Last year 2017, was a bit of a “downer” in terms of mergers/acquisitions in the home health and hospice industry. Though 2017 was fluid for hospital and health system activity, the home health and hospice sectors lagged a bit. Some of the lag was due to capacity concerns in so much that health system mergers, if they involve home health as part of the “roll-up”, take a bit of sorting out time to adjust to market capacity changes (in markets impacted by the consolidations). The additional drag was attributable to CMS proposing to change the home health payment from a per visit function to a process driven by patient characteristics – after implementation, a net $950 million revenue cut to the industry. CMS has since scrapped this proposed payment revision however, the future foreshadows payment revisions nonetheless including changing to some format of a shorter episode window for payment (ala 30 days).
Hospice has always been a bit of niche in terms of the post-acute industry. Where consolidation and merger/acquisition activity occurs, it is most often fueled by a companion home health transaction. De Novo hospice “only” activity of any scale has been steady and unremarkable, save regional and local movement. From a reimbursement and policy implication standpoint, hospice has been far less volatile than home health. Minor changes in terms of scaling payment levels by length of stay have only marginally impacted the revenue profile of the industry. What continues to impact hospice patient flow is the medical/health care culture within the U.S. that continues to be in steep denial regarding the role of palliative medicine/care and end-of-life care, particularly for advanced age seniors. Sadly, too many seniors still pass daily in expensive, inpatient settings such as hospitals and nursing homes (hospitals more so), racking up bills for (basically) futile healthcare services. If and when this culture shifts, hospice will see expansion in the form of referrals and post-acute market share.
Despite somewhat (of) a tepid M&A climate in 2017, the tail-end of the year and early 2018 provided some fireworks. Early 2018 is off to the races with some fairly large-scale consolidations. In late 2017, LHC group and Almost Family announced their merger, recently completed. Preceding this transaction in August, Christus Health in Texas formed a joint venture with LHC, encompassing its home health and hospice business (LTAcH too). Tenet sold its home health business to Amedysis (though not a major transaction by any means). And, Humana stepped forward to acquire Kindred’s Home Health business.
In the first months of 2018, Jordan, a regional home health and hospice business in Texas, Oklahoma, Missouri and Arkansas, announced a merger with fellow regional providers Great Lakes and National Home Health Care. The combined company will span 15 states with over 200 locations. In other regions, The Ensign Group, primarily a nursing home and assisted living provider continues to expand into home health and hospice via acquisitions; primarily underperforming outlets that have market depth and need restructuring. Former home health giant Amedysis continues to redefine its role in the industry via additions of agencies/outlets in states like Kentucky. Amedysis, once the largest home health provider in the nation, fell prey to congressional inquiries and regulatory oversight regarding suspected over-payments and billing improprieties. Having worked through these issues and shrinking its agency/outlet platform to a leaner, more core and manageable level, Amedysis is now growing again, though less for “bigger” sake, more for strategy sake.
Given the preceding news, some trends are emerging for home health in particular and a bit (quite a bit) less so for hospice. Interestingly, one of the trends apparent for home health has been present for hospitals, health systems, and now starting, skilled nursing: there is too much capacity, somewhat misaligned with where the market needs exist. I believe this issue also exists for Seniors Housing (see related post at https://wp.me/ptUlY-nA ) but the drivers are different as limited regulation and payment dynamics are at play for Seniors Housing. While home health is no doubt, an industry with continued growth potential as more post-acute payment and policy drivers favor home care and outpatient over institutional options, capacity problems still exist. By capacity I mean too many providers wrongly positioned within certain markets and not enough providers properly positioned to deliver more integrated elements of acute and post-acute, transitional services in expanding markets (e.g., Washington D.C., Denver, Dallas, etc.).
Prior to their final consolidation with Humana, Kindred provided an investor presentation explaining their rationale for exiting the home health business (somewhat analogous to their exit rationale from skilled nursing). The salient pages are available at this link: Kindred Investor Pres 2 18 . Fundamentally, I think the underpinnings of the argument beginning with the public policy and reimbursement dynamics which are extrapolated against a “worse-case” backdrop (MedPac recommendations don’t equate to Congressional action directly nor do tax cuts equate directly to Medicare reimbursement cuts) get lost to the real reason Kindred exited: excess leverage. Kindred was overly leveraged and as we have seen with all too many like/analogous scenarios, excessive overhead and fixed costs in a tight and competitive market with sticky reimbursement dynamics and risk concentration on Medicare beget few strategic options other than shrink or exit.
With the backdrop set, the home health environment is at an evolutionary pass – the fork-in-the-road applies for many providers: bigger in scale or focused regionally with more network alignment required (aka strategic partnerships). I think the following is safe to conclude, at least for this first half of 2018.
- The M&A driver today is strategy and market, less financial. While financial concerns remain due to some funky (technical term) policy dynamics and reimbursement unknowns, the same are more tame than 12-18 months ago. To be certain, financial gain expectations are part of every transaction, just less impactful in terms of motivation.
- The dominant strategic driver is network alignment: being where the referrals are. The next driver is “positioning” as a player managing population health dynamics. Disease management focus is key here.
- Medicare Advantage penetration is re-balancing patient flow in many markets. As the penetration escalates above 50% (half or better of all Med A days coming from Med Advantage), the referral flows are shaping to more demand for in-home care (away from institutional settings), shorter lengths of stay across all post-acute segments, increasing complexity and acuity on transition, and pay-for-performance dynamics on outcomes (particularly, re-hospitalization).
- Market locations are key and very, very strategic. With home health, being able to channel productivity, especially in a low labor supply/high demand environment, is imperative. Being proximal to referrals, being tight with geographic boundaries, being able to lever staff resources, and being able to deploy technology to enhance efficiency is operationally, imperative.
- Partnerships are synergistic today and in-flux. It used to be that a key partner was an acute hospital. Today, the acute hospital remains important but not necessarily, primary. With physicians starting to embrace ACOs and Bundled Payment models, the referral relationship most preferred may be direct agency to doctor. In fact, the hospital partner may not be anywhere near as valuable as the surgical center partner, owned and controlled by physicians.
- Capacity and capability to bear risk from a population management perspective and to accept patients with higher acuity needs (in-home) and broader chronic conditions. Effectively, home health agencies are going to continue to feel pressure to take patients with multiple chronic needs and comorbidities and to coordinate these care needs across perhaps, two to three provider spectrums (outpatient, specialty physicians, hospice if required, etc.).