In a previous blog, we looked at the many factors driving growth in the home health care and hospice space. We’ll now look at the hospice brokers reasons why today may be the best time for providers to sell rather than wait.
While large and profitable, the hospice and home care business remains a highly fragmented industry populated by many small, privately-owned players. According to Health Care Appraisers, the top 10 home health providers hold a 26.2% market share, while the 10 biggest hospice providers have only an 18% market share.
That presents a huge opportunity for consolidation and greater efficiency, and strategic investors and private equity firms have taken notice. There were over 90 M&A deals in the first eight months of this year, surpassing all of the prior year’s activity. According to some estimates these investors hold more than $1.5 trillion in unspent capital and are eager to put it to work. Indeed, agencies are trading at very high valuations, which in turn has incented many small providers to sell. But there are other compelling reasons why agency owners might want to exit now.
While the Covid-19 pandemic certainly benefited the industry at large, many smaller agencies were overwhelmed by it and “suffered financially due to Covid,” Hospice News reports. “Many providers also saw reduced referrals and admissions from hospitals, skilled nursing facilities and senior living operators due to pandemic-related disruption.” According to a May 2020 report by the National Association for Home Care & Hospice, about 60% of hospices expected a decline in revenue due to the pandemic, with nearly 30% of them expecting revenue to drop by 15% or more.
At the same time, “hospices saw increased demand for personal protective equipment (PPE) and other scarce resources even as prices of those products skyrocketed,” Hospice News added. “A contingent of smaller organizations that tend to see slight margins were unable to take these punches. This moved many of them to sell their businesses to larger companies or private equity firms hungry for a hospice.” Many owners and their staffs are simply burnt out and want out.
One of the biggest changes in the industry that is driving market consolidation and the desire to sell is the way home health care agencies get reimbursed by the government. Beginning January 1, 2020, the Centers for Medicare and Medicare Services (CMS) replaced their previous reimbursement model, the Prospective Payment System (PPS) with a new one, called the Patient Driven Grouping Model (PDGM). At the same time, the agencies are phasing out requests for anticipated payments (RAPs), in which providers get paid in advance of providing service.
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