Market Conditions Q1 2018
Although 2017 sometimes felt like a whipsaw, 2018 promises to be a year of continued growth and consolidation in the healthcare services industry. Even with increasing regulatory uncertainty, market imperatives require greater efficiency, creating demand for in-home providers across the spectrum.
Medicare Certified Home Health
A study published in the American Journal of Medicine found that each home health episode saves over $6,000 in the year after a hospital discharge, demonstrating the importance of home health in improving outcomes while reducing costs. Even so, providers are fighting margin erosion from numerous rate cuts as they adjust to new CoPs and a renewed threat of HHGM. NAHC benchmark data indicate providers becoming more efficient with average cost/visit and visits/episode declining. However, the data also reveal greater separation between the top and bottom of the market with the top 1/3 of agencies netting over 20% of revenue and the bottom 1/4 of agencies reporting negative margins. Our observation is that many of the larger and more efficient providers are capturing much of the traditional Medicare referral stream, thus yielding the highest margins and highest valuations.
Hospice
In an environment otherwise characterized by rate cuts and regulatory uncertainty, hospice providers are enjoying comparatively favorable conditions. Stable rates and excellent growth prospects are attracting buyers from across the continuum who want to diversify their business mix, bolster their margins, and position themselves to participate in bundled payments. Sellers are in short supply, keeping valuations high.
Medicaid
Researchers at Johns Hopkins determined that the 13% of Medicare patients who require long term supportive services cost almost 300% more than typical patients. This would seem like another opportunity to leverage patient coordination and address chronic assistance with the activities of daily living to improve outcomes and reduce systemic costs. However, although some new states are continuing the expansion of Medicaid under the ACA, it’s more likely that any new legislation will reintroduce block grants & per capita caps as well as allowing states to experiment with their own methods for curbing growth.
Non-Medical Home Care
A healthy economy and tightening labor market are fueling strong growth for non-medical home care providers who are capitalizing on a seemingly never-ending demand for care. The opportunity for sustained growth free of government payers is attracting a diverse range of strategic buyers and private equity investors. Higher costs associated with greater regulatory compliance can be offset by scale, driving accelerated consolidation and high premiums being paid for market leading acquisition candidates.
Conclusions
Last year was marked by mega-mergers that exemplified both accretive and strategic approaches to improving efficiency. Accretive buyers are driving down costs through scale and strategic buyers are improving outcomes and margins by following the patient through the continuum of care, which is now extending all the way to the payer as insurance companies apply their expertise in population health management to the provision of care. Perhaps the announcement by Amazon, Berkshire Hathaway, and JP Morgan that they are starting a healthcare company is an indication of things to come, but whatever innovation they introduce is sure to include in-home services of all kinds. The bottom line is that buyers are active from every angle, paying high premiums for highly strategic assets and gobbling up market share as the market shifts towards value-based and risk-based compensation models.
If you’d like to discuss how all of this affects you, feel free to contact us any time.
We’re always happy to discuss market conditions, valuations, and the process we undertake to effect a successful transaction.