If you’re an agency owner, you may be getting overwhelmed with emails and phone calls from brokers, M&A advisors (and increasingly, buyers themselves) with catchy subject lines, or lofty promises tied to an unnamed buyer (or buyers), which can at times be hard to ignore.   If you are considering an exit or sale, how do you decide who deserves your response?  Let’s start with this fact:  Finding a quality buyer for your agency is the (relatively) easy part. Maximizing value, getting a transaction through diligence, successfully executing a purchase agreement, and closing on the transaction with few or no surprises takes skill, foresight, healthy respect from the buyer universe, and relentless advocacy on your behalf. Deciding to take your agency to market is often the biggest decision of an owner's career. Running a competitive process  to maximize value is almost always the best decision (Do What the Pros Do)  but choosing the best firm to represent you is equally important. Some of the key factors to consider are: 1. Respect/Credibility from the Buyer Universe:  The firm representing you and your business must have earned respect from the buyer universe. The credibility of the firm representing you will ultimately correlate with the buyer's confidence in marketing materials, adjustments, and negotiations. Buyers respond positively to established firms that prioritize advocating for their clients throughout the entire process while adding value to the transaction. Working towards the best deal for a client could extend or draw out a deal, but this advocacy creates a firm tone and respect from buyers.  2. Customized Confidential Approach Every M&A transaction is unique, and a good advisor will tailor their approach to your specific needs and goals. Confidentiality is paramount to a successful transaction. An advisor should prioritize confidentiality to protect the business during the period in which a transaction will take place. Oftentimes, online listings or blasts about a business going to market will give competitors and other agencies in the local market clues that your business is being sold, which can negatively impact your operations, staffing, and flow of referrals. Business owners will have different wishes and goals with an exit so while running a competitive process will always extract the most value, it can look different based on your business, objectives, and timeframe.  3. Track Record Assess the M&A advisor's track record in successfully completing transactions in the healthcare sector, particularly within the home-based care industry. Look for evidence of their ability to facilitate deals, negotiate favorable terms, and achieve positive client outcomes. Client testimonials  and case studies can provide valuable insights into their past performance.  4. Candor Engaging with an advisor is a commitment.  Trust  and integrity are critical in the M&A process. Most engagements include a one-year term plus a commitment to the firm for 18-24 months for those buyers the firm has “introduced” to the seller (also known as a tail period). Be sure the firm is not selling you on an inflated valuation just to lock you into this agreement. The right firm will create a competitive process among the best buyers in the industry and allow the market to decide value. If it sounds too good to be true… 5. Strong Communication and Negotiation Skills Effective communication and negotiation skills are vital in M&A transactions. The advisor should be a strong communicator who can articulate complex concepts clearly, facilitate discussions between parties, and advocate for your interests. They should also possess excellent negotiation skills to secure favorable terms and resolve any conflicts arising during the deal process. 6. Industry Expertise It is crucial that the M&A advisor has deep knowledge and understanding of the home-based care industry. They should be familiar with the market dynamics, regulations, trends, and key players within the sector. This expertise will help them identify potential opportunities, evaluate potential acquirers accurately, and navigate the industry's complexities.

