An international private equity fund that aims to make a social impact with its investments is now tying itself to home health care in the U.S. To read more click here… HomeHealthCareNews

Public Company Buyers Bolster Transaction Activity in Q3 Home health, home care, and hospice transaction activity remained relatively steady in the third quarter of 2019, according to the latest data from M&A advisory firm Mertz Taggart. Publicly traded companies largely led the way. Overall, there were at least 29 home health, home care, and hospice transactions in Q3 2019, three more than the 26 total deals that transpired in Q2. This past quarter was the most active from a transaction perspective since the second half of 2018. “We saw a lot more activity from the public companies like LHC Group Inc. (Nasdaq: LHCG) and Encompass Health (NYSE: EHC) this quarter,” Mertz Taggart Managing Partner Cory Mertz says. “In the recent past, private equity has really been the catalyst.” Despite the active quarter, year-to-date deal volume is down through Q3 2019 compared to the same period last year (78 deals in 2019 vs. 95 in 2018). This is largely due to the drop in Medicare-certified transactions, which have declined by a substantial 30% through the first three quarters of 2019 (35 deals vs 50 in 2018). Note: Total sector transaction data reported by Mertz Taggart is not equal to the sum of all individual sub-sector deals, as many sub-sector transactions fit into more than one category. Home Health Care Thanks to some of the big public companies, the home health care sub-sector saw an uptick in deal activity in Q3 2019. In total, there were at least 13 deals for Medicare-certified home health assets in the most recent quarter – roughly in line with the 12 deals that took place in Q2. Lafayette, Louisiana-based LHC Group was responsible for at least six of those transactions during the quarter, as the home health giant continued to ramp up the joint-venture strategy it has historically hung its hat on. Among its moves, for example, LHC Group announced in early August that it had finalized a joint venture (JV) expansion agreement in Missouri and formed a new JV partnership in Alabama — all while purchasing the assets of two home- and community-based services locations in Ohio. “We are excited by this opportunity to expand our footprint in these important markets and provide quality in-home care for even more patients,” Keith Myers, LHC Group chairman, and CEO said at the time. “Providing quality service, for both our partners and the patients we serve together, is our highest calling.” [Meanwhile, Addus HomeCare Corporation (Nasdaq: ADUS) was also notably active in Q3. Among its deals, for example, the Frisco, Texas-based home care services provider announced it acquired Alliance Home Health Care LLC and affiliate House Calls of New Mexico. Addus additionally announced that it had purchased the operating assets of Foremost Home Care Inc. The largest home health deal in Q3: Encompass Health’s $217.5 million play for privately owned Alacare Home Health & Hospice, finalized in early July. Home health activity has remained steady with publicly traded companies likely due to 1) their familiarity and comfort with industry-shaping headwinds coming around the corner, including the Patient-Driven Groupings Model (PDGM), and 2) the availability of highly strategic targets. PE interest has likely dwindled slightly for the same reason, Mertz says. “Right now, it’s hard enough for a PE firm to get a handle on the industry in general, but then to figure out how PDGM might impact a target is very difficult,” he says. “They have other opportunities they can look at for now until the dust settles in home health. I would look for private equity to jump back into the mix in the second half of 2020, barring any other unforeseen regulatory announcements.” Home Care On the non-Medicare home care front, Mertz Taggart tracked at least 10 transactions during the third quarter of 2019, up from the seven recorded in Q2. The 10 home care deals in Q3 were the most since the fourth quarter of 2018, which saw at least 12 transactions. Arosa+LivHome — the PE-backed home care platform led by Ari Medoff — maintained its aggressive mentality, announcing in September that it agreed to buy care management company LifeLinks. Arosa+LivHome currently operates in more than a dozen markets across California, North Carolina, Illinois, and Texas. Similar to the home health sub-sector, Q3 saw fewer deals spearheaded by PE buyers, primarily due to a lack of attractive, scalable home care assets on the market. “Why fewer PE platform deals?” Mertz says. “In the case of home care, it’s simply a lack of supply of investment-grade platforms, which require significant infrastructure in the way of management and resources to scale.” Some organizations looking to scale home care networks have found creative solutions to this problem. For an example, look no further than the rapidly expanding ClearCare-Amedisys partnership announced in July. Hospice The hospice landscape remains strong, with several interesting transactions taking place in the quarter. In September, Dallas-based Three Oaks Hospice announced three acquisitions alone, using their recently acquired funding that they secured in May from a consortium of private equity groups. Three Oaks Hospice now has locations throughout the Dallas market, plus Fort Worth and San Antonio. “While we’ve assembled an incredible team of experienced hospice executives — both in terms of compliance and growth — our greatest strength is the company’s ability to build a culture for caregivers who do the meaningful hands-on work every day,” Andrea Bohannon, CEO of Three Oaks Hospice, said in a statement. Additionally, about a month prior to the Three Oaks Hospice news, St. Croix Hospice — a major hospice provider in the Midwest — announced the acquisition of Hometown Hospice & Homecare in Wisconsin. St. Croix Hospice now operates across more than 220 counties in Minnesota, Iowa, Wisconsin, Nebraska, and Kansas. There were at least ten hospice-related transactions in Q3 2019, down from the 14 deals that took place in Q2.

