Private equity’s influence in home-based care and health care at large has been exaggerated. But the active health care firms still play an important role.

Pitchbook estimates that PE-backed providers represent 3.3% of the U.S. health care provider ecosystem by revenue. There are at least 73 PE-backed home-based care providers, according to Pitchbook, which represents a very small percentage of the thousands of providers out there.

I don’t have the data to back it up, but I would guess that, if insiders and outsiders were polled, their guesses on that first number would come far above 3.3%.

“It’s an estimate. We don’t have disclosed enterprise value and the revenue figures for every company,” Pitchbook Lead Healthcare Analyst Rebecca Springer told me. “But the numbers came out actually a little bit below what I was expecting. And I think it’s a number that’s worth paying attention to.”

Springer and Pitchbook data analysts took a stab at figuring out PE’s control of health care providers “to lay out pertinent, objective information in order to contribute to fact-grounded future discussion.”

The information revealed by Pitchbook this week was eye-opening. I certainly would have guessed that at least 10% of providers had PE backing, for instance.

For the home-based care space in particular, it’s a reminder that PE activity isn’t the end-all, be-all. But it’s also important to remember why PE catches so many headlines in the first place.

In this week’s exclusive, members-only HHCN+ Update, I take a closer look at the relationship between PE, home care and home health care.

Bootstrapping and funding

Pitchbook’s analysis of private equity in health care was not opinionated, and sought out to be exclusively “fact-grounded.”

But the report does come just seven months after the Biden administration released a fact sheet around “promoting competition” in health care to reduce pricing. In that fact sheet, private equity involvement in home care was specifically mentioned as a deterrent to that competition goal.

“Consolidation has also led to a rapid decline in independent physician practices, with research finding that patients of hospital-owned practices pay nearly $300 more for similar care than at independent physician practices,” the fact sheet read. “At the same time, private-equity ownership in the health care industry has ballooned, with approximately $750 billion in deals between 2010 and 2020 — in sectors including, but not limited to, physician practices, nursing homes, hospices, home care, autism treatment and travel nursing.”

The Pitchbook report, on the other hand, showed that 70% of all employed physicians are employed by hospitals; that there has not been a major PE investment in a U.S. hospital or health system since 2018; and that deal activity in both hospitals and skilled nursing facilities is near zero currently.

In home-based care, there was more private equity activity in 2020 and 2021. That’s for two obvious reasons: home-based care is considered a future-facing mode of care, and interest rates at that time – unlike now – were low.

More care will be done in the home in the future given patient preference and cost considerations.

“I think home-based care is a good example of an area that’s attractive to private equity investors because of a high level of fragmentation and demand for increased investment support, scale and increased sophistication on the operating side,” Springer said. “And the long-term tailwind that we see in home-based care, where more patients would like to be treated in the home, where there are cost savings by treating patients in the home.”

That increased level of sophistication is an argument for an influx in PE money being a good thing. For decades, home health care and home care have been mostly dominated by mom-and-pop providers.

Mom-and-pop providers are a must-have, as they often provide care in areas where large companies won’t go. But even some of the more regional providers are just recently turning into more tech-driven operators.

Whereas hospitals were awarded millions to upgrade their EMR systems years ago, for instance, home health providers were awarded nothing.

So, while more patients want to be treated at home than ever, providers are still catching up on the technology side. PE capital gives them the time, money and resources to do so.

That also allows legacy home-based care providers to be the beneficiaries of health care tailwinds, and not new “disruptors” who do have capital and technology, but don’t have experience caring for patients in the home.

It’s also worth noting that a lot of the PE activity in home-based care is through add-ons to existing platforms, or trade-offs from one PE firm to another. In those cases, that’s not “more” PE activity, per se, but just continued PE activity.

The largest deals still usually come from strategics. For instance, UnitedHealth Group’s (NYSE: UNH) $5.4 billion and $3.3 billion deals for LHC Group and Amedisys Inc. (Nasdaq: AMED), respectively.

PE platforms generally look to turn state-wide providers into regional ones, or regional providers into national ones. All things considered, home health agencies gaining more scale is probably a good thing, as home health access remains an issue for Medicare beneficiaries.

The Centers for Medicare & Medicaid Services (CMS) is reducing home health payments by the year. The agency is also scrutinizing profit in home- and community-based services (HCBS), while rate increases remain hard to come by in certain states.

All the while – outside of COVID-19 funding – home-based care providers have been forced to pull themselves up by their bootstraps over the years to modernize. Now, the government has taken some issue with providers looking for outside help via PE.

Currently, 17.3% of GDP spending right now is from health care. Health care’s proportion of PE activity overall is at about 13.8%, according to Springer.

What PE does is help set the standard for industry practices, just like home-based care’s public companies do. That’s why HHCN tracks activity closely. But, as the above numbers show, calling PE involvement in home-based care a concern – even given the bad apples – is probably a bridge too far.

