Hospital and healthcare system activity creates ‘highly disruptive point’ in hospice mergers and acquisitions landscape

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More and more hospitals and healthcare systems are entering the palliative home care space, often seeing joint ventures as a promising path to return on investment.

While several factors are driving residential healthcare organizations to consider home care, more than anything, hospices and other providers simply need to be aware that the “normal” aspect of M&A activity in their spaces is changing.

“You see different kinds of deals happening in palliative care and home health care,” Mark Kulik, managing director of mergers and acquisitions advisory firm The Braff Group, told Hospice News. “And that indicates that business hasn’t been business as usual over the past decade.”

In part, the trend to increase the number of palliative care hospitals and health systems is a response to the growing demand and pressure on acute care services. More and more health systems are looking to expand into palliative and community-based palliative care to complement existing offerings while creating new channels of care delivery.

The trend is also linked to a harsh reality: an aging and growing population – a population that is generally sicker and more medically complex than ever – is expected to put additional pressure on hospitals and healthcare systems in the years to come.

The number of seniors requiring specialized high-acuity hospital care is expected to increase by 17% over the next decade, according to a to research of Vizient and subsidiary Sg2. Outpatient volumes will also increase, by 16%, according to the research.

Many others are seeing this trend toward palliative care and palliative home care come to fruition firsthand.

“As hospitals invest in [home-based care]I think they’ll naturally see that it’s, in fact, an important service to have there,” Contessa Health COO Aaron Stein told Hospice News during the care conference. palliatives in Chicago.

Contessa Health, based in Nashville, Tennessee, is a subsidiary of palliative care giant Amedisys Inc. (NASDAQ: AMED). Its business model is entirely focused on helping health systems and other partners move high-acuity care to the home.

Interest in palliative home care joint ventures on the rise

Lines of investor interest in the palliative care industry have faded over the past decade, according to Kulik.

A total of 109 palliative care and home health care transactions involved a hospital and health system from 2014 to 2021, according to market analysis data The Braff Group shared with Hospice News. The number of transactions in 2017 and 2018 reached 20 and 19, respectively, before dropping during the pandemic in recent years.

“We’re at a very disruptive point in the M&A landscape,” Kulk told Hospice News. “The traditional process of thinking about service agreements and dividing lines is blurring.

In some cases, this activity has taken the form of a hospital or health system purchasing a palliative care or home care asset, perhaps to get into the field for the very first time. In others, however, it involved bringing in a dedicated home health or hospice partner by sharing ownership in a traditionally internal segment.

Overall, 69 of the 109 transactions were joint ventures rather than outright sales or acquisitions. The bulk of joint ventures indicate that joining forces to provide hospice and hospice care at home is a more attractive investment strategy for hospitals and health systems, Kulik said.

“By far the strategy that hospitals or health systems pursued during this window of time was joint ventures,” he said. “Indicating that they didn’t want to get out of this business, but they also didn’t want to be 100% responsible for it.”

Large health care systems made up the lion’s share of these joint ventures, Kulik noted. For example, Lafayette, Louisiana-based LHC Group (NASDAQ: LHCG) accounted for nearly half of joint ventures, accounting for 30 of 69 joint venture transactions over the seven-year period.

Joint ventures have been central to the LHC Group’s growth strategy, as the company had a record year in 2021 for acquisitions. Much of this activity was in hospice.

That year, for example, LHC Group acquired home care and palliative care businesses in 22 states from a joint venture between Brookdale Senior Living (NYSE: BKD) and hospital system HCA Healthcare (NYSE: HCA ).

Amedisys, based in Baton Rouge, Louisiana, has also placed hospital joint ventures at the forefront of its pipeline. Its acquisition of Contessa Health in June 2021 for $250 million fueled that fire, according to Amedisys CEO Chris Gerard.

At the time, Contessa had 17 joint ventures that generated $80 million a year, Gerard said at the annual William Blair Growth Stocks Lecture. This made Contessa ripe for future joint venture deals.

“For Amedisys, being able to be self-sufficient and focus on hospital health systems and our palliative care business ends up being really important to accelerating the growth that we’ve been able to be blessed with,” Contessa’s Stein told Hospice News. . Conference on palliative care.

Health System Investors Come to the Palliative Care Table, But Don’t Always Sit

According to Freeman Smith, President of the Northern Region of Traditions, the potential for an attractive return on investment may entice hospitals and health systems to seek palliative home care assets, but the reality of integrating such businesses in their laps can push them to sell. Health.

Some hospital system buyers are entering into these deals anticipating up to a 20% profit margin, only to have revenue expectations dwindle under the weight of an entirely different care and payment model, Smith told Hospice News during the VALUE conference.

“They’ll see those increased margins, but what they’ll sometimes see afterward is that hospice is a unique animal unto itself,” Smith said. “You’ll see them dive, because all of a sudden it doesn’t work anymore. You must have this reverse engineer watch [hospice billing] in the financial model.

Compared to other health care facilities, hospices lack diversity in revenue sources such as private insurers and Medicaid funding. Through the provision of palliative care, Medicare covers nearly 90% of a provider’s patient care revenue.

This makes palliative care billing for patient care a different reimbursement beast for other healthcare providers.

Managing hospice and home care services beyond the four walls of hospitals and health systems is very different from delivering health care within them, Kulik says. The value proposition for many hospitals and health systems to enter into joint ventures with hospices calls for experienced providers to efficiently and effectively bill and manage end-of-life and critical illness care services, it said. -he declares.

Meanwhile, investors who take on hospice acquisitions have increasingly seen the value in selling them, Kulik continued.

“Some are divesting to unlock the value of having a separate home care and palliative care society,” Kulik said. “There were 12 total divestments where hospitals and health care systems sold palliative care and home health assets between 2014 and 2022.”

The high prices of hospice assets are prompting some to sit down at the vendor table. Multiples in the palliative care and home care sector have hit record highs in recent years. Valuations reached more than 29x in 2020, breaking 2019’s record high of 26x, the PwC Health Research Institute reported.

According to PwC, “mega deals” have pushed some palliative care deals into the billions, largely thanks to the backing of non-traditional buyers in the space, such as private equity, initial public offerings (IPOs) and special purpose acquisition companies (SPAC).

Like the hospital and healthcare systems, demographic tailwinds from the country’s aging population are whetting the appetite of these investors.

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