How New Day Healthcare Plans To Be The Face Of A Changing Home Health Landscape

New Day Healthcare has been one of the most active acquirers in home health care over the last year. As it grows, it’s looking to set itself apart from the home health company archetype of yesteryear.

At the heart of New Day’s paradigm-shifting approach lies a commitment to remote home health models, a concept born out of necessity during the pandemic. Unlike traditional setups, New Day opts for a decentralized approach, ditching corporate offices allowing for more flexibility and adaptability in delivering care.

Amidst the promise of innovation, Herman remains aware of the challenges ahead.

From the seismic shift towards Medicare Advantage, to the perennial growth and workforce management hurdles, the road ahead is full of obstacles.

Herman sat down with Home Health Care News on the latest episode of HHCN+ Talks to chat about his company’s emergence and what lies ahead.

The transcript of that conversation is below.

HHCN: Scott, let’s start with background on yourself and New Day.

G. Scott Herman: I’m a nurse paramedic by trade. I’ve got 30-plus years of home care experience. I’ve been blessed to lead and form some of the largest companies in the country, including Harden Healthcare’s home health and hospice line, Jordan Health Services, and Elara Caring. I’ve worked in nearly every type of home care company including publicly-traded, not-for-profit, and private equity.

I’m currently the CEO and founder of New Day Healthcare. We’re a provider of home health, hospice, pediatrics, home-based community care and consumer-directed and personal care services. We currently serve about 11,000 patients on average daily census and we touch nearly 110,000 patients annually.

We’re operating in Texas, Kansas, Missouri and Illinois. We have 28 locations with nearly 7,000 team members. We’ve completed nine acquisitions since formation in July of 2020 and we have a robust growth and acquisition plan for 2024.

One of the interesting things that your company does is you have a remote home health model, especially in Texas. Can you take us behind the curtain there and explain what that means?

To take you behind the scenes, a bit of background is necessary. In late 2019, I sat with a few trusted colleagues and planted the seed to start a new home care company. We wanted to be capable of meeting the demands in the changing industry. We all had previous experience in mid- and large-scale organizations, and we understood the investment models and the effort needed to create a platform company.

The climate at that time was robust with acquisitions and the market was white-hot. Shortly after our concept was born, the pandemic hit and we all know the world dramatically shifted. Although we couldn’t predict exactly what would happen, we did know that things would not be the same; access to patients was limited, providers were locked out of facilities and labor became sparse and very expensive.

Our circumstance as a new startup looking to buy a platform became really interesting and we almost immediately had to pivot from our original plan. We knew we needed to build something that needed to be way different from anything we had previously done. We needed to rethink it all. We needed to rethink everything. We gathered around my breakfast table and wrote a very intentional purpose statement consisting of eight guiding principles. These principles allowed us to rethink it all and build something that could impact how home care is delivered.

Now, we weren’t working completely blind. We’ve been heading down a continuum integration for a decade but we were not able to close the loop, mostly due to investment models and demands. Understanding what we wanted to build, we etched out how we would build this and then what we needed to get there.

Interestingly, we agreed to hold the purpose statement and commit to it. Collectively, we agreed that if we could not build a home-based company capable of innovation we envisioned, we’d simply leave the industry. In other words, if we couldn’t do it our way, we were done.

That’s where our mantra, “Burn the ships,” was born, and this will tie into that remote model. In 1519, Cortés arrived in the New World with 600 men and famously burned his ships upon arrival. This act sent a clear message to his men that there was no turning back and no options. While we didn’t limit all of our options, we did take a very narrow path that defines success. The path has three simple elements.

Firstly, build a home-based care model aligned with payer networks and the growing managed care populations. Secondly, create a technology platform that enables our provider network to identify chronic disease indicators that create illness exacerbations while building out the care networks to intervene and improve outcomes — both clinical and financial outcomes for payers and providers. Finally, refine a comprehensive solution so that it can be injected into a national provider or payer to be meaningful in scale.

Our approach isn’t new; it’s people, process and technology. The technology is our Carelytics program — a proprietary combination of software, databases, algorithms and artificial intelligence that link in real time for intervention.

