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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
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: Q2 2013
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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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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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