess

Addus leaders have, over the past few years, never strayed from a very specific vision.

That vision was to continue expanding its personal care presence, and to find markets where it could – again – overlay home health on top of personal care to up its value-based care capabilities.

That vision only slightly changed with the 80-20 provision, which may or may not be implemented in six years. Allison said the company would exit markets where the provision would make it harder to operate a profitable business. It may have already gotten one of those out of the way when it exited New York.

“It wasn’t a stable environment. … We felt we could take our capital and move it to other states that were more appropriate for our programs,” Allison said earlier this month. “When we were approached to look at selling it, we decided to make that move. While we hate to leave New York, from a standpoint of financial implication, and the time we’ve had to put in, it’s a good move for us.”

Based in Frisco, Texas, Addus provides home-based care services to over 49,000 consumers through 214 locations spanning 22 states. Its personal care business currently makes up 74% of its revenue, with hospice and home health representing about 20% and 6% of revenue, respectively.

Let’s take stock of what the company has done to execute on the aforementioned strategic vision.

It acquired Tennessee Quality Care last year for $106 million, which added at least 14 home health and hospice locations to its footprint in the state, on top of eight existing personal care locations. Of importance is the fact that Tennessee is a Certificate of Need state, meaning Addus was able to both achieve the three legs of the stool in the state, while also entering a home health market with less competition.

The year prior, it acquired the Chicago-based Apple Home Healthcare. While not a huge deal – Apple Home Healthcare reportedly did around $10 million in annual revenue at the time of the sale – it aligned with the strategy: more home health care in solid personal care markets.

Even with home health care remaining a small part of overall revenue, Addus can now enter into value-based care contracts that include all three of its services in multiple states. Illinois, New Mexico and Arizona already fall into that category, and now Texas will likely be next.

“ADUS is pursuing strategic expansion in its core personal care services (PCS) business with the acquisition of Gentiva’s PCS operations for ~$350 million,” the investment banking company Stephens wrote in an analyst note. “The seven-state operation generates ~$280 million in annualized revenue serving ~16K patients per day. The deal includes three new markets for ADUS (i.e., TX, MO and NC) with TX representing a #1 market share entry and accounting for ~79% of the acquired revenues.”

As noted Monday, Addus will also be entering into Missouri and North Carolina. Even after leaving New York, the Gentiva deal has already significantly expanded the company’s footprint year to date.

Value-based care remains a small portion of Addus business, too. But those capabilities are a future-facing, nice-to-have result of recent acquisitions.

Addus’ ability to say what it’s going to do, and then doing it, unsurprisingly has worked out for the company. As of Wednesday afternoon, the company’s stock price is up 28% year over year, and up over 100% since 2020 lows.

The post With $350 Million Gentiva Deal, Addus Puts Its Money Where Its Mouth Is appeared first on Home Health Care News.

Those assets amount to over 16,000 home care patients per day, in Arizona, Arkansas, California, Missouri, North Carolina, Tennessee and Texas. Addus – which just left the state of New York – will fund the acquisition through its existing revolving credit facility.

“We believe this acquisition is a great strategic fit for Addus, and we are excited about the opportunity to expand our personal care market coverage in seven states, including Texas and Missouri, which are new markets for Addus,” Addus CEO Dirk Allison said. “Notably, Gentiva is the largest provider of personal care services in the state of Texas, where we currently have no personal care operations. This acquisition fits squarely into our growth strategy to leverage our strong personal care experience to build scale in existing markets as well as enter select new markets where we can immediately establish a significant presence.”

Addus currently provides home care, home health care and hospice services to over 49,000 consumers through 214 locations spanning 22 states.

On its end, the Atlanta-based Gentiva is a provider of home care, hospice and palliative care services. It has more than 590 locations across 38 states. The company was born out of Humana’s (NYSE: HUM) divestment of Kindred at Home’s home care and hospice assets to Clayton, Dubilier & Rice (CD&R). Once Humana fully acquired Kindred at Home – turning it into CenterWell Home Health – it only kept the Medicare-certified home health care.