“The deal activity trends in health care broadly mirror what’s going on in the rest of the industries,” Springer said. “There’s been a little bit of variation [over time], but in general, the deal activity remains the same.”

The post ‘It’s A Number That’s Worth Paying Attention To’: Understanding Private Equity’s Role In Home-Based Care appeared first on Home Health Care News.

This idea was laid out by Rebecca Springer, the lead health care analyst at Pitchbook, in a new report.

One of the key points of the report was this data point: that PE-backed providers represent less than 4% of the U.S. health care provider ecosystem by revenue, at 3.3% specifically.

PE headlines may be more eye-catching in home-based care because home health and home care are burgeoning sectors. But, overall, PE firms are still not incredibly influential across any part of the health care system.

“PE investment in health care providers is neither new nor surging,” Springer wrote in the report. “Such investment grew as a proportion of overall PE activity between 2000 and 2018 but has declined proportionally since then. Year-over-year growth in the total number of PE-backed companies has slowed steadily over the past six years, dipping below 1% in the first quarter of 2024.”

Springer added that more than 70% of all employed physicians are employed by hospitals; that there has not been a major PE investment in a U.S. hospital or health system since 2018; and that deal activity in both hospitals and skilled nursing facilities is near zero currently.

The report comes at a time when PE-driven M&A has been scrutinized by lawmakers and federal regulators in Washington, D.C.

In December, the Biden administration released a fact sheet condemning certain PE activity in the health care space, including in home-based care.

“Private-equity ownership in the health care industry has ballooned, with approximately $750 billion in deals between 2010 and 2020 – in sectors including, but not limited to, physician practices, nursing homes, hospices, home care, autism treatment and travel nursing,” the fact sheet read. “Too often, aggressive profiteering by private equity-owned practices can lead to higher patient costs and lower quality care.”

Pitchbook data shows that private equity ownership has ebbed and flowed, however.

But that stigma alone has likely played a role in slower deal activity in health care – and home-based care specifically – over the last couple of years.

“The key effect of the Biden administration’s scrutiny of PE in healthcare is not direct antitrust risk, but headline risk,” Springer wrote in a separate report earlier this year. “We have been struck by the sudden change in tone among investors on this topic. While the interest-rate environment remains the most important driver of the pace of dealmaking, we also believe sponsors will be somewhat more cautious in 2024 about entering any provider categories that primarily serve vulnerable populations, including home-based care, post-acute care, high-acuity behavioral health, intellectual & developmental disabilities (IDD) care and autism treatment.”

PE-driven dealmaking in home-based care peaked during the height of COVID-19, which makes sense. Some seniors had no choice but to be treated within their homes, and also grew to prefer that mode of care.

Since then, it has cooled. As Springer pointed out, that’s due to a variety of factors, with the biggest one being high interest rates.

Currently, there are about 73 home-based care companies backed by PE, according to Pitchbook. That represents a very small percentage of all providers. It also means that just over 10% of all PE-backed providers are operating in the home-based care space.

“Considerable confusion about the scope and emphasis of PE’s current involvement in US health care is circulating widely in news articles, white papers and even government missives,” Springer wrote. “We are not trying to address critiques of PE’s involvement in healthcare, especially regarding clinical outcomes, which would require different datasets and analytical tools than we have. Rather, as the leading provider of PE health care deal flow data, our aim in this note is to lay out pertinent, objective information in order to contribute to fact-grounded future discussion.”

The post Why Private Equity’s Involvement In Home-Based Care Is Largely Overstated appeared first on Home Health Care News.

There’s some feeling that sidelined private equity firms will eventually have to enter the game, but that may not be the case.

For one, interest rates have still not come down. But also, the “dry powder effect” – and available money being ready to be deployed by PE firms – can sometimes be overstated, Rebecca Springer, the lead health care analyst at Pitchbook, told Home Health Care News.

“I think it’s really easy to overstate the pressure of the dry powder effect,” she said. “I hear the narrative a lot, that there’s a lot of dry powder, and therefore deals have to get done. There is always a lot of dry powder. And it’s not correlated, if you look historically at deal activity. In reality, managers have a lot of flexibility in how they deploy capital, they can deploy into existing portfolio companies, they can do smaller deals, they can wait. There is pressure, especially from the [limited partner] base, to deploy capital, but more to a much greater extent to return capital.”

Pitchbook released its Q1 health care services report last week.

The report showed extremely low deal activity, in home-based care and across the health care industry. The estimated health care services PE deal count for the first quarter was 158, putting 2024 on a slower pace than the past four years.

It is worth noting, however, that deal activity generally picks up in the back half of the year. Last quarter, there were 235 PE health care deals, for reference.

It’s also worth remembering that dry powder on its own does not push across deal activity, Springer said. She did say, however, that there are more signs of PE dealmaking activity picking up, but it’s tough to pinpoint when exactly that will lead to more deals.

