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In Q1 of 2011, we have seen something of a rebound from the healthcare reform doldrums of 2010. Much of the uncertainty regarding the Patient Protection and Affordable Care Act (PPAC) has been alleviated and buyers have aggressively returned to the market to best prepare themselves for operating conditions in the new era. CMS reports that 2010 showed the lowest growth in healthcare spending in 50 years, but because of the contracting economy, that 4% growth rate comprised the highest increase in the proportion of GDP ever. The Standard and Poor’s Health Care Economic Composite Index indicates that healthcare costs are continuing to rise, but Reuters reports that Americans are more confident about their ability to pay for healthcare than they were during the recession. The Camden Group published a study indicating that efficiency and cost cutting will be the leading trends in the healthcare industry in 2011, which suggests growth opportunities for homecare providers of all types. However, since home health comprises only about 3% of Medicare spending, homecare providers will probably have far less influence on how Congress, CMS, and MedPac respond than acute (30% of spending) and primary care (20% of spending) providers. Medicaid providers are waiting for the economy to stimulate tax revenue so they can take advantage of certain provisions in the PPAC while Private Pay providers are starting to see purse strings loosen a little as the recession is officially over. When the economic recovery actually takes hold, all segments will benefit from the rising tide. Irving Levin Associates reported in their Health Care Services Acquisition Report that M&A activity registered a noticeable bump in 2010 and they predicted more consolidation in 2011. They attributed the increase to easing recessionary conditions and easier credit, but noted that cumulative valuations (as a proportion of revenue) were down as a result of several distressed hospital transactions. The Levin report is not as informative for the homecare market because they focus on publicly announced transactions; of which there are very few in the homecare industry (they only recorded 8 homecare transactions in their most recent dataset). We at Healthcare Advisory Partners have definitely seen an uptick in volume, but not the decrease in valuations predicted by some buyers. In fact, several large transactions were closed in Q1 with sky-high premium prices. As always, distressed companies are selling for discounted prices while market leading agencies can command significant premiums. Along with cutting costs and improving efficiency for all providers, another recurring theme impacting the M&A market for Medicare, Medicaid and CHIP providers is program integrity. Last year, the Healthcare Fraud and Abuse Control Program (HCFAC) and the Healthcare Fraud Prevention and Enforcement Action Team (HEAT) netted a record $4 Billion by conducting over 1,000 investigations and almost 500 prosecutions against almost 1,000 defendants that resulted in over 700 convictions. Seventy percent of those investigated were convicted! Additionally, the Department of Justice recovered $2.5 Billion more from civil prosecutions under the False Claims Act. Not surprisingly, enforcement is now being augmented by statistical predictive modeling and RAC and ZPIC audits are being expanded to include Hospice, Medicaid, and Medicare Advantage providers. The muckrakers at the Wall Street Journal have stayed on the story (including a very suggestive piece last year about leading home health providers who might be gaming the therapy threshold) and are suing the federal government for access to Medicare billing records for all providers. In February, Department of Justice announced “the largest-ever federal health care fraud takedown” which involved over 100 defendants accused of stealing hundreds of millions of taxpayer dollars. From the M&A market’s perspective, the more prosecutions, the better. Not only are buyers more likely to pay a premium for an acquisition candidate that is squeaky clean, but everybody benefits from the elimination of fraudulent competition. Medicare Adjusting to changes brought about by healthcare reform is still the primary issue facing buyers and sellers of Medicare Certified Home Health agencies. Although the Republicans took control of the House of Representatives on a promise to repeal the PPAC, they simply don’t have enough votes to do the same in the Senate nor to overturn a presidential veto. Thus, the PPAC is the law of the land and buyers and sellers are acting accordingly. Rate Cuts, the 36 Month Rule, and the 2013 pilot program to Bundle services into Accountable Care Organizations are all realities that must be contended with. In addition to the known issues of the PPAC, MedPAC and the National Commission on Fiscal Responsibility and Reform have published new recommendations to Congress to further rein in the growth of expenditures in the Medicare program. Most notably for home health providers are the recommendations to accelerate the rate cut schedule, to reintroduce the co-pay idea (which is also supported by the Congressional Budget Office) and to introduce a deductible. They also recommend implementing a moratorium on the creation of any new Medicare provider numbers. The National Association for Home Care (NAHC) has pointed out that (according to the most recent cost report data), if the rate cuts are accelerated, over 50% of Medicare Certified Home Health agencies will be paid less than the cost of care as soon as 2012. They have also strongly stated that both co-pays and deductibles are discredited ideas that lead to longer hospital stays, increased institutionalizations, and worse outcomes for patients (not to mention the financial impacts on providers), although they do support the moratorium idea as a way to allow regulatory authorities to maintain their statutory survey responsibilities to enhance