Since, Gentiva – led by CEO David Causby, the former CEO of Kindred at Home – has mostly focused on hospice and palliative care. The company acquired ProMedica’s home health, palliative care and hospice assets for $710 million last year.

Causby told Home Health Care News last year that he believed the company was going to turn a historical loss leader in palliative care into a “game changer.”

“One of the things that we’re really trying to build out is an advanced palliative care model,” Causby said. “Palliative care is very difficult today. It’s built on the physician Part B schedule. It’s a loss leader. There’s just not very good reimbursement. But we personally feel that’s one of the greatest needs. One of the biggest spends in the health care system today are those patients that sit in that middle bucket that don’t qualify for home health and don’t qualify for hospice. That’s really where palliative should sit.”

Now, the company will be able to focus solely on palliative and hospice care.

“A recognized leader in personal care services, Addus is the right home for our personal care division and our teammates who provide care to these important clients,” Causby said in a statement. “This will ensure continued growth for that segment under proven leadership and will allow us to sharpen our focus on our industry-leading core hospice and palliative businesses, where we have the greatest opportunity to deliver the compassionate care that defines who we are, to those who need us the most.”

Addus, on the other hand, has repeatedly said it wants to continue to acquire personal care assets across the country, and then ideally layer home health services on top of that to boost value-based care capabilities.

Gentiva’s seven-state footprint was a perfect opportunity to do the former.

“Acquisitions remain an important part of our growth strategy, and we will continue to pursue strategic acquisitions that meet our criteria and are accretive to our operations,” Allison continued. “Fortunately, our strong capital structure supports our strategy, and we look forward to additional opportunities ahead for Addus.”

Looking ahead

After leaving New York, Addus has now entered an array of new states. As mentioned above, it will now be one of the largest personal care providers in Texas, where it previously only had a hospice footprint.

That now gives it the opportunity to add home health care there as well, which would turn it into a possible value-based care market for the company.

It also will expand its footprint in Arkansas, where it only had three locations, and in Missouri and North Carolina, where it did not have a footprint at all.

In Tennessee, Addus will further its scope in a state where it already made a significant leap last year. The company acquired Tennessee Quality Care in 2023 for $106 million.

On the other hand, Gentiva now has the opportunity to narrow its focus. Hospice has generally been a positive area of investment for home-based care companies over the last few years.

While palliative care has not been, Gentiva and others are bullish on what that kind of care can do in value-based care arrangements.

“We’re going on a PMPM basis arrangement and a risk-sharing basis to where we can take these patients during that five-year journey and provide services,” Causby said last year. “We believe that we have the data, and the partners we’re working with believe that there’s no doubt that, over that five-year journey between home health and hospice, we’ll be able to majorly impact those patients to ensure that they have decreased re-hospitalizations, … and we’ll help the payers in managing those patients.”

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The company announced Tuesday that it will offload its New York operations to HCS-Girling, another home-based care provider. The divestment will be worth “up to” $23 million for Addus, the company said, and the transaction is not yet closed. Addus will use the money to reduce the outstanding balance on its revolving credit facility.

“We are pleased to reach this agreement with HCS-Girling to divest our New York personal care operations and exit the state,” Addus CEO Dirk Allison said in a statement. “This has been a challenging market for Addus and no longer fits our growth strategy. We do not have the opportunity to offer all three levels of home care services there, and the well documented program challenges and start-and-stop changes in the state’s approach have consumed a disproportionate amount of management resources for limited financial contribution.”

Based in Frisco, Texas, Addus provides home care, home health and hospice services to more than 49,000 consumers across 214 locations spanning 22 states.

Though personal home care makes up the majority of its revenue, Addus wants to layer home health and hospice services on top of its personal care footprint to enable value-based care capabilities.