“I think dealmakers are actively looking at potential opportunities,” Springer said. “There’s more conference attendance, more proactive thesis development happening. But we’re still expecting that deal processes are going to take a while, and that larger platforms are still going to want to sit back a little bit and see what the Fed does, as well as wait for some other platforms to trade and see where multiples come in. There’s no real big hurry to get deals done.”

Springer also acknowledged that dealmaking generally picks up later on in the year, a trend she expects to continue in 2024.

“I think processes will continue to slowly ramp up throughout the year, we’ll start to see announcements probably in late 2024 for some bigger processes – that would be my best guess,” she said. “I always want to hedge that a little bit. But it looks like that’s approximately the timeline for there to be lower interest rates as well.”

Home-based care dealmaking

Health care dealmaking has been about in line with home-based care dealmaking over recent quarters.

In the first quarter, there were fewer than 15 home care, home health and hospice deals, according to data from the M&A firm Mertz Taggart.

In addition to the macroeconomic headwinds, home-based care investors are also seeing regulatory uncertainty, specifically with home health payment rates and the now finalized 80-20 provision from the Medicaid Access Rule.

The next home health proposed payment rule is expected early this summer. The 80-20 provision, on the other hand, is finalized – but it won’t be implemented for another six years.

That’s why Springer doesn’t expect the 80-20 provision to impact dealmaking significantly in the near-term future.

“I think that it probably doesn’t have a huge effect,” she said. “I think if you were going to be investing in Medicaid home- and community-based services, you’re already the type of investor who’s willing to do some regulatory due diligence and be really thoughtful about what geographies you’re diving into.”

For home-based care investors still inclined to get into the business right now, Springer did also say she believes there’s some untapped potential in hospice.

“We believe there is still a good investment opportunity in hospice, which has fared better than home health in recent CMS fee schedules, and particularly in palliative care, which is increasingly seen as an important component of VBC,” the Pitchbook report read.

The post Home-Based Care Investors Show Interest, But M&A Pace Remains Cautious appeared first on Home Health Care News.

Released last week, Pitchbook’s Q4 health care services report shines a light on the Biden administration’s antitrust and private equity stances, and how those may be affecting dealmaking.

For instance, the Humana Inc. (NYSE: HUM) and Cigna Group (NYSE: CI) combination rumor ended late last year with the insinuation that the two massive payers couldn’t agree to a price tag. But Pitchbook – and its lead health care analyst, Rebecca Springer – believe that a heightened antitrust focus from the president’s administration also could have played a role.

In late November, initial reports came out regarding Humana-Cigna conversations. By Dec. 11, those conversations had ended.

“Cigna and Humana call off merger talks, which were first reported in November,” the Pitchbook report noted. “Antitrust opposition is believed to have contributed to the deal’s demise. Many payers are under pressure due to rising utilization, slowing growth, and changes to the Medicare Advantage (MA) program.”

UnitedHealth Group (NYSE: UNH), and its subsidiary Optum, are in the process of navigating this more complex regulatory landscape as well.

A prolific acquirer, Optum is beginning to meet more pushback on its acquisitions. Its deal for the home health and hospice provider Amedisys (Nasdaq: AMED) has already received scrutiny from lawmakers. If it acquired Amedisys, Optum would own about 10% of the home health market, having already acquired LHC Group.

At the same time, its planned takeover of the Corvallis Clinic in Oregon is also receiving significant pushback.

Elsewhere, on Dec. 7, the Biden administration released a fact sheet condemning certain PE activity in the health care space, including in home-based care.

“Private-equity ownership in the health care industry has ballooned, with approximately $750 billion in deals between 2010 and 2020 – in sectors including, but not limited to, physician practices, nursing homes, hospices, home care, autism treatment and travel nursing,” the fact sheet read. “Too often, aggressive profiteering by private equity-owned practices can lead to higher patient costs and lower quality care.”

Though interest rates likely remain the no. 1 deterrent to activity, this dynamic also appears to be playing a role.

While there are more PE-backed health care companies than ever, new investments and new exits have waned over the past few years.

“The key effect of the Biden administration’s scrutiny of PE in healthcare is not direct antitrust risk, but headline risk,” Springer wrote. “We have been struck by the sudden change in tone among investors on this topic. While the interest-rate environment remains the most important driver of the pace of dealmaking, we also believe sponsors will be somewhat more cautious in 2024 about entering any provider categories that primarily serve vulnerable populations, including home-based care, post-acute care, high-acuity behavioral health, intellectual & developmental disabilities (IDD) care and autism treatment.”

The post Home-Based Care M&A Downturn Partly Driven By Biden Administration’s Attitude Toward Dealmaking appeared first on Home Health Care News.

Health care’s share of global private-equity (PE) deal count peaked at 13.7% in 2020. Three years later, that number fell to 10.8% — its lowest level since 2015.

Compared to the bustling activity of 2021, home-based care dealmaking was mostly sluggish in 2023 and has followed that same trend.

The slow year was largely due to PE firms’ reluctance to re-engage in the market. In 2024, those tides may shift ever so slightly, making it an intriguing year.

