How the PE Nursing Home Crackdown Could Affect the Home Health Industry

Pushed by the White House, federal watchdogs have a new directive – cracking down on private equity in health care.

While they’ll largely be targeting nursing homes and PE investment as part of a recently unveiled senior care initiative from the Biden administration, there will likely be ripple effects in the home-based care space.

In particular, industry insiders believe the heightened scrutiny will lead to stricter regulations and less business-friendly policies.

“Too often, the private equity model has put profits before people — a particularly dangerous model when it comes to the health and safety of vulnerable seniors and people with disabilities,” the White House noted in a fact sheet published online.

Over the past several years, private equity investors have ramped up home health, hospice and home care acquisition activity. PE action in those spaces, in fact, has arguably outpaced nursing home investment.

“In home-based care, the private equity interest has been very strong,” Angelo Spinola, the co-chair of the home health and home care industry group at the law firm Polsinelli, told Home Health Care News. “We’re seeing a lot more activity from private equity in home-based care than nursing homes, actually. People want to age at home, and that’s going to be the play for the next several decades.”

Data from M&A advisory firm Mertz Taggart supports that idea.

Between 2018 and 2019, Mertz Taggart data shows that there were nearly 250 home health, hospice and home care transactions. M&A slowed slightly at the tail end of 2019, as buyers hesitated with the uncertainty around the Patient-Driven Groupings Model (PDGM) that was scheduled to go into effect in January 2020.

Transactions picked back up in 2020, with the 59 fourth-quarter acquisitions that year breaking records. Of the 152 and 166 home health, hospice and home care deals that took place in 2020 and 2021, respectively, PE accounted for a majority.

“In my 16 years in the industry, I have never seen more private equity interest and investment than now,” Mertz Taggart Managing Partner Cory Mertz told HHCN. “It was strong pre-pandemic, and it has only gotten stronger since.”

About 5% of all nursing homes are now owned by private equity firms, according to a March 2020 working paper published by the Center for Economic and Policy Research.

PE investment outlook

Some in the home health care industry are now wondering how the Biden administration’s focus on private equity involvement in the nursing home industry will affect future acquisitions in their sector.

On his end, Mertz believes that home health care providers will continue to see ample interest from PE in the next year. One of the reasons is because the White House has specifically said it will focus on nursing home investments in light of system-wide failures exposed during the COVID-19 pandemic.

Another reason is projected industry growth and opportunity in the home health care space.

“While the public company multiples have come down over the past year or so — primarily related to staffing issues exacerbated by COVID — there have been strong regulatory tailwinds as our lawmakers have become more aware of the value of treating our most vulnerable patients in their homes,” Mertz said. “This is a result of COVID. This has resulted in multiple bills designed to incentivize home-based care.”

There’s also a big difference in how PE investors behave in already-mature industries compared to those that are still growing.

Generally, with investments in a mature industry with low upside, private investors often look for ways to cut costs and increase operational efficiencies. To maximize their return on investment, they need to manufacture profit.

Yet with investments in high-upside areas and emerging markets, PE firms may actually pump money into a company to accelerate growth.

“When private equity acquires a platform, they will usually add resources to help facilitate growth, both organically and by acquisition,” Mertz explained. “They’ll acquire a $50 million revenue company and grow it to, say, $200 million, then exit. There is usually not a lot of time and effort directed toward reducing expenses, as it won’t really move the needle in terms of returns to their investors.”

That has certainly been the case for Intrepid USA Healthcare Services, a Texas-based provider of home health, hospice and personal care services. Intrepid CEO John Kunysz previously told HHCN that PE involvement in home health care is “critical” to the industry, especially in terms of technological advancements.

“The PE firms that have a longer-term view on the industry are going to do well,” Kunysz said during an episode of Disrupt. “You will certainly have the PE firms that can come in and do short-term acquisitions, maybe do a little bit of growth and then flip it. They’re going to do fine, too. Both are required to effectively consolidate our industry. Our industry is still highly fragmented with tremendous room for growth.”

Caution ahead

Although home health care providers should feel optimistic about the enthusiasm from PE on the investment side, Spinola said there are a few things the industry should look out for.

“We’ve seen an uptick in Department of Labor audits over the last six months,” Spinola said. “I think we’re going to see the Federal Trade Commission focus on the antitrust aspect, which I think is really funny because it’s such a fissured industry, right?”

Because the home health care industry is largely made up of thousands of smaller agencies, it’s harder for the industry as a whole to coordinate like today’s nursing home industry.

“The idea of having a monopoly or being worried about private equity coming in and sort of controlling the industry as a whole, there’s no reality to that,” Spinola said.

Spinola noted that home health care providers should be focused on overall compliance, specifically when it comes to restrictive covenants.

The Trump administration, Spinola said, looked at restrictive covenants as protecting the interests of the business. The Biden administration looks at it as a restriction on the “ability for the worker to earn a living.”

“He’d like to see those types of agreements being used less frequently,” Spinola said of President Biden.

However, if the industry is going to be more heavily regulated, costs will rise, and an industry that already doesn’t have the largest margins will be navigating a different environment.

“Everything points in the right direction, but there also needs to be consideration of, how are we going to pay if the industry is going to be more heavily regulated?” Spinola said. “There’s going to be more investigations. If wages are going up, if benefits are going to go up for caregivers, how does all that get paid for?”