Let me briefly explain Carelytics at a high level because it’s important as we discuss this remote capability: We currently collect information from 14 different EMRs and data systems. The number of data systems we can collect information from is unlimited. We then run algorithms on the data to identify tendencies, and using pattern identification, we identify potential adverse reactions.

Our algorithms stimulate alerts that automatically notify providers and caregivers of potential issues. Internally, we deploy care teams. Externally, we alert providers and make referrals. These external referrals would only be in areas we don’t cover or don’t have full-service access.

Now, let’s consider that remote model because we started New Day during the pandemic’s challenges and we had to think differently. We began at the top of the formation with our corporate office and decided the organization should be run without a corporate facility.

Throughout my nearly 30-year career, I’ve prioritized keeping overhead low and investing in clinical care rather than expensive corporate offices and support. To this day, New Day has no corporate facility and all executives work effectively remotely. We adapted to the pandemic environment and never incurred corporate facility costs. This allowed us to develop innovative solutions to meet and communicate. It works for us due to our seasoned team and experience in multi-state organizations.

In 2Q of 2020, with the pandemic at its height of uncertainty, we really began to look at the tea leaves and where we thought this changing ecosystem might be headed. Finding a growing portion of home care census was shifting to managed care, we firmly believed this pandemic would push seniors to MA plans at an accelerated pace. We began looking to acquire a provider that had a remote model capable of delivering services effectively and on some scale. We located a provider serving the entire state of Texas from a single location.

As we worked through the operation and the model, we were convinced that a remote workforce plan could work and effectively serve the growing managed care populations in a non-episodic capacity. We were able to acquire this provider, Home Care Providers of Texas, and we began to develop and scale remote-operated home health businesses. Home Care Providers had been around for 20 years so we had a good workforce and a base to build on.

Because we were creating something new, we had the luxury of building it for purpose and we weren’t burdened with the ingrained legacy process of models that are facility-tied that tend to drive increased expenses, not very much brick and mortar, so we were not dragged down with those expenses and we had a business that was very accustomed to running remotely. We had to build and insert scalable processes, which began with EMRs, finance system, contracting expertise, especially important, recruiting, hiring and training.

At the peak of the pandemic, we were hiring at an astonishing rate and we were able to move quickly to staff cases. The growth of MA plans actually accelerated at a much faster pace than we really anticipated. We had to ration admissions, pull payers based on reimbursement while we renegotiated agreements. Today, our Texas home health operations operate functionally with approximately 72% non-Medicare episodic patient mix. We’re off to a good start, but we’ve got some work ahead of us in this remote model.

Something that I put in a recent HHCN+ update, Scott, was a quote from you, basically saying that home health providers were unprepared for — and still are unprepared for — the looming MA penetration. What do you mean by that? Why do you think there’s such a lack of preparation among the home health industry when it comes to Medicare Advantage?

What I mean by the fee-for-service model being obsolete really means that the traditional episodic models have evolved. Patient mixes of 85% and 90% are unsustainable levels for home health providers, on scale anyway, and unsustainable in the foreseeable future. At least that’s what we’re experiencing internally in our markets.

The rise of Medicare Advantage and per-visit reimbursements shifted dramatically in the pandemic, maybe it’s traumatically, but it’s also dramatic. Maybe the pandemic seems to have accelerated that. According to the Kaiser Foundation, 31 million people are enrolled in Medicare Advantage Plans, accounting for more than half of the eligible population, 51%. Those 31 million people represent $454 billion or 54% of total Medicare spending — and that’s net of premiums.

The average Medicare beneficiary has 43 Medicare Advantage Plans to choose from. It’s the largest they’ve ever had. That’s an insane number to me — and that’s grown. We see how MA plans market — their persistence is winning the day. The current baby boomers entering retirement were introduced to managed care and have participated in managed care for 20 years or more. These retirees were raised in managed care plans. The stigma of managed care is not the same for those new retirees. They’ve been in those plans for extended periods, and they don’t seem to be afraid of the option limitations.

MA plans have been sweeping the pots with medication supplements, transportation, vision, dental — even cash and food. MA marketing is large-scale. It’s effective in winning market share. When we talk about market differentiators, we’ve created that option from data. Kaiser Foundation said nearly one-third of Medicare beneficiaries live in a county where at least 60% of all beneficiaries are enrolled in MA plans. Those are metro-concentrated. Communities are converting to MA plans and I’m sure it’s focused marketing that’s making it work.