Behavioral Healthcare Stocks down 14.8% in March 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 14.8% for the month of March. The S&P 500, by comparison, was up 1.1% during the same period. The gain in the BHC index was mainly driven by AAC. American Addiction Centers – AAC ( ↓35.9% ) fell sharply as the company postponed its conference call, which was scheduled for March 13, as it needs additional time to complete the consolidated financial statements for 2018. The company continues to have liquidity and leverage issues. The press release indicated the following highlights: (i) the census downturn experienced in the last several months of 2018 was more significant than originally anticipated, with an initial 30% drop in call volume resulting in sharply decreased admissions in Q3 and Q4; (ii) implemented over $30.0MM in annualized expenses reductions to benefit 2019 margins and (iii) closed an additional $30.0MM incremental term loan to provide liquidity into 2019. The company is also exploring alternatives to generate additional liquidity from its real estate portfolio. Acadia Healthcare – ACHC ( ↓3.6% ) decreased slightly on mixed Q4 and year‑end 2018 earnings. Q4 revenue was $743.5 million, an increase of 2.6% compared with $724.5 million for Q4 2017. Net loss per diluted share was $3.80 for Q4 2018 compared with $0.80 per diluted share for Q4 2017.  Adjusted for non-recurring items, Q4 2018 net loss per diluted share was $0.47.  Same facility revenue in the U.S. grew 3.5% in Q4 year-over-year, with a 3.5% increase in patient days and flat revenue per patient day.  Same facility revenue in the U.K. increased 4.4% in Q4 year-over-year, with a 1.5% increase in patient days and a 2.8% increase in revenue per patient day.  For the full year 2019, the company is guiding to revenue of $3.15 – $3.2 billion, adjusted EBITDA $610 – $630 million, and adjusted earnings per diluted share of $2.15 – $2.30. Universal Health Services – UHS ( ↓5.0% ) was down for the month of March.  On February 27th, UHS delivered its earnings.   EPS for Q4 came in at $2.37 while expectations were $2.34.  Revenue came in at $2.75 billion compared to estimates of $2.74 billion.  For the Behavioral Health segment, on the same facility basis, adjusted admissions rose 4.5% while adjusted patient days dipped 1.2%, both on a year-over-year basis. Net revenues were up 2% in Q4 due to higher admissions. For the last twelve months (LTM), the BHC is well behind the S&P 500 at a -30.9% loss relative to the S&P’s gain of 9.8%. 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 3/1/19 AAC $2.87 ACHC $30.41 UHS $140.80 Enterprise Value/EBITDA Company 3/1/17 3/1/18 3/1/19 AAC 13.05x 11.12x 12.00x ACHC 12.37x 11.23x 10.26x UHS 9.60x 8.66x 9.96x Enterprise Value/Revenue Company 3/1/17 3/1/18 3/1/19 AAC 1.49x 1.53x 1.18x ACHC 2.55x 2.30x 1.95x UHS 1.67x 1.44x 1.56x M&A News April 3, 2019 – Vizion Healthcare LLC announced that it has acquired Panola Medical Center, a 112-bed acute care medical hospital located in Batesville, Mississippi.  Vizion partnered with Progressive Medical Management of Batesville, LLC, Whitwell Holdings, LLC, and Java Medical Group on this acquisition.  The Panola Medical Center is Vizion’s third acquisition. Vizion currently owns two facilities in Miami, Oklahoma; Willow Crest Hospital and Moccasin Bend Ranch. March 20, 2019 – Ashley Addiction Treatment announced that it has acquired Aquila Recovery, an outpatient addiction treatment provider with four locations across Maryland, Virginia, and Washington, DC. Aquila will become a member of Ashley’s network by July 1, with both organizations retaining their respective names in the meantime. Ashley president and CEO Rebecca Flood will serve in the same role once the merger is completed, overseeing all operations. March 15, 2019 – Audax Private Equity (“Audax”), a Boston-based private equity firm, acquired Proud Moments, an autism behavioral health services provider.  Proud Moments operates in New York, New Jersey, Maryland, Tennessee, and Nevada. March 13, 2019 – Gryphon Investors (“Gryphon”), a San Francisco-based private equity firm, announced that it has acquired a majority stake in LEARN Behavioral (“LEARN” or “the Company”), from LLR Partners.  LEARN is a network of providers serving over 4,000 families with autism and other special needs in 23 states. LLR and senior management will maintain minority stakes alongside Gryphon. The transaction marks Gryphon’s first investment in the behavioral health sector. March 1, 2019 – Perimeter Healthcare, a network of mental and behavioral health treatment centers backed by Ridgemont Equity Partners, announced the acquisition of Lake Pines Hospital, a 36-bed behavioral healthcare facility, and the St. Theresa Hospital building that houses the program in Kenner, La.  