Message from the Managing Partner: Q4 2009

Somebody must have invoked the ancient curse “may you live in interesting times” because, for healthcare service providers, these are certainly interesting times. The last major upheaval in the healthcare services industry was the transition away from reimbursement to the Prospective Payment System in the late nineties. Although not every provider is reliant on the Medicare program, major changes from such a huge payer ripple through the entire industry. Now policymakers are at it again. The current proposal is to extend health insurance coverage to all Americans, but at the expense of existing providers in the Medicare program. While this debate is still unfolding, it has significant implications for Medicare providers and other participants in the healthcare services industry.

Many people feel that in crisis, we find opportunity. While the healthcare services industry is far from crisis (in fact, it’s performing better than just about any industry in the economy right now), the reforms currently being debated by policymakers represent a direct threat to Medicare providers. The current proposal slices the Medicare homecare budget by 50% over ten years and bundles homecare with other services, making it very difficult for small providers to stay competitive. Since homecare is the most cost effective way to deliver care to the greatest number of people, we would think that Medicare reform would be an opportunity to expand the homecare benefit. While politicians pay a great deal of lip-service to the importance of homecare, every policy proposal on the table right now has deleterious effects for Medicare certified home health providers. Perhaps the opportunity hidden in this potential crisis is to convince policymakers that expanding homecare benefits to include chronic and preventive care would save Medicare money by reducing the need for more expensive acute care provided in institutional settings.

The crisis that preceded the implementation of the Prospective Payment System in 2000 created opportunities for Medicare providers to be profitable in a way that they never had been before. As that opportunity was seized, Medicare home health agencies rose to the top of the valuation hierarchy by delivering stable profits as high as 20% of revenue or more. If the next crisis for Medicare providers isn’t unleashed by the fall session of Congress, it can’t be that far off in the future because the predicted insolvency of the Medicare program must be resolved at some point.

Meanwhile, as Medicare providers deal with the vagaries of public funding, private pay providers have been busy deeply ingraining themselves into the continuum of care. I remember when we couldn’t give away a private pay homecare agency. Now, the private pay segment has matured and the market for mergers & acquisitions is active and robust. As more private pay providers gain size and scale, there are more buyers in the market to drive up prices. Not only are larger operators rushing to capture turf in this emerging market, but even private equity investors have come to see the value in a cash business that is not reliant on government payers. Private pay valuations have slowly crept up to be equivalent with Medicare valuations over the last few years. Now that private pay providers are proving that they can maintain their growth and profitability under difficult economic conditions, we can bet that their high valuations are not a fluke: this is an industry segment that has been and will continue to be on the rise.

Yes, these are interesting times in the healthcare services industry. Threats and opportunities abound, and the market just keeps on growing due to demographic trends that have just begun to take effect. We are excited to be in business during these interesting times. With over 15 years of experience in the healthcare services M&A marketplace, we have seen interesting times before and we know how to mitigate threats and capitalize on opportunities.

Consider putting our experience to work for you. When we fit the pieces of the puzzle together correctly, we can create a very pretty picture!

Jack J. Eskenazi, Jr.
Managing Partner