Mergers and Acquisitions Trends in 2023
Author: Harper Dion
Posted: January 17, 2023
The uncertain climate of the past few years impacted the post-acute landscape in operations, financials, and staffing. The pandemic increased desire to receive care at home to avoid overcrowded hospitals. Pairing this increased demand with the shortage of skilled staff creates unfavorable conditions within the industry. Industry regulations like OASIS-E, PDGM, COVID regulations, and increased documentation rules inflate difficulty for post-acute agencies to operate. In many cases, as the demand for home care increases, the operational productivity of these agencies decreases. With CMS striking down proposed budget cuts through the CY2023 Final Rule2, the industry is seeing increased hope for the future. However, the state of investor relations and M&A is in an inconvenient place. The whole economy is in recession, with poor rates and difficulty to get approved on loans, many buyers are unable to meet the price requested by sellers. Keeping this in mind, home health and hospice are experiencing irregular conditions regarding M&A. The differences in the home health and hospice spaces come from the same economic issues; understanding these trends is increasingly important as the state of the industry continues to evolve.
Home Health
With shifts in government assistance because of CMS legislation5, clarity has been re-established regarding reimbursement rates and operational practices. The pandemic has popularized home care; this popularity, paired with clarity from CMS sees many companies reorienting towards home health5. Moving forward, transparency of legislation has essentially restarted consideration of acquisitions5. For the first half of 2022, publicly traded home-health providers endured drops in earnings before interest, taxes, depreciation, and amortization (EBITDA) from the low 20s to the mid-teens1. In addition to EBITDA drops, price-earnings (P/E) ratios have decreased from the mid-30s to lower 20s because of broader market issues1. Even with these issues in mind, M&A transactions are still present, reaching close to 30 in just the first quarter. Home health M&A is in a strange spot, despite the unideal conditions, and dropping values, merger deals appear to still be in effect. Although everyone is at the liberty of the economy, home health remains viable amid a market recession.
Hospice
Due to care trends, the use of hospice is becoming increasingly prominent, and many agencies are beginning to enter the market or expand their services. With the change in the Home Health PDGM model, hospice becomes increasingly desirable for acquisition and growth. This model created uncertainty, shifting buyer interest towards M&A in hospice segments4. Even with CMS budget increases making home health more desirable, the funding likely won’t make up for increasing wages and COVID inflation. Home health tends to be considered as a first stop before hospice6. Because of this belief, hospice transactions are viewed as safer investments of capital. Furthermore, CMS issued a 3.8% rate increase through FY20233. This rate update makes hospice agencies increasingly worthwhile for investors; due to this value, many hospice-only agencies are starting to go to market. Entering 2023, the US Department of Health & Human Services Office is planning a nationwide audit of hospice eligibility for CY20236. As a seller, it’s increasingly important to prioritize compliance as investors and buyers will perform a comprehensive pre-acquisition analysis.
Solutions
The issues in the greater economy and the post-acute space are here for the foreseeable future, but that doesn’t mean undergoing a merger or acquisition is impossible. We sat down with Tom Maxwell and gained his insight on the issue.
- The unique market situation is a result of the labor crisis, poor debt market, and CMS final rule confusion. These conditions foster uncertainty in the market alongside an economic recession, leading to decreased activity.
- It’s difficult to find and retain employees which impact company valuation. Furthermore, a decrease in loan rates makes it difficult to finance an acquisition as sellers are looking for more than buyers can afford. Financing a new acquisition is incredibly difficult as many agencies are struggling to maintain success in their primary focus.
- Hospice is becoming more valuable as industry acknowledgment increases; many hospice agencies are beginning to enter the market and look for possible M&A activity. A few huge hospice-only agencies continue to expand into new markets. Undergoing a merger or acquisition is increasingly difficult during this time but not impossible. M&A is always a difficult process, juggling this workload with increased compliance requirements and economic turmoil makes M&A seem undesirable, but with the right team this transition proves smooth and beneficial. M&A activity is common practice during Q1, it is becoming normalized once again as the market stabilizes.
- It is important to seek assistance from a third party during the pre-acquisition process, as buyers will thoroughly evaluate the compliance of your agency. This can be especially helpful as your agency may be stretched thin due to worker shortages, allowing your team to focus on providing patient care and preventing burnout while industry experts handle the backend processes with excellence.
MHA can assist with any M&A activity in which your agency has found interest. To begin, we create an intensive quality program starting with a mock survey. We will analyze your charts and rebuild any documentation that could come up negative to possible investors. From there we will ensure your agency is properly staffed and perform training to make sure processes and workflows are updated. Possible buyers will deeply analyze any documentation practices within your agency, ensuring these are spotless is the most important step. The worst-case scenario is getting 75% through a merger and having the buyer back out due to an error in documentation. Our experts will ensure this process not only goes smoothly, but also increases agency productivity and excellence in the long run. If you’d like to learn more or have any questions regarding an upcoming merger or acquisition, contact us at [email protected], or visit www.maxwellhca.com.
Resources:
1. Caine, Matt. “A Look at Current Home Health M&A Trends.” HomeCare Magazine, September 17, 2022. https://www.homecaremag.com/september-2022/look-current-home-health-ma-trends.
2. “Fact Sheet CY 2023 Home Health Prospective Payment System Rate Update and Home Infusion Therapy Services Requirements - Final Rule (CMS-1766-F).” CMS. Centers for Medicare and Medicaid Services, October 31, 2022. https://www.cms.gov/newsroom/fact-sheets/cy-2023-home-health-prospective-payment-system-rate-update-and-home-infusion-therapy-services.
3.“Fact Sheet Fiscal Year (FY) 2023 Hospice Payment Rate Update Final Rule (CMS-1773-F).” CMS. Centers for Medicare and Medicaid Services , July 27, 2022. https://www.cms.gov/newsroom/fact-sheets/fiscal-year-fy-2023-hospice-payment-rate-update-final-rule-cms-1773-f.
4. Parker, Jim. “How Proposed Cuts to Home Health Payments Could Impact Hospice M&A.” Hospice News, August 29, 2022. https://hospicenews.com/2022/08/29/how-proposed-cuts-to-home-health-payments-could-impact-hospice-ma.
5. Vossel, Holly. “How the 2023 Home Health Rule Could Change the Game in Hospice M&A.” Hospice News, November 4, 2022. https://hospicenews.com/2022/11/04/how-the-2023-home-health-rule-could-change-the-game-in-hospice-ma.
6. Vossel, Holly. “Tightening Hospice Regulation May Give Some Buyers Pause in M&A Deals.” Hospice News, November 29, 2022. https://hospicenews.com/2022/11/27/regulatory-focus-in-hospice-giving-buyers-pause-in-ma-deals.