Perimeter plans to add 40 to 45 beds to the inpatient facility over the next eight months as part of a renovation project. The facility will be renamed Perimeter Behavioral Hospital of New Orleans. February 22, 2019 – Family Counseling Services of Cortland County and Family & Children’s Society announced the merger between the two services.  The renamed Family & Children’s Counseling Services will serve as a joint urban-rural agency focused on essential behavioral healthcare services throughout the Oneida, NY region February 19, 2019 – Ryan Chapman, who grew and sold a nationwide service company, Premier Parking, before age 35, purchased Integrative Life Center (ILC), a provider of residential and outpatient treatment for substance abuse, eating disorders, and mental health disorders.  The company was founded in 2010 and has two facilities in the Nashville, TN area.  Ryan Chapman is now the majority shareholder and CEO. February 6, 2019 – Ideal Option, a provider of Medication-Assisted Treatment (MAT) and behavioral counseling services for individuals suffering from Opioid Use Disorder (OUD), announced today a strategic minority investment by BlueCross BlueShield Venture Partners (BCBSVP). BCBSVP invests on behalf of 33 BlueCross BlueShield entities in healthcare companies of strategic relevance to BlueCross BlueShield Plans. January 24, 2019 – Pharos Capital Group-backed Beacon Specialized Living Services acquired Owakihi, Inc., which provides home and community-based support services to individuals with intellectual and developmental disabilities.  Headquartered in Saint Paul, MN, Owakihi serves over 200 individuals across 14 sites in the seven counties surrounding Minneapolis and Saint Paul. Also read Behavioral Health Composite – April 2019

What is Driving the Surge in Hospice M&A? And how long will it last? 2019 was a banner year for hospice mergers and acquisitions activity. Of the roughly 101 home health, home care, and hospice M&A transactions that took place, 42 were hospice-related deals. Hospice didn’t just make headlines for volume, it also accounted for the largest deals in the fourth quarter of 2019. Multiple factors created an impressive 2019 that helped hospice providers ride a wave of successful transactions, however, there are potential market changes in the future that could turn, or at least slow, the tide in 2020. “While they won’t last forever, we see three main drivers behind the surge in hospice M&A,” says Mertz Taggart Managing Partner Cory Mertz. “First, hospice offers desirable health care synergies; second we are seeing a huge wave of private equity deals; and third, this sector has historically shown immunity to payment changes under the Centers for Medicare and Medicaid Services (CMS).” Synergy Seekers As the U.S. health care sector continues to progress toward a more value-based model, hospice allows buyers to better align themselves with this change. Because of their ability to provide the right care setting at the right time for the patient, hospice is becoming an appealing addition to some organizations. Accountable care organizations (ACOs) and payers are attracted to the continuum of care that results from adding hospice to the menu of institutional offerings. Hospice also creates the opportunity for payment diversification, which is especially important as the recent implementation of the Patient-Driven Groupings Model (PDGM) has created some disruption for home health operators. Organizations that have both home health and hospice assets have the ability to leverage referral synergies, essentially becoming a one-stop shop for post-acute care services. Hospice usually boasts stronger margins than home health. “More and more, hospice has become favorable among buyers due to those strong margins,” Mertz says. “Many have caught on to this; in fact, the number of hospices operating in the U.S. has almost doubled since the year 2000.” Private Equity Leading the Charge Heading into 2020, private equity firms have more funds than ever before; a reported $1.5 trillion in unspent capital. These private equity players, whose interest in health care has grown significantly over the years, have taken notice of hospice, accounting for 54 of the 107 hospice transactions from 2017-2019. “Private equity firms also have aggressive growth mandates, and, given their supply of cash, often this growth is best achieved through acquisition,” Mertz says. “Typically, these firms look to buy and sell an asset within three to seven years, making the hospice sector, with its relatively strong margins, very attractive.” Protected Payments Historically, the hospice market has been shielded from significant reimbursement changes — making it a bright spot in the post-acute care market. This has also made hospice relatively stable when compared to the home health market, which has to navigate tricky reimbursement hurdles due to PDGM. “Nothing lasts forever, but this care setting has