Market Conditions Q2 2017
The current quarter has been a period of assessment of a changing landscape and corresponding implications for strategic positioning. On one hand, the new administration and new Congress promise to significantly alter the regulatory environment; on the other hand, the same old market forces are driving growth and requiring providers to deliver care as efficiently and cost effectively as ever. Although greater uncertainty will give some operators pause, a less rigid approach allowing greater experimentation will probably create a lot of new opportunities – especially for smaller and mid-sized providers.
Medicare Certified Home Health
The Medicare certified home health space has undergone unprecedented consolidation under the Affordable Care Act and we expect the trend to continue no matter what the new administration does. Medicare providers may see less cost-inducing bureaucracy through the possible elimination of face-to-face requirements, pre-claim reviews, and mandatory participation in experimental reforms, but patient coordination and value-based compensation will probably survive and continued rate reductions will require everybody to be as efficient as ever. We continue to see buyers valuing traditional Medicare above all other payers for skilled home health.
Hospice
What few hospice providers are for sale attract buyers from all quarters due to disproportionately high growth potential and low competition – all with very respectable margins and a relatively stable regulatory environment. Larger providers are commanding the highest premiums but smaller providers that are clean and profitable in desirable markets are also selling for impressively high prices.
Medicaid
Medicaid providers will probably see curbs on expansion and the proliferation of managed care compensation models, but will still be essential in the effort to reduce overall systemic costs by achieving good outcomes for dual eligible beneficiaries and by preventing chronic conditions from escalating into acute episodes. Although lower margins and state-specific operating conditions tend to dampen valuations, we’re seeing demand for Medicaid providers from strategic buyers who want to follow their patients and appeal to their referral sources by accepting all payers.
Private Duty Home Care
As long as economic conditions permit, demographic conditions will continue to present ample opportunities for growth. Also, the new regulatory environment could improve operating margins as private duty providers hope for a reversal of the ACA employer mandate and the Department of Labor ruling eliminating the companionship exemption. We’re seeing high demand for quality W-2 private pay providers as many operators look to diversify into segments that promise strong growth with limited exposure to government payers.
Conclusions
As some things change and some things stay the same, all providers must be strategic in achieving good outcomes for patients while delivering cost effective efficiency for payers and referral sources. Even if the regulatory environment is turned on its head, the economic benefits of consolidation and the demographic fundamentals driving growth won’t be undone, so the M&A market will continue to surge. A PricewaterhouseCoopers study concluded that the home health sector is currently commanding the highest valuation premiums in the healthcare industry. However, their study focused on 55 transactions involving the largest companies at the top of the market, belying much greater volatility for the market as a whole. We are seeing a strategy-driven market meaning the same asset may be much more or less valuable, depending on the perspective of the buyer. Thus, it’s especially important for sellers to “clear the market” prior to making any final decisions.
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.