Disruption in home health care reimbursement is impacting the hospice merger and acquisition market, especially with more companies offering both services.
A recent example is the Patient-Driven Grouping Model (PDGM), introduced in 2020. Uncertainty about how this new payment system will affect their businesses, many strategic buyers have shifted their M&A pipeline for 2020 to 2021 into the hospice segment.
“At the country level at the time, no one knew what the 2020 reimbursements would look like, or more specifically, how the behavioral adjustments would end up. Treatment agencies were expected to lose 10 to 20 percent of their reimbursement for the same work,” Cory Mertz, managing partner at M&A advisory firm Mertz Taggart, told Hospice News. “This has created a somewhat lengthy period of uncertainty. Too many industry consolidators have paused all but the most strategic deals and turned to hospice.”
The turmoil has led to a surge in transaction volumes in the hospice space from 2019 to 2021, reaching all-time highs. This is from the end of last year when he started to level off towards early 2022.
Companies such as LHC Group (NASDAQ: LHCG), Amedisys Inc. (NASDAQ: AMED) and Addus Homecare (NASDAQ: ADUS) have said they will prioritize home health deals this year.
But now, with more turmoil looming in the home health sector, the question is whether buyers will turn to hospice again as events unfold.
The US Centers for Medicare and Medicaid Services (CMS) released its proposed 2023 Home Health Care Reimbursement Rule in June.
Through these cuts, the agency seeks to reconcile overpayments to home health care providers totaling approximately $2.02 billion in 2020-2021 and adjustments related to PDGM. Many home health care providers have condemned the proposal, with some calling it a “declaration of war” that threatens sustainability.
Even if this changes before the proposed rule becomes final, home health care providers will still see pay increases high enough to offset rising wages, lingering COVID headwinds, and rampant inflation. You may not see it.
While some disruption is likely, the impact on hospice M&A remains uncertain.
“This will certainly affect the volume of home health M&A in the third and fourth quarters, but whether the period of uncertainty will be long enough for buyers to shift their focus significantly to hospice. I don’t know,” said Mertz. “We’ll have to see how this all settles. I think by the end of this year or early next year we’ll have more clarity about refunds for 2023-2025. Depending on how harsh it looks at that point. could see a significant shift in buyer demand towards hospices.”
Several factors come into play here. For one thing, CMS may change the proposed payout rate when the rules are finalized. Lawmakers also introduced a bill to the U.S. Senate that would prevent CMS from lowering home health care rates by 2026.
Second, demographic tailwinds are sustaining demand, with more healthcare continuing to move into the home environment. This is a trend that accelerated during the pandemic.
Some stakeholders suggest the cuts, if done as proposed, could drive further consolidation as smaller providers struggle to absorb the financial left hook. doing.
“One of the biggest implications that could occur is that consolidation may continue to accelerate,” Barbara Jacobsmeyer, CEO of Enhabit Home Health and Hospice (NYSE: EHAB), told Hospice News. “If the proposed regulations become final as they are written today, I don’t see how some of these smaller agencies will continue to do business.”
In this uncertain environment, and with major reimbursement changes slated for 2023 through the Home Health Value-Based Purchasing (HHVBP) model, providers of both home health and hospice will have to weather the storm. You may be in the best position for
When it comes to deals, the biggest impact will be felt in smaller deals involving dedicated home health providers, according to Al Veach, founder and CEO of M&A advisory firm Agenda Health.
“If you have a large contract, especially if you have a hospice component, it doesn’t hurt so much,” Veach told Hospice News. “Home health care is not only viewed as a business per se; it is also viewed as a referral engine for hospices, so it tends to have less impact.”