You’ll be speaking at Home Health Care News’ upcoming Capital + Strategy conference. Who is Capital + Strategy for – who should be thinking about adding this to their list of conferences to attend next year?
Capital + Strategy is sponsored by Home Health Care News, and it covers a whole spectrum of issues affecting home health and hospice providers. It’s for anyone who wants to know what’s going on in our industry, anyone who wants to know more about current trends. It’s one to keep an eye on for next year; this year’s event is already sold out.
What will you be discussing at Capital + Strategy?
I’ll be talking about the current state of the mergers and acquisitions industry, trends we’re seeing in 2020, and what kind of inventory is out there in home health and hospice from a deal perspective. It will be an update on the market generally and current deal flow.
Do you think mergers and acquisitions activity in any particular market segment will be “hotter” than the others in 2020, and if so, why?
I think hospice M&A will continue to be extremely hot, which is really a function of supply and demand. There are more providers who want to get into the hospice market than there are available hospice agencies for sale, so it’s a sellers’ market. Valuations and prices are very robust right now – and that’s just a continuation of something we’ve been seeing for the past couple of years.
In your recent M&A experience, have you noticed operators seeking to add different service lines in order to expand their continuum of care, or are they just looking to grow existing service lines? Which do you think will be most prevalent in 2020 and why?
Buyers are still seeking to add both to existing service lines and to expand services. But if you look back 15 years ago or so, providers were much more siloed. We are seeing more buyers who are looking to provide a continuum of services – episodic services, intermittent services, palliative and end-of-life care. They’re looking to build capacity in post-acute community care and crossing historical business lines. Many still want to increase their scope across geographies, but now we see more buyers trying to build size within one geography by investing in new services and growing their market penetration.
We’re two months into PDGM – what are you hearing from your industry contacts about how it’s affecting operators so far? How do you think it will affect M&A activity in 2020?
It’s still early, but from an operations perspective it is definitely having an impact. As far as how it will impact provider cash flow, we probably won’t know that until the end of this month, possibly even April or May. Providers still have cash coming in from the end of 2019, so any interruptions in cash flow probably haven’t hit the bottom line yet. I do think it’s had less of an impact, however, than the new regulations on skilled nursing facilities. I think we’re just in a wait-and-see mode right now. Providers are still just working hard and waiting to see how it all comes out – to be determined.
Has PDGM had a different effect on smaller providers vs. larger providers? If so, how?
I think from an M&A perspective, PDGM is going to create a bigger divide between the small and medium-sized providers and the larger providers. Impacts to cash flow may limit smaller providers from investing in growth opportunities, and reductions in RAP payments may convince some smaller agencies to sell. Newer transactions have been a little slow to come to market because everyone’s waiting to see what the valuations will look like. But I still think 2020 will be a good year for M&A, particularly a little later in the year.
Signs seem to indicate that the next step will be a unified post-acute care payment system. Is that on the horizon, in your opinion? If so, what do you predict the affect will be on the in-home care industry?
We’ve been talking about unified payments for a long time, and I think it will stay part of the conversation, but it’s probably three or more years out from being a reality. It’s going to take a lot of work to put such sweeping changes into place, but I think we’re heading in that direction – if we can get there. It’s not a sure thing. I think it’s probably the right way to go, but we won’t be there for likely three to five years.
If you’re in the early stages of determining the next steps for your home care, home health or hospice business or potentially considering a sale, where should you start?
If your horizon is less than five years at this point, I would start looking around the market now, because valuations are high and the future is uncertain. It’s time to be looking at potential exit strategies, or perhaps opportunities for partnerships. Reach out to people who do the kind of work we do at Stoneridge to begin managing your future – should you enter the buyers’ market and grow? Should you sell and move on? The time is right to ask. Staying the same may not be a viable answer with potential reimbursement changes like unified payments in our future. Now is the time to maximize your current value.
What is something operators are surprised by/don’t know/don’t expect about the M&A process?
It sounds simple, but the first thing sellers need to be sure of is that they really want to sell. It can be an emotional process – in many cases, sellers have put their lives and souls into their businesses, so you have to be sure you’re ready for the ups and downs of the negotiation process. And a lot of sellers are surprised at how intense that negotiation process can be. You’re not selling a house or a car – every transaction is different. These transactions are not cookie-cutter. Each one is multi-faceted and every distinct piece has to be negotiated. There’s a lot more to it than just finding a buyer, it’s finding the right buyer and negotiating the right terms. It can be a very time-consuming process. But that’s why I love the work we do at Stoneridge – we get to walk providers through this process step by step, advocate for them during negotiations and answer all their questions. We are the advisors they can trust to help them achieve their goals.