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The fiscal cliff deal relieved some uncertainty for providers, but sequestration remains as a potential margin pincher and the debt ceiling debate looms as another opportunity for policy makers to reduce federal spending. Healthcare spending growth is down for the third year in a row (and is now the lowest it has been in 50 years), yet healthcare job growth continues as the economy slowly recovers. Chad Mulvaney of the Healthcare Financial Management Association sees “a continued push toward linking reimbursement to cost and quality,” giving home and community based providers an opportunity to capitalize on the need for efficiency. Irving Levin Associates reported that, although the overall dollar amount of healthcare M&A transactions shrank last year, the number of transactions was flat which indicates an increase in the number of smaller transactions. In fact, they noted a 20% increase in home health and hospice transactions and they predict increased activity in 2013 due to less uncertainty regarding legislative, regulatory, and economic conditions. Carsten Beith of Cain Brothers concurred that “home healthcare will see robust M&A activity this year.” Medicare Demand for home health services continues to increase…and so do costs of compliance with a blizzard of program integrity and efficiency measures. MedPAC has been unsympathetic to the plight of providers, recommending the elimination of the market basket update and an accelerated rebasing schedule based on the assumption that beneficiary access to care and provider access to capital is more than adequate. NAHC has countered that, if the proposed rate cuts were fully implemented then over 50% of Medicare certified home health agencies would be operating with negative margins. Additionally, policy advocates from the Simpson-Bowles Commission to the Business Roundtable have proposed further burdens on providers such as co-pays, means testing, and increasing the eligibility age of beneficiaries, meaning the pressure on providers to do more with less will not relent. Although success requires as much effort as ever right now, the Robert Wood Johnson “Care About Your Care” initiative determined that not enough progress has been made on reducing hospital readmissions, indicating that home health agencies will continue to be attractive acquisition candidates as larger, multi-discipline providers seek greater efficiencies and better outcomes for their patients. We’re seeing many large buyers searching for strategic home health acquisitions, but not enough qualified sellers to meet demand. Hospice When a prominent Republican like Bill Frist and a prominent Democrat like John Breaux both publish op-ed pieces supporting growth of your industry, you know that hospice occupies a special place in the healthcare economy right now. The Journal of the American Medical Association estimates that hospice services have grown over 100% since 2009 and the ACA promotes further growth as a way to simultaneously reduce costs and increase the quality of life for terminally ill patients. This steep growth trajectory has rightfully raised program integrity concerns and Donald Schumacher, CEO of the National Hospice and Palliative Care Organization says members have experienced an “increased level of scrutiny” from regulatory authorities. CMS is cracking down on generous admission practices by using PEPPER and MACs to look for patterns of utilization that might indicate fraud. MedPAC recommends more of the same, including increased focused medical reviews in addition to an elimination of the market basket update and the introduction of the U-shaped payment model. Providers from just about every discipline view hospice as a newly strategic link in the continuum of care and buyers are willing to pay premium prices for acquisition opportunities of all sizes. Medicaid Although certainly included in the overall discussion regarding the need for financial efficiency, Medicaid providers were spared any direct impact from the fiscal cliff deal: no rate cuts and no sequestration (which is especially good news considering the already slim margins providers are surviving on to date). Unfortunately, the repeal of the CLASS Act eliminates the emergence of a new payer for non-medical home care providers (at least for now), but the ACA guarantees more than enough growth within the Medicaid program to keep providers busy. Several Republican governors have reversed their positions as AZ, MI, NM, OH, NJ, and most recently FL have agreed to allow expansion of Medicaid within their states. Buyers are incentivized to grow and consolidate in order to make a profit on such slim margins, but are being very strategic – especially about in which states to invest and which states to avoid. Private Duty While the fiscal cliff wasn’t necessarily a direct threat to private duty providers, the negative impact on the economy that surely would have followed would have contributed to the headwinds created by the painfully slow economic recovery. If Congress insists on governing by crisis as the debt ceiling debate unfolds, the promise of a truly improved economy will probably be delayed yet again and private duty providers will just have to keep waiting for that tide to lift all boats. In the meantime, the last chance to defeat the elimination of the companionship exemption is upon us as the White House cleared the new rule and sent it to the OMB for final review. NAHC has registered a protest pointing out the potential harm to consumers and caregivers (not to mention providers). Increased labor costs from the combination of the elimination of the companionship exemption and the implementation of the ACA employer mandate could wipe out profit margins for smaller providers, forcing survivors to grow and consolidate in order to remain successful. Buyers are looking for opportunities to increase revenue and decrease administrative costs, but qualified acquisition candidates seem pretty scarce. Conclusions Now that it looks like the ACA is here to stay, providers are implementing strategies to capitalize. One theme that applies equally to all providers is the need to become more efficient. As costs go up while rates go down, consolidation is a necessity that has drawn more buyers into the market – but with such difficult operating conditions, good deals are hard to find. If you’d like to discuss how all of this affects you, feel free to contact us any time. We are always happy to discuss market conditions, valuations, and the process we undertake to effect a successful transaction. |
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Market Conditions: Q4 2012