Do Your Employees Have Value? Bruce Vanderlaan, JD, Managing Director, Mertz Taggart, LLC January 29, 2020 Do your employees have value? The short answer, of course, is yes. The underlying questions are determining the value, along with the typical, “who, what, when, where, why, and how” of trying to figure out this critical component of your agency. In over 27 years of legal practice advising companies and agencies on their employees, I have encountered many situations where employees added great value and were critical to the success of their employer, as well as somewhere they did, or almost did, cost the employer the business. Throughout my practice, many clients have wanted to utilize workers as independent contractors instead of employees. There are a variety of reasons they’ve supplied for doing so, from saving the cost of employment taxes to protection from Employer/Employee liability. I would caution anyone from doing so, both from a legal perspective and from a value perspective. Legally, many states and the federal Department of Labor are stepping up enforcement and claims against such companies, which can lead to not only paying what they claim should have been paid in the first place, eating up any cost savings but adding penalties and interest on top. In addition, if you exercise a certain level of control, they can be determined to be employees anyway. I have often heard the term “1099 Employee” used. These are really mutually exclusive things. Even calling your independent contractor a “1099 Employee” could lead to re-classification, and the penalties and paybacks mentioned. From a value perspective An independent contractor has even less motivation to support and help grow your business. Being an independent contractor is a sign to many that they are not part of the team, and they are not valued, and that’s true for those looking at your agency as well. I would encourage anyone who is using independent contractors to consult with their attorney and really consider whether it makes sense for them. There may be situations where it does, but it can be risky. I have had discussions with both Strategic buyers — existing home care companies with either similar operations looking for a geographic hole to fill, or a service to provide in an area and Private Equity Groups who have money to invest in agencies that have significant growth potential about what they look for in evaluating an agency. One of the top factors is the agency’s employees. The cost of employees We have all heard about, and probably experienced, the difficulty in getting good employees. A recent report suggested an 82% turnover rate industry-wide. That’s simply not sustainable. There are many costs associated with hiring new employees, including training, and even the cost of the time it takes to think about the job duties and post an advertisement for the job. The Society for Human Resource Management has studied the problem and estimates that it costs about 38 percent of an employee’s annual earnings to replace her, which includes training and recruitment as well as the costs of the separation process and losses in productivity because of the disruption in workflow. [1] Even relatively low-wage earners have significant costs to replace. Stephen Tweed, of Leading Home Care, recently told me that the last time they used their “Bad Hire Calculator” to report using real numbers from a member agency, they came up with a cost to replace home care aides for that agency was $1,575.00 per employee. The Home Care Pulse Caregiver Turnover Calculator can also be used to give you an idea of what your costs might be. The Sasha Corporation averaged the results of 15 studies that determined average costs to replace lower-cost employees, determining an average cost of $9,444.47 per turnover. Even when the 33 percent of estimates with the highest prices were removed from calculations, replacement costs were $5,505.80 per turnover, including lost productivity, administrative costs, training, and money out of pocket. Chart course estimates it costs $40,000 on average to replace a nurse. [2] Estimating costs to replace a home health aide on the low end, using a cost estimate of just $1,500, shows it does not take long to significantly affect the bottom line of any agency. Consider that if you have 100 caregivers and 50% turnover, it is costing you about $75,000 per year to replace the ones who leave. Cutting that to 30% saves $30,000 per year and adds directly to your bottom line, puts more money in your pocket, and dramatically affects your enterprise value at transition. If you were to take your agency to market, using a 5x multiple, that savings alone would increase your agency’s value by $150,000. Couple that with the fact that not having the employee who left means not being able to provide services to your clients and patients and it’s a double whammy of reduced revenue as well. Not only can it be expensive to replace employees, but it also takes a significant amount of effort on the part of management as well. That effort could and should be spent on growing the agency and increasing its value, rather than scrambling to keep up and keep jobs filled. There are several important ways this can affect an agency’s value. The factors that strategic buyers and private equity groups consider when evaluating agencies provide good guidance to agency owners, even if there is no desire to sell. In evaluating an agency for purchase, both strategics and PEGs want to reduce their risks and to add growth opportunities. An agency with high employee turnover is risky. It’s also hard to grow when you’re spending so much time, money, and effort on replacing the people who are supposed to be helping you succeed. So, how can your employees increase your value? I frequently talk with successful agency owners about what works for them; what makes them special; and, what they have done to drive a higher value for their agency. First, it actually seems to help to set high expectations for your employees, so long as they are communicated clearly and followed consistently. Like the old saying “kids want boundaries,” employees want to know they are part of a team that has high standards. Sports teams use slogans like “A Tradition of Excellence,” and “Play Like a Champion” and they do tie new players to strong traditions and make them want to support their fellow players. Outside activities bring people together, whether it’s a regular Friday afternoon meet-up at a restaurant, a “paint night,” or a quarterly movie night, these types of activities let everyone get to know each other better, in a non-work pressure setting. If your employees like to be together, they are much more likely to want to help each other. Fun, friendly competitions work well too. Decorating competitions at holidays are enjoyed by many. Tying competitions to job duties can provide both motivation and improvement. Things like awards for accuracy or speed of turning in client paperwork help focus everyone on the critical tasks. The expense can be small, but if it’s done consistently and in a good spirit they are very motivating. Paying for training and strongly encouraging certification tells your employees you value them and want them around for the long haul. Bonuses for bringing in new business, new employees, or ideas that make the agency better encourage the type of engagement you want from them too. Some agencies have moved toward daily pay, recognizing that they sometimes can’t make it to work if they don’t. Even cost-saving employment-related actions can have a dramatic impact. One agency I spoke with changed their retirement benefit plan, which resulted in significant savings to the agency and they passed a significant part of that savings on to the employees. The fact that the agency communicated that they were looking for ways to benefit the employees, and did something concrete about it, generated a great deal of long-term goodwill from the employee toward the employer. We often talk about “revenue neutral” actions because of the language our regulatory agencies use, but this move was both revenue and employee positive. At Mertz Taggart, we are obsessed with maximizing value for our clients, not only in getting the “best deal” in a merger or acquisition, but also in strategies for growth, value, and operations. Leaders in the industry, strategic buyers, and private equity groups all value employee retention. Having and keeping good employees makes your agency better for you as an operating business, and increases its value. [1] SHRM’s Jim Dooney in an interview with Entrepreneur Magazine [2] Wilhelm Shotz, Small Business Chronicle, 2019

LOS ANGELES, Jan. 7, 2020 /PRNewswire/ — Discovery Behavioral Health, a nationwide leader in mental health services, has acquired Associated Behavioral Health Care (ABHC) of Seattle, one of the leading providers of addiction and mental health services in the Northwest with four centers located throughout greater Seattle. The acquisition which took place on December 31, 2019, caps a banner year for DBH during which it acquired four additional treatment center brands. ABHC provides medical, mental health, and substance abuse/chemical dependency outpatient behavioral health services. With four locations in the Puget Sound region in Bellevue, North Seattle, West Seattle, and Kent, it is one of the largest providers of behavioral health outpatient services in Washington State. Over its 20-year history, ABHC has built a reputation amongst the health care and legal community that is second to none. “Associated Behavioral Health is among a handful of companies in the country that provide all facets of behavioral health care. ABHC’s CEO Alex Bard and his team of acclaimed professionals has created one of the Northwest’s largest providers of psychiatry, psychology, psych testing, TMS, chemical dependency counseling and assessments, domestic violence and medication management services,” says Joe Tinervin, MSW, Division President at Discovery Behavioral Health. The acquisition of ABHC comes at a time when the national opioid crisis continues to engulf the nation and specifically, the Pacific Northwest. Two people in Washington state overdose on opioids each day, according to the Drug Enforcement Agency. Recently, a new deadly street drug has surfaced in Seattle, carfentanil, a synthetic, illicit narcotic 10,000 times more potent than morphine and 100 times stronger than fentanyl. Yet, only 20 percent of those who need treatment for alcohol or drug addiction in the U.S. receive treatment. Discovery Behavioral Health President & CEO John Peloquin said, “There’s a great need today for the professional treatment of substance use disorder as well as other mental health services. ABHC shares the philosophy of Discovery Behavioral Health, providing access to comprehensive, evidence-based treatment. We welcome them into our growing family of brands.” This article originally appeared in an article in  PRNewswire .

