2018 was a banner year for mergers & acquisitions in the home health, private duty home care, and hospice industries. We saw more deals announced and closed than any year in recent history.
Total transaction volume across all three sub-sectors increased substantially, from 82 transactions in 2017 to 110 in 2018 – a 34% increase.
As we have seen over the past several years, home health led the way with 58 transactions closed. However, private duty home care saw the greatest year-over-year gain, with 45 transactions in 2018 vs. 20 in 2017 – a 125% increase. Hospice continues to gather strength as virtually all of the large, traditional home health operators vie to become the leaders in hospice as well, positioning themselves further for alternative payment models that emphasize care coordination, and enhancing their margins at the same time. There were 38 hospice transactions completed, compared to 28 in 2017.
Home health transaction volume increased again 2018, with 58 transactions closed vs. 44 in 2017. While most of the transaction volume was dominated by the public companies and large private equity-backed providers, the biggest news was the acquisition of Kindred at Home by the consortium of Humana, TPG Capital and Welsh, Carson, Anderson & Stowe in the first of its kind transaction combining a major payor, a provider and private equity.
Another monumental transaction was the closing of the LHC Group/Almost Family merger. The deal, which closed April 1, combined two publicly traded entities with a combined value (at the time of transaction) of $2.4 billion on revenue of nearly $2 billion. In addition to the combined revenue and geographic footprint (from servicing 35% of the population to 60%), the deal brought significant synergies. Josh Proffitt, LHC Group’s Chief Financial Officer, said, “In addition to the immediate benefits from the merger to the patients, families, communities and partners we are blessed to serve, we also are excited about the double-digit accretion that we will recognize in 2018. We are confident in achieving the $25 million in pre-tax synergies by the end of 2019 and look forward to additional accretion in 2019 and beyond as we continue to capture additional synergies.”
Encompass Health continued its torrid deal pace, adding 23 home health locations and 22 hospice locations in 2018. Mark Tarr, President and CEO of Encompass Health told Bailey Bryant, as was reported in Home Health Care News earlier this year, that Encompass plans to spend tens of millions of dollars to further bolster those areas in 2019.
Hospice M&A was hot in 2018, with 38 transactions closed vs. 28 in 2017 — a 36% increase. The consortium of Humana and private equity groups TPG Capital, and WCAS again made the biggest splash, announcing its $1.4 billion acquisition of Curo Health Services. Curo is a hospice provider with 245 locations in 22 states.
In October, Amedisys announced a deal to acquire Compassionate Care Hospice for $340 million. This growth by acquisition strategy would make the third-largest U.S. hospice provider. President and CEO Paul Kusserow told investors during a third quarter 2018 conference call that Amedisys is continuing its plan to add to its hospice business because of the segment’s more favorable reimbursement environment.
The numbers clearly show that hospice care has gained a solid foothold within the overall continuum of care. In 2006, there were just over 3,000 hospices in operation across the United States. By 2016, that figure jumped to more than 4,300. During that same period, Medicare spending for hospice care increased 81% to $16.7 billion in 2016. Additionally, the number of Medicare beneficiaries on hospice care grew from about 930,000 to 1.4 million.
Home care M&A saw the largest year over year gain from 2017, and was fueled by seven (7) private equity platform investments, several add-ons and the emergence of a publicly-traded private duty home care company.
KKR’s acquisition of Brightspring Health Services (formerly ResCare) for $190 million highlights the largest provider acquisition of 2018. Bain Capital acquired and combined Arosa and LivHOME out of its Double Impact fund in another multi-state transaction of 2018. Additionally, Apax Partners invested in franchisor Homewatch Caregivers. With growth-driven private equity groups as their investors, it will be interesting to see if Homewatch follows Comfort Keepers’ and Brightstar’s path from strictly franchisor into home care operator.
We also saw the emergence of a small, Canadian-based, publicly-traded (TSXV: NLH) company – Nova Leap Health. Nova Leap completed five transactions in 2018, with a concentration in New England. The company announced plans to acquire up to four additional agencies in 2019.
The Buyer Universe
Across the board, private equity groups, public companies, and other post-acute providers stepped up their involvement in acquiring agencies, with private equity of one type or another taking the lion’s share of activity. What is notable is the number of private equity platform investments, increasing from 11 transactions in 2017 to 24 in 2018, a 218% increase. While relatively small in absolute numbers compared to public company and PEG add-ons, it signals several years of deal activity ahead, as nearly all of these groups intend to grow by acquisition over the next 3-7 years.
We expect 2019 will be another active year for M&A. However, most of the growth will come from hospice and private duty home care, and for similar reasons. Both have seen a jump in private equity platform investments in 2018, which will spur on add-on investments. Both are also fairly under-regulated, at least compared to home health. And both are targets of the well-funded traditional home health-dominant operators, all looking to offer a coordinated care-in-the-home solution to the senior populations they serve.
The uncertainty around PDGM reimbursement, and specifically the 6.4% behavioral adjustment, planned by CMS, but finding significant opposition, could make 2019 a more challenging year for home health M&A. Reimbursement uncertainty tends to create valuation gaps between buyers and sellers, with buyers inclined to take a conservative approach to financial modeling, while sellers are holding out hope the behavioral adjustment will go away before it takes effect. The fluidity of this issue makes it difficult to predict when we’ll start to see more alignment with valuation prior to locking in the final rule in November.
Paul Kusserow, President and CEO of Amedisys, told Robert Holly in an interview reported in the January 16, 2019 issue of Home Health Care News:
“I still think M&A is going to continue to be largely driven by private equity. I think the pricing of M&A is going to continue to be high, particularly in hospice. I don’t see it in home health until after PDGM hits. After PDGM hits, I think there will be a lot of activity from a PE perspective.”
While we see challenges on the road for home health, they can be negotiated, and will be somewhat mitigated by a promising signal from CMS – the sector’s first payment increase (2.2%) in several years in 2019. There will continue to be significant activity in home health M&A. Whether it continues to grow at its recent pace, or that of private duty home care and hospice, or finds other drivers of activity, will make the year interesting to watch.