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Q4 closes out a year that was devoted to debating the merits of the Affordable Care Act in the face of persistent challenges on many fronts. After the Supreme Court endorsed the constitutionality of the law, the electorate endorsed the political status quo. Even though President Obama won almost every battleground state, Republicans managed to retain the majority in the House and Democrats retained the majority in the Senate. The net effect is that the Affordable Care Act remains the law of the land, so providers can now develop strategies to adapt. M&A activity has been somewhat suppressed by the uncertainty surrounding the implementation of the ACA. Irving Levin Associates reported a drop in overall healthcare M&A deals, although healthcare service dealflow remained flat as providers focused on transactions that make sense no matter what happens with the ACA. The New England Journal of Medicine reported on the importance of patient coordination in effectiveness of transitions of care, further reinforcing the role of community and home based services within the continuum of care. Medicare The good news for Medicare providers is that home health will be central to achieving the patient coordination efficiencies of the ACA, portending continued growth in the segment. The bad news is that providers will have to absorb that growth with increasing costs of regulatory compliance and lower payment rates, resulting in lower operating margins. Additionally, new program integrity measures may include alternative sanctions for condition level deficiencies, surety bonds, and a potential moratorium on new provider numbers. The ACA incentivizes a diverse range of providers to follow their patients throughout the continuum of care in order to optimize outcomes and maximize efficiency, thus attracting new buyers from outside the industry. We’ve seen buyers from all points on the continuum of care becoming interested in including home health within their core business. Many facility-based and mid-market providers are pursuing a “pin prick” acquisition strategy, identifying small or distressed properties that include a provider number while financial buyers and some larger strategic buyers have consummated several platform acquisitions at premiums equal to or higher than prior to the financial crisis. Hospice Given the disproportionate amount of money spent on end of life care (not to mention the human element of dying with dignity), the ACA strongly supports continued growth of the hospice segment. Hospice providers are facing some of the same margin shrinking rate reductions and cost increases as home health providers, but to a much lesser extent. MedPAC determined that beneficiaries have good access to care and providers have good access to capital, so they felt comfortable recommending that Congress eliminate the market basket update and revise the payment methodology. This is in addition to shifting cap calculations to the proportional method, introducing a new Hospice Quality Monitoring Program and some cost reporting changes. As the hospice segment matures, greater regulation to ensure program integrity has been introduced and providers have responded with shorter lengths of stay and fewer agencies exceeding the aggregate cap. Simple supply and demand continues to dictate high price premiums as sellers are few and far between. Medicaid The ACA relies heavily on the expansion of Medicaid, increasing chronic care to decrease acute care. Although much of that growth is financed by the federal government, states still must bear a significant financial burden for the long term. The new emphasis on dual eligibles gives states an opportunity to be creative as they determine whether and how to expand their Medicaid programs. While future growth attracts buyers, uncertainty about various states’ experiments with differing payment models has tempered the market. As the regulatory landscape becomes more stable and an improving economy restores state coffers, buyers will become more aggressive and the market will see more activity. Private Duty The ACA has done nothing to fill the sails of private duty providers of non-medical homecare. The employer mandate could be the difference between positive and negative cash flow, especially for smaller providers. The possibility of the companionship exemption being eliminated and worker classification issues confusing consumers has softened an already soft rebound from the recession. A stronger economic recovery and tighter labor market may be required to reverse the tide and allow providers to grow their revenues and margins. We’ve heard from financial and strategic buyers interested in getting ahead of the curve in this segment, but not enough qualified sellers to stimulate any significant market activity. Conclusions The electorate has chosen the defined-benefit model by re-electing President Obama, but enabled the defined-contribution opposition by retaining the same balance of power in Congress. Thus, the ACA is the law of the land but the economic need for improved efficiency will continue to challenge providers. The transitional state of the market requires providers to be strategic about positioning themselves for a future that could be very different from the present. If you’d like to discuss how all of this affects you, feel free to contact us any time. We are always happy to discuss market conditions, valuations, and the process we undertake to effect a successful transaction. |
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Market Conditions Q3 2012
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Q3 was dominated by the presidential election campaign. Now that the Supreme Court has clarified the constitutionality of the Affordable Care Act, it’s up to the electorate to decide who will be next to lead the reform of our healthcare delivery system. Both candidates present clear choices, but no matter who is elected in November, the next administration will begin in January facing the “fiscal cliff” created by Congress’s inability to balance a budget. The expiration of the Bush tax cuts could take cash out of taxpayers’ hands and the imposition of budget sequestration could take cash out of healthcare providers’ hands just as the sputtering economy might be stabilizing. Both Republicans and Democrats professed support for homecare during their respective conventions, but each prescribes a starkly different path of reform than the other. Democrats promise to preserve and protect Medicare and Medicaid by restructuring public payment methodologies to encourage patient coordination and efficiency, especially for dual eligible beneficiaries. Republicans promise to preserve and protect Medicare and Medicaid by introducing greater private market methodologies like vouchers and premium supports and giving states more flexibility through block grants. The market has already begun to respond to the necessity for