Behavioral Healthcare Stocks down 20.1% in August The Behavioral Health Composite, which tracks investor interest in the three public behavioral healthcare companies – Acadia Healthcare (ACHC), American Addiction Centers (AAC), and Universal Health Services (UHS) –was down 20.1% for the month. The S&P 500, by comparison, was down 1.8% during the same period. The BHC index declined to result from: American Addiction Centers – AAC ( ↓39.0% ) stock price dropped significantly after an up month in July. July stocks were up in anticipation of the NYSE’s approval of the AAC’s plan to regain compliance with rules about share price and market cap. In August, shares of AAC were trading below $1 again, but the company projected positive changes in the back half of 2019. The company plans to use the proceeds from real estate sales to pay off at least $100 million of debt by the end of the year and is considering proposals from third-party investment firms. Acadia Healthcare – ACHC ( ↓17.2% ) declined in August, one month after the company shared its latest earnings report, which showed that ACHC beat quarterly estimates ($0.59 per share) at $0.61 per share. The report reflected an increase in revenues, which were offset by a higher increase in expenses. Universal Health Services – UHS ( ↓4.2% ) had a down month after a strong July. But UHS stock outlook remains strong for the back half of 2019. In August, UHS stocks were the closest on trend to the S&P 500 when compared to the remainder of the BHC. For the last twelve months (LTM), the BHC lags well behind the S&P 500 at a -24.2% loss while the S&P held at +0.2%. Valuation – Public Comps Below are the Enterprise Value / EBITDA and Enterprise Value / Revenue ratios for AAC, ACHC, and UHS. The valuations provide a relative barometer for what smaller companies can expect. Given the higher relative risk of smaller companies (e.g., less liquidity, smaller revenue base), we typically (though not always) see multiples that are lower than those of the public companies. Stock Prices Company 8/30/19 AAC $0.60 ACHC $26.46 UHS $144.58 Enterprise Value/EBITDA Company 8/30/17 8/30/18 8/30/19 AAC 16.45x 12.30x N/A ACHC 13.27x 11.75x 11.65x UHS 8.44x 9.39x 10.31x Enterprise Value/Revenue Company 8/30/17 8/30/18 8/30/19 AAC 1.41x 1.55x 1.55x ACHC 2.56x 2.29x 2.00x UHS 1.42x 1.52x 1.56x M&A News August 5, 2019 – Kadiant, an organization that provides high-quality Applied Behavior Analysis (ABA) therapy and other services to individuals diagnosed with autism spectrum disorder (ASD), announced that it has partnered with Behavioral Education for Children with Autism (BECA), a provider of ABA services in centers and school-based settings. BECA is the fifth ABA practice to join Kadiant since its founding in early 2019. BECA was founded in 2001 by Dr. Tracy Guiou to meet the growing need for behavior analytic services in Southern California. This partnership expands Kadiant’s services into Southern California for the first time. August 5, 2019 – Formation Capital and Safanad Limited announced the sale of their portfolio company, RHA Health Services LLC to Blue Wolf Capital. RHA is a comprehensive provider of services to individuals with intellectual and developmental disabilities (I/DD), behavioral health needs, and substance use challenges. RHA has operations in Georgia, Florida, North Carolina, and Tennessee, serving 25,000 people each year across 440+ locations. August 25, 2019 – Vizion Health, LLC assumed co-management with Focus Treatment Centers in Chattanooga, Tennessee. Vizion is a privately owned healthcare company in Charlotte, NC. Focus is a 48 bed residential center for substance abuse and eating disorder treatment, offering care ranging from detox to outpatient services.

Behavioral Health Care Stocks Up Again – 8.1% in March, Driven by AAC’s AdCare Acquisition. For the fifth straight month, the Behavioral Health Composite, which tracks the performance of the three largest behavioral health companies – American Addiction Centers (AAC), Universal Health Services (UHS), and Acadia Healthcare(ACHC) – rallied again, up 8.1% in March. This is in spite of significant losses in the broader market, with the S&P losing 1.4%. Investors cheered AAC’s acquisition of AdCare…. ACC (­ ↑ 18.6% ) drove the composite, still rallying from its positive Q4 2017 earnings release in February. However, the real boost came after announcing on March 1 the completion of its acquisition of AdCare for $85 million. “This transaction brings approximately 15% additional in-network and public payor revenue and EBITDA to AAC’s portfolio , thereby de-risking it, as the company’s out-of-network revenue is reduced from 77% to 65%,” said Kevin Taggart, Managing Partner at Mertz Taggart. The transaction was also accretive. AAC was trading at approximately 11x AEBITDA as of the date of the closing while paying 10x for AdCare’s $8.5 million in AEBITDA. AAC management has also identified approximately $3.9 million in total synergies over the next 12 months, bringing its Pro-forma multiple down to an attractive 6.9x . ACHC ( ­ ↑ 3.5% ) continued to increase from its positive Q4 2017 earnings release in February. The company reported earnings of $0.61 per share and beat analysts’ expectations by 13%. The company also saw EBITDA and earnings increase by 2.7% and 3.4% year over year, respectively. UHS ( ↑ 2.1% ) rose slightly after having a down month in February. The company also had a positive earnings surprise, reporting $2.00 EPS vs. estimates of $1.84. For the last twelve months (LTM), the BHC lags the S&P by approximately 5%. For the past five months, however, the BHC beats the S&P by nearly 22%. Valuation – Public Comps Below are the Enterprise Value / EBITDA and Enterprise Value / Revenue ratios for AAC, ACHC, and UHS. The valuations provide a relative barometer for what smaller companies can expect. Given the higher relative risk of smaller companies (e.g., less liquidity, smaller revenue base), we typically (though not always) see multiples that are lower than those of the public companies. Stock Prices Company 3/31/18 AAC $11.48 ACHC $39.18 UHS $118.41 Enterprise Value/EBITDA Company 3/31/16 3/31/17 3/31/18 AAC 18.63x 13.27x 12.40x ACHC 18.33x 12.20x 11.45x UHS 9.57x 9.54x 8.79x Enterprise Value/Revenue Company 3/31/16 3/31/17 3/31/18 AAC 2.97x 1.46x 1.70x ACHC 3.93x 2.52x 2.35x UHS 1.75x 1.66x 1.46x M&A News March 1, 2018 – AAC Holdings, Inc. announced today the completion of the acquisition of AdCare, Inc. for $85 million. AdCare is one of the leading providers of addiction treatment in New England with ~8,000 hospital and residential admissions and over 116,000 outpatient visits per year. AdCare’s facilities include a 114-bed hospital for substance abuse treatment, including detoxification and rehabilitation services, and five outpatient centers in Massachusetts and a 59-bed residential treatment center, and two outpatient centers in Rhode Island. The acquisition also includes the purchase of 1-800-ALCOHOL™, a nationally recognized referral phone line, and other toll-free numbers that together generate ~50,000 calls per year. March 2, 2018 – BayMark Health Services announced the acquisition of Canadian Addiction Treatment Centres (CATC), the largest opioid addiction treatment provider in Canada. The acquisition includes 72 Opioid Treatment Programs (OTPs), 19 pharmacies, and 1 residential treatment center located in Ontario. This acquisition positions BayMark as the largest provider of opioid addiction treatment in North America with 167 locations across the U.S. and Canada. March 2, 2018 – Gateway Foundation acquired Beacon House of Pacific Grove. With two locations in Pacific Grove, Beacon House treats men and women seeking to realize a lifetime without drugs and alcohol. The nonprofit partnership expands Gateway’s national alcohol and drug treatment programs to California. March 28, 2018 – Banyan Treatment Center recently announced it has acquired the 68-bed Clearbrook Manor in Laurel Run, Pennsylvania. Clearbrook Treatment offers services such as detox and residential services, with the acquired Clearbrook Manor including a 22-bed detoxification unit and sub-acute medical station. The deal will extend Banyan’s reach to seven locations over four states. Follow the link to see Behavioral Health Composite – April 2019 .

