Home-based care dealmaking remains in a lull, one it hasn’t been able to shake since the historical M&A highs of 2020 and 2021.
“We didn’t expect it to be that flat and that consistent for 2023,” Mark Kulik, senior managing director at M&A firm The Braff Group, said during a presentation at Home Health Care News’ Capital + Strategy conference last week. “That was disappointing by any measure. If you speak to anyone, certainly at our firm, it was a disappointing year for ourselves with the lack of transactions and the lack of deal flow.”
Kulik noted that there are a number of forces negatively impacting health care dealmaking, including high interest rates, inflation, U.S. staffing shortages and global unrest.
In the last 40 years, there have been seven tightening cycles that occurred from the increasing of the Fed rate.
In 2022, the rate of increase was profound, according to Kulik.
“It seemed like every month, or every two months, the Fed was coming out with another increase of 25 to 50 basis points — bumping it up and bumping it up and bumping it up,” he said. “Last year, it took the shortest amount of time, roughly 16 months, to go from the first rate increase to 5.25, where it’s hovering right now. This is akin to the Fed jamming the brakes on the monetary policy to help slow down the economy because inflation was occurring.”
Though this was a tool to slow down the economy as a response to inflation, this policy ended up also impacting dealmaking by skyrocketing the cost of capital to buyers.
When looking at home-based care deal trends, hospice saw a 67% dropoff. In 2021, 67 hospice transactions took place, compared to 40 the following year, and 23 in 2023.
“We went from phone calls trying to find every hospice for sale in the country, to virtually no one calling and asking for hospice,” Kulik said.
On the Medicare-certified home health side, there was 33% dropoff in deals. In 2021, there were 86 home health deals, compared to 75 in 2022 and 54 last year.
“Pre-pandemic [transactions] were in the 50 to 60 range for transactions, and then it spiked up to 86 transactions in 2021,” Kulik said. “No one would have ever predicted that with PDGM coming out.”
In 2023, there were 7 Medicaid home care transactions, which was the same amount of deals that took place the previous year. In 2021, this sector saw 16 transactions. Driving this downturn is the unresolved proposed 80-20 rule, an internal factor versus the aforementioned external ones, according to Kulik.
The private-duty nursing space checked in at 29 deals in 2023, compared to 37 in 2022 and 53 in 2021.
One of the main reasons behind the previous deal volume in the home-based care space was private equity interest between 2017 to 2023.
“In that timeframe, as private equity was doing transactions, it forced the strategics to step up their game, relative to their interest level and prices that they offered to sellers,” Kulik said. “So private equity is a big superstar relative to activity and also valuations.”
Looking ahead, the Fed has indicated that a series of interest rate cuts will likely take place this spring. Still, inflation sitting at roughly 3% could delay cuts.
“Until rates drop, and until there’s some certainty that the marketplace and the Fed is heading in that direction, it puts a chokehold on activity because it presents risks to the marketplace,” Kulik said.
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