“So much of what we’re expecting to see from an activity standpoint is going to depend on whether or not the [Federal Reserve] adjusts interest rates,” Rebecca Springer, lead health care analyst at PitchBook, told Home Health Care News. “Higher interest rates could affect the value of future cash flows and exit valuations.”

Despite 2023 being a down year for home-based care dealmaking, it was a relatively strong year for PE health care specialists in terms of cumulative dollars closed, according to Pitchbook. However, that fundraising activity is not expected to translate into increased deal counts in 2024.

“Dry powder or available capital is not always indicative of future dealmaking,” Springer said. “The typical investment period for a 10-year fund is five years with some additional flexibility through a number of technicalities. In 2024, we anticipate that PE health care managers will focus on deploying capital into existing portfolio companies, lower-middle-market platforms and occasionally pursue opportunistic carve outs.”

Slow start expected

Home-based care is in a particularly interesting position when it comes to M&A and PE-involved deals, Cory Mertz, managing partner at Mertz Taggart, told HHCN.

There’s a contrast in financial strategies that exists between physician groups and home-based care companies.

Physician groups, Mertz explained, rely heavily on growth through acquisition and accumulating significant debt in the process.

“Once you buy a physician practice, it’s hard to grow that significantly organically,” Mertz said. “You just have to keep buying them so it’s almost entirely a roll-up strategy. They’re dealing with organic growth, so you’re piling on more debt deal after deal.”

In contrast, mature home-based care companies — especially those owned by established private equity groups — often have cash reserves due to early investments and successful organic growth.

This financial stability enables them to expand without relying heavily on debt financing, giving them a competitive edge in dealmaking.

“On the home-based care side, there are some buyers out there that are cash-strapped,” Mertz said. “Especially those that overpaid for platforms between 2020 and 2021. A lot of those guys are probably a little bit cash-strapped or a little bit more highly leveraged because they overpaid. They put debt on it and they haven’t had a chance to really grow organically and throw a bunch of cash on the balance sheet.”

Both Mertz and Springer mentioned that it’s not a matter of quantity, but quality.

“Not all of them, but the more recent portfolio platform deals that we’ve seen over the last year or two — they’re going to have a harder time being aggressive if they’re looking for quality companies,” Mertz said.

Macroeconomic factors will continue to play a huge role in PE’s involvement for home-based care in 2024, Springer said.

“The drop in provider add-on activity we saw last year happened for two reasons,” Springer said. “First, the industry has been hit hard by labor cost inflation. It’s improving slightly as macroeconomic conditions change, but it’s clear that the pandemic has only worsened the ongoing labor shortages across various sectors, from urology and dental hygiene to home health care. Second — and most importantly — high interest rates and roll-ups do not mix well.”

It’s becoming more risky for PE firms to rely on borrowing money to fuel rapid growth through acquisitions. As a result, the industry is shifting focus in different directions like, as Pitchbook has pointed out, behavioral health and aesthetics.

Others are moving away from traditional health care providers and investing more in tech and pharmaceutical services.

Year of two halves

Private equity investors told HHCN on background that despite some of the caution being taken by investors, the second half of the year could be a busier one.

Investors and analysts called it a “mixed bag” when projecting what 2024 will look like.

In speaking with other investors, Mertz has received a similar message.

“The ones that have been under the same ownership group or even some of the publicly traded companies have got plenty of cash and they are looking for quality opportunities,” Mertz said. “But then there are some that are saying, ‘Right now, we have to focus on organic growth and integrating these deals that we’ve done in the last 12 months.’ At least for the first half of the year. That’s the general sentiment I’m getting.”

As will be the case for 2024 and following years, one of the biggest obstacles PE investors face is a lack of high-quality deals available. The other — as Springer pointed out — is the capital markets.

“The first thing they all say is quality deal flow,” Mertz said. “They’ll say, ‘There’s just not enough quality opportunities out there for us to sink our teeth into.’ And, with the capital markets, the consensus is that the Fed will start cutting rates in the second quarter of 2024. Buyers, especially those that rely on debt, are waiting for things to ease up a bit before they get acquisitive.”

The post Predicting Private Equity’s Involvement In Home Health Care In 2024 appeared first on Home Health Care News.

There were only two transactions in hospice in the third quarter, and just four in home health care. Those were both record low totals, according to a new report from the M&A firm Mertz Taggart.

M&A has been slow throughout the year, but industry insiders expected things to tick back up. In quarter two, they did a little bit, but the third quarter was an undeniably slow one.

There were just six home health transactions in Q1, too, but 16 in Q2.

It’s possible that waiting for the arrival of the home health payment rule – which resulted in a meager 0.8% aggregate payment increase – played a part in the slow quarter. Whether the final rule was a positive one or not, buyers like to have some certainty moving forward.

That can put deals in “wait and see” mode, Mertz Taggart Managing Partner Cory Mertz said.