Behavioral Healthcare Stocks Down 9.6% in August & September Analysts have become a little nervous about American Addiction Centers for two reasons: 1) very disappointing Q2 earnings, missing consensus estimates by 50%; 2) spurring uncertainty about what AACs future business will look like after a substantial makeover in both operations and marketing. “Over the past two years, the company has transformed itself from a handful of highly profitable out of network centers with significant toxicology revenue to a more diversified (and sustainable) service provider,” said Cory Mertz, Managing Partner with Mertz Taggart. “It may take a while for this to shake out and for analysts to get comfortable with this evolving model. In other news… Acadia Healthcare – ACHC ( ↓12.8% ) fell in the month of September, after an up and down August. As mentioned in the previous newsletter, ACHC reported Q2’18 earnings on July 31st which provided for lower revenue and earnings per diluted share 2018 guidance. In September, analysts said the US psychiatric hospital building boom is leading to increased competition for the most profitable managed care and Medicaid patients, resulting in declining revenue for these business lines. This has been compounded by the economic instability in the UK related to the uncertainty around Brexit. ACHC’s UK operations account for 37% of the company’s total revenue. Universal Health Services – UHS ( ↑5.3% ) continues its steady performance, which is to be expected for a more mature, diverse organization, rising consistently throughout the month of August and September, likely due to positive Q2’18 earnings reported at the end of July. For the last twelve months (LTM), the BHC was behind the S&P 500 at an 11.9% loss relative to the S&P’s gain of 15.2%. Valuation – Public Comps Below are the Enterprise Value / EBITDA and Enterprise Value / Revenue ratios for AAC, ACHC and UHS. The valuations provide a relative barometer for what smaller companies can expect. Given the higher relative risk of smaller companies (e.g., less liquidity, smaller revenue base), we typically (though not always) see multiples that are lower than those of the public companies. Stock Prices Company 9/30/18 AAC $7.63 ACHC $35.20 UHS $127.84 Enterprise Value/EBITDA Company 9/30/16 9/30/17 9/30/18 AAC 19.69x 14.26x 11.58x ACHC 15.98x 12.90x 10.57x UHS 9.22x 8.61x 9.36x Enterprise Value/Revenue Company 9/30/16 9/30/17 9/30/18 AAC 2.44x 1.61x 1.56x ACHC 3.39x 2.62x 2.13x UHS 1.66x 1.46x 1.51x M&A News September 14, 2018 – Advanced Recovery Systems (ARS) has purchased the real estate of The Treatment Center (of the Palm Beaches) out of bankruptcy and plans to open the facility near its South Florida corporate home base in 2019. Over the past five years, ARS has expanded from one location in Orlando, Fla., to eight locations, with facilities in Maryland, Ohio, Washington, and Colorado, as well as additional properties in Florida. September 13, 2018 – Fulcrum Equity Partners announces the creation of City Line Behavioral Healthcare LLC, and the acquisition of Life of Purpose Treatment Centers. City Line Behavioral Healthcare LLC will act as the holding company to own its current and future behavioral healthcare assets. City Line Behavioral Healthcare’s core focus will be in identifying, acquiring, and integrating treatment centers throughout the greater mid-Atlantic and southeastern U.S. Life of Purpose Treatment Centers were created in 2013 by Founder Andrew Burki. The program provides services specifically designed to assist emerging adults who have a desire to focus on their education, vocational training, and/or professional development. September 6, 2018 – Summit BHC (Summit), a leading provider of addiction treatment and behavioral health services, today announced the acquisition of St. Gregory Retreat Center. Located in Bayard, Iowa, the 56-bed facility is Summit’s first property in Iowa and brings the Company’s total number of operating facilities to fifteen. Now known as St. Gregory Recovery Center, the facility is a CARF-accredited addiction treatment center. The acquisition also includes a second property located in Adair that the Company will utilize to expand services and beds. Mertz Taggart provided exclusive M&A advisory services to this transaction, representing the seller. September 5, 2018 – PSA Behavioral Health Agency, a nonprofit behavioral health services provider in Arizona, has reached an agreement to purchase the Epicenter clinic from the Institute for Mental Health Research (IMHR). The Epicenter, located in downtown Phoenix, was created to provide early intervention programs for individuals who have symptoms of psychosis. August 31, 2018 – BayMark Health Services announced the acquisition of Counseling Solutions, a medication-assisted treatment provider with locations in Chatsworth, GA, and Brasstown, NC. MedMark Treatment Centers provides outpatient medication-assisted treatment (MAT) for opiate addiction and dependency. Medication-assisted treatment is the use of medications, such as methadone and buprenorphine, in combination with addiction counseling and behavioral therapies, to provide an evidence-based, comprehensive approach to recovery. August 29, 2018 – Frazier Healthcare Partners announced the acquisition of Caravel Autism Health, a leading provider of Applied Behavioral Analysis (“ABA”) therapy to children on the autism spectrum. Caravel operates nine clinics across Illinois and Wisconsin, providing in-home, individualized treatment programs. The investment will allow Caravel to pursue geographic expansion and additional treatment models as well as invest in technology. August 20, 2018 – SOC Telemed (SOC), the leader in acute care telemedicine, announced the acquisition of behavioral health telemedicine company JSA Health. The JSA team will join SOC Telemed in providing 24/7 access to high-quality telePsychiatry care for a wide variety of settings, including emergency departments, community health clinics, educational institutions, and more. August 6, 2018 – Hackensack Meridian Health and