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Q2 is federal budget season and both sides issued their wish lists: the Obama budget shaves costs from the defined benefit programs by further intensifying fraud prevention enforcement and proposing to cut $400 Billion from Medicare and Medicaid over ten years while the Ryan budget puts forth (again) a defined contribution model characterized by block grants and premium supports. A report released by AARP concluded that studies in over 35 states have indicated that home and community based services are more cost effective than institutional care and James McLain of Brown Brothers Harriman said that “case management will have to become a core skill for most providers.” Thus, no matter how the budget battle is settled, homecare providers of all types will be called upon to improve efficiency and reduce costs. Medicare The fiscal cliff deal didn’t solve much for home health providers as sequestration took another bite out of margins and budget battles could draw more blood. Although the Obama budget was perhaps easier on home health providers than other providers, it did include a co-pay provision and bundled payments that could undermine independent operators. MedPAC essentially re-issued their 2012 recommendations, arguing that significant rate cuts and a leveling off in service volume didn’t discourage over 700 new home health agencies from being established and that access to care is now almost universal. They recommend revising the case mix methodology to rely on patient characteristics to determine payment amounts, increasing medical reviews and suspending new provider enrollment, introducing co-pays for community referrals, and eliminating the market basket update as well as accelerating the ACA rebasing schedule to two years from four. NAHC opposes just about all of these proposals because they add undue burdens to providers that would threaten to reverse trends towards greater access to care for beneficiaries. Program integrity commands headlines as USA Today published that the federal government recovered a record $4.2 Billion in fraudulent billing from Medicare and Medicaid providers last year. The OIG estimated that 1 in 4 home health agencies have questionable billing practices, but NAHC countered that many of those agencies are concentrated in a few geographic areas. The HEAT Medicare Fraud Strike Force arrested 89 people in 8 cities and is continuing to focus on Miami, Los Angeles, Detroit, Houston, Dallas, Chicago, Baton Rouge, and other hot spots. On a more positive note: the Medicare Board of Trustees extended its estimate of Medicare solvency to 2026 and home health continues to be essential to improving efficiency through patient coordination. Large strategic and financial buyers are looking for home health acquisitions, but good deals are hard to find and prices have remained relatively high. Hospice Hospice growth is so essential to financial efficiency that policymakers have spared providers the relentless rate cutting that has prevailed in other segments. However, as hospice utilization increases so does scrutiny and pressure to reduce costs. MedPAC has recommended reducing payments, redesigning the payment model, introducing variable payment rates, and requiring revalidation for all Medicare certified hospice providers. OIG has recommended that CMS review inpatient utilization, length of stay, and live discharges to reduce fraud and abuse. Hospice providers can expect increased data reporting through PEPPER and a greatly expanded cost report as well as increased medical reviews and potentially lower payment rates for some services. Growth prospects trump margin erosion as buyers outnumber sellers and prices remain high for hospice transactions. Healthcare Finance News reported that private equity groups want to invest in hospice, according to Burk Lindsey, managing director of healthcare investment banking at Raymond James. We’ve found relatively few for-profit hospices are large enough to qualify as private equity platform investments, but strategic buyers will consider acquisition candidates of any size if they meet other important criteria. Medicaid The Obama budget is supportive of Medicaid expansion under the ACA with comparatively modest cuts and no per capita caps. The Ryan budget proposes block grants and various states are exploring alternatives to Medicaid expansion such as premium assistance (the “Arkansas Model” or “private option”), managed care, and various waiver and dual eligible pilots (Medicare Medicaid Alignment Initiative). AARP noted that 2/3 of states are integrating services for dual eligibles, but more than half of those have delayed or cancelled implementation of MMAI projects. Program integrity is being stepped up as regulators brace for significant growth. Fraud investigators will be utilizing data mining methods to identify suspicious practices and arrests have been made in several states. Buyers are looking for opportunities to scale up and consolidate, but not every state will attract the same level of investment. Private Duty Although private duty providers of nonmedical care are not dependent on the federal budget, the inability of Congress to chart a sustainable path threatens economic stability just as the economy is improving and demand for care is on the rise. The employer mandate will certainly change operators’ calculus, even if proposed legislation is passed redefining “full time” as 40 hours per week. Although if proposed legislation is passed redefining “large employer” as at least $7MM in annual revenue, a big chunk of the private duty industry will be off the hook. Additional headwinds from the potential elimination of the companionship exemption could be compounded by some states’ introduction of new licensing requirements and the possibility of increasing minimum wages. Operators who have already exceeded either definition of “large business” are as incentivized as ever to grow revenue and spread their costs in order to preserve margins and profitability. As with other segments in the current market, quality sellers are hard to find as successful operators are adapting to conditions rather than looking for the exits. Conclusions The stark contrast between budget proposals indicates that scores that were supposed to have been settled by the Supreme Court and election are not settled. While everyone agrees that our healthcare delivery system needs to be more efficient, the lack of cooperation among elected officials impairs regulators’ ability to implement policies coherently. All parties agree that home and community based services are integral to maximizing efficiency through patient coordination, but lack of political coordination introduces chronic uncertainty that can undermine confidence in the market. Irving Levin Associates reported that “healthcare mergers and acquisitions plummeted in the first quarter of 2013…excluding the home health and hospice sector” which remained flat. We continue to see a diverse mix of qualified buyers selectively seeking strategic acquisitions to optimize growth and efficiency in preparation for the implementation of bundled services and outcome based compensation. 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 2013