certainly fared better across the reimbursement landscape than its home health and skilled nursing counterparts,” Mertz says. Potential Headwinds While we have seen a significant amount of hospice mergers and acquisitions activity, there are a number of possible headwinds to look out for on the horizon. Turning market cycles: All markets are cyclical, and high public company valuations allow for high private company valuations. Home health and hospice operators could see a valuation hit in upcoming years, and hospice will not always have the sky-high multiples of EBITDA seen today. An economic downturn: An economic downturn would carry an impact on the hospice market, with many expecting a recession in the next few years. This could lead capital markets to tighten and interest rates to rise. For context, it’s been over 10 years since the Great Recession hit. Payment rates: Last month, the Medicare Payment Advisory Commission (MedPAC) made a lot of noise with its vote to recommend that Congress skip Medicare payment increases for hospices in 2021. The vote also called for a 20% reduction in the aggregate payment cap. “It’s not immune to a downturn,” Mertz says. “But hospice has seen a boom year for transactions. Pending economic shifts, changes to the payment landscape, and other unforeseen factors, those who are currently active in the hospice space are continuing to enjoy a strong M&A market.” CLICK HERE for a downloadable pdf of this article.

Three Trends Driving M&A in Home Health, Home Care and Hospice Mergers and acquisitions “M&A” have become a major strategy for health care companies seeking to succeed in a rapidly evolving marketplace, with payment systems rewarding value more than volume. That’s especially true when it comes to the home health, home care, and hospice industries, which have all seen record-breaking M&A action, along with skyrocketing valuations. Hospice, buoyed by higher margins, has been particularly hot—and that’s not likely to change any time soon. “This is, in fact, the first time in more than a decade that home health, home care, and hospice are all selling at relatively high valuations,” says Cory Mertz, co-founder and managing partner of health care M&A firm Mertz Taggart. There have been several drivers behind the increased M&A activity. There have been several drivers behind the increased M&A activity. On a broad level, home-based services have only grown—and will continue to grow—in demand as baby boomers age and seek to age in place. Policymakers, too, have come around to placing a heightened value on in-home care, widely seen as the lowest-cost setting. The overall strong state of the U.S. economy—still with low borrowing rates—has likewise had a noticeable impact. “It’s still a strong environment for borrowing,” Mertz says. “Interest rates are low, though they’re creeping up a bit. But money is still cheap.” A robust infusion of private equity investment has even played a significant part, with PE firms interested in platform deals that have size and scale. Of the more than 70 home health and hospice transactions that have taken place in the first eight months of 2018, at least 36 have involved private equity groups looking to make strategic- or platform-style deals, according to proprietary Mertz Taggart data. Private equity investors played major roles in transactions in 2017 and 2016 as well, data show. The three-way mega-merger between Great Lakes Caring, Jordan Health Services, and National Home Health, led by private equity firms Blue Wolf Capital Partners and Kelso & Company, is one example of this trend. TPG Capital and Welsh, Carson, Anderson & Stowe teaming up with insurance giant Humana in separate deals for Kindred At Home and Curo Health Services is another example. Perhaps the three biggest factors shaping the M&A landscape, however, have been companies’ desire to diversify their offering, turning their businesses into “one-stop shops” for payors and consumers alike, and strengthen care coordination in preparation of value-based care models. “We’re seeing further integration of care across the continuum as a result of this M&A activity,” Mertz, whose firm has completed more than 70 home health and hospice business transactions, says. “2018 is on track to be a record year in terms of a number of transactions, so we’re really seeing the home health, home care, and hospice industries kind of all coming together as one.” Diversity is key The success of home health, home care, and hospice businesses are closely tied to the broader regulatory environment and the moves that policymakers carry out. For that reason, it’s important for providers to diversify their businesses, insulating themselves from adverse changes directed toward any one line. Having diverse revenue streams similarly allows providers to branch out in finding different referral partners. In some