Carrier Clinic in New Jersey announced merger plans that will combine their services in the treatment of behavioral health and substance use disorders. Hackensack Meridian health operates 16 hospitals, more than 450 patient care locations, and physician offices in eight counties. Carrier Clinic, 100-acre rural campus in Belle Mead, N.J., provides short-term, acute care hospitalization for psychiatric illness and substance abuse for adolescents and adults. The campus includes a licensed 281-bed inpatient psychiatric hospital, a licensed 40-bed inpatient and outpatient detox, and a recovery facility. July 31, 2018 – Universal Health Services, Inc. announced that, through its UK subsidiary Cygnet Health Care, it has acquired The Danshell Group (“Danshell”). Danshell owns and operates 25 facilities with a total of 288 beds in the United Kingdom. Cygnet Health Care will operate and manage these new facilities. The Danshell facilities support and care for adults living with learning disabilities, who may also have a diagnosis of autism, in specialist supported living, residential services, and hospitals. Through this acquisition, the company expands into new service lines and new geographical areas, complementary to the existing UK portfolio. Follow the link to see Behavioral Health Composite – October 2018

Behavioral Health Care Stocks Down – 2.2% in April. The Behavioral Health Composite, which tracks investor interest in the three public behavioral health companies – American Addiction Centers (AAC), Universal Health Services (UHS), and Acadia Healthcare (ACHC) – was down for the first time in five months, losing 2.2% of its value. The S&P 500, by comparison, gained 2.6% for the month. April was mixed, with Acadia falling sharply on the heels of a class-action lawsuit. ACHC (­ ↓ 7.2% ) fell on news of a class-action lawsuit filed on behalf of ACHC investors that purchased stock between Feb’17 and Oct’17. The lawsuit alleges that ACHC failed to disclose material information during this period. On Oct 24, 2017, the company disclosed negative financial results for 3Q’17 including a reduction to its guidance for the fiscal year 2017 and a significant cut to EBITDA relating to its U.K. facilities. On this news, the price of Acadia’s shares plummeted 26%. AAC ( ­ ↑ 2.4% ) continues to increase from its positive boost from the announcement of the $85MM AdCare acquisition, which was completed on March 1st. UHS ( ↓ 1.9% ) fell slightly as the company’s earnings fell short of its Q1’18 estimates. The company reported adjusted EPS of $2.45 per share versus Wall Street estimates of $2.59 per share. During Q1’18, behavioral health services adjusted admissions increased 1.6% and adjusted patient days increased 0.4% as compared to Q1’17. On a same facility basis, behavioral health care services net revenues increased 3.0% YoY during Q1’18. For the last twelve months (LTM), the BHC surpassed the S&P 500 at an 11.6% gain relative to the S&P’s gain of 10.9%. Valuation – Public Comps Below are the Enterprise Value / EBITDA and Enterprise Value / Revenue ratios for AAC, ACHC, and UHS. The valuations provide a relative barometer for what smaller companies can expect. Given the higher relative risk of smaller companies (e.g., less liquidity, smaller revenue base), we typically (though not always) see multiples that are lower than those of the public companies. Stock Prices Company 4/30/18 AAC $11.33 ACHC $35.58 UHS $114.20 Enterprise Value/EBITDA Company 4/30/16 4/30/17 4/30/18 AAC 19.23x 12.23x 12.30x ACHC 20.90x 12.10x 10.91x UHS 9.78x 9.15x 8.59x Enterprise Value/Revenue Company 4/30/16 4/30/17 4/30/18 AAC 3.06x 1.35x 1.69x ACHC 4.43x 2.47x 2.23x UHS 1.79x 1.57x 1.40x M&A News March 19, 2018 – Learn It Systems acquired The S.P.A.R.K.S. Group. Learn It Systems, an LLR Partners-backed company, provides high-quality, research-based ABA treatment services to children in the child’s natural environment, whether that be the family home, daycare, or local community. The S.P.A.R.K.S. Group provides high-quality, research-based ABA treatment services to children ages birth through 21. March 28, 2018 – ncgCARE acquires Grace Harbor Behavioral. Founded in 2006, Grace Harbor Behavioral provides behavioral health services to children, adolescents, and adults throughout Georgia. ncgCARE is a national network of provider partners in behavioral healthcare. April 13, 2018 – Blackstone announced that it has agreed to acquire the Center for Autism and Related Disorders, a leading provider of autism behavioral health services for children and adults affected by autism spectrum disorder. The transaction is expected to close later this year. April 16, 2018 – Center For Discovery and Cliffside Malibu are merging to form the newly created parent company Discovery Behavioral Health (DBH). Private equity firm Webster Capital has owned the Center for Discovery since 2011 as a portfolio company and will now fold in Cliffside Malibu’s Southern California facilities. Center for Discovery delivers services in 11 states and Cliffside Malibu operates inpatient, outpatient, detox services, and sober living around the greater Los Angeles area. April 26, 2018 – Delphi Behavioral Health Group, a substance abuse treatment provider, announced it has merged with Summit Behavioral Health to expand its service offering to more individuals struggling with substance use disorder and addiction. Delphi is majority-owned by The Halifax Group, which recapitalized the Company in October 2017. The combined corporate company will be called Delphi. Summit’s centers will retain their current Serenity at Summit branding. The combined company will operate 14 facilities across six states. April 20, 2018 – Turning Point Centers, represented exclusively by Mertz Taggart, was recapitalized by InTandem Capital Partners, a New York-based Private Equity Fund. As InTandem’s addiction treatment platform, Turning Point Center plans to expand on its existing in-network payor relationships, enhance its aftercare capabilities and build out infrastructure to support its growth strategy.