program integrity. In their budget proposal, the Obama administration ignored MedPAC and the National Commission’s recommendations to accelerate the rate cut schedule and to introduce co-pays and deductibles. Rather than support drastic changes that could threaten access to care, the President chose to focus on cost savings achieved through increased enforcement of program integrity. MedPAC is generally unsympathetic because they start with the assumption that “Medicare continues to overpay for home health services” which is informed by cumulative cost report data showing that the average net margins for home health providers hover around 17% of revenue. (NAHC has repeatedly pointed out that MedPAC’s “average margins” have been derived from actual margins that range from 37% to -9% and that relatively few agencies are actually performing at the average.) MedPAC notes that 98% of Medicare beneficiaries live in a zip code served by at least two Medicare Certified Home Health agencies and that the ratio of the number of agencies to the number of beneficiaries increased by over 50% in 2010. So, while the Obama administration is trying to be sensitive to compromises designed to prevent disruption in the industry, MedPAC seems to have concluded that there are simply too many agencies chasing too few patients to be financially efficient for the payer. NAHC is more supportive of the president’s approach of rendering savings from program integrity enforcement rather than punishing the most efficient link in the continuum of care. To that end, they have announced a legislative initiative designed “to establish the home health services and hospice benefits as models of compliance and integrity in the Medicare program.” NAHC proposes the creation of a Home Health and Hospice Benefit Integrity Advisory Council comprised of honest providers and beneficiary representatives who will assist authorities to identify potentially fraudulent activities. NAHC also recommends establishing competency standards and credentialing requirements to root out inferior providers. Additionally, and of greatest importance to buyers and sellers, NAHC recommends that all agencies undergo a new survey after a change of ownership (CHOW) to ensure the integrity of new participants. We applaud NAHC’s efforts to improve program integrity from within the industry, but we do have a quibble with that last recommendation to survey all agencies that have undergone a CHOW. Since most of the buyers we introduce to our clients are larger and more experienced than the sellers, it doesn’t make sense to do a survey on every transaction. For new providers, we would agree with NAHC, but if a buyer is already a reputable participant in the Medicare program, we don’t see another survey as a helpful program integrity measure. For the foreseeable future, the primary elements of the PPAC that most impact home health providers will remain intact. The rate cuts will be implemented as scheduled, the 36 Month Rule will continue to be enforced, and the pilot program to Bundle the home health benefit into Accountable Care Organizations (ACOs) is still scheduled for 2013. Of these issues, the Bundling pilot to establish ACOs creates the most uncertainty for Medicare Certified Home Health providers. According to CMS Administrator Donald Berwick, the goals of replacing the fee for service model with the ACO model are to better care for the individual, to create better health among populations, and to slow the growth of costs in the healthcare system. The idea to coordinate health care delivery to improve outcomes while saving costs is nice in theory, but, given their disproportionate size and political power, Medicare Certified Home Health agencies might find themselves at a disadvantage when “coordinating” with primary and acute providers in the formation of ACOs. Many large health systems and insurance companies are already experimenting with various ACO models and reporting initial cost savings. The New England Journal of Medicine published an article about the financial risks of ACOs that found that “first and foremost, providers must have sufficient size and breadth” to make the model successful. Consistent with MedPAC’s belief that there are already too many home health providers, the primary effect of Bundling services into ACOs is that far fewer home health providers will be needed to provide care to the ever expanding population of people who need care. If the worst case scenario unfolds, many Medicare Certified Home Health providers will become redundant and lose their Medicare billing privileges. The lucky few who are welcomed into ACOs by their primary and acute care partners will grow to be huge, while everybody else will have to diversify into other payer classes in order to survive. Many providers don’t want to overreact since it’s far from certain how or if this reform will be implemented. However, many of the largest providers with the most to lose or gain are starting to prepare as if services will be Bundled into ACOs. Others who may have survived the transition from Reimbursement to Prospective Payment are deciding whether or not it’s worth toughing it out for another potentially radical restructuring of the industry. We have seen many very qualified buyers coming off of the sidelines to pursue acquisition candidates that help them to develop the comprehensive clinical capabilities and geographic coverage needed to be attractive to potential ACO partners. Facility based buyers are often motivated by licensure, thus may be willing to consider smaller acquisition candidates that are geographically desirable. Free standing buyers are looking to create size to capitalize on efficiencies of scale (while still preserving quality to satisfy P4P) and private equity groups continue to look for platform opportunities that have the talent and cash flow to be taken to the next level. Larger candidates continue to command premium prices and the 36 Month Rule continues to preserve