As Allison also mentioned, New York has had significant issues with its Consumer Directed Personal Assistance Program (CDPAP), a program where home care providers act as fiscal intermediaries to seniors and their chosen caregivers.

Outside of CDPAP, the state generally has been a difficult one to operate in for home care providers. Wage mandates, rate issues and other factors have contributed to that.

“We expect exiting New York will be immaterial to our consolidated earnings and will lead to a modest expansion in our margin profile,” Allison said. “We believe we can have a greater impact for both our clients and our shareholders by focusing on and growing other more strategic markets. HCS-Girling has a solid reputation for personalized, professional care for customers in their own homes, and we are confident that our customers in the New York market area will continue to receive excellent care.”

Addus plans to be active in M&A in 2024, mostly by expanding its existing personal care footprint and, again, layering home health and hospice capabilities on top of that.

In this case, New York’s juice didn’t appear to be worth the squeeze.

“We look forward to the opportunity to expand our personal care service coverage in the New York market,” Agnes Shemia, the co-founder and co-CEO of HCS-Girling, said in a statement. “Addus and HCS-Girling have a shared commitment to provide safe, quality care to more customers in the preferred home setting, and we will build upon the excellent reputation that Addus has already established in our market. We welcome the dedicated Addus employees and caregivers to the HCS-Girling team as we bring together our shared expertise and experience and extend our market reach.”

The investment banking company Jefferies noted on Tuesday that the move also allows Addus to insulate itself from further risk in the New York market.

“Addus’ decision to sell its operations in the state of NY allows management to exit a market and book of business that has seen fundamental degradation in recent years caused primarily by changes to state regulations, particularly in the CDPAP program,” the Jefferies analyst note read. “Given other upcoming changes to NY State’s personal care program and the relatively minimal EBITDA contribution/margins the business brings to Addus, management’s move to exit is prudent, in our view.”

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If there were ever a time for Medicare Advantage-related troubles to cool off in the home health care space, now would be it. And, heading into the summer, some of the largest home health providers in the country are scoring demonstrable wins that could lead to future success.

Virtually no one has the MA game figured out entirely, and it’s hard to imagine a day where that even becomes achievable. But there are certainly signs that the worst just may be behind providers, at least in a good portion of U.S. counties.

For one, MA plans are not in a strong financial position currently, at least for the most part. Providers are in a better position than they were three to five years ago to persuade the plans to pay more fairly for services, even if plans are less well off.

In value-based care, and in work with managed care companies in general, success begets success. Home health providers now can show their work, to one plan after another.

Instead of a woe-is-me approach, the largest providers – like The Pennant Group (Nasdaq: PNTG), Enhabit Inc. (NYSE: EHAB) and Aveanna Inc. (Nasdaq: AVAH) – are taking a more hard-lined approach.

That’s not possible for every provider, for certain. But the public companies are contributing to a new tone setting: pay fairly, or else.

“I think the payers are recognizing that this is not a commodity business, that there is a real need to partner with high-quality providers in the communities,” Pennant CEO Brent Guerisoli said Wednesday. “That’s also why these discussions have gone favorably for us, because they recognize the value of [partnering with] a quality provider.”

The latest slate of earnings calls and investor presentations from home-based care’s publicly traded providers came with a few key learnings, mostly centered around MA.

Those learnings are the topic of this week’s members-only, exclusive HHCN+ Update.

MA penetration

A better MA landscape may not just be driven by providers taking a more hard-lined approach in negotiations.

In fact, Addus HomeCare Corp. (Nasdaq: ADUS) CEO Dirk Allison said during the company’s first-quarter earnings call earlier this month that there may be a “leveling off” when it comes to MA penetration.

For the first time ever, in 2023, there were more Medicare beneficiaries under an MA plan than traditional Medicare.

That penetration occurred rapidly, according to data from Kaiser Family Foundation. For instance, in 2023, about 51% of beneficiaries were enrolled in MA. Just five years earlier, only 37% of beneficiaries were enrolled in MA.