“Demand remains historically high for cashflow-positive home-based care companies,” Mertz told Home Health Care News in July. “That’s driven by scarcity of supply and insatiable private equity demand for add-on acquisitions, caused by a substantial decline in PE exits.”

Speaking of private equity, that’s part of the problem. PE activity remains extremely slow across all health care sectors.

A lot of that has to do with macro economic factors affecting the market right now. Still, PE buyers being sidelined has shaken up the home health and hospice sectors. 

“The drop-off in home health & hospice deal activity, which started in late 2022 and has continued into 2023, is unprecedented since the start of our dataset in 2017,” Rebecca Springer, lead health care analyst at Pitchbook, wrote in a recent report.

The post Home Health, Hospice M&A Is Historically Slow As 2023 Comes To Close appeared first on Home Health Care News.

This shift, while not a radical departure, is something stakeholders are keeping an eye on heading into 2024.

“I think we’re already seeing a little bit of that,” Rebecca Springer, lead health care analyst at PitchBook, told Home Health Care News. “It’s not a full pivot, but we’ve definitely seen private-duty deals come through. Home- and community-based services deals have had a slow uptick in interest for a little while now. I think that’s because it’s an alternative to home health and hospice, but also because there’s a lot of green space there.”

Meanwhile, the reimbursement dynamics in HCBS have been mostly positive, Springer said.

HCBS often includes personal care, respite care, home modifications and other support services. In that service line, there are typically lower overhead costs as well.

Private equity firms may stick to what they know.

But the regulatory dynamics could end up forcing a shift in M&A throughout home-based care.

“I think, traditionally, private equity firms in health care have been conditioned to search for commercial pay,” Springer said. “I think part of this is learning a new muscle for some firms. You can look at these Medicaid models and you can make them work. It just may be more of a piece meal than they’re used to and you have to do your homework.”

The Vistria Group, a Chicago-based private equity firm, is a good example of an investor with a diversified strategy.

Over the past few years, the company has built a portfolio that includes home health care, home care, HCBS, home-focused vendors and more.

In October 2020, the Vistria Group and Centerbridge Partners backed the Chicago-based HCBS provider Help at Home.

The firm’s other home-based care investments include Mission Healthcare, Medalogix, Tango and VitalCaring, among others.

With portfolio companies like Sevita, Beacon and Behavioral Health Group, Vistria has also invested heavily into behavioral health as an extension to its home health offerings.

“Not every company can do everything, so having partners that are willing to help you pilot, or do things that are not always natural, we found is immensely valuable,” David Schuppan, senior partner and co-head of health care at The Vistria Group, recently told HHCN. “The building blocks to value are not just medical and non-medical in-home care, but they’re also behavioral, they’re social, they’re pharma-related. Having partners, or best-in-class platforms, helps us collaborate towards a common solution where we can also leverage or capitalize on our relationships with those risk-bearing entities.”

Another reason why there has been a steady uptick in HCBS investment is because stakeholders are figuring out that more HCBS could reduce the demand for home health care.

“There has been an uptick in interest levels in home- and community-based services,” Mark Kulik, managing director at M&A advisory firm The Braff Group, told HHCN. “I think it has been growing because people are saying, ‘Gosh, if we did more HCBS services, that would [theoretically] reduce the demand for home health care services.’ Because then providers would be able identify things a lot sooner, avoid ER visits, etcetera.”

According to Kulik, over the last 10 years, there has been an average of about 70 to 80 transactions in certified home health on an annual basis. For hospice, that number ranges between 40 to 60.

For context, in HCBS, there have recently been between 10 to 14 transactions per year.

Not panicking yet

Despite the uncertainties associated with venturing into Medicare home health care in 2023, demand is still relatively strong.

“I think broad-based buyers, meaning those that aren’t just in one vertical, are always looking for opportunities,” Les Levinson, co-chair of the transactional health care practice Robinson & Cole LLP, told HHCN. “Certainly the turmoil recently in Washington D.C., adds another layer of uncertainty to the market generally, but I don’t necessarily see certain firms going after other areas looking for stability because I think the stability [in home health] is fine.”

Kulik called it “guaranteed demand” when taking into consideration the macro trends in the aging U.S. population.

“It’s overwhelming,” Kulik said. “If that wasn’t there, we’d have a big question mark. However, for the next 30 to 40 years, as the boomers get older, there’s an enormous demand for these home health care services.”

It’s easy to forget, Levinson said, that the home health market is still so fragmented. Major headline-grabbing deals like the ones made by UnitedHealth Group (NYSE: UNH) and Humana Inc. (NYSE: HUM) can sometimes cloud that reality.

Most of the M&A activity in home-based care is still in the mid- to lower-mid market.

Investors in the home-based care space are calloused to some of the headwinds by now, too. Labor shortages aren’t new. Reimbursement uncertainty and inflation are real, but will always be there.

“For people in the space, I expect that if they’ve been doing it for a while then they’ll be in it for the foreseeable future,” Levinson said. “They’re always keeping an eye on reimbursement pressures but they know that that’s going to be an ongoing factor. That just forces these investors to keep their eye on the ball and make sure they batten down the hatches.”