cases, diversification also means melding the strengths of different organizations, especially when a smaller company may not have the resources needed to succeed in a competitive market. “Strong capital markets and private equity interest, attractive demographics, and recent legislative regulatory developments that provided clarity around reimbursement have all aided in fueling a strong year in-home health and hospice M&A,” Morris Estes, managing director of Capital One Healthcare, says. “Increased regulatory requirements are also driving consolidation. Unable to meet the increased data requirements, many smaller companies are looking to sell or merge with larger businesses with more resources.” Diversity is also key for sellers, as strategic buyers and private equity investors will undoubtedly be looking for well-rounded businesses that they can easily buy and gradually add on to overtime. Becoming a ‘One-Stop Shop’ M&A activity is also being driven by companies looking to become one-stop shops with different subsidiaries and integrated brands operating across the continuum in any given market. It’s an approach that has been shown to be beneficial for attracting both payors and consumers. For many home health and personal care operators, it’s become a strategic goal to have a hospice presence wherever they already have a strong foothold. In doing so, companies are able to care for in-home patient populations during various stages of life and provide a foundation able to effectively weather any possible regulatory or economic hurdles. “Creating a core home health strategy benefits payors, as the home is the least expensive site of care,” Estes says. “Therefore, we’re seeing a lot of vertical integration consolidation driving M&A activity. Additionally, consumers have continually shown a strong preference for home health in their post-acute recovery plans. By offering hospice services as well, providers certainly have a greater opportunity to work with that patient throughout their healthcare journey.” Citing high margins and the prospects of complementing its existing personal care offerings, Addus HomeCare recently made its first serious foray into hospice through a $40 million acquisition of Ambercare. [/fusion_text][/fusion_builder_column_inner][/fusion_builder_row_inner][fusion_text] Furthermore, becoming a one-stop-shop gives providers a convenience advantage when it comes to managed care organizations, alternative payment models, and leveraging future Medicare Advantage opportunities. “I think we’re going to continue to see more bundled programs and other alternative payment models evolve,” Mertz says. “But [providers] are at least positioning themselves properly so they can take advantage.” In the current M&A climate, the integration of hospice services has proven to be the costliest in terms of transactions and valuations. “One the M&A front, our strategy is unchanged,” Amedisys CEO and President Paul Kusserow said during a Q2 2018 earnings call. “We remain very interested in hospice assets, though market pricing has been relatively unattractive, and we have seen some recent deals get done at very lofty multiples.” The one-stop-shop strategy includes entities on the peripherals of home health, home care, and hospice, too. CVS and Aetna, for instance, have joined forces with the goal of transforming CVS pharmacies into one-stop shops where seniors could do their errands, pick up medication and receive health care services all in one place—all the while helping them manage chronic conditions, avoid hospitalizations and cut costs for Aetna’s Medicare Advantage business. “Together with CVS Health, we will better understand our members’ health goals, guide them through the health care system and help them achieve their best health,” Mark T. Bertolini, Aetna chairman, and CEO said in a statement released when CVS and Aetna merged. “Aetna has a proud tradition of continually innovating to address unmet consumer needs and providing leading products and services to the marketplace.” Put simply: The value of becoming a one-stop-shop means payors and consumers don’t need to leave a business in order to find what they’re looking for. Prioritizing Value Over Volume M&A activity often picks up in the face of significant change. Home health has seen major changes in the past two years, with more yet to come. Specifically, the changes for the home health, personal care, and hospice industries are setting the stage for the shift from volume- to value-based care. The Centers for Medicare & Medicaid Services (CMS) currently has a home health value-based purchasing demonstration in nine states, in which home health providers see their reimbursement tied to how well they do on certain quality measures. It proposed refinements to that model in July for the calendar year 2019, including changes to how agencies’ achievement and improvement