“We continue to be affected by the movement of Medicare beneficiaries from Medicare fee-for-service to Medicare Advantage, but we feel we may be seeing a leveling off of this shift in the markets we currently serve,” Allison said. “We are continuing to work with our Medicare Advantage payers to obtain higher rates.”

The rapid penetration that took place from 2013 to 2023 led to the assumption that MA plans would continue to gain market share, and quickly. But that doesn’t seem like a sure thing anymore.

Now that the Centers for Medicare & Medicaid Services (CMS) has pulled back on MA rates, plans have less of an ability to expand and offer supplemental benefits that differentiate them from traditional Medicare.

For two years in a row, CMS has finalized unsatisfactory – from the MA plan perspective – payment rates. In 2025, plans will see a 0.16% decrease to core payments.

“As we think about the decisions for ‘25 bids, we do intend to exit some counties,” Humana Inc. (NYSE: HUM) CFO Susan Diamond said earlier this week. “When we thought about the framework of how we make those decisions, a primary input was the profitability of the plan.”

Humana CEO Bruce Broussard also added that supplemental benefits would be “less and less offered” moving forward.

So, in addition to exiting some markets, Humana – along with other insurers – are opting for profitability over growth. That could mean less stark penetration in the coming years for MA.

That would be a positive trend for home health providers. Although traditional Medicare payment is being cut, it still pays far better compared to MA plans.

MA isn’t going away, and will be a larger part of home health business for the foreseeable future. But providers are still making adjustments to account for that. If the firehose is turned down – even for a year or two – it would be of benefit.

Positive steps with plans

Over the last few years especially, providers have been constructing strategies to deal with MA penetration.

Those strategies are finally being implemented, and even if they’re still in their infancy, they’re certainly better than grasping onto what’s left of fee-for-service Medicare business.

Outside of home health care, Addus is also toying with a value-based care strategy that includes more personal care for MA beneficiaries.

“[We have] a small contract, and instead of gain-share, we’re taking some risk,” Allison said Wednesday. “Now, it’s very minimal. We’re only taking risk for our part, for our hours. We wanted to — I won’t say experiment — but we wanted to enter into a contract with a payer that we could partner together to determine if adding personal care hours can help reduce overall medical loss ratio for their patient base. We’re excited about that. We’ve only been in it less than a few months.”

Data doesn’t always persuade lawmakers. Instead, stories do. That’s not as much the case with MA plans, where data remains king.

Providers have caught up there, too.

As Enhabit shifts its home health mix to include more – and better – MA contracts, it is championing its 30-day rehospitalization rate, which is 20.5% below industry average, according to the company.

The new face on the public market, BrightSpring Health Services (Nasdaq: BTSG), said on its first-quarter earnings call that its home health services were also helping drive hospitalizations down significantly.

“Our medication management program … has demonstrated a 73% reduction in hospitalizations when utilized together with our home health,” Jon Rousseau, president and CEO of BrightSpring, said during the company’s first-quarter earnings call earlier this month.

Pennant was ahead of the game in MA, having recognized the need to take on MA beneficiaries long before a crisis arose.

Now, it is in the position to tell plans to pay up. Pennant President and COO John J. Gochnour said Wednesday that the company had achieved per-visit pay bumps from MA plans over the last two years that were above any increases it saw over the previous ten years before that.

Specifically, those rates have climbed anywhere from 10% to 15%, according to Gochnour.

It’s tough to say that the tide is turning in the MA-home health provider relationship. Providers are still struggling mightily to deal with the landscape shift.

But in a generational war like this one, all battle victories are worth taking stock of.

“Because, in the end, they still save money, right?” Gochnour said. “Because we’re the lowest-cost setting. And they make the right investment, we reduce hospitalizations, we reduce the overall cost of the care, and it’s a win-win for both.”

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The company is regularly building out its personal care footprint, expanding it in some areas and bolstering it in others. If consolidation is a result of the Medicaid Access Rule’s 80-20 provision, Addus would be a likely beneficiary.

