It’s becoming very clear that the private equity industry and other
investors are positioning themselves to take advantage of the United
States’ generational tsunami by investing in the home health and hospice
Investor interest in these healthcare subsectors has increased dramatically
over the last several years. EBITDA multiples in the private markets for
post-acute, home health and hospice providers are sky-high, averaging in
the mid-teens in 2019, and nothing suggests a slowdown in investors’
appetite to acquire providers in these subsectors. Investment in the home
health and hospice sectors likely is only just beginning — based on the
demographic trends in the United States — and should continue strongly for
the next several years.
In the last two years, investors have targeted and acquired significant
post-acute, home health and hospice providers. A few examples of such
investments are as follows:
Revelstoke Capital Partners.
In October 2019, Revelstoke Capital Partners took an investment stake in
The Care Team, a Michigan-based home health and hospice provider,
solidifying Revelstoke’s search for a provider in the home health and
hospice industry capable of offering excellent outcomes to patients in a
low-cost setting. The Care Team is a leading home health and hospice
provider of skilled care for homebound patients, as well as end-of-life
care for older adults. With three locations across eastern Michigan, The
Care Team offers instant access to comprehensive home health care,
including physical therapy, occupational therapy, speech therapy, nursing,
social workers, home health aides and bereavement care.
Blue Wolf Capital Partners and Kelso & Company.
In May 2018, Blue Wolf Capital Partners and Kelso & Company backed the
three-way merger of Michigan-based Great Lakes Caring, Connecticut-based
National Home Health Care and Texas-based Jordan Health Services,
rebranding the combined entity as Elara Caring. This merger created one of
the largest home-based care providers in the United States, serving more
than 65,000 patients each day across 16 states, and employing about 32,500
Summit Partners. In August 2019, Summit Partners acquired Abode Healthcare, a
Colorado-based provider of home health and hospice services. Adobe provides
services to patients throughout the United States and offers a full
spectrum of palliative care and support services tailored to the individual
needs and preferences of terminally ill patients and their families.
Towerbrook Capital Partners and Ascension Health. In October 2019, Towerbrook Capital Partners and Ascension Health
acquired Compassus, a national hospice, palliative and home healthcare
provider. Compassus operates more than 125 community-based hospice,
palliative and home healthcare services locations in 30 states.
InTandem Capital Partners. In December 2018, InTandem Capital Partners acquired Pediatric Home
Service, a Minnesota and Wisconsin home healthcare company specializing in
helping kids be kids — at home — no matter what their medical challenges.
Pediatric Home Service provides advanced and integrated services in the
home to children.
In May 2019, Advent International acquired AccentCare Inc., then the
sixth-largest home health provider in the United States, with a presence in
more than 175 markets. AccentCare offers a wide range of services — from
personal, nonmedical care to skilled nursing, rehabilitation, hospice care
and care management — to patients across 16 states. The company serves
health systems, physician practices and managed care organizations, and
includes strategic joint ventures and partnerships.
Encompass Health Corp.
In July 2019, Encompass Health Corp. acquired Alacare Home Health &
Hospice, adding 23 home health and 23 hospice locations to Encompass’
Alabama presence. The acquisition further solidifies Encompass’ focus on
national integration of healthcare services, which includes the post-acute
care space. Encompass offers both facility-based and home-based patient
care through its network of inpatient rehabilitation hospitals, home health
agencies and hospice agencies. Encompass has a national footprint that
includes 131 hospitals, 244 home health locations and 82 hospice locations
in 37 states and Puerto Rico.
Investors’ Increased Interest in the Post-Acute Care Space
Three main drivers attracting private investors to the post-acute care
- Organic Growth Drivers. There are attractive and sustainable long-term organic growth drivers,
namely (1) U.S. demographics and (2) the coming bubble of patients in the
baby boomer generation who will need access to all things post-acute care,
especially home health and hospice services. While demographics matter, the
baby boomer generation (the oldest of which are only in their 70s) has not
quite reached the age of routinely and consistently needing access to home
health and hospice services. Some projections suggest that the tsunami of
patients requiring access to home health and hospice services will arrive
in the next five years — and will not subside for the next several decades
due to the population demographics of each subsequent generation.
- De Novo Opportunity Drivers. The second primary driver is the meaningful de novo opportunities for
private investors to create and grow valuable assets in geographies that
historically have lacked or provided subpar post-acute care services.