greater efficiency with many providers exploring partnership opportunities for patient coordination within and between points along the continuum of care. Reuters Health reported that the formation of the first Accountable Care Organizations has reduced costs for providers and payers and a recent survey by healthcare public affairs firm Jarrard Phillips Cate & Hancock says that “executives are gearing up for increased M&A activity” as leading providers look for ways to increase revenues while reducing costs. …and healthcare continues to lead the economic recovery with the Bureau of Labor Statistics reporting 12,000 new healthcare jobs being created in July and 17,000 new healthcare jobs being created in August. Medicare Economic pressure to increase efficiency in the Medicare certified home health industry predates the ACA, but the Supreme Court decision seems to endorse trends toward horizontal and vertical consolidation that are already well under way. Over 150 ACOs have already been formed to serve almost 2.5 Million patients in 40 states. CMS will now penalize hospital readmissions, creating another opportunity for home health providers to demonstrate the economic value they add through patient coordination. However, MedPAC is still considering whether to include acute providers in the post-acute bundle and other variables that could impact post-acute providers. A hospital-centric approach could de-emphasize post-acute providers, potentially undermining the coordination that bundling is designed to foster. Meanwhile, the 2013 CMS proposed rule portends expected rate cuts and adjustments to regulatory compliance with required face-to-face encounters and therapy assessments. Although technically not a rate cut, budget sequestration could result in another 2% reduction in cash flow. Program integrity is always festering as another home health agency made headlines for false claims of over $40 Million and the OIG estimates that as many as 25% of claims in CA, TX, FL, and MI may have statistical anomalies that could suggest illegitimate billing. Alternative sanctions such as payment suspension, civil monetary penalties, and the installation of temporary management could be introduced within the next year. As the fiscal cliff nears, there has been renewed interest in the Bowles-Simpson budget proposal or another Grand Bargain between Republicans and Democrats. For Medicare certified home health providers, this could mean more discussion of co-pays, deductibles, accelerated rate cuts, and greater influence of IPAB. There are conflicting signals in the market for home health providers: Home health is at the center of reform trends toward patient coordination but payment rates keep going down while costs for regulatory compliance keep going up. The need for consolidation is evident, but some providers are waiting until after the election to commit to a strategy. The difficulty of the immediate operating environment is reflected in public company valuations. Even the largest providers are struggling to maintain revenue growth as the number of competing agencies increases and the number of referral sources without their own home health agency decreases. However, while short-term stock market investors reflect the challenges of uncertainty in the market today, long-term private equity investors continue to make significant acquisitions betting on the efficiency of home health to continue to deliver market beating growth and margins. Hospice Hospice continues to enjoy enviable growth prospects as terminally ill patients and their families better understand how the service can improve their quality of life. Even though the National Hospice and Palliative Care Organization notes that the industry has grown by over 100% in the last 10 years, with over 5,000 providers now serving more than 1.5 million patients, many potential beneficiaries still never claim the benefit. Hospice is also at the vanguard of efficiency as end-of-life care rivals dual eligible beneficiaries as a source of disproportionate costs in relation to benefits and outcomes. As utilization of hospice services increases in response to the need for greater efficiency, the hospice industry will mature into a more integral role in the continuum of care and be subject to greater scrutiny and regulation. Hospice providers are evolving from merely being reactive to the dying process to being proactive in improving the quality of life. Providers are expanding beyond traditional cancer diagnoses and beyond medical care to palliative care and greater emotional support. Some providers are expanding into “pre-hospice” patient populations through the Patient for All Inclusive Care for the Elderly (PACE) Medicaid program. In order to measure the cost savings of higher hospice utilization, CMS is developing data benchmarks such as the Program for Evaluating Payment Patterns Electronic Report (PEPPER) and other efforts to maintain program integrity. CMS is still analyzing payment reform recommendations from MedPAC, OIG, GAO and others, but the hospice industry appears to be avoiding most of the worst rate cutting that is occurring throughout the Medicare program. In fact, the 2013 proposed rule will probably yield an almost 1% rate increase (not including sequestration), but a revival of the Bowles-Simpson proposal could slap a co-pay as high as $2,000/patient on beneficiaries. With a relatively stable regulatory environment, significant growth prospects and comparatively generous margins, hospice providers continue to be very much in demand by buyers. We are seeing many more buyers than sellers, resulting in premium valuations even for small or underperforming agencies. Medicaid The Supreme Court decision may have prevented the feds from expanding Medicaid by fiat, but it did not change the economic necessity of expanding access to chronic assistance with the activities of daily living in order to reduce more expensive acute medical care. Matt Solo of the National Association of Medicaid Directors voiced “legitimate budget concerns” of states, for many of which Medicaid is their number 1 or 2 budgetary expense. At least seven states with Republican governors have vowed to forgo federal money to prevent expanding their Medicaid programs and some have used the court’s decision as an opportunity to try to shrink their current program enrollment. HHS Secretary Sebelius has warned that “the court’s decision did not affect other provisions of the law” such as maintenance-of-effort requirements and other state responsibilities. According to the Center for Budget and Policy Priorities, now that states can choose whether or not to expand Medicaid under the ACA, many states are determining that “the net costs of expanding state Medicaid programs may be lower than expected,” especially since new enrollees are usually