Not all markets are built the same, we customize our offerings by market. Most providers we look at and work with are longer-term legacy operations. They built their business over many years in highly competitive markets. The competition for finite clinical resources demanded that home care providers step up and pay benefits and to compete. They had to compete with health systems. Having heavy traditional Medicare mixes made that possible.

This conversion of patients to Medicare Advantage meant that you could no longer manage large caches of traditional Medicare patients because they just weren’t there. Because reimbursements were so much lower, the traditional models are suffering. There’s a fundamental shift in how these organizations have to operate. Smaller providers are against the reality that they do not have the resources to create innovation, and the rising cost of labor to include wages and benefits just compounds the payments issue.

As owners see margins slip, labor costs rise. They’re just struggling to keep up. In my opinion, it’s not that providers are not willingly slow to adapt, it’s the resource constraints that make that adaption pretty difficult. Investments in technology, refining processes and taking big care model leaps are just difficult transitions. We find many providers coming to the market don’t have the contract negotiations used to meaningfully move rates and terms, and they cannot supply the compelling data needed to manage these large-scale populations. It’s just an evolution of the space. I think the slowness of adoption is really about the ability and access to resources for these smaller providers.

Resources are certainly a big part of it, but in 2024 and beyond, what can home health providers do to catch up, in your estimation?

How we prepared is we bought a large-scale statewide provider in Texas to attack the problem and create a solution. Our remote operating strategy is effective. It’s improving every day. We’ve invested in technology and the development of our paralytic software and support programs to identify patients early and intervene.

This has proven to not only be a cost-effective avenue for cross-service line referrals, but it’s evolved into a community outreach and new community patient acquisition tool. Because we’re heavily involved in the communities in which we serve, our culture and our traditional brick-and-mortar businesses in the north — which are higher producing more successful businesses in Missouri and Kansas through our Phoenix Home Care and Hospice line — are very culture-ingrained. They have pop-up meetings in the community. They don’t do them in the bricks-and-mortar buildings and the locations that they have. They go to the community. They provide meals during Christmas that can be drive-thru meals or sit-down meals. They meet their staff at coffee shops and parking lots, and that ingrains them in the community.

Because they’re ingrained in the community, the community looks to us for senior care operations. We may not have all the solutions, but the contacts that we get when the community calls us for senior care options, the contacts that we get result in database input and access to resources for patients. It allows us to follow potential patients.

We process thousands of inbound calls every day and a rapidly growing number of social media contacts. As the contact occurs, we route plans, implement care resources for the patient in all our lines and all our offerings. If we don’t have the needed services, we refer it out, but we manage the patient in our Carelytics database.

When a need is identified, we enter data into Carelytics and we do that over a thousand times every single month. These entries are run through our software and our algorithms and they help define potential needs. We get automated responses when we have a trigger to our Carelytics teams and they assess, develop plans for patients, then they make referrals, internal and external, if appropriate.

Our Carelytics is about 35% deployed for our enterprise. We have 60,000 patients in our database. In 2023, we had 18,000 clinical patient interactions and about 2,500 cross-company admissions. Approximately 200 chronic disease patients are tracked on the hospice path each month and in all our programs, we admit over 5,000 patients annually through Carelytics and that’s 35% deployed.

To address preparations, the things I outlined took a very high level of investment and commitment to do things differently. You see, “Burn the ships” isn’t just a catchphrase, we’re living it with our investment partners at Kaltroco. Not many organizations are positioned to either invest or commit to rebuilding the new provider paradigm.

If they’re large enough, they have the resources, they’re often committed to traditional models, it causes a lot of redesign and that takes time. Our startup position gave us the latitude to build for purpose and we can manage, remote and integrate traditional programs on scale. Providers have to engage data and have to find ways to engage in Medicare Advantage plans.

You’ve had an impressive run here during a mostly quiet period for the home health industry. What has been your M&A strategy? Before we get to the future, what has been your M&A strategy over the last couple of years? How have you found targets? How have you ultimately decided that they were in the right markets, that they had the right people? Then, also, how do you integrate them once you actually have agreed on a price?