The post Given Reimbursement Challenges In Home Health Care, Investors Are Beginning To Look Elsewhere appeared first on Home Health Care News.

Private equity investment remains down in health care services. But the firms active in home-based care will likely have a major impact on the industry in the near future.

The decisions those firms make – while entering or exiting – will have a lasting impact.

In the second quarter, there were 164 PE deals across health care services in the U.S., which is the lowest mark since the second quarter of 2020, according to PitchBook’s health care services report, released this week.

“It was a bigger drop than expected in terms of deal activity,” Rebecca Springer, lead health care analyst at PitchBook, told me. “I thought that we had probably hit close to the bottom in Q1, but then we dropped over 20%.”

Private equity dealmaking has been affected by higher inflation and the subsequent higher interest rates. While inflation is easing, interest rates have not yet followed.

Because of that, the home care, home health and hospice M&A environment has been affected in multiple ways. Some of the dominoes have already fallen, while others could fall any time now.

Firstly, different types of transactions are getting done. Private equity firms are opting to go ahead with “platform deals” to get into home-based care.

At the same time, there are multiple, massive PE investments that have nearly run their course. When they officially do – and PE firms exit their current positions – the home health market could look a lot different.

In this week’s members-only, exclusive HHCN+ Update, I break down the macro PE trends – and explain how they could shake up the broader home-based care market for years to come.

PE dominoes waiting to fall

There are multiple large PE investments that have nearly run their course.

– Elara Caring is backed by Blue Wolf Capital Partners and Kelso & Company, the latter of which joined in 2018.

– Advent International acquired AccentCare in May of 2019.

– Looking further down the road, The Vistria Group and Centerbridge Partners backed the large home- and community-based services provider Help at Home in October of 2020.

– Wellspring Capital Management acquired Interim HealthCare’s parent company – Caring Brands International – in October of 2021.

All of these companies are top home-based care providers in the country.

It’s likely Blue Wolf Capital Partners and Kelso & Company are looking to exit their investment in Elara Caring sooner rather than later.

“The bank loan market is slowly improving, but it’s still a shadow of what it previously was,” Springer said. “There needs to be better access to finance some of those bigger deals. Also, the health of those older platforms is going to be pretty varied. Some are in a good position to exit; some are really not, given the current interest rate environment.”

While they have to eventually exit their investments, those PE firms also have to do so at an advantageous time, Springer said.

“I would expect that those that are not in such a good position are going to be holding on for longer,” she said. “Then, once platforms start trading, sponsors are going to be looking at what else is in the market and trying to time exits. They’re already working with multiples that are a couple turns lower than what they would have gotten in previous years.”

If they hold on too long, though, they run the risk of hurting both their internal rate of return and their fundraising on future deals.

An extension is usually available at the end of an investment, but lenders generally don’t like to see that extension realized.

“In the past couple of years, continuation funds have primarily been used for really good assets, strong assets that they want to hold onto and continue growing,” Springer said. “But in times past, … they were used to hold onto assets that have really underperformed. Generally, lenders don’t like that, and aren’t going to be supportive. But technically, it’s something you can do.”

In the end, this puts PE firms in a precarious position. AccentCare and Elara Caring are two large, solid home-based care companies.

The largest independent home health companies have been dropping like flies over the last couple of years. Humana Inc. (NYSE: HUM) acquired Kindred at Home. UnitedHealth Group’s (NYSE: UNH) Optum acquired LHC Group and is now in the process of acquiring Amedisys Inc. (Nasdaq: AMED).

Enhabit Inc. (NYSE: EHAB) announced last week that it was exploring the launch of a strategic alternatives process, which could ultimately end up in a sale.

If Enhabit is on the market, there could be one fewer buyer around to bid on the likes of Elara Caring or AccentCare. If it’s not another private equity group coming into the mix to buy those assets, it could be a managed care company.

Managed care companies – like Humana and UnitedHealth Group – have become a new group of buyers for home health assets in the last half decade.

“I think, for most private equity firms, they’re an exit opportunity,” Springer said. “Vertical payer-provider integration is not just Optum, it’s everyone. It’s just the direction that the industry is going. So, private equity has to focus on building assets that are attractive to those buyers.”

More managed care involvement in home health care specifically could cause trouble. If payers have significant in-house capabilities, they may be less likely to bend the knee and increase rates for small- to mid-sized providers.

At the same time, some home health insiders have suggested that managed care companies becoming aligned with industry advocacy efforts could be of benefit in the future.

Smaller ‘platform deals’

Despite a dip in activity, PE firms are continuing to invest in home-based care, albeit in a slightly different way.

A couple have already launched their own “platform companies,” which tend to be cheaper and less risky investments.

Havencrest Capital Management officially launched Avid Health at Home last week, and Waud Capital recently put $100 million behind the post-acute veteran Steve Jakubcanin to do the same.