“There are other points worth making on the rule and its impact,” Addus CEO Dirk Allison said on the company’s first-quarter earnings call Tuesday. “We continue to believe the rule disproportionately impacts small providers and encourages scale, which will lead to further consolidation opportunities.”

Based in Frisco, Texas, Addus provides personal care, home health care and hospice care to over 49,000 consumers through 214 locations spanning 22 states.

Allison pointed out that exemptions for smaller providers – to pay caregivers less – would also give Addus the opportunity to gain a greater share of the labor market, a potential unintended consequence of the 80-20 provision and its exemptions.

The 80-20 provision, if implemented, will require scale, he noted.

That’s why Addus will continue to build more scale in each of its personal care markets, but also why it believes small providers will have trouble complying.

“Of course, we and other providers are disappointed with the result,” he said. “Even though we support the overall policy aim at providing higher wages and increasing access to home- community-based services.”

Allison also laid out some of the positives that came about between the Medicaid Access Rule’s proposal and its finalization in late April.

For one, the timeline switching from four years to six years until implementation was recognized as a positive.

Certain costs such as mileage, PPE and training will also be deduced prior to 80-20 calculations, which is also a positive for providers. The “direct care worker” umbrella now includes clinical supervisors, too, and states have the liberty to adjust what goes where in the 80-20 calculation – at least to a certain extent.

“All of these changes combined to lessen the potential impact of the rule on our margin,” Allison said.

Still, given the administration turnover that could materialize over six years, Addus is not yet convinced that the 80-20 provision will become mandated in six years time.

“Realistically, we believe [the timeline] substantially increases the likelihood that the rule will not be implemented in its current form,” Allison continued. “For a variety of reasons, including as a result of legal or Congressional action, or potential administration changes in either of the next two presidential election cycles.”

In the first quarter, Addus’ overall net service revenues grew by 11.6% year over year, to $280.7 million.

Personal care revenues in the fourth quarter saw a 9.5% year-over-year increase. Home health revenue increased by over 35.2%, while hospice saw an 13.8% increase.

M&A, MA and staffing

Addus’ modus operandi has not changed when it comes to growth, particularly through acquisition.

“We are currently in the process of looking at personal care opportunities that would give us a larger presence in our current states,” Allison said. “We are also looking for opportunities where we can enter new states in a material way. Personal care is a valuable service to our elderly and disabled population, and we are optimistic that states will evolve their programs to remain viable, regardless of the rule.”

Though home health remains a small part of Addus’ business – about 6% of revenue – it plans to continue to layer it onto its personal care markets to increase value-based care capabilities.

“It remains our primary focus to use our financial capacity to acquire strategic operations that align with our overall growth strategy of adding clinical services where we have strong personal care presence,” Allison said. “This acquisition strategy will continue to strengthen our ability to participate in value-based contracts with our payers and to adapt to potential reimbursement changes.”

In regards to hiring, Addus’ first quarter mirrored its first quarter in 2023. The company is netting about 84 hires per business day. That’s also up about 5% over the fourth quarter.

Allison also suggested that, while Medicare Advantage penetration continues to affect Addus in its home health segment, he believes there has been some leveling off in that area.

“We continue to be affected by the movement of Medicare beneficiaries from Medicare fee-for-service to Medicare Advantage, but we feel we may be seeing a leveling off of this shift in the markets we currently serve,” he said. “We are continuing to work with our Medicare Advantage payers to obtain higher rates.”

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In March, the U.S. Centers for Medicare & Medicaid Services (CMS) approved a request from one state to allow more personal care service delivery within acute care facilities. Though not yet widespread, the amendment could open doors for providers and patients needing personal care in alternative settings in the future. 

One change to a Medicaid program may seem negligible, but with Medicaid program directors talking to each other as much as they do – and taking feedback while applying it to their own state programs – the change is worth paying attention to. 