We’ve got a great investment group focused and committed to doing well by doing good. Kaltroco North America is led by Kenny Hammond, the Chief Investment Officer, along with our commercial lender and co-investment partner, First Citizens, formerly CIT. They’ve been crucial not only in supporting our investments, but as strategic partners.

Kaltroco delivered innovation development from day one. They supported it. We funded it, beginning with the investment and team members before we had an asset or a real line of sight on assets. Because we committed to not working with short-sighted partners and only accepting reasonable returns, we’ve been able to be very selective in building this enterprise. We’ve kept our leverage very low, and we’re in a very liquid position in time when the industry was struggling, so our discipline put us in a very strong investment position.

Our investment position discipline is something we outlined early. Three core elements. We do not take on train wrecks. In my career, I’ve been and have seen over-optimism around turning companies around. It’s always harder, it takes longer than ever envisioned and then, it gets in the way of innovation. More often than not, the juice just simply isn’t worth the squeeze for us. We want good culture and compliance companies. Good companies begin with culture. If the cultures do not align, we simply do not chase the deal. Chasing culture, changing culture is extremely difficult, time-consuming and egregiously expensive.

Cultures develop for specific business reasons and that culture exists for a purpose. Good companies, by our definition, align with culture. If we do not align with a culture, we just don’t chase it. It doesn’t mean it’s bad; it just means it’s not for us. Good companies, by definition, do not have unresolved compliance issues. Unresolved compliance issues are troublesome; they’re most often always more problematic and reach farther than diligence uncovers.

All companies are going to have some regulatory oversight and corrective actions. That’s part of the business, and we all understand that. And by unresolved I mean no clear path to resolution. If we don’t have it, we just walk away.

Third, we have to demonstrate our capability. Back-office contracting skill and culture will produce performance and grow market share for the economy.

As we assess companies, these are the critical elements that we have to have. These three elements are core for us. We looked at over 200 companies over the past three and a half years and we bought nine because we adhere to the strategy that we will not overpay for companies. We will not engage in what became very aggressive auctions in 2020 and 2021. We simply stepped in, took a look, and stepped back. We knew that if we over-levered ourselves, if we played that position, we wouldn’t be in the spot we’re in today to move forward.

Is your M&A strategy going to change at all in 2024 and beyond? I assume the core principles are still going to be there, but is anything going to be different about the M&A strategy moving forward?

Yes, we are. Because we’re in a very good position, our leverage is low, we’re performing well, we’ve got really good diversification across our assets while taking care of 11,000 patients in four states. We’re not really impacted by one negative movement in reimbursement markets or one regulatory problem. Our ability to understand that patients are what matter, not as much the payer. The patient is what we really examine, the payer is how we fund that. A lot of organizations tend to look at payers driving their formation rather than the patient driving it.

Our M&A strategy is twofold. We’re in a great position. We’re very liquid. We’ve got lots of access to capital. We will be opportunistic for transformative assets, larger assets. We’ve been deep on several large assets over the past two years, but since the purchase of our platform company, Phoenix Home Care and Hospice, we’ve not pulled the trigger on another transformative acquisition. We would do those, but they will be based and executed on the things we discussed. It’s not a lack of capital. I said we’ve got plenty of that.

Really, the elements of culture, pricing and impact on patient mix changes closely tied to asset readiness have caused us not to pull the trigger on those. We are very interested and still looking at those. We’re seeking transformative assets of a larger size, $50 million plus. The criterion is size as well as geography, but looking to grow in the South and Midwest.

Second, we’re continuing to fill out our footprint with complementary assets. Those are in personal care and hospice in Texas, skilled and hospice in our other regions and PDN in Missouri, Kansas and Illinois. We would love to close five to seven solid transactions this year. We are open to size and scale. We would love to close more and we would like to be as aggressive as the market allows us to be in those transactions.

Layering on the services you do have in every single market — is that one of the goals?

One of the goals is to fill out our service footprint where the supporting reimbursement structure makes sense. In some states that we operate, being in the personal care, the consumer-directed care business just doesn’t make sense. In other locations, it makes a ton of sense.

In our Missouri operation where we have a pediatric business, it makes all the sense in the world because Missouri really stepped up and supported it. But in our Texas business, it’s a lot tougher. Where we have tremendous skilled care competition in Texas, we’ve got the state covered with home health and hospice. We want to layer in personal care services there. Then where we want existing footprints where it makes sense, we’ll lay in those complimentary services.