“For as long as platform trades are quiet, this is one of the primary ways that firms are going to be deploying capital in this market,” Springer said.

PE firms continuing to take advantage of this opportunity would prove that it’s the macro headwinds – and not necessarily the micro ones within home health or home care – that are affecting deal flow.

The first and second quarters have also been relatively quiet in the home care, home health and hospice markets from an M&A perspective.

“There are advantages of small platform creation,” Springer said. “It can be a proprietary deal sourcing process, so you can get a better entry multiple. The group is not already leveraged, so you’re not dealing with that issue in the high rate environment. You can start out with low leverage and position it to be able to grow pretty significantly. And, it’s just less capital to deploy in a slightly riskier environment.”

As for Avid Health at Home, it’s starting local in Chicago. It launched in tandem with Havencrest’s acquisition of For Papa’s Sake Home Care, but plans to scale quickly – in the Midwest, in the Mid-Atlantic and in the Mountain West geographies.

Avid Health at Home CEO Jen Lentz told me that Havencrest did look at more “sizable” deals at first, but ultimately felt like going that route would be more complicated.

“What we found was that it would be harder to go in and really change [things], when it comes to being tech-enabled, when it comes to best practices and policies,” she said. “We weren’t really too excited about some of the things we had looked at. So we opted to pivot and go for the platform, looking for smaller, quality agencies – that really have a unique perspective on the communities that they serve – to bring them up into the larger entity.”

The post Next Wave Of Home-Based Care Private Equity Activity Could Shape Market For Years appeared first on Home Health Care News.

The new company will be dubbed “Avid Health at Home,” and Havencrest Operating Partner Jen Lentz will be the CEO.

“We are very excited about the creation of Avid as well as our partnership with FPS,” Christopher W. Kersey, founding managing partner of Havencrest, said in a statement. “With Jen’s leadership and her successful operating track record in the post-acute care marketspace, our investment in FPS represents a strategic entry point into home care and will allow Avid to establish market leadership and expand access to quality care for patients across the Chicago market.”

Based in Dallas, Havencrest is a health care-focused private equity fund with about $600 million of assets under management. The company’s strategic approach is to partner with founder-owned health care companies with EBITDA between $3 million and $15 million.

For Papa’s Sake Home Care fits the bill. Founded in 2011, the company provides home care services to the broader Chicagoland area.

“At Avid, our goal is to establish a platform that provides quality person-to-person care that leverages industry best practices as well as innovative technology,” Lentz said in a statement. “Havencrest is the catalyst to achieve that goal through our shared vision of expanding the critical role that home care plays in the larger health care delivery system.”

The plan is to begin expanding immediately. Avid is “actively exploring new acquisition opportunities” across the Midwest, Mid-Atlantic and Mountain West geographies.

Ultimately, Avid hopes to be a successful home care platform, but also a disrupter.

“We believe there is significant opportunity to innovate in home care through a focus on technology, training and quality measures,” Jett Aubrey, principal of Havencrest, said in a statement. “Home care is increasingly demanding a bigger seat at the post-acute table, and we believe that Avid is positioned to be that provider of choice for patients, providers and payers.”

Private equity involvement in home-based care has slowed of late due to macro economic factors.

But the platform formula – where PE firms hand the keys to an in-house leader – is an emerging trend.

Waud Capital recently put $100 million behind two home-based care veterans to build a home-based care company, for instance. 

“Models like that, which are going to allow firms to take advantage of a little bit better pricing on smaller agencies, while still putting capital to work without having to do big platform deals – we’re going to see a lot of that,” Rebecca Springer, senior health care analyst at Pitchbook, told HHCN in February.

The post PE Firm Havencrest Forms Home Care Platform ‘Avid Health at Home,’ Plans To Rapidly Expand appeared first on Home Health Care News.

June is upon us. The year is nearly halfway gone, and since the turn of the calendar, there have been a lot of learnings on where the home health industry currently sits — and where it may be headed.

But everything will be reset in the next month when the Centers for Medicare & Medicaid Services (CMS) drops its CY2024 proposed payment rule.

“I think, in general, the broad consensus view is that CMS will pursue completing out the second phase of the behavioral adjustments,” Scott Fidel, managing director at Stephens Inc., told me last week. “There is also still substantial uncertainty around the clawback piece of this, and whether CMS will pursue that, and to what degree. That clearly could create more volatility.”

Anything having to do with the home health business – M&A, payer relationships, staffing, operations – will be affected by that proposal.

No source I’ve talked to has expressed optimism about CMS’ plans.

Now that it’s a month out, I’m breaking down what another backbreaker from CMS could mean for the industry’s future. That is the topic of this week’s exclusive, members-only HHCN+ Update.

Mergers, acquisitions and premonitions

The first quarter of the 2023 saw a historically low amount of M&A activity.

Without clarity on even a proposed payment rule, PE firms are staying away. Strategics may be more inclined to buy up smaller providers, but many of them have griped about asking prices and the amount of high-quality providers left to acquire.