Behavioral Health Care Stocks Down – 2.2% in April. After a weighting adjustment, the Behavioral Health Composite, comprised of American Addiction Centers (AAC), Universal Health Services (UHS), and Acadia (ACHC), rallied again, up 3.9% in February. This is in spite of significant losses in the broader market, with the S&P losing 3.8%. February means earnings season and Q4 2017 did not disappoint… ACHC (­ ↑ 8.2% ) led the way, reporting earnings of $0.61 per share, and beating analysts’ expectations by 13%. The company also saw earnings increase 3.4% year over year. CEO Joey Jacobs commented, “We are pleased with the overall performance for the fourth quarter. Our results met or exceeded our revised expectations. Total same-facility revenue for the fourth quarter of 2017 increased 5.6% as compared to the fourth quarter of 2016.” Wall Street cheered as ACHC’s shares rose 8% the day of the announcement. AAC ( ­ ↑ 9.5% ) reported next, with earnings of $0.10 per share vs. a consensus estimate of $0.04, or a 125% surprise . The Street rewarded the company as shares rallied 16% during the two-day period following their announcement. “Revenue, adjusted EBITDA, and operating cash flows all increased double-digit on a year-over-year basis. We continue to keep our costs down, enabling us to deliver operational efficiencies that enhance shareholder value” said Michael Cartwright, CEO of AAC. UHS ( ↓ 5.9% ) also had an earnings surprise, albeit more modest, after the market closed on 2/28 (the stock did jump nearly 9% the first two days of March). The company reports $2.00 EPS vs. estimates of $1.84. Management continued to both beat their bullish drum and allude to future (select) M&A in one brief statement “I think in our guidance, we presume that roughly half of our free cash flow will be dedicated to sharing repurchase and the other half to sort of undesignated M&A opportunities.”, said UHS’ Chief Financial Officer, Steve Filton. For the last twelve months (LTM), the BHC lags the S&P 500, losing 6.9% to the S&P’s gain of 14.8%. Optimistically, that gap has narrowed in recent months. Valuation – Public Comps Below are the Enterprise Value / EBITDA and Enterprise Value / Revenue ratios for AAC, ACHC, and UHS. The valuations provide a relative barometer for what smaller companies can expect. Given the higher relative risk of smaller companies (e.g., less liquidity, smaller revenue base), we typically (though not always) see multiples that are lower than those of the public companies. Stock Prices Company 4/30/18 AAC $9.46 ACHC $38.10 UHS $114.20 Enterprise Value/EBITDA Company 2/29/16 2/28/17 2/28/18 AAC 20.77x 13.26x 10.98x ACHC 18.40x 12.35x 11.27x UHS 8.73x 9.61x 8.56x Enterprise Value/Revenue Company 4/30/16 4/30/17 4/30/18 AAC 2.98x 1.52x 1.51x ACHC 3.94x 2.55x 2.31x UHS 1.60x 1.67x 1.42x M&A News February 13, 2018 – Summit BHC (Summit), a leading provider of addiction treatment and behavioral health services, announced the acquisition of Cottonwood Tucson. Located in Tucson, Arizona, the 65-bed addiction treatment facility will be its second facility in the state (Summit acquired Women in New Recovery, a Mertz Taggart client, in 2017) and brings the Company’s total number of operating facilities to fourteen. The financial terms of the deal were not disclosed.

Mertz Taggart follows the publicly traded home-based care companies and reports on their earnings calls each quarter. As a group, public company performance and share price serve as a proxy for industry performance and investor sentiment, respectively. Historically seen as the “ultimate consolidators”, the publicly traded home-based care trading multiples have a downstream effect on lower middle market home-based care M&A. Addus Homecare (Nasdaq: ADUS) Highlights Addus’ top line growth continued as revenue in Q1 2024 increased 11.6% compared to Q1 2023. Despite continued revenue growth, ADUS’ profitability in Q1 2024 decreased slightly when compared to Q4 2023 – gross profit margin decreased ~2%, operating income margin decreased ~1.5%, and EBITDA margin decreased ~3%. This was due to “annual merit increases and the annual reset of payroll taxes as well as compression from certain collective bargaining negotiations”, Brian Poff, CFO. Comments on the final Medicaid access rule: Disappointed that the rule maintained the proposed 80% requirement. Welcomed that the implementation period increased from four to six years. Encouraged by the positive technical adjustments made – for example, training, mileage, and PPE will be deducted from total payments before calculating the 80% requirement. Compensation will also include PTO, retirement, insurance, workers’ compensation, and tuition. In Q1 2024, ADUS began using its new value-based care management system, which is expected to develop payor relationships and assist in reimbursement rate negotiations. Key Financial Figures M&A Activity ADUS expressed that the Medicaid access rule will lead to an active M&A market as it encourages scale and impacts small providers. Dirk Allison, CEO, expressed that “acquisitions will continue to be an important part of our growth strategy at Addus.” However, the acquisition strategy is different for the personal care and clinical segments: Personal care: Allison commented, “With the Medicaid access rule finalized, we are focused on opportunities that will help us obtain the needed scale in our current personal care markets to operate more efficiently.” Clinical: Allison mentioned “We are focused on home health opportunities, which operate in certain of our personal care states where we have the opportunity to continue our growth in value-based care and to complement existing hospice operations.” Guidance For 2024, excluding M&A, ADUS expects its gross margin percentage to remain stable and adjusted EBITDA margin to remain above 11%, consistent with 2023. Aveanna Healthcare (Nasdaq: AVAH) Highlights Revenue in Q1 2024 increased 5.2% in comparison to Q1 2023. Private Duty Services (PDS) was responsible for ~90% of this increase.  Gross profit margin decreased ~2%, however operating margin increased ~1% and EBITDA margin increased ~0.5%. AVAH grew revenue and EBITDA growth by focusing clinical capacity on preferred payers. Aveanna continues to work on its strategy to successfully negotiate reimbursement rate increases. For 2024, the goal is to improve rates in GA, MA, and CA, which represent ~15% of PDS revenue. In Q1 2024, Aveanna made progress on its goal to increase the number of PDS preferred payer agreements from 14 to 22 as it added four new preferred payer agreements.  AVAH introduced a new KPI called “PDS volume indicator”. The metric will report current PDS preferred payer volumes against the total MCO opportunity. This will define the opportunity for AVAH to continue shifting clinical capacity and efforts towards preferred payors. Currently, the 18 PDS preferred payors account for 40% of the total PDS MCO volumes. With regards to preferred payor agreements in home health, AVAH achieved its goal of having an episodic payor mix > 70% with an episodic payor mix in Q1 2024 of 75%. AVAH continued to highlight the fact that there is no demand problem for its services, and that top-line growth is constrained mostly by shortage of caregivers. That said, the company expects to increase its ability to attract caregivers over the next few quarters as it negotiates acceptable reimbursement rates. Key Financial Figures M&A Activity AVAH is not in a position to pursue a growth strategy through acquisitions as it has $1.48B of debt in its balance sheet. This is high relative to EBITDA (TTM Mar. 2024 EBITDA was $128M). On a positive note, no material portion of this debt will mature until July 2028, which gives AVAH a few more years to continue to positively shift operations and increase FCF. Guidance Based on Q1 2024 results, AVAH expects revenue to be greater than $1.97B, compared to the $1.96B – 1.98B range provided in Q4 2023 earnings call, and adjusted EBITDA to be greater than $150M, compared to the $146M – $150M range provided in Q4 2023. The Pennant Group, Inc. (Nasdaq: PNTG) Highlights PNTG reported revenue of $156.9M for Q1 2024; this represents a 24.1% or $30.5M increase over Q1 2023.  