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Q3 In Review In Q3, the effects of healthcare reform started to sink in and the effects of the recession continued to linger. While the market for all types of homecare services continues to expand, regulatory and economic conditions threaten to impede growth for certain providers. Medicare • Rate Cuts All three of these provisions are designed to increase efficiency and reduce fraud, but in combination they present potential obstacles to growth, especially for smaller providers. Rate Cuts Service Bundling The 36 Month Rule After an initial clarification from CMS, the application of the rule was greatly expanded to include all changes of ownership, not just those of start-up operations. The industry (including NAHC) protested to CMS that the broader interpretation was preventing many legitimate transactions and discouraging capital investment in the industry. Subsequently, rumors spread that the 36 Month rule had been rescinded, but these were just rumors. CMS did rescind certain narrow provisions of the rule and defined some narrow exceptions, but the basic rule remains intact: Any new agency or any newly acquired agency must wait 36 months from initial certification or the most recent CHOW before consummating a divestiture. The obvious effect of the rule is to prevent many smaller transactions from occurring as many of the smallest and weakest providers are younger than 36 months. Smaller agencies that are older than 36 months may benefit from higher valuations as there are now fewer smaller transactions available to the market. Less obvious is the impact on larger, more established providers – especially those sponsored by private equity investors. Private Equity Groups have stimulated significant consolidation in the industry as they try to emulate the growth and profitability of the largest, publicly traded operators. Since most private equity groups invest with a 5-7 year exit horizon, the 36 Month Rule is troubling for them because each new add-on acquisition delays a final divestiture by an additional three years. Thus, the 36 Month Rule not only takes many small sellers out of the market, it also takes several larger buyers out of the market too. Although growth due to market fundamentals is inevitable, the Medicare segment of the homecare M&A market is more uncertain than it has been since the implementation of PPS. Constant pressure on margins and increased scrutiny regarding program integrity is making life harder for large and small providers alike. The 36 Month Rule has taken both sellers and buyers out of the market while the prospect of Bundling simultaneously threatens small providers while attracting larger, facility based buyers into the market. The changes under way now will yield winners and losers and providers are now positioning themselves to mitigate regulatory risk and capitalize on opportunities created by the ever expanding market. Hospice Medicaid Private Duty Conclusions 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 2010
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The second quarter of 2010 started off with a bang, just a week after President Obama signed healthcare reform into law. This should have been big news for homecare providers, but it was overshadowed by media attention (some good, some bad) on some of the biggest operators in the industry.
The best thing about the enactment of healthcare reform on the healthcare services mergers and acquisitions market is the removal of uncertainty. The legislation generally promotes homecare, although Medicare Certified Home Health providers will see some margin erosion in the next few years. On the positive side: the rural add-on is restored, “Bundling” has been pushed back to a pilot program in 2013, the CLASS (Community Living Assistance Services and Supports) Act will create a new payer for non-medical homecare, FMAP (Federal Medical Assistance Percentages) was extended and the Community First Choice Option implemented for Medicaid providers, and Medicare hospice concurrent care can be introduced. The jury is still out on the 36 month rule and the potential moratorium on new provider numbers. For Private Pay providers, employer responsibility will add costs to the provision of care, but the end of the recession should stimulate growth where trends have been pretty flat – especially when the labor market recovers. While healthcare reform acknowledged the cost/benefit advantages of homecare of all types, media attention reminded the country about the persistent problem of fraud and abuse in the Medicare program. Specifically, a Wall Street Journal article on April 27 suggested that most of the largest Medicare Certified Home Health providers in the country “game” the therapy threshold. (The article focused narrowly on therapy, not mentioning recerts, outliers, medical directors or any of the other ways that dishonest providers cheat the system.) All of the providers mentioned in the article are among the most reputable in the industry. Congressional investigations and class action lawsuits will determine if any of these stalwarts actually did anything wrong, but the story dredges up an unfortunate recurring theme: That fraud and abuse can and does undermine the argument that homecare agencies provide the best care to the greatest number of people for the lowest cost to the payer. Back in Q1, the OIG issued a report stating that Recovery Audit Contractors did a great job of sniffing our fraud and recovering misspent money for taxpayers. In the first week of Q2, President Obama directed Medicare to increase payment recapture audits as over half of all government billing fraud ($54 Billion out of $98 Billion) comes from Medicare and Medicaid. OIG is turning up the HEAT (Healthcare Fraud Prevention and Enforcement Team) to further clean up the industry. The reaction from most honest providers is to say “What took so long?” as they are sick and tired of competing against fraudulent operators and of the industry being tarnished by a few (or more than a few) bad apples. Market fundamentals continually push the industry forward while fraud and abuse continually stunt its growth. That being said, the biggest news story of Q2 had to be the announcement that Gentiva is buying Odyssey for quite a premium. We believe that this announcement is a harbinger of future growth as one of the largest home health providers and one of the largest hospice providers have shown enormous confidence in the synergy between their respective businesses. While this is certainly an endorsement of the alleviation of uncertainty and good news for the healthcare services M&A market, it should not be interpreted as an indication that valuations are skyrocketing. Market fundamentals (baby boomers aging in place) have kept valuations relatively high through good times and bad, but one blockbuster deal does not set a new bar for valuations (see our quote in Eli’s Home Care Week 5/31/10). The good news is that much of the uncertainty regarding healthcare reform is gone. The bad news (for some) is that it’s getting harder and harder for small providers to compete. Bundling may kill off more Medicare providers than IPS did, but it is also attracting large, facility based providers who want to position themselves for a potentially brave new world. For Private Duty providers, the official end of the recession bodes well for valuations as buyers continue to pay premium prices for private pay, W-2 agencies – especially those that have some critical mass. If you’d like to discuss how all of this affects you, feel free to contact us any time. We always happy to discuss market conditions, valuations, and the process we undertake to effect a successful transaction. |
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Market-Conditions Q1 2010
Market Conditions Q4 2009
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Current market conditions in the healthcare services industry are relatively good. While most of the economy is slowly thawing from a deep freeze created by the financial crisis, the healthcare services industry is, with few exceptions, still boiling with activity as demographic trends drive significant growth and consolidation. During the turbulent financial crisis over the last year and a half, the healthcare services industry has performed well by any standard of comparison. Healthcare service companies have remained profitable, continued their strong growth (even adding jobs to an otherwise moribund labor market), and further strengthened the trend towards consolidation through mergers, acquisitions, and recapitalizations. Every segment within the healthcare services industry is experiencing growth and consolidation, although not every segment is at the same point in the valuation cycle. Segments with significant government payers are more challenged by current uncertainties in the regulatory environment than those with an emphasis on private payers. Healthcare service providers (especially homecare providers) should theoretically benefit from healthcare policy reforms that propose to extend and expand coverage. However, current proposals threaten to undermine the ascendance of the homecare industry as the low-cost alternative to more institutional providers. The most important variable in the market for providers who rely on government payers is Medicare. How will potential reforms impact the Medicare program and participating providers? Nursing and equipment providers face entirely different regulatory challenges, but they both are under constant pressure to eliminate fraud and maximize program efficiency on behalf of taxpayers and beneficiaries. Medicare certified home health agencies are fighting against draconian budget cuts that have been proposed recently while durable medical equipment and respiratory therapy providers have been trying to stabilize and recover from the blows dealt to them by competitive bidding, rate cuts, service caps, and now, accreditation requirements. Both industry segments provide essential products and services that are relatively cost effective and that significantly improve the quality of life for beneficiaries. Nevertheless, both need to do a better job of preventing policymakers from reforming the Medicare program to their detriment. Medicare Certified Home Health Durable Medical Equipment/Respiratory Therapy Medicaid Private Duty Medical Staffing Conclusions |