not the most expensive beneficiaries. Some of the biggest state critics may change their thinking after the political dust is settled and states will have to work with CMS to increase patient coordination and reduce costs, especially for dual eligible beneficiaries. Buyers are continuing to seek opportunities for consolidation that emphasize economies of scale to prepare for the expected increase in beneficiary population, particularly in states that will be leveraging ACA mandated federal financial support. Private Duty As the economy gains traction and private duty homecare providers resume their growth trends, costs are increasing – especially for regulatory compliance. The Supreme Court decision did not undermine the employer mandate to provide health insurance for employees and many states are requiring caregivers to become certified and private duty homecare agencies to become licensed. Providers seem to be getting some help on the Companionship Exemption issue as Congress pushed back against the DOL by introducing specific legislation to protect the exemption and included language in the House Appropriations Bill preventing implementation of any rule changes. In California, the Democratic Governor vetoed a “Domestic Worker’s Bill of Rights” and legislation that would have required caregivers to become certified and private duty homecare agencies to become licensed. Now that private duty homecare has become more important in the continuum of care, increased regulation is to be expected. Additionally, media scrutiny can project a positive or negative image that influences both policy makers and consumers. CNN reported on the Companionship Exemption debate and the New York Times reported on a Northwestern University study about caregiver selection, training, and supervision: Neither story portrayed the private duty homecare industry in a very positive light. With so much attention focused on the efficiency that all types of homecare providers contribute to the larger healthcare delivery system, now is the time for the private duty homecare industry to establish a reputation for integrity so policy makers and consumers can have enough confidence in providers to support future growth. Economic efficiency demands that chronic assistance with the activities of daily living be utilized to reduce acute medical care. Private duty homecare satisfies the private demand as Medicaid satisfies the public demand for increased chronic care. The financial crisis and recession temporarily suppressed demand for private services, but the need for efficient and cost effective care has allowed the healthcare industry to lead hiring and growth as the economy recovers. Private duty providers are growing again and franchise operators are piling in to chase the many entrepreneurs who want to serve this lucrative segment. Established traditional providers who have regained some of their former market share are exploring acquisition opportunities within the private duty industry and beyond. However, we haven’t seen the floodgates open just yet as potential sellers are still concerned about perceptions of low prices and potential buyers are surprised by the actuality of higher prices, especially for Medicare certified acquisition candidates. Conclusions The electorate will determine whether defined-contribution reforms will be favored over defined-benefit entitlements. However, no matter who wins the election, greater efficiency is an economic necessity that will continue to drive growth in the homecare industry. Until further notice, the ACA is the law of the land. Providers must navigate an environment that offers significant opportunities for growth in exchange for assuming more risk and potential reward for outcomes. Conditions support consolidation because spreading costs over greater revenue allows operators to absorb the margin erosion associated with more complex regulatory compliance. There are good reasons to buy and good reasons to sell, but there is just enough uncertainty for many operators to delay making any major decisions until after the election. If you’d like to discuss how all of this affects you, feel free to contact us any time. We are always happy to discuss market conditions, valuations, and the process we undertake to effect a successful transaction. |
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Market Conditions Q1 2012
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Q1 of 2012 was unusual in that everybody was talking about the future of healthcare. The Supreme Court heard arguments for and against the Patient Protection and Affordable Care Act (ACA) and pundits of all types weighed in on the implications of those arguments. The conventional wisdom before the hearings was that, although it would be a rigorous academic exercise, the law would probably be upheld. Many observers were surprised by the court’s aggressive questioning and now many are saying they won’t be surprised if at least some elements are overturned. The central issue for the court is whether it is unconstitutional for the government to require individuals to buy health insurance in order to ensure that the interstate market for health insurance is functional. This always seemed like a red herring to us because Congress could simply restructure the law to avoid any issues of constitutionality if the political will existed to do so. Since the Democrats have adopted many of the Republicans’ core ideas regarding healthcare reform (not least of which is the individual mandate) but the Republicans still refuse to cooperate to implement any policy, it’s clear that the stalemate is not constitutional nor is it policy related: it’s just politics exaggerated for the election year. The individual mandate doesn’t impact homecare providers directly, but without it many of the core elements of the law no longer make sense. A bigger issue for homecare providers that is under consideration by the Supreme Court is whether it’s coercive for the federal government to require the states to spend more money to increase enrollment in their Medicaid programs. Precedent would suggest that, although the states may not agree with federal policy, they are not required to participate in the Medicaid program and thus must submit to federal requirements if they want federal money. Although most of the attention went to the Supreme Court, annual budget proposals highlighted the two main partisan approaches to the evolution of healthcare reform. The Obama administration more or less proposes staying the course, preserving Medicare and Medicaid as entitlement programs and hoping that increased efficiency and decreased fraud will free up enough money to pay for it all. The other side of the argument was represented by House Budget Chairman Paul Ryan’s proposal to replace the current entitlement