a “valuation floor” at the bottom of the market. Hospice MedPAC hasn’t been as hard on hospice providers as they have been on home health providers. Although they note that the percentage of Medicare decedents utilizing the hospice benefit has almost doubled since 2000, they acknowledge that a much larger population could probably benefit from hospice services at the end of life and they are investigating whether expanding the hospice benefit might save money by reducing expenditures on other types of care. Although the number of in-home hospice providers has increased by about 50% since 2000, the total number of hospices in the entire country is still only about 3,500 which is a small fraction of the number of home health agencies that have mushroomed in the last few years. Also, at 4-5% of revenue on an aggregate basis, hospice net margins are a small fraction of what home health agencies are accused of netting. Since MedPAC doesn’t see the overutilization of services by an overpopulation of agencies with relatively high net margins as they do in the home health industry, they have been much more lenient in their hospice specific recommendations to Congress. Still, they did recommend reducing the 2012 market basket update to 1% which is a net increase of about .4% after the BNAF cut of .6%. This is still much better than cuts faced by home health or any other Medicare providers. In the future, MedPAC will be considering whether hospice should be Bundled into Accountable Care Organizations, whether to introduce a co-pay requirement, and whether to introduce a U-shaped payment model to better reflect the higher costs at the beginning and end of each episode. Although hospice providers will have their own challenges in the coming years, the segment looks relatively strong in comparison to other industries. The promise of significant growth with significantly less competition has attracted many very qualified buyers to the hospice market. Not only have LHC Group and Amedisys made significant hospice acquisitions (though nowhere near as large as Gentiva’s Odyssey transaction), several facility based providers are aggressively searching for strategic opportunities. The hospice industry probably has the most disproportionate number of buyers to sellers, thus prices for acquisition candidates continue to remain at high premiums, especially for sellers with some critical mass that are well under Cap. Medicaid The federal government wants to use Medicaid to relieve some of the financial pressure on Medicare. The PPAC includes several provisions that expand Medicaid and create opportunities for non-Medicare providers. However, state budgets are so overextended that Medicaid providers are enduring a period of rate cuts before seeing any of the benefits of reform. The National Conference of State Legislators has highlighted healthcare reform as one of the highest priorities for states in 2011, predicting that “budget cuts will again be deep, controversial, and painful.” The recession reduced state tax revenues at the same time that economic conditions forced more individuals to become reliant on state programs for care which has pushed Medicaid to as much as 30% of the budget in many states. Republican governors and congressional representatives are petitioning the Department of Health and Human Services (HHS) to waive “maintenance of effort” requirements to give states the flexibility to restrict access to and reduce costs associated with state Medicaid programs. Several states (most notably TX, FL, AZ, and others) are considering radical restructuring of their Medicaid programs with provisions such as drastic rate cuts, moving beneficiaries into managed care programs, and abandoning the Medicaid program (and related federal matching funds) altogether. HHS has responded by giving 13 states $45 Million to move Medicaid beneficiaries from institutional to community based settings. They have allocated an additional $621 Million for those initial 13 states in accordance with the Money Follows the Person and Community First Choice Option provisions of the PPAC and have proposed another $3.7 Billion to cover the remainder. Furthermore, HHS secretary Kathleen Sebelius has advocated that the Community Living Assistance Services and Supports (CLASS) provisions of the PPAC be reformed rather than repealed, giving further credence to the federal government’s commitment to expand opportunities for chronic care in order to reduce the need for more expensive acute care. As Medicaid becomes more integral to the greater continuum of care and becomes a larger proportion of federal spending, program integrity issues will also become more important. The PPAC created Medicaid Integrity Contractors to identify potential fraud as well as Medicaid Recovery Audit Contractors to complement their Medicare counterparts. An OIG survey of 10 states suggested that 18% of claims lack proper attendant qualification documentation and 2% of all claims lack any supporting documentation whatsoever. The OIG is currently conducting investigations in several states and Medicaid providers should expect to come under ever increasing scrutiny as policy makers rely on them to play an important role in reducing healthcare spending overall. For Medicaid providers in several states, falling pay rates are leading to weaker margins and lower valuations. Many potential sellers are waiting out the current down period and plan to sell when the economic recovery produces enough tax revenue for states to restore pay rates to reasonable levels. By then, the additional beneficiaries created by the PPAC will have actually started to enroll and individual agencies will find it easier to grow. Buyers are affected by the same operating challenges as sellers, thus they are being extra selective when pursuing acquisition candidates. Buyers who have contacted us are looking for larger Medicaid acquisition candidates in states with more stable Medicaid programs. The only Medicaid transactions