Where do you want the company to be in five years, with all the big ambitions that you have now? Where are those going to take you when we get to 2029?

Today, we touch 110,000 patients annually in that agency of about 11,000. In five years, I would be disappointed if we were not at 25,000 plus on ADC with a fully integrated Carelytics program.

Having said that, there are a number of factors that drive that growth and target, including stability to financial markets, reimbursement, state budget considerations and then of course the expansion of managed care. We do know that Carelytics is very attractive to the industry and we will have to decide at some point to hold and continue to build or let the technology move into the hands of a strategic more capable of national deployment.

Throughout 2024 and 2025, we’re focused on growing this enterprise through acquisitions and organic growth. More distant than that, we’ll be driven by the demand and the evolution of the market. We update our strategy every year, keeping a two, three-year focus.

What do you think are going to be the biggest obstacles besides Medicare Advantage?

Well, I will tell you that staffing has eased up and our recruiting strategy, tied in with our cultures, puts us in a really good position on staffing. We have very low vacancies across our organization. One of the reasons we’re able to do that: we kept corporate overhead really low and we’re able to ensure that every single employee that works for New Day — all 7,000 — is eligible for full health benefits. That’s full-time, part-time, PRN, every person at every level. If you’re a part-time employee, you’re eligible on day one.

One of the big cost pushers for smaller organizations as we go out and do acquisitions is the cost of health care benefits. They’re just rising and I will tell you that the pandemic has pushed them to unpredictable levels. Health insurance costs are rising everywhere. One of the things we do on an acquisition is we immediately implement our benefits plan and we upgrade benefits for almost everyone that we encounter. In fact, today, every company we’ve bought, we’ve upped their benefits. That doesn’t come at an additional cost to us. We actually get scale reductions at a lower cost, but those companies are benefit-positive day one.

We know that the health care paradigm has shifted. We know that cost is of essence out there. Another big obstacle to getting to our size is market conditions and the availability of quality assets. That’s probably the biggest factor. Elections will have a big impact on financial markets and investor confidence will respond appropriately. The labor markets are beginning to loosen up. We have had good success recruiting. We’re internally recruiting — with very low vacancy rates — but we’re seeing owners settle in and level set on home care market conditions that include reimbursement changes and regulatory oversight.

’21 and ’22 created very high valuation expectations. That frenzy’s a bit in the rear-view mirror. Sellers are beginning to settle on realistic value propositions. We see them either settling in and continuing to operate, letting the dust settle, or they’ve reconciled that it’s time for the value adjustments and are here to sell the company. The latter is being seen more frequently as the cost of capital rises and inflates. The quality assets coming to market might be our biggest issue in 2024. We’ve got a pretty good handle on the labor issue, at least in our enterprise, because of culture and the ability to spread benefits.

Do you have a prediction for home health care in the next year?

I think it’s all going to tie into what we’ve talked about, but the prediction is really pretty obvious. Home health M&A will open up in 2024. We’re setting expectations around pricing and whether the final deals get done or not. The free money days that drove prices up, it’s just not available at the moment.

As previously referenced, ongoing confidence and sustained revenue-earning streams will make quality assets a challenge. However, good companies will draw attention and secure solid pricing. I actually have a second prediction and it’s around Medicare Advantage and it’s probably obvious. M&A will continue to grow and home care models will evolve as they always have because home care operators are very resourceful.

The question for all of us might be, where are we on the evolution adoption curve? Answering that question might be the biggest conundrum for home care. That prediction would be, “Are you preparing? Are you advancing on this M&A front?” If you are, there’s some survivability opportunity there and the ability to thrive. If you’re not, you might want to be thinking a little more about the previous, maybe reconciling on values, and maybe selling the business.

Now, those are the predictions. Data is going to drive the world. M&A is going to require more data. They’re going to get deeper into it. For us, in our particular strategy, size isn’t as important as quality in the product we deliver. We create our Carelytics program. We show cross referrals. We show community involvement, the ability to drive new revenues. We take that information and inject it into a strategy, then, that’s how you can change the face of home care. Does that happen in 2024? Big steps in ’24, but ’25 and beyond is what we’re really looking at.