Conditions Influencing Performance-Driven M&A Activity
Author: Harper Dion
Posted: September 26, 2023
The entire post-acute industry has faced a vast number of regulatory changes and turmoil over the recent years as the popularity of aging-in-place continues to grow. Most of these changes affect payor relations, documentational requirements, and overall care-processes. Recently, however, experts are seeing an interesting effect on the business side of operations. Specifically, M&A activity is operating at a lower-than-expected volume throughout 2023 despite the trends of growth and consolidation. Key players and analysts in the space expect activity to increase, as the drop is partially due to the exaggerated transactions in the last few years. Regardless, there remain notable internal and external factors affecting M&A activity. Altogether, 2023 M&A activity is down a record 32% from 2022.1 It’s essential for providers to remain wary of the current conditions, their causes, and any industry implications that may arise from these outcomes. As these trends continue, the industry will experience changes in transactional consideration and strategy behind valuations.
Conditions Effecting Acquisition Activity
M&A activity happens for a variety of reasons, namely, to benefit both entities and achieve economies of scale and expanded geographic range. Some notable transactions in the post-acute world have also taken place in the name of diversification, such as Optum’s acquisition of Amedisys in June.3 Regardless of motivations and possible positive outcomes, there is heavy risk involved through miscalculation of valuation or inability to integrate an acquisition into an aligned entity. With the volatility of the post-acute environment both internally through operations and externally from legislation and economic conditions, it makes sense for activity to fluctuate. Compounding this with record M&A transactions in 20211, activity is at an all-time low. This uncertainty is projected to equalize over time, however, understanding the causes is essential for agencies navigating this current landscape. Some key factors currently influencing M&A activity include:
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CMS Rules: To fight fraud and waste in the industry, CMS creates legislation that increases documentational requirements with the goal of enforcing legitimate post-acute practices. Recently, CMS created rulings against quick license sales, ensuring all post-acute licenses are held by legitimate patient-facing firms. Among these regulations, CMS prohibits change of ownership within 36 months (about 3 years) of Medicare enrollment.2 Another recent ruling requires those holding 5% or more in a firm to submit a criminal background check. These sorts of regulations create a healthier industry, but slow transactions and acquisitions in the early stages as providers must invest more time toward remaining compliant.
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Overall economic struggles: The past few years have been riddled with economic turmoil across all industries. Although medical care is somewhat recession proof, the post-acute industry is still at the liberty of the greater economy. However, despite interest rates, inflation, decreased spending, and employment struggles, the public interest and usage of post-acute facilities has increased throughout the pandemic. Although the usage and awareness of these facilities is growing, many agencies are struggling financially, ultimately contributing to an undesirable valuation from possible buyers.
In addition to the economic and governmental influence, conditions and pitfalls within the agency affect the desirability and success of M&A activities. These internal conditions include:
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Staffing shortages: Agencies with less experience are already fighting to retain staff, mixing this with the ever-changing regulatory requirements, overworked clinicians struggle to stay up to date. This demanding workload requires most of the operational focus. Scaling operations upwards through means of a merger or acquisition is an afterthought for agencies already struggling with understaffing and burnout at the branch level.
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Operational miscommunications: In this uncertain time, many agencies experience turmoil, strained communication, and unaligned goals. These miscommunications affect positive outcomes and lower overall valuation. When attempting to sell or combine, agencies with unaligned operational processes raise countless red flags to possible buyers or partners.
The Future of M&A
The low M&A activity is slightly amplified by the vast increase in transactions throughout 2021. With that in mind, the previously mentioned turmoil both externally and internally makes M&A transactions less desirable for smaller entities. A lot of this turmoil is due to growing pains and will likely slowly reach resolution as post-acute professionals become accustomed to industry volatility. Many experts, investors, and strategists remain optimistic that the market will level itself out as time goes on. 1 Adverse economic conditions are seemingly here to stay, however the necessity of post-acute care isn’t going anywhere. As we continue to adapt as an industry this trend will pass, and consolidation and growth will increase. As the activity begins to flourish, providers will become increasingly methodical about their valuations and considerations for acquisition. With M&A decisions requiring deeper understanding, it is no longer just justified through expansion. The new era of M&A decision making will be defined by the acquisition of high-performing, high-quality entities.
The MHA Difference - M&A
As agencies continue to navigate the ups and downs of the post-acute industry, MHA’s team is here to provide unparalleled support across all facets of operation. Our vast roster of experts has experienced everything from clinical to managerial responsibilities in both the hospice and home care spaces. Our team remains at your service to assist navigation throughout changing regulations, understaffing, and overall uncertainty. Our wide range of experience and services aim to empower your experts to reach their personal goals while achieving those of the agency. For more information visit www.maxwellhca.com or contact us at [email protected].
Resources:
1. Filbin, Patrick. "Dealmaking: Expect M&A to Tick Up Towards the Back End of 2023." Home Health Care News, May 2023. https://homehealthcarenews.com/2023/05/dealmaking-expect-ma-to-tick-up-towards-the-back-end-of-2023/
2. Parker, Jim. "Attorney Ari Markenson: 36-Month Rule Will Have Cooling Effect on Hospice Deals." Hospice News, September 1, 2023. https://hospicenews.com/2023/09/01/attorney-ari-markenson-36-month-rule-will-have-cooling-effect-on-hospice-deals/?utm_campaign=li&utm_source=linkedin&utm_medium=Hospice+News&utm_content=1694194741
3. Landi, Heather. "UnitedHealth Outbids Option Care Health for Amedisys in $33B Deal." Fierce Healthcare, June 26, 2023. https://www.fiercehealthcare.com/providers/unitedhealth-outbids-option-care-health-amedisys-33b-deal