programs with block grants and vouchers to assist the elderly and infirmed to access care through private markets. Whichever philosophy one subscribes to, the fact is that we all must do more with less so providers who can deliver the best care with the greatest degree of efficiency will be best positioned to capitalize on changes in the marketplace. We are seeing two forces impacting the M&A market for healthcare service providers right now: first is the drive towards efficiency that attracts investors to the most efficient providers in the continuum of care, second is the political and regulatory uncertainty that scares investors and encourages them to wait on the sidelines until they can better predict the future. The result is that the primary actors in the market today are those who are already committed to the industry and have already mapped out a strategy to succeed no matter what happens in the policy arena. Medicare Medicare Certified home health providers continue to exist at the fulcrum of efficiency and patient coordination. Thus, they continue to gain importance within the continuum of care. None of the primary issues debated by the Supreme Court directly impact Medicare Certified home health providers, but if the law is determined to be non-severable then a finding of unconstitutionality for the individual mandate could jeopardize the constitutional parts of the law that do impact Medicare Certified home health agencies. If the ACA is invalidated, providers may be relieved of the employer mandate to provide health insurance for all employees, but it’s likely that other provisions such as bundling services and creating ACOs will survive in another form, so the Supreme Court decision will probably not drastically change the course of evolution for this segment of the industry. Conversely, the budget debate has much more radical implications for the future. The Obama approach and the Ryan approach present two starkly different philosophies that voters have been considering for the last few elections. Most providers have become very comfortable with the philosophy of entitlements, but if Obama’s efficiency measures can’t cover the spiraling costs of growing programs then radical measures such as those proposed by Ryan will become very real options no matter who wins the next election. With the economic recovery teetering and austerity in the air, at least voters will have the privilege of supporting one direction or another. Either way, the home health industry’s critical role in reducing costs while improving outcomes makes providers attractive acquisition candidates no matter what happens with the Supreme Court or the budget. Although regulatory uncertainty has probably cooled the market temporarily as buyers and sellers wait to find out what happens with the Supreme Court and the election, we are seeing activity among those who are already committed to the industry and who want to be positioned for either a worst case or best case scenario. We’re seeing upward pressure at the top of the market and downward pressure at the bottom of the market as conditions continue to favor larger providers. At the top of the market, we’re definitely hearing from more buyers than sellers but inventory is scarce as any desirable acquisition candidates have a lot to gain from staying off the market and growing themselves as competition from smaller providers continues to weaken. Opportunities abound at the bottom of the market, especially in saturated markets where provider capacity has outstripped beneficiary growth and referral sources dry up as a consequence of consolidation and bundling. Prices at the top have been untested due to a lack of inventory, but at the other end of the spectrum prices seem to have bottomed at the replacement cost of starting from scratch, which hasn’t changed for years. More good news for smaller providers is that we’ve seen some small transactions that were financed by third parties, suggesting that lenders are starting to become more aggressive as the healthcare industry leads what little traction the economic recovery has displayed. As always, what few larger providers do choose to exit can command very respectable premiums and buyers are having no problem securing financing if necessary. Hospice All things considered, it’s been a pretty good quarter for hospice providers. The U-shaped billing model is still being discussed, but hospice providers are facing no new rate cuts and relatively little exposure to the Supreme Court decision. The disproportionate imbalance between supply and demand in the hospice segment combined with unparalleled growth prospects in a relatively favorable regulatory environment has lead many different types of providers to consider hospice as a desirable vehicle for diversification. Home Health Agencies and Skilled Nursing Facilities are probably the most complementary buyers, but we’ve noted interest in hospice from all points on the continuum of care and from financial as well as strategic investors. The rare hospice that does sell seems to fetch such a premium that Irving Levin and Associates warns of a possible bubble. Given the significant growth prospects and limited competition, we expect hospice transactions to continue to set the bar at a fairly high level. Medicaid Medicaid providers have found themselves in the center of the spotlight during the Supreme Court arguments and they have used the opportunity to draw attention to the central role they play in preventing acute episodes that cost so much and compromise the quality of life for so many people. The logic is undeniable: the more we spend on chronic care, the less we’ll need to spend on acute care. The only question is Who pays? The Obama administration has been so aggressive about shifting costs from the Medicare program to the Medicaid program that many states claim it’s coercive. Federal dollars are being used to pay for most of the transition, but eventually the states will be required to contribute a much greater share to care for a much larger eligible population, so the states are fighting to preserve as much flexibility as possible into the future. …and although the CLASS Act has been left for dead by many, it’s still on the books as a potentially new payer for assistance with the activities of daily living. Even without the ACA, Medicaid programs will grow significantly because of their importance to containing costs while preserving the quality of life for beneficiaries. Growth has been constrained because the sick economy hasn’t been able to generate the tax revenue necessary to pay for services. As the economy recovers, states will be in a better position to pay for services and providers should be able to take advantage of their position as the lowest cost alternative to support individuals with assistance with the