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Q3 started with some pretty good news, but the combatants in Washington threaten to undermine promising fundamentals if they can’t facilitate a financially and politically stable environment. In spite of the sluggish economy and political gridlock, the healthcare industry continued to grow by over 20,000 jobs per month, one third of which were in the homecare sector. Martha Ross, an economist at the Brookings Institution, said that “Healthcare is a strong and growing industry compared to others.” Also, the Obama administration delayed some key provisions of the ACA, most notably the employer mandate and certain data collection and reporting requirements which are now scheduled to go into effect January 1, 2015. Just when things were starting to pick up, the federal shutdown gave decision makers pause as policymakers discuss and experiment with alternative value based models of care delivery. The fact that ACOs now serve about 14 percent of the nation’s population indicates that coordination through consolidation is well under way, but exactly how the market will react is still far from certain. Medicare As Congress negotiates different approaches to the budget, home health providers have received mixed messages. They’re necessary and important for efficiency, but rates are being reduced and costs are being increased. Sequestration remains in effect and rebasing threatens the viability of many agencies. NAHC contends that CMS is relying on faulty data and Val Halamandaris calls rebasing “the straw that breaks the camel’s back.” Billy Tauzin of the Partnership for Quality Home Healthcare said “any further cuts to Medicare home health will endanger seniors’ and disabled persons’ access to the clinically advanced and cost effective home-based care that is medically necessary for homebound patients.” Additionally, co-pays, deductibles, means testing, raising the eligibility age, and introducing a catastrophic cap are all being considered by policymakers. So why would anyone want to buy a Medicare certified home health agency? Patient coordination & bundled services are strategic reasons and comparatively decent margins & strong growth prospects are financial reasons. We’re continuing to see financial buyers seeking large platform investments and strategic buyers looking for add-ons that expand and enhance operations. Hospice Hospice continues to grow in both numbers of patients and providers and legislation was introduced in the Senate (again) to establish a benefit to discuss end of life options. Much like home health agencies before them, hospice providers’ costs are increasing as they become subject to greater scrutiny from MACs, RACs & ZPICs, must endure more frequent surveys and ADRs, and provide greater documentation for PEPPER and the Hospice Quality Monitoring Program. Administratively, providers will be required to submit a much more detailed cost report and may have to adjust to a new tiered or U-shaped payment model. The ACA wiped out most planned rate increases, but margins are still relatively good and growth prospects couldn’t be better. Although hospice providers are starting to see the margin erosion already experienced by other providers, their still-respectable margins combined with supercharged growth prospects have attracted buyers from all points on the continuum of care. …and since most hospice providers are thinking about growth strategies rather than exit strategies, the rare seller can command a premium price at any size. Medicaid Although sequestration doesn’t apply to the Medicaid program, growth promised by the ACA has been stymied by the weak economy and partisan politics. An AARP article entitled “Home and Community Based Services: The Right Place and the Right Time” encouraged the Commission on Long Term Care to rebalance Medicaid spending toward HCBS but Reuters reported that only about half of the states have agreed to expand Medicaid. Thus, the Department of Health and Human Services has downsized its estimate of new enrollees from over 20 million to under 10 million, which could hamper growth in some states. A Rand study concluded that states opting out of Medicaid expansion will spend over $1 billion more on uncompensated care than states implementing Medicaid expansion. States searching for alternatives to Medicaid expansion have considered premium supports for beneficiaries, but the director of North Carolina’s Medicaid program, Tony Keck noted that the private option “covers the same number of people with the same benefits, but is more expensive.” Political uncertainty is limiting progress on the dual eligible problem, but since reducing costs through patient coordination will undoubtedly be a part of the solution, we expect further consolidation as the economy improves. Private Duty Providers of nonmedical homecare were pleased by the delayed implementation of the ACA employer mandate, but displeased by the elimination of the companionship exemption from paying minimum wage and overtime to caregivers: Both changes become effective January 2015. The New York Times portrayed the latter story as a “redress of long standing injustice” without any coverage of the provider perspective while the National Council on Independent Living pointed out that higher costs would threaten access to care – especially for those who need it most. Also, limiting access to community based care for disabled persons could be a violation of the ADA and/or the Olmstead decision. With the employer mandate and elimination of the companionship exemption threatening to substantially increase costs, providers need a strong economy to help stimulate revenue growth. Although viable candidates are somewhat scarce, we continue to hear from new buyers searching for both platform investments (which could be as small as $5 Million) and strategic add-ons in the private duty space. Conclusions Both sides in Congress have valid concerns, but governing by crisis is counterproductive. The need to provide care to a growing and aging population at a lower cost remains the fundamental force driving consolidation in the healthcare services industry. However, decision makers need a stable regulatory environment for planning and execution of strategies that can yield greater efficiency. Home and community based services of all types are central to every patient centered and performance based model of care being considered, but political uncertainty is curtailing the economic recovery and sidelining many buyers and sellers from the market. We believe a “grand bargain” is needed to provide enough certainty for market forces to resume. Until then, we’re only seeing the most strategic transactions being consummated. If you’d like to discuss how all of this affects you, feel free to contact us any time. We’ll be making a presentation at the NAHC Annual Meeting in Washington DC on November 2. |
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