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The historic wave of consolidation that home health M&A experts predicted ahead of the Patient-Driven Grouping Model (PDGM) hasn’t fully panned out, largely due to the COVID-19 emergency and the billions in federal relief dollars that have come with it. There was some degree of contraction within the industry, however. Going into 2020, there was an almost 6% decrease in the number of home health providers submitting Medicare claims — or a dip of about 600 individual entities. The decrease wasn’t entirely the result of mergers and acquisitions, according to Mike Dordick, president of the Wayne, Pennsylvania-based health care services and consulting firm McBee Associates.

“We saw many agencies just disappear, whether they decided to disband or close in that process,” Dordick said Tuesday during the Home Health Care News PDGM Summit. “Then when you look at Q2 of 2020 claims, which is the most recent set of data out there right now, we saw another decrease of about 200 [providers].”

M&A experts anticipated consolidation because of the new payment overhaul in 2020, but that hasn’t been the only factor pushing some agencies out of the market. The Review Choice Demonstration (RCD), billing changes and an increase in audits are all contributing factors, Dordick pointed out.

But while the number of home health providers appears to be going down, home health multiples have remained relatively steady amid the pandemic and the first year of PDGM. In some cases, multiples have even increased, with more health care stakeholders looking to shift care into the home setting.

Additionally, valuations have gone up because of the demand for medium to large-sized transactions, according to Rich Tinsley, president and CEO of Stoneridge Partners. Stoneridge Partners is a Louisville, Kentucky-based health care M&A advisory firm specializing in the brokerage of home care, home health, hospice and behavioral health companies.

“Historically, you were talking about a ‘4 to 5 multiple’ on home health assets,” Tinsley said at the PDGM Summit. “For the right ones, that’s gone higher. We’re seeing 6s and 7s.”

Others have echoed that idea. Home health and hospice multiples both hit record-breaking numbers in the first half of 2020, according to one report from PricewaterhouseCoopers’ (PwC) Health Research Institute.

Indeed, Tinsley noted how the home health market has seen an influx of buyers as of late.

“It’s not balanced,” he said. “You have more buyers entering the market than sellers leaving. For the right assets, we’re seeing valuations actually go up, and they’re continuing to go up through Q3, Q4 and Q1 of 2021. For those assets that are struggling with PDGM or COVID, I don’t think they’re coming to market.”

Stoneridge Partners only worked on two transactions that could be categorized as “fire sales” last year, Tinsley added.

Amedisys Inc. (Nasdaq: AMED) — one of the largest home health companies in the country, with more than 500 care centers in 39 states — has been at the center of major M&A action.

Early on in 2020, the Baton Rouge, Louisiana-based Amedisys had begun fielding numerous inquiries from peers looking to exit the market or absorb into the company. Since then, it has followed through on some of these transactions.

But many providers were able to stay afloat due to stimulus funds, according to Kris Novak, vice president of mergers and acquisitions at Amedisys.

“I think we’ll see some of that, as we continue to see the full RAP phaseout this year and the resulting cash flow impacts,” Novak said. “Ultimately, [relief] funds have to be repaid or forgiven and folks are going to still be in a scenario whereby they may be receiving less reimbursement through PDGM.”

In other words, providers that were once looking to exit may eventually be on the market again.

Compliance is key
Providers that have a strong compliance program, strong clinical documentation and the resources to respond to things like audits and RCD have the advantage when it comes to dealmaking.

“The larger groups … have more ability to spend money on those compliance programs,” Dordick said. “But if you’re a small or mid-sized provider and can reinvest in your business to have those same programs, you can have the same edge larger players do.”

Clean compliance is paramount to getting top dollar for your agency, he emphasized.

Compliance problems that may have been overlooked in the past are now resulting in purchase-price adjustments. In some cases, this could cause a buyer to completely walk away from a deal.

Another factor buyers and sellers have to navigate are Paycheck Protection Program (PPP) loans, which were designed to keep small and mid-sized businesses afloat during the economic fallout triggered by the COVID-19 emergency.

For providers that are looking to sell their business, PPP loans may complicate the process and deter buyers, according to Tinsley.

“You need to be aware that if you go out and borrow, whether it’s $100,000 or $1 million, … the cash proceeds will be escrowed until it is forgiven,” he said. “The buyer is not going to take that on. In the beginning, a lot of the sellers were trying to push that on to the buyers.”

Still, compared to other industries impacted by the COVID-19 emergency, there is much more money coming into the home health space.

“Some of the reasons the multiples have increased — you look at a deal two years ago, there may have been a few players in the process,” Dordick said. “We’ve been in deals recently that have three or four parties doing diligence on the same deal. They obviously know they’re all not going to get it, but they’re spending hundreds of thousands of dollars in the deal to try to win it. A lot of times before maybe one or two parties would come into that process.”

Inside the Amedisys pipeline
Over the years, Amedisys has also grown into one of the largest hospice providers in the country. In terms of its 2021 acquisition pipeline, though, Amedisys has plans to shift focus, according to Novak.

“We view M&A as a tool to help us with our longer-term strategy of providing a continuum of care in the home,” he said. “There’s plenty of opportunity for us in the states that we currently operate, but also in areas of the country where we have less density as well. I think you’ll see us focus a little bit more heavily on home health coming out of the recent investments we made in hospice.”

In 2020, the company completed the acquisitions of two hospice providers in Asana and AseraCare.

Overall, Amedisys has invested $650 million in its hospice segment since February 2019, according to the company’s Q4 2020 supplemental materials.

Looking ahead, Amedisys is open to de novo opportunities in markets where the company has a strong home health or hospice presence. Novak noted that de novo deals were a cost-effective method of expanding.

“We know what the returns will look like from a startup and de novo perspective,” he said. “And they’re very good, if executed well.”