activities of daily living. If the ACA is upheld, the organic growth of Medicaid will be further augmented. While the market waits for the economy to restore growth, providers are hunkering down and cutting costs to survive the lean times. Economies of scale are necessary, so successful operators are seeking acquisition candidates to help them spread their costs and increase their revenues. Smaller providers are faring the worst because they are least able to absorb rate cuts and compete effectively. We are seeing activity in states with stable legislative environments that have settled on rate cuts and eligibility requirements that efficient providers can live with. Private Duty The part of the ACA that private duty homecare providers object to most is the employer mandate. While not unconstitutional, the employer mandate would disproportionately hurt private duty providers because of the high use of low wage and part time employees. Where Medicaid providers may hope that severability protects them if the individual mandate is declared unconstitutional, private duty providers may hope that a lack of severability protects them if the individual mandate is declared unconstitutional. A bigger regulatory issue for private duty providers is the Department of Labor’s attempt to revoke the companionship exemption from the payment of overtime. This would result in some combination of increased cost and decreased services, potentially placing the most vulnerable at risk. Durable Medical Equipment What could the Supreme Court do to the DME industry that hasn’t been done already? DME providers are settling in for the long haul as hopes for the repeal of competitive bidding have faded. Providers have accepted that they need to adjust to lower margins and new models are being developed to deliver quality products and service at historically low prices. The second round of competitive bidding includes most major metropolitan areas, so a great deal of dust will be settling in the next few quarters. Providers are diversifying their payer mixes to survive if they don’t win the bid and negotiating new supply contracts to survive if they do. What few buyers are braving this segment are either looking for winners to invest in or losers to mop up. Conclusions In the first quarter of 2012, the forces of certainty and uncertainty were playing against each other to keep the market relatively calm. The market is certain that the necessity of efficiency places homecare of all types at the center of healthcare reform, but is uncertain about the political and regulatory environment. In one scenario, the Supreme Court upholds the ACA and President Obama and the Democrats carry the election, in another, the Supreme Court overturns the law and Mitt Romney and the Republicans carry the election: reality will probably be somewhere in between these extremes. While these two scenarios may have radically different implications for the future of healthcare delivery, either way, payers and policymakers will be relying on homecare providers to deliver the highest quality of care for the lowest cost. Many buyers are looking for opportunities to leverage the efficiencies of homecare, but aren’t necessarily finding candidates that warrant a transaction. Some sellers are skeptical of the market, focusing instead on preparing their businesses for whatever changes may occur to best position themselves for an exit in the future. The transactions that are closing are between knowledgeable parties who are executing strategies that make sense no matter what happens with the Supreme Court or the election. If you’d like to discuss how all of this affects you, feel free to contact us any time. We are always happy to discuss market conditions, valuations, and the process we undertake to effect a successful transaction. |
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Market Conditions Q2 2012
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Most of the media attention in Q2 was focused on the Supreme Court decision regarding the Patient Protection and Affordable Care Act (ACA). Hundreds of separate provisions of the law hung in the balance while the Court considered whether the Individual Mandate and the Expansion of Medicaid are constitutional. Meanwhile, the Republican presidential candidates debated the similarity between the healthcare policies implemented by Governor Romney in Massachusetts and the ACA introduced by President Obama. As the quarter came to a close, the Supreme Court announced their decision: The Individual Mandate is constitutional because it’s a tax and the states can decline to expand their Medicaid programs without jeopardizing their current funding. The decision was surprising because pundits in the media thought they had considered every possible scenario and the conventional wisdom seemed confident the law would be upheld until it became confident the law would be overturned. Nobody could have predicted that the Individual Mandate would be constitutional (but not because of the Commerce Clause) by virtue of it being a tax (but not for the purposes of the Anti-Injunction Act). The Medicaid ruling made sense to a lot of people, but the logic behind the Individual Mandate ruling was more confusing. Was Justice Roberts apolitical and scholarly or cleverly partisan? The clearest result of the ruling is to hand the decision about the future of our healthcare system back to the electorate. If Obama is reelected, the current entitlement system will remain in place and the reforms of the ACA will be put to the test. Otherwise, any number of alternatives could be considered. Out of the media spotlight, the realities of underfunded entitlement programs continue to mount and pressures to deliver quality outcomes via efficient models continue to build. In June the CBO reminded us of the unsustainability of the current model by noting that, if we don’t change, Medicare will become insolvent by 2024. Former US Comptroller General David Walker remarked that the ACA “focused more on expanding coverage and not enough on controlling costs” and several voices have called for new models to improve patient coordination and reduce waste and inefficiency. MedPAC criticized the fee-for-service model as an obstruction to patient coordination and CMS has proposed bundling services into Accountable Care Organizations and incentivizing providers with pay-for-performance to reduce hospitalizations, re-hospitalizations, and duplication of services. A Rand study highlighted Consumer Directed Health Plans and a Forbes study recommended Value Based Pricing as alternatives to traditional fee-for-service models. No matter which alternatives might be considered, former Director of OMB Peter Orszag predicts that “providers will be bearing much more risk for care than today.” Medicare Medicare Home Health