are weighted in calculating reimbursement rewards or penalties. Industry insiders view fine-tuning as a step toward taking value-based purchasing nationwide, an idea that home health executives widely support. “We again encourage CMS to expand the value-based purchasing program nationwide,” Kusserow said during a Q1 2018 earnings call. “If quality is important, those who deliver it should be rewarded.” In respect to value-based care, ample opportunities exist for companies providing services for patients with chronic conditions and multiple illnesses. The better positioned a company is to care for an individual as they age and, ultimately, near the end of their life, the likelier the company is to do well with new methods of payment under Medicare and Medicaid. “We’re seeing both buyers and sellers position themselves to succeed under value-based purchasing, alternative-payment models,” Mertz says. “Buyers are looking to become providers that operate across the continuum of care, while sellers are realizing they might not be ready to participate or compete in such models as currently structured.” Multiple studies have highlighted how personal care, palliative care, and home health services all work to reduce costly hospital readmissions. For the chronically ill, especially, routine home care services can make a big difference, research has shown. “On the home care side, home health operators are getting into that in a big way,” Mertz says. “You look at Amedisys, for example … They continue to make strategic personal care acquisitions that align with their home health service areas so that they can continue to monitor patients and keep them out of the hospital.” Indeed, one of the latest examples of that strategy was when Baton Rouge, Louisiana-based Amedisys acquired Bring Care Home, which provides skilled and non-skilled home care, at the beginning of August. “As providers increasingly take on a greater share of risk, it is likely that industry consolidation will continue as efficient providers or those that are able to scale will have a definite advantage in a fragmented market,” Estes says. “There are many different strategies being explored in this new value-based [and] accountable care environment, and home health is a central provider setting that appears to be part of many of them.” Looking Ahead Although the M&A landscape has certainly hit a new all-time high, there’s still room for even more action in the next few years. In its most recent proposed payment rule, CMS suggested increasing Medicare payments to home health agencies by 2.1%, or $400 million, in the calendar year 2019. Doing so may afford providers even more financial wiggle room to make deals happen, as they’re able to operate with a somewhat heightened sense of financial certainty compared to years past. The proposed payment rule, of course, also came with potential barriers to home health providers, namely the Patient-Driven Groupings Model, an updated version of the widely opposed Home Health Groupings Model introduced in 2017. In all likelihood, M&A will be the quickest route for growth for existing players. “Nobody has a crystal ball or knows just how everything will play out,” Mertz says. “But I think we’re going to continue to see more risk-sharing, rewarding those operators that are able to position themselves to properly take advantage of opportunities.” With demand projected to remain strong for the next several years and the shift from volume to value not going away, the industry should continue to have the right elements aligned for continued M&A activity. -Mertz Taggart

MT. LAUREL, N.J.–( BUSINESS WIRE )–Pinnacle Treatment Centers, a leading provider of community-based drug and alcohol addiction treatment services offering a full continuum of care, has acquired HealthQwest in Georgia.  Founded in 2008, HealthQwest provides professionally supervised medication-assisted treatment (MAT) and medical withdrawal as a licensed Narcotic Treatment Program (NTP) in the state of Georgia. It serves nearly 1,100 patients daily through five outpatient centers located in Buford, Douglasville, Macon, Savannah, and Warner Robins. The acquisition increases Pinnacle’s reach and capabilities in treating those suffering from opioid addiction and furthers its mission of making recovery possible for individuals who need it. Joe Pritchard , CEO of Pinnacle, said, “Similar to Pinnacle, HealthQwest has a long track record of providing effective treatment rooted in evidence-based care. We’re excited to bring HealthQwest into our network of care, extend our reach to Georgia, and continue assisting communities that have been plagued by the opioid epidemic.” In Georgia, more than 60% of drug overdose deaths involved opioids with 866 fatalities reported in 2018. Deaths involving heroin continued to rise with 299 reported in 2018. Read the full press release here .