Adj. EBITDA of $11.2M grew $3.2 or 41.8% when comparing Q1 2024 to Q1 2023. Pennant reported on its strategy to focus on five key areas: leadership development, clinical excellence, employee experience, margin improvement, and growth. PNTG highlighted progress in the following: Leadership development: There are now 44 CEOs and 42 CCOs, or close to 50% progress towards the goal of developing 100 local CEOs and 100 CCOs. Clinical excellence: Q1 2024’s average CMS-reported home health star rating of 4.1 and acute rehospitalization rate of 13.4% are well ahead of national averages. Margin improvement: YoY adjusted EBITDA margin improved 90 basis points (6.4% to 7.3%). Growth: This is a two-front effort involving organic growth and strategic acquisitions. On the organic front, PNTG had double-digit percentage growth YoY in same-store home health admissions and hospice ADC. Acquisitions were responsible for ~14% segment revenue growth in hospice and home health. Key Financial Figures M&A Activity Home health and hospice segment: PNTG initiated Muir Home Health, a JV with John Muir Health on 1/1/2024. Acquired a home health license and a CON in King County, Washington on 4/12/2024. Acquired South Davis Home Health and Hospice in Bountiful, Utah on 5/1/2024. Senior living segment: Acquired Capitol Hill Senior Living, a 113-unit community in Salt Lake City, Utah, including the RE. Acquired Southgate Senior Living, a 75-unit community in St. George, Utah, including the RE. Acquired, through a long-term lease agreement, the operations of Veranda Senior Living at Paramount, a 73-unit assisted living and memory care community in the Boise area. Guidance Brent Guerisoli, CEO, said that Q1 2024 was a very strong quarter, which puts PNTG on pace for the top end of their guidance. As a reminder, PNTG guided 2024 full year revenue of $597M - $634M and adjusted EPS of $0.82 - $0.91. Enhabit Home Health & Hospice (Nasdaq: EHAB) Highlights “After the evaluation of a full range of strategic alternatives with the support of external financial and legal advisors, our strategic review process has concluded” said Barb Jacobsmeyer, CEO.  EHAB did not receive any formal proposals to acquire the company and will, therefore, remain a standalone entity. EHAB believes this was mainly due to macro headwinds, including uncertain regulatory developments such as Medicare reimbursement policies. Revenue of $262M in Q1 2024 decreased 1% when compared to Q1 2023. Q1 2024 adjusted EBITDA was in line with Q1 2023. The growth strategy in home health involves stabilizing Medicare admissions, progressing with the payor innovation strategy, and increasing the utilization of clinical resources.  Medicare admissions: EHAB’s Medicare mix has steadily declined over the last year. Medicare admissions declined 11.4% in Q1 2024 compared to Q1 2023. However, this decline should slow down as EHAB’s Medicare mix is now in line with its peers.  Payor innovation strategy: Shifting volume to preferred payors has been successful – admissions on historically lower-paying contracts declined from 42% of total admissions in Q1 2023 to 29% in Q1 2024.  Utilization of clinical resources: EHAB reported that patients have become more receptive and are beginning to understand the benefits of virtual encounters, which is why the company is exploring how implementing virtual care strategically can increase care efficiency. The main priority for hospice continues to be growing census to gain operating leverage against the fixed cost structure associated with the case management staffing mode. While EHAB did not report any material acquisitions, it did report progress on its de novo strategy with the opening of two hospice locations in Q1 2024. Additionally, EHAB is targeting ten more de novo locations for the remainder of 2024. Key Financial Figures M&A Activity EHAB did not provide any updates on its M&A efforts. Guidance Enhabit maintained the 2024 full year guidance provided in the last earnings call of: Net service revenue of $1.076B – $1.102B Adj. EBITDA of $98M – $110M (or an 8.8% – 10.2% margin) BrightSpring Health Services, Inc. (NASDAQ: BTSG) Highlights Revenue in Q1 2024 was $2.6B, a 27% increase over Q1 2023 and exceeded expectations.  Pharmacy Solutions accounted for $2B of the total revenue and increased 35% over Q1 2023. Growth in this segment was further broken into the infusion and specialty business ($1.5B), which grew 44% YoY in the quarter, and the home and community-based pharmacy business ($511M), which grew 15% YoY in the quarter.  Provider Services accounted for $600M of the total revenue and increased 7% over Q1 2023. Growth was driven by “strong home health care performance as well as continued strength in our rehab business” mentioned Jon Rousseau, President and CEO. Adj. EBITDA of $130.5M in Q1 2024 represented a 13.2% growth over Q1 2023. Pharmacy Solutions: Adj. EBITDA in Q1 2024 grew 7% YoY for Q1 2024. Provider Services: Adj. EBITDA in Q1 2024 grew 25% over Q1 2023 due to cost efficiencies, economies of scale, operational quality, and volume and revenue growth. From a quality standpoint, BrightSpring highlighted the following for each operating segment: Pharmacy Solutions: Net promoter scores greater than 90 in infusion and specialty, patient satisfaction scores of 95% in the infusion business, and Continue CareRX demonstrated a 73% reduction in hospitalizations when utilized together with home health. Provider Services: The home-based primary care team demonstrated an 84% reduction in readmission for IDD patients and seniors and dual patients experienced ~50% less hospitalization than the national average for similar patients. The rehab business received a 99% customer satisfaction score. The personal care business had a customer satisfaction score of 4.4 out of 5. The hospice business was rated in the country’s top 5% of all hospice providers. Key Financial Figures M&A Activity BTSG referenced two transactions in the prior earnings call. One closed in 12/31/2023 and the second one has not closed yet. Looking into Q2, Rousseau, CEO and President, said that the “M&A pipeline remains active” and that “we’ll have a few smaller deals that will close in Q2.” Guidance BTSG increased 2024 guidance provided in the previous earnings call: Revenue: Original guidance $9.35B – $9.5B compared to the revised guidance of $10.3 – $1.08B.  Adj. EBITDA: Original guidance $550M – $564M and the revised guidance is $555M – $570M. Option Care Health, Inc. (NASDAQ: OPCH) Highlights Revenue of $1,146B was 12% higher than Q1 2023. Newer chronic therapies launched over the last year played a large part in this increase. Patient satisfaction for Q1 2024 was 93%, and the Net Promoter Score was 76.2. On 3/14/2024, OPCH disclosed the potential impact from a Change Healthcare cybersecurity incident that occurred in late February. The incident meant teams had to find workarounds to continue operating, which has resulted in certain inefficiencies and incremental costs. However, at the time of the earnings call (4/23/2024), OPCH has been able to return to the traditional ways of doing business for the most part. The most significant impact on the financials from the cybersecurity attack was the inability to submit claims to payors (from the date of the attack to the end of Q1 2024, OPCH was unable to submit more than half of their claims). This has resulted in a detrimental impact on cash flow for the quarter, but the effect will be temporary, and OPCH has not changed 2024’s guidance on CF. Gross profit increased ~$10M, but the margin decreased by 2.7% in Q1 2024 compared to Q1 2023 due to three reasons: 1) inefficiencies related to the Change Healthcare cybersecurity incident, 2) supply chain disruptions for certain acute drugs compounding inputs that led to higher-than-expected therapy costs, and 3) revenue mix as a significant component of chronic therapy revenue growth was driven by newer therapies that carry lower initial gross margins that OPCH believes can expand upward over time. Key Financial Figures M&A Activity Due to the impact to cash flow from the Change Healthcare, particularly from the inability to submit claims, “preservation of liquidity or preservation of capital was an important aspect” when it comes to capital allocation decisions, mentioned” John Rademacher, President & CEO. Additionally, Rademacher commented “the ability for us to think about capital deployment as we had before, as we get through the disruption will be something that we'll continue to put in the mind space that Mike and I are spending time and looking at where the opportunities sit and where opportunities may exist to drive strategic and economic value for our shareholders.” Mike Shapiro, CFO, added “as we go forward, I think we go back to our capital allocation policy which we've been consistent with which is we think that there are a number of M&A opportunities… there are some opportunities that are being shaken out of the tree”. Guidance OPCH revised the lower range of their 2024 guidance: Revenue: Original guidance of $4.6B – $4.8B, and the revised guidance is $4.65B – $4.8B.  Adj. EBITDA: Original guidance of $425M – $450M compared to the revised of $430M – $450M. CFO guidance for the full year remained the same at $300M. To download the .pdf version of this report, click below.

