On Tuesday, Addus HomeCare Corp. (Nasdaq: ADUS) leaders explained the reasoning behind the pending acquisition of Gentiva’s personal care assets. They also suggested more acquisitions could be on the way.
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.”
Companies featured in this article:
