The COVID-19 emergency has wreaked havoc on the U.S. and global economy, with nearly every industry feeling the impact of virus-related restrictions. Yet despite the stresses resulting from the pandemic, both behavioral health and home-based care M&A remain relatively strong.
Behavioral health and home-based care are certainly not immune to the impact of the virus on their operations, but the short- and long-term outlooks for both segments are largely positive with hospice, addiction treatment and mental health sub-sectors poised to do especially well. Demand for these service lines remains steady, even amid the coronavirus.
Behavioral Health M&A
Interestingly, behavioral health M&A, which includes addiction treatment, autism/IDD and mental health — has not dropped off significantly in light of the pandemic. With 10 deals mid-quarter, the industry is on track to remain in the ballpark of Q2 2019 (27 deals) and Q1 2020 (22 deals).
“On the behavioral health side, especially addiction treatment and mental health, this pandemic will unfortunately create more demand as people struggle with their new realities,” says Mertz Taggart Managing Partner Kevin Taggart.
While the coronavirus might lead to a modest slow-down in transaction activity in the short-term, behavioral health will likely be one of the quickest industries to bounce back, with addiction treatment and mental health being especially attractive. Mertz Taggart has seen a renewed interest from buyers since the pandemic, because behavioral health is considered an essential service, and for the most part has weathered the storm much better than other industries.
“While interest in addiction treatment deals has cooled in recent years, we’re expecting things to start picking back up as we move through 2020,” Taggart says. “COVID-19 will weed out some providers and will lessen competition in the addiction recovery space, where we’ve recently seen record census for the well-run companies nationwide.”
Outpatient services such as Medication Assisted Treatment (MAT), traditional mental health and addiction treatment services, and the ability to negotiate in-network contracts with commercial payers will make such providers especially attractive to buyers.
Home Health, Home Care, Hospice M&A
Meanwhile, home-based care — including Medicare-certified home health, hospice and non-medical home care — has taken more of a hit, with only nine transactions quarter-to-date, compared to 25 deals in Q2 2019 and 27 deals in Q1 2020. That represents a fall-off of about 30-35%.
But even before COVID-19, industry experts were predicting a drop in home health M&A in 2020, largely due to the implementation of the Patient-Driven Groupings Model (PDGM) payment system overhaul for home health, which took effect Jan. 1.
“We may have had a few deals get pushed back or killed due to COVID-19, but most of this dip is a predictable result of PDGM,” Mertz Taggart’s Cory Mertz says. “Buyers want to wait until the dust has settled on PDGM and see how potential targets perform under the new model, which requires at least a few months of financial and patient data.” We believe we’ll start to see more home health companies come to market in the second half of 2020. The fall-out from PDGM hasn’t been as bad as many had predicted, with many home health agencies performing better under the new system.
While select home health transactions will prevail in the short term, they’ll likely be highly strategic, paired with hospice, or rescue deals. Additionally, despite demand, COVID-19 adds a degree of complexity because home health providers aren’t currently being reimbursed for providing telehealth services, resulting in additional financial strain.
Meanwhile, hospice M&A remains hot. Q1 2020 saw more transactions in the space than ever before, continuing a two-year upswing. Again, that isn’t surprising, but rather a strategy many buyers have adopted amid pausing home health transactions.
And while hospice has had to endure some business challenges amid the coronavirus, those have been less disruptive than those in home health.
COVID-19 Buyer Motivations
Strategic buyers are still pursuing M&A opportunities in behavioral health and home-based care, and they’re financially equipped to do so. However, most executive and operations teams are currently consumed with COVID-19, meaning M&A is taking somewhat of a back seat in the short term.
Private equity companies are also re-deploying a portion of their dry powder to keep holdings in harder hit industries afloat. Plus, travel for due diligence is difficult right now, and banks — which typically provide new funding for deals — are exercising caution, as they’re writing off significant amounts of debt for bleeding industries.
“Banks’ focus right now is on salvaging what they can from those investments, so their ability to lend will change, as will their standards,” Mertz says. “They will mostly likely not be able to be as aggressive as they were in 2019, but for essential healthcare companies we believe the lenders will come back in Q3 or Q4 of 2020.”
One piece of good news is that more PE buyers than ever are showing interest in behavioral health and home-based care, and they’re still sitting on record levels of capital.
In the short term, deal activity will likely rise steadily in home-based care and behavioral health, especially in hospice, addiction treatment and mental health. But throughout 2020, many of those deals will be smaller transactions with EBITDA below $5 million.
Valuations will likely remain flat for larger deals and down modestly for smaller companies.
“Valuations almost definitely will not be going up, but for well-run companies we don’t expect them to go down much, if at all, either,” Taggart said. “For individual companies that are considering a sale, valuations will depend on where you are in your COVID-19 recovery. Those companies that haven’t yet fully recovered, but expect to, may still be able to command ‘as-if’ pricing, but the buyer will likely want the seller to take on some of that recovery risk in the form of an earnout or other structure.”
Ultimately, well-run behavioral health and home-based care companies have an optimistic future ahead on the other side of COVID-19.
“All said, we expect we’ll continue to inch back toward normalcy,” Mertz said. “We expect deal volume to get back to near-normal levels by mid-2021. It seems like a long time, but companies that are recovering and going to market today likely won’t close until Q4 2020 or Q1 2021.”