The Patient-Driven Groupings Model (PDGM) — set for a Jan. 1, 2020 implementation date — is the most significant change the home health industry has seen since the current Prospective Payment System (PPS) was put in place nearly two decades ago. While the payment overhaul is sure to affect how and when home health providers are reimbursed, it’s also certain to have a powerful impact on mergers and acquisitions over the next 12 months. Arguably, that impact may have already arrived. Since Q1 2017, each quarter has seen double-digit transaction totals for Medicare-certified home health providers, spiking at 17 deals in Q1 2018. During the first quarter of 2019, however, there were only a handful of transactions completed, perhaps suggesting potential hesitancy among both buyers and sellers. “Over the past nine quarters, we’ve seen between 10 and 17 Medicare certified transactions completed per quarter,” says Cory Mertz, managing partner at M&A advisory firm Mertz Taggart. “In the first quarter of 2019, we saw six Medicare transactions completed. While all the transactions have not been reported, and it is only one quarter, we can’t help but take notice.” As home health deals have slowed, M&A activity in the hospice sector has remained robust, however. Home care dealmaking has also held steady. Making Sense of the PDGM Impact Potential Among its changes, PDGM halves the traditional 60-day unit of payment to 30 days, requiring home health agencies to streamline their referrals, intake and billing processes. Additionally, the overhaul makes patient classification more complex, as the model comes with 432 case-mix groups, each with varying levels of reimbursement. PDGM’s biggest red flag: a potential 6.42% payment cut based on certain “behavioral adjustments,” or assumptions that the Centers for Medicare & Medicaid Services (CMS) has made related to coding, Low Utilization Payment Adjustment (LUPA) claims, and other factors. The Washington, D.C.-based National Association for Home Care & Hospice (NAHC) and other industry stakeholders have rallied against PDGM’s behavioral adjustment provisions. So far, efforts have even included recently introduced bills in both the House and Senate aimed at eliminating or modifying them altogether. “From the Medicare home health advocacy perspective, this is issue No. 1 for us,” NAHC President William A. Dombi said during a January interview with Home Health Care News. “The 6.42% in the proposed rule was not finalized by CMS. Instead, CMS finalized they would be doing behavioral adjustment using factors such as upcoding on diagnosis, adding visits to avoid LUPA thresholds that are in the model.” At the risk of oversimplifying, take, for example, the value of two identical agencies, the second of which encounters a flat, 6.42% cut to reimbursement. Both generate $10 million in revenue and have $8.5 million in expenses: Agency 1 Agency 2 Revenue $10,000,000 $9,358,000 A 6.42% revenue (rate) reduction Expenses $8,500,000 $8,500,000 With no reduction in expenses EBITDA $1,500,000 $858,000 Leads to a 43% reduction in EBITDA And, consequently, a 43% reduction in value (at any given multiple) “In general, uncertainty can create a challenging transaction environment,” according to Mertz. “Buyers tend to be conservative unless compelled to get aggressive, while sellers want to assume the best result. “If you’re looking to do a transaction, it will be important to confidentially market to multiple strategic buyers. While all buyers will want to look at the current PDGM models for the agency, including the potential 6.42% rate cut, those buyers with the strongest strategic interest will be willing to spend the time to look beyond those models and how the agency will likely perform in the new environment.” The Bottom Line Despite the uncertainty, there are opportunities, according to Mertz. But home health providers looking to sell need to identify the right buyer at the right time, taking into consideration their size, geography and payer mix. Moreover, while buyers may be conservative, those of the private equity variety aren’t going to lose interest in the home health space any time soon. PE groups are sitting on a record amount of buying power, with ample cash available to pursue transactions. Overall, there were 33 add-on and 22 platform transactions from PE firms in the home health, home care, and hospice spaces in 2018, Mertz Taggart research shows. Historically, M&A activity has often increased in the midst of industry-shaping change as well, with smaller mom-and-pop providers looking for exits rather than staying put and adapting to a new payment landscape. After PDGM becomes a reality, this trend may persevere. One interesting prediction: therapy-heavy home health providers may be the most active when it comes to M&A, as PDGM eliminates the use of therapy thresholds as a determining factor in payment. Telehealth has been cited as a solution to upcoming therapy changes — and PE firms may be able to provide the needed capital for providers to roll out new technologies.

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 .