we are seeing are large enough to generate sufficient premiums to motivate sellers to sell before the potential benefits of the PPAC can be realized. DME/O2 After eight years of hearing about Competitive Bidding, DME providers (and Medicare beneficiaries) finally got a taste of what life might be like under the program in the initial nine pilot markets. The primary question is “Can the lowest bidder provide a high enough level of service to be worthwhile to the beneficiary and the payer?” According the American Association of Homecare (AAH), the answer is a resounding “No!” A litany of complaints to their www.biddingfeedback.com website have included difficulty in identifying local providers, delays in receiving medically necessary equipment, longer than necessary hospital stays, and a general reduction in the quality of products and services. Several state associations have joined the AAH in criticizing Competitive Bidding for actually eliminating competition to the detriment of beneficiaries, providers, and ultimately payers. The effects of the lack of competition should be instructive for anybody who is relying on extreme consolidation (such as Bundling home nursing providers into ACOs) as the primary tool to protect Medicare solvency: Too Big to Fail is not in the best interests of patients, payers, or providers! Now that the effects of Competitive Bidding have become more concrete, Congress has heard from constituents on all sides of the issue who have been negatively impacted. In a rare bipartisan effort, a Republican and a Democrat from Pennsylvania (Pittsburgh is one of the pilot markets) have introduced legislation to repeal Competitive Bidding for DME providers. We will be carefully monitoring the progress of the Fairness in Medicare Bidding Act (HR 1041) in hopes that genuine competition can be restored to this important corner of the healthcare services continuum. Although regulatory issues have all but killed the M&A market for DME providers in the last few years, we are very encouraged that providers’ efforts to fight back are finally starting to gain some traction. Providers who can hang in there long enough for Competitive Bidding to be repealed will be rewarded by access to an expanding market serviced by fewer competitors. We very much look forward to that day! Private Duty Private Duty providers of nonmedical homecare are simply waiting for the economic recovery to give consumers enough confidence to spend more cash on private care. Many leading providers saw significant erosion of business during the recession as the weak labor market freed up family members to provide care for their elderly relatives. The economy seems to have stabilized, but the domestic growth needed to absorb so many unemployed people has yet to materialize. Providers have adjusted by trimming administrative expenses and hunkering down until growth resumes. Although free from many of the most odious provisions of the PPAC, private duty homecare providers continue to face a handful of regulatory issues that could impact profitability in the future. The one PPAC provision that could really hurt private duty homecare providers is the employer mandate to provide health insurance to all employees on a FTE basis. Orrin Hatch has introduced legislation to repeal that provision (American Job Protection Act S 20), but he hasn’t garnered enough support to make a serious challenge. The employment classification of caregivers is one issue that continues to smolder, but for which a resolution is nowhere in sight. The IRS may become involved, but no regulatory authority has given much consideration to the many consumer protection implications raised by 1099 and W-2 caregivers performing the same work in the same setting. Also, as private duty homecare becomes more prevalent and more important to the continuum of care, increased regulation is to be expected and many states (including California) are considering the introduction of licensure requirements that would add additional costs to the provision of care. Business Week summed it up nicely with their headline Home Care’s Booming, and So Is Regulation. Although we have seen fewer private duty transactions since the economic crisis and recession, valuations have remained consistent. Nonmedical homecare agencies that utilize W-2 caregivers continue to sell for significant premiums when compared to their 1099 cousins. Size is an important point of differentiation and larger agencies with professional management will command greater premiums than owner-operated agencies with less management depth. We continue to be strongly bullish on private duty homecare as the demand for services will increase along with consumers’ ability to pay. Conclusions The expression is “When the going gets tough, the tough get going!” and there’s going to be some pretty tough sledding out there for some providers. Meanwhile the toughest providers are getting going on their preparations for the implementation of various provisions of the PPAC. Medicare providers are making acquisitions now to make themselves attractive ACO partners later while Medicaid providers are cutting costs now to survive long enough to benefit from expected growth later. Private Pay providers continue to be in demand and there’s even a ray of hope for DME providers. Operating conditions are shifting in favor of larger providers and many smaller providers are carefully considering whether or when to exit. If they sell too soon, they might not be large enough to qualify for their strike price: If they wait too long, they could get crowded out by a stampede triggered by Bundling or get hit with a larger tax bill after the Bush tax cuts expire. Either way, the market is reacting to healthcare reform and buyers are positioning themselves to be among the survivors who stand to reap the most from consolidation. 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 2010
Market Conditions Q3 2010
Market Conditions Q2 2010
Market-Conditions Q1 2010 |