Overall Transaction Activity Dipped in Q2, but Hospice M&A Remains Strong

Post-acute care transaction activity experienced a marked lull during the second quarter of 2020, as was to be expected based not only on a tumultuous health care landscape and the financial marketplace due to the COVID-19 pandemic but a post-Patient-Driven Groupings Model operating landscape.

The initial rise in COVID-19 cases nationwide in April combined with the spread of the virus across the southern and western U.S. in June certainly stressed the economy and many health care providers, but the pandemic was not only to blame for the lowest quarterly home health, hospice and home care deal volume since the third quarter of 2017. Home health mergers and acquisitions activity continues to be affected by the January 1 implementation of the Patient-Driven Groupings Model (PDGM), which was just taking hold when the pandemic hit.

In all, the home health, hospice and home care industries saw just 18 deals during Q2, down from a combined 26 transactions reported during the same period a year ago, according to the latest M&A update from advisory firm Mertz Taggart. There were 27 total transactions in Q1 2020.

As has been the case since for some time now, the hospice segment led dealmaking activity during Q2 2020, with home health trailing.

“The industry is facing some major challenges at the moment, but overall, hospice has managed to remain relatively stable compared with home health and home care,” Mertz Taggart Managing Partner Cory Mertz says. “Similar to home health agencies, hospice providers saw a downturn in new admissions following the Trump administration declaring a state of emergency in late March. Unlike home health providers, though, hospice agencies aren’t also adjusting to a major payment overhaul.”

Home Health Transactions Slow

There were just five home health deals in Q2, down from the previous quarter, which saw 13 transactions. The majority of these transactions were paired with hospice deals, or were highly targeted.

The decline in standalone home health deal volume was to be expected, as the industry was already prepped for a cautious approach to dealmaking after the implementation of PDGM on January 1.

Still, more data needs to surface in order to get a full picture of PDGM’s impact, especially in the wake of COVID-19. Early data analyses suggest providers have been able to mostly navigate the payment model’s cash flow impact, though cash flow hasn’t fully recovered to December 2019 levels.

“There was an automatic gap in valuations between buyers and sellers, and the only way to settle that gap is through data,” Mertz says. “We needed to see the first three to six months of data under PDGM before we could really establish a fair market value. This has been exacerbated by the COVID-19 crisis, which skews the data from late March onward.”

One of the rare standalone home health deals that took place in the quarter was Lafayette, Louisiana-based LHC Group Inc.’s (Nasdaq: LHCG) joint venture with Orlando Health, a nonprofit health care organization that operates in nine Florida counties.

The deal helps LHC Group gain even more of a foothold in a market that has been successful for the company. Other targeted deals included  The Pennant Group Inc. (Nasdaq: PNTG) announcing in early July it had purchased two home health agencies with multiple locations throughout southeastern Idaho and northern Utah.

Hospice Stays on Top

Despite the overall decline in transactions, hospice maintained its stronghold on M&A activity in the post-acute care space during the quarter.

With 13 transactions — compared to 14 in Q1 — hospice is one of the few industries that has remained relatively unscathed during the public health emergency.

The highlight of all transactions that took place in Q2 was the Amedisys / AseraCare acquisition. Amedisys acquired AseraCare for a cash purchase price of $235 million. AseraCare Hospice cares for a daily census (ADC) of 2,100 patients and employs more than 1,200 hospice professionals in 44 locations across 14 states, generating approximately $117 million in annual revenues.  The transaction also included a tax asset for $32 million, bringing the net purchase price down to $203 million, or approximately $97k/ADC.

“Hospice doesn’t appear to have missed a beat, as transaction totals are in line with what we’ve seen over the past year,” Mertz says. “Nothing has really changed for hospice. It was an investment target before COVID-19 and continues to thrive despite the public health emergency, remaining relatively easy to finance. This makes hospice even more attractive to the investment community.”

Among the hospice transactions to take place in the quarter was Choice Homecare’s purchase of Nextgen Hospice, a Houston, Texas-based provider.

Additionally, Dallas, Texas-based Three Oaks Hospice acquired hospice assets from VeraCare Hospice, Hospice Partners of Kansas, and AMED Management.

Looking ahead, Mertz Taggart expects to see continued strength in hospice, barring a significant threat of reimbursement changes or payment cuts.

Home Care M&A Activity Plummets

The second quarter of 2020 saw a sharp dropoff in home care deals, with only three transactions reported, compared to seven deals in Q1.

However, the decline in home care transactions isn’t due to a lack of investor interest.

“There just isn’t a lot of investible, quality home care agencies on the market, and this is likely impacted by COVID-19 to some extent,” says Mertz.

One notable deal that took place during Q2 was home care franchise company Senior Helpers’ purchase of hospice companion provider Lowcountry Companions.

“Our acquisition of Lowcountry Companions strategically expands our reach in South Carolina allowing for more growth of in-home and hospice care opportunities,” Amy Petersen-Smith, owner of Senior Helpers of Charleston, said in a statement.

The most recent home care deal was announced by Addus HomeCare Corporation (Nasdaq: ADUS) on July 1. The company unveiled its plans to buy Kalispell, Montana-based home care provider A Plus Health Care Inc.

Looking Ahead

With the impact of payment changes still not totally realized and COVID-19 cases still spreading across the country, the dealmaking landscape will likely continue to be stressed for the foreseeable future. Yet the steady presence of hospice deals bodes well for the overall market outlook despite the uncertainty from the pandemic.