Essentially, this option for additional personal care to be provided to patients in acute care settings was granted during the COVID-19 pandemic, with Rhode Island later on getting approval to make the amendment permanent through a 1115 demonstration.

“CMS has determined that Rhode Island’s demonstration amendment is likely to assist in promoting the objectives of the Medicaid statute by increasing access to high-quality medical assistance coverage for certain low-income individuals,” the agency wrote in a letter to the state’s Medicaid director.

Home- and community-based services (HCBS) providers can now step in and offer care that would otherwise not be a part of a hospital’s care plan. For instance, certain individuals may have needs that hospital staff are unequipped to address, such as dementia or other behavioral challenges, Damon Terzaghi, the director of Medicaid advocacy at the National Association for Home Care & Hospice (NAHC), told Home Health Care News.

That’s one reason that, in particular, the IDD provider and advocacy community was pushing for these types of amendments during the peak of the pandemic. Eventually, the option was included in the CARES Act.

The more care patients can receive in an acute setting, the better. More specifically, the more care they can receive tailored to their specific needs, the better.

Home-based care providers can now step in and elevate the level of care and comfort for patients in Rhode Island.

“The real impetus of this policy is to make things easier for the participant,” Terzaghi said.

He offered a few examples. Take an older adult with dementia who has broken his or her hip and been placed in the hospital. The cognitive issues may lead to challenges that hospital staff are unable to address, potentially leading to a worse health outcome for the patient. At that point, behavioral health care or personal care could be provided by an outside home-based care agency.

Providers wouldn’t be delivering care the hospital is already obligated to provide, but instead augmenting care plans for these types of individuals.

“Having a caregiver that may be a little bit more trusted – or that’s familiar with their own routines, nuances or the specifics of their behaviors – would be extremely valuable in alleviating potential adverse incidents,” Terzaghi said. “Helping the individual calm down, making sure that their needs are matched, and those sorts of things. And then also, just having that person in the hospital helps get them back into the community faster and smoother.”

Popularizing the concept

Rhode Island is a trailblazer in its adoption of Medicaid-funded personal care services in acute care settings, but it’s likely other states will adopt, if there’s positive outcome data driven by the change.

“When a state makes an innovation and has a good experience with it – meaning there’s good cost effectiveness attached to it – other states adopt it,” Darby Anderson, executive vice president and chief government relations officer at Addus HomeCare Corp. (Nasdaq: ADUS), told HHCN. “In this day and age, state Medicaid directors talk, and so do the more programmatic people involved with the programs.” 

Frisco, Texas-based Addus provides home care services that primarily include personal care services that assist with activities of daily living (ADLs). It also delivers hospice and home health services, with its overall footprint stretching across 217 locations in nearly two dozen states.

If more states did adopt the flexibility, it would be a major win for patients, for one. But it would also be a tailwind for providers and payers, though to what extent remains unclear.

Anderson believes the flexibility is already one worth advocating for, but doesn’t see a direct line yet to an upturn in business for HCBS providers.

But, symbolically, further adoption would be a win for the HCBS provider community. There would also be ancillary benefits to providers’ care plans, Terzaghi said.

“What this does do is it increases predictability, it increases the ability of the providers to schedule and assume that, even if this individual does ultimately get admitted to a hospital setting for whatever reason, we’re not going to have to scramble and reallocate hours,” he said. “It’s much more predictable for everyone across the board. I think it’s definitely beneficial to providers, I think that it will increase predictability, and also potentially lead to some revenue upside.”

With the flexibility implemented, the next step is to wait and see how things turn out for Rhode Island.

If HCBS providers, patients and hospitals all benefit – through better outcomes and perhaps some cost savings – it’s the sort of change that could bring on a ripple effect across the country.

“What were the outcomes we saw? Did the benefit to the individuals, providers and the state ultimately demonstrate through the provision of these services?” Terzaghi said. “And if so, will this be something that catches on nationwide and is made permanent? I think that those are really important questions to examine further.”

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