providers weren’t waiting for the Supreme Court decision to start preparing for the implementation of the ACA. Even if the law were overturned, experimentation with new models of delivery is well under way. Over 50 Accountable Care Organizations in 18 states have already been formed to serve over 1 million beneficiaries and there are more than another 150 applications being processed. With efficiency through patient coordination as the foundation of reform, home health providers are well positioned to capitalize on the changing environment. A PriceWaterhouseCoopers study warned that the ACA will spawn a “new era of megapayers” such as CMS, states, and large employers. Healthcare Advisory Partners has warned that the conditions exist to allow “mega-providers” to form, but opportunities still exist for smaller providers who can add value by increasing efficiency and reducing costs for their partners. As long as patient choice is preserved, smaller providers will have the opportunity to distinguish themselves as worthy alternatives who can deliver superior care with superior efficiency. Program integrity continues to be the factor which most undermines the potential importance of home health to the evolution of the healthcare delivery system. Deputy Attorney General James Cole announced that a $375 Million fraud indictment of a doctor working with home health agencies in Texas was the “single largest fraud amount orchestrated by one doctor in the history of Medicare Fraud Strike Force operations.” The Strike Force indicted another 107 individuals for $450 Million in Medicare fraud in Miami, Baton Rouge, Houston, Detroit, and Los Angeles and the OIG has instructed CMS to widen sanctions against potentially fraudulent providers before terminating them from the program. Such sanctions could include civil monetary penalties, suspension of payments, and/or the appointment of temporary management! As always, this is good news for the majority of providers who deliver legitimate care, but innocent agencies can be swept up and destroyed by RAC audits that could be unnecessarily attracted by sloppy practices. Although the Supreme Court has ruled that the ACA is constitutional, that doesn’t guarantee that it will remain the law of the land. The House of Representatives voted to approve Paul Ryan’s budget proposal to replace Medicare with vouchers and Medicaid with block grants (of course the Senate and President didn’t agree) and MedPAC recommended exploring alternatives to fee-for service payment models as well as potentially introducing deductibles and co-pays for beneficiaries. The election should give greater clarity to the direction voters want policymakers to pursue, but market forces will still dictate that all providers will be need to increase communication and coordination throughout the continuum of care while reducing costs and delivering positive outcomes. Now that the Supreme Court has ruled, providers are thinking about next year’s budget. Rate cuts are an inevitable part of CMS’s proposed rule for 2013, but CMS may be miscalculating new rates by underestimating provider expenses because they only consider “reimbursable costs,” not actual costs such as marketing, telehealth, and the extra costs of compliance with new regulations like face-to-face encounters, therapy assessments, and now the employer responsibility requirements of the ACA. A program integrity measure to require all vendors to have individual NPI numbers is projected to save CMS $1.6 Billion, but, just like with PECOS, providers will have to bear the incremental cost of compliance. Provider cash flow would be further eroded if “sequestration” is triggered by Congress failing to reconcile their budget. The bad news for providers is reduced rates and increased regulatory complexity, but the good news is a vastly expanding market and an elevated status due to the importance of home health in the coordination of care for improved efficiency. We see current conditions as very advantageous for larger providers (especially those who are related to significant referral sources) and potentially disadvantageous for smaller providers (especially those who don’t become indispensable to their referral sources). At the top of the market, we’re seeing strategic buyers and private equity groups aggressively seeking opportunities to consolidate operations and eliminate administrative costs: At the bottom of the market, we’re seeing facility based buyers and new entrants who are attracted to growth and margins that beat just about any other industry in the economy right now. Hospice Although hospice hasn’t experienced the same level of regulatory scrutiny to date, just about every measure implemented to improve the efficiency and program integrity of the home health program will probably eventually also be applied to hospice. The newly introduced Hospice Evaluation and Legitimate Payment (HELP) Act would require that hospices be surveyed every three years and would refine hospice face-to-face encounter rules. The HELP Act would also implement testing of new payment methodologies to more accurately reflect the nature and timing of actual hospice expenses. Operationally, hospice providers have been spared the worst of possible rate cuts while they adjust to proportional CAP calculations and other changes necessitated by the ACA. Hospice providers continue to enjoy exalted status in the M&A market as palliative care gains importance as a tool to improve efficiency. Many different types of providers have concluded that hospice services are complementary with their own. The fact that hospice margins remain relatively generous as service utilization expands dramatically has attracted buyers of all types and sizes to the hospice M&A market. The great demand of buyers simply can’t be satisfied by the modest numbers of providers currently in existence. Thus, prices will remain high until enough new providers are created to satisfy demand. Medicaid The Supreme Court decision prevents the federal government from withholding financial support for existing Medicaid programs if states refuse to adopt new programs. It’s logical that increasing chronic care and assistance with the activities of daily living will prevent more expensive acute care, but the issue has become highly politicized because states contribute significant funding to chronic care covered by Medicaid but the feds pay for acute care covered by Medicare. CMS estimates that the 15% of Medicaid beneficiaries who are dual eligible account for 40% of the program’s expenses. A recent Kaiser study found that most dual eligible patients interact separately with each program with none of the patient coordination that could reduce costs and improve outcomes. CMS has started to work with 25 states to explore options for integrating Medicare and Medicaid to