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 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 on 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 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 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 a 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. 2019 Outlook 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.

Behavioral Health Care Stocks Up – 1.9% in May The Behavioral Health Composite, which tracks investor interest in the three public behavioral healthcare companies – Acadia Healthcare (ACHC), American Addiction Centers (AAC), and Universal Health Services (UHS) – was up slightly after a down month, gaining 1.9% of its value in May. The S&P 500, by comparison, grew at the same 1.9%. Stocks were mixed, but the strength of Acadia’s Q1 2018 earnings, which produced a 12.3% return for the month, drove the composite higher. “BHC stock performance for the month is a bit misleading. While the overall composite was up ‘modestly’, if you look at ACHC and AAC, throughout the month, there were some interesting storylines.”, said Cory Mertz, Managing Partner. May means earnings season and brought mixed results among the public companies. Diving in… Acadia Healthcare – ACHC (­ ↑ 12.3% ) rebounded on strong earnings, offsetting a 7.2% loss in April (on the announcement of a class-action lawsuit). The company reported Q1 2018 adjusted earnings of 52 cents per share, which beat the consensus estimates by 8.33% and the prior year by 13%. ACHC generated Q1 revenue of $742MM, beating prior year Q1 by 9.3% and estimates by 1.89%. The growth can be attributed to the addition of more than 57 new beds to the existing facilities. The company expects to add more than 800 beds to existing and new facilities in 2018. “You’re going to see us continue to build our own beds through the joint ventures, and I think in the last six months of this year you will see an acquisition”, commented Joey Jacobs, Acadia’s Chairman, and CEO. It appears US operations are performing well and that things are getting turned around in the UK due to several factors, including increased patient volume and reduction in agency costs. American Addiction Centers – AAC ( ­ ↓ 6.5% ) was up 5% through May 22 before closing down 6.5% for the month. What caused the drop? That’s hard to pinpoint as there was no news. However, it’s worth noting Michael Cartwright sold (a relatively modest) 100,000 shares between May 21 and May 23, which seems to have precipitated the fall. While Q1 2018 revenue and Adjusted EBITDA increased by 18% and 20% respectively (adjusted EBITDA was $15.1MM) the company posted a net loss of $0.2MM. The adjustment was due mainly due to a one-time payout from AAC’s settlement with its shareholders complaining the company and some of its executives made false or misleading statements, and for not disclosing information related to the 2010 death of a California patient at a facility company had since acquired. Universal Health Services – UHS ( 0.0% ) held steady throughout the month on a mixed Q1 earnings release. The company reported Q1 2018 adjusted earnings of $2.45 per share, missing consensus estimates by 5.4%. However, the bottom line grew 17% year over year. Net revenues increased 2.9% year over year to $2.7Bn. However, the top line lagged consensus estimates by 2%. For the behavioral hospital segment, on the same facility basis, adjusted admissions increased 1.6% while adjusted patient days declined 0.4%, on a year-over-year basis. Net revenues increased 3% during the quarter under review on the same facility basis. For the last twelve months (LTM), the BHC greatly surpassed the S&P 500 at a 23.2% gain relative to the S&P’s gain of 12.2%. Valuation – Public Comps Below are the Enterprise Value / EBITDA and Enterprise Value / Revenue ratios for AAC, ACHC, and UHS. The valuations provide a relative barometer for what smaller companies can expect. Given the higher relative risk of smaller companies (e.g., less liquidity, smaller revenue base), we typically (though not always) see multiples that are lower than those of the public companies. Stock Prices Company 5/31/18 AAC $10.76 ACHC $40.19 UHS $114.98 Enterprise Value/EBITDA Company 5/31/16 5/31/17 5/31/18 AAC 20.75x 12.11x 12.82x ACHC 20.03x 11.77x 11.43x UHS 9.84x 8.75x 8.64x Enterprise Value/Revenue Company 5/31/16 5/31/17 5/31/18 AAC 2.96x 1.26x 1.92x ACHC 4.25x 2.40x 2.33x UHS 1.80x 1.50x 1.41x M&A News May 14, 2018 – Fulcrum Equity Partners acquires Liberation Way, a drug and alcohol addiction treatment facility, with participation from Vocap Investment Partners. Liberation Way has three locations in Pennsylvania currently and is targeting several geographies for expansion in the future. May 15, 2018 – Halifax Partners acquires ChanceLight Behavioral Health, Therapy & Education, a leading provider of behavioral health, therapy, and education solutions for children and young adults. ChanceLight, headquartered in Nashville, Tenn., serves nearly 19,000 clients and students each year at more than 150 locations in more than 20 states. The Company serves those with autism spectrum and other behavioral disorders. May 16, 2018 – Webster Capital acquires Behavior Development Group, a provider of Applied Behavior Analysis to children with Autism Spectrum Disorder in the southeast. They work with children with the aim of helping them achieve their maximum potential. May 23, 2018 – Elements Behavioral Health, a family of behavioral health programs located throughout the U.S., announced that it will execute an asset purchase agreement with a group of its First Lien Lenders under chapter 11 of the United States Bankruptcy Code in the District of Delaware. The business will continue uninterrupted, and operations will be supported by debtor-in-possession (DIP) financing provided by the company’s lenders. The company anticipates the transaction will move swiftly with the sale approval occurring within 4-6 weeks of the bankruptcy filing and closing to occur thereafter, subject to certain regulatory approvals.