The CY2023 final rule amounted to a 0.7% increase, or $125 million increase, compared to 2022 aggregate payments. But that was due to a phasing in of the negative, permanent adjustment CMS is seeking, totaling -7.85%. Half of that – a -3.925% adjustment – was implemented in 2023. 

Providers are expecting the second half of that to come in 2024.

Strategic buyers – such as the larger home health players – may be more inclined to make deals with more certainty. They have to deal with the same landscape as the smaller providers do. For providers with a desire to dive more into value-based care, layering on home health, hospice and home- and community-based care capabilities still makes sense, despite worse Medicare fee-for-service (FFS) payment rates. 

That’s one argument.

But Medicare FFS payment rates have traditionally been the sturdy leg that providers have relied upon to do business. While the Medicare Payment Advisory Commission (MedPAC) has historically viewed those rates as too high in a vacuum, providers argue that sufficient FFS rates are imperative for them to operate. 

Without that leg to stand on, taking on Medicare Advantage (MA) patients – which providers are reimbursed far less for – becomes even more burdensome.

This is a problem that all providers – large and small – are grappling with right now.

So, while strategics may be more likely to acquire after the proposed rule than PE firms – which need a clear return on investment – there’s not certainty there.

The best evidence of that is Amedisys Inc. (Nasdaq: AMED) combining with Option Care Health (Nasdaq: OPCH), a deal that valued the former at $3.6 billion. Industry experts have speculated that Amedisys was willing to combine at this time given the future uncertainty of both MA and FFS rates.

“I don’t think there was was much surprise at all to see Amedisys announce that they are merging with another company,” Fidel said. “I think there has been a lot of focus and speculation around whether Amedisys and other large standalone home health and hospice operators would be looking to merge, just given the recent trends that we’ve already seen.”

In other words, if the biggest and baddest home health providers are potentially looking for exits, that leaves even less buyers on the market – at least for now.

PE firms may not stay away completely in 2023 and 2024, but it’s likely they will take a wait-and-see approach until there’s further certainty on what they’re getting into. And, even then, they’re likely to be picky. With that said, it is important to note many PE groups still see massive long-term opportunity in the home health market.

Gone are the days of a ripe market for consolidation where buyers can’t get enough of mom-and-pop exits. For the time being, everyone is on their own in this fight against poor payment rates. 

“Home health, hospice and home care dealmaking really took a nosedive in Q3 of 2022,” Rebecca Springer, senior analyst at PitchBook, told HHCN last month. “I expected things to pick back up a little bit more than they have, and I’m a little bit surprised that we haven’t seen more activity in the home health space.”

Innovation, service lines and staffing

Inadequate payment from CMS and MA plans are the cause in this situation. The effects are likely to be wide ranging.

Firstly, a downward trend in the amount of home health agencies in the U.S. will likely continue, but perhaps for a different reason than industry experts previously thought.

Many providers built for FFS payment will simply have to go out of business without the chance to be acquired. The payment may be too low across the board, with the cost of transitioning into a slimmer business able to take on MA patients too high.

“To get Medicare Advantage right, you have to be prepared for a sea change in your cost structure and the way that you operate your business,” Frontpoint Health CEO Brent Korte told HHCN last month. “There’s only so much change any provider can make from a clinician expense perspective. It’s impossible to get the cost structure right unless they’re completely prepared to restructure their organization.”

There have already been documented cases of home health providers going out of business due to this sea change, including Hospice and Home Care of Juneau, the Illinois-based Trinity Health At Home, and Oahu Home Healthcare. 

That’s part of the effect, which could lead to reduced home health care access. Another part, though, is fewer quality and innovative existing providers.

Plenty of providers will be in this for the long haul. But with the current payment landscape, don’t expect them to be liberal with new investments – in service lines, in sign-on bonuses, in new care models.

“Our margin is what we use to fund innovation,” Michael Johnson, the head of home health and hospice at Bayada Home Health Care, told me in March. “We have to fund our own innovation. There’s no way to do that when you’re paid [subpar] rates.”

The excitement of venturing into palliative care, hospital at home or SNF at home wanes when there’s more cash-strapped providers in the space.

Further payment cuts certainly won’t help with the No. 1 threat in home health care, either, which is still staffing. Offering competitive wages – or innovative training and retention programs – will also be at least incrementally tougher. 

“Labor costs for nurses home health aides are up – in some places, you can’t even find folks,” former VNA Health Group President and CEO Dr. Steve Landers told CMS reps on a stakeholder call that frustrated providers in March. “And one of the reasons you can’t find them is because we’re competing with the hospitals. And the hospitals have differential treatment by CMS under wage index policy.”

Landers’ argument fell on deaf ears that day. Not long after, he announced he was headed out of home health care to take the helm at a senior living organization.

If cuts continue, it may be only a matter of time before other home health leaders follow him.

The post Home Health Industry Preparing For Potential CMS Clawbacks, Rate Cuts appeared first on Home Health Care News.