improve patient coordination and reduce waste. System-wide pressures to deliver quality outcomes as efficiently as possible dictate that Medicaid will continue to expand. The Supreme Court decision gives states much more flexibility to influence the nature and extent of that expansion. The National Governor’s Association has started to emphasize delivery system reforms in addition to reducing provider payment rates to gird for the expected increase in beneficiary population size. California has initiated a patient coordination demonstration project for dual eligibles that could save over $1 Billion and Oregon has accepted $1.9 Billion in federal funding to experiment with Coordinated Care Organizations (not to be confused with Accountable Care Organizations). Thirty states have reduced provider rates or implemented program integrity measures: Twenty states have introduced managed care models or limited program enrollment. As Medicaid programs continue to grow, providers must adapt to changes intended to foster efficiency. Shifting beneficiaries from Long Term Care settings to Community settings is not only a great opportunity for payers to reduce costs, but also for homecare providers to grow. Federal support continues as the Community First Choice Option and now Money Follows the Person programs start to get traction and the HHS has given grants to Aging and Disability Resource Centers. …and the ACA calls for federal financial responsibility for the first few years of implementation. Some providers are still stuck between the promise of growth in the future and the reality of reduced rates and increased costs in the present. Consolidation is inevitable as smaller providers find it difficult to absorb costs while larger providers thirst for revenue. We’re seeing selective interest in Medicaid homecare providers from strategic and financial buyers, but geography and size are important considerations. Durable Medical Equipment HHS claims that Competitive Bidding saved 42% in its first year with no negative impact on the health or access of beneficiaries. Really??? Is HHS saying that 42% of its prior expenditures on DME/O2 products were wasteful or fraudulent? Has HHS not noticed the chorus of complaints about beneficiary access? Although the American Association for Homecare, 30 patient advocacy groups, and 145 members of Congress disagree, CMS is rolling Competitive Bidding out to 91 new MSAs and the entire country should be covered by 2016. As providers will need to deliver product for less, we’ve seen more interest from buyers who want to drive costs down through efficiencies of scale. As the current bid unfolds, we’ll have a better idea of what threshold providers will have to meet to remain competitive. Private Duty Although more impacted by economic conditions than regulatory conditions, private duty homecare providers were still monitoring the Supreme Court decision. Even though the Employer Mandate was not at issue, private duty providers may have been hoping for the Court to overturn the entire law, sparing them the expense of providing healthcare insurance for employees or pay a penalty. It wasn’t to be, but perhaps a positive unintended consequence of the Individual Mandate might be that awareness is raised for non-mandated Long Term Care policies as everyone is encouraged to take responsibility for their own potential care needs. Private Duty providers are equally concerned about the possible phase-out of the Companionship Exemption from minimum wage/overtime requirements as legislation was introduced to prevent a change. Much like the Employer Mandate, eliminating the Companionship Exemption would increase incremental costs, forcing providers to become more efficient. Although the economy still hasn’t completely recovered, many private duty providers have seen steady increases in volume as more affluent families see non-medical care as a very worthy expenditure. A HHS study found that consumers are willing to pay a premium if they believe they are getting value for their money, supporting our contention that private duty providers should try to compete on quality rather than price. This translates to company valuations as buyers are always more impressed by sellers who deliver quality without compromising margins. We’re seeing more buyers seeking acquisition opportunities, but relatively few sellers who have recovered sufficiently to be ready to divest. As the economy continues to improve, we expect an increase in demand for services combined with the need to be more cost efficient to increase activity in the market. Conclusions Every type of healthcare reform being implemented or considered is intended to increase economic efficiency. This is true at the macro-system level and the micro-provider level. The market-driven path to efficiency is consolidation: Operators making acquisitions to increase their revenue while decreasing their relative administrative costs. Irving Levin & Associates reported that M&A transactions in the healthcare services industry increased in Q1 of 2012 with managing editor Stephen Monroe saying that the “market is currently being driven by middle market deals.” The Nashville Care Council noted that market forces are keeping M&A activity “active but not frenetic.” The PWC study found that, in light of the patient coordination directives of the ACA, “incentives for collaboration are quickening the convergence of” different types of providers and “organizations that were previously sitting along the sidelines are going to have to get the ball rolling.” Georgetown University predicts that “the healthcare economy is expected to grow at twice the rate of the national economy” and Bill Bernstein, chairman of the healthcare practice at Manatt Phelps predicts that “It’s unlikely that the election would lead to a change in a lot of the fundamental provisions of the ACA” because “the genie’s out of the bottle.” Homecare providers of all types are at the center of the action because they are experts in the patient coordination that leads to greater efficiency. Some are waiting to see what happens with the election, but many others are moving to get ahead of the curve. We’re seeing many different types of buyers – private equity sponsored, facility based, and others who are interested in acquisitions to leverage homecare to make their own operations more efficient and profitable. As the economy continues to strengthen and the regulatory environment continues to become more certain, we expect demand for all types of homecare providers to continue to increase. If you’d like to discuss how all of this affects you, feel free to contact us any time. We are always happy to discuss market conditions, valuations, and the process we undertake to effect a successful transaction. |
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