Certain areas of the country have seen increased access to post-acute care
services, while other areas have not, often due to lack of investor
interest, population demographics, lack of quality payor coverage, or
prohibitions set by the government. In January 2019, the Centers for
Medicare and Medicaid Services (CMS) lifted its moratorium on the creation
of new home health agencies. That moratorium had been in place for almost
five years in certain parts of Florida, Illinois, Michigan and Texas.
Consequently, these areas have not participated in the natural growth of
the home health agency market, which could drive further de novo
opportunities in these underserved areas.
- Traditional M&A Drivers. The third and most obvious driver is the significant opportunity for
mergers and acquisitions, consolidation, and joint venture relationships in
the post-acute care subsector. Since historically home health and hospice
agencies have been owned and run as stand-alone small businesses, both
subsectors continue to be highly fragmented and ripe for consolidation. The
fragmented nature of the home health and hospice industry and the
increasingly complex regulatory system in which these providers operate
should continue to elevate the speed at which this sector consolidates.
Primary Takeaway: The ballgame for private investors to take on positions in the home
health and hospice market has just started; we are likely only in the very
early innings from a consolidation standpoint and the trend could last well
beyond a decade.
Current Operational Challenges
There are several current market challenges that investors in the home
health and hospice space should consider.
- Reimbursement. Effective Jan. 1, 2020, the federal reimbursement scheme for the home
health industry is subject to an overhaul under the Patient-Driven
Groupings Model (PDGM). PDGM was developed to improve
reimbursement for all types of patients who are eligible to receive home
health benefits. CMS intends for PDGM “to reduce volume-based reimbursement
that doesn’t necessarily align with a patient’s condition and for home
health agencies to develop closer, more collaborative relationships with
hospitals and skilled nursing facilities.” At its core, PDGM shifts the
reimbursement model for home health agencies from volume-based care to
value-based care — a shift that the healthcare industry is seeing in
general. As such, implementation of PDGM will change how home health
agencies currently operate, requiring them to become process-centric and
data-focused to ensure that the value provided is at the forefront to be
While PDGM could trigger a slowdown of investment in the home health agency
sector, in the very near term, private investors may redirect their focus
to the hospice sector, which has been extremely active for the last six to
12 months, rather than abandoning the post-acute care sector altogether.
Any potential slowdown in the home health sector will likely be temporary,
as the industry observes the practical effects of PDGM.
- Lack of Sophisticated Management Teams. Since, historically, home health agencies and hospices have been run as
small businesses (one owner with one location), investors increasingly are
seeing a lack of experienced management teams that are capable of running
multifacility and/or state home health agencies and hospices. Finding a
management team that is capable of effectively operating a multilocation
home health agency or hospice can be challenging. When sophisticated
operators are identified, investors should take note of agencies with this
experience because they can be more desirable to facilitate fast
consolidation and expansion.
- Clinical Shortages. It is no secret that there is a clinical staff shortage in the healthcare
industry. A recent report by CNN suggested that the United States will need
to hire 2.3 million new healthcare workers by 2025 to care for the aging
population. Clinical shortages are more significant in rural areas. As
private investors continue to focus on home health agencies and hospices,
both of which are staffed largely by registered nurses, ensuring consistent
and reliable access to clinical staff and/or staffing agencies should be at
the top of any business plan focusing on post-acute care.
Regulatory Compliance Considerations
- Government Oversight. Post-acute care providers enrolled in and participating in the federal
healthcare programs are subject to significant government regulatory
oversight. In addition to CMS and the Office of Inspector General (OIG) of
the U.S. Department of Health and Human Services (HHS), providers could
fall within the regulatory dominion of the FBI, Drug Enforcement
Administration, Food and Drug Administration, Office of Civil Rights of
HHS, or any relevant state counterparts of the same. Importantly, private
investors should continue to be aware that the OIG and CMS continue to
focus enforcement attention on home health agencies and hospices, since the
government historically has viewed these provider types as fraud-prone and
key focal points.
- Medicare Home Health Agency 36-Month Rule. The Medicare Home Health Agency 36-month rule prohibits Medicare-enrolled
home health agencies from undergoing a majority change of ownership within
36 months of the initial enrollment in Medicare or its most recent majority
change of ownership. Violating the 36-month rule can significantly disrupt
business operations of a home health agency because a home health agency
could lose Medicare billing privileges, which require initial enrollment in
Medicare along with new state surveys. Sophisticated healthcare regulatory
and corporate counsel, both with experience navigating the 36-month rule,
are crucial when structuring an investment to avoid the rule’s draconian
- Targeted Probe and Educate Audits. In recent years, CMS has implemented the Targeted Probe and Educate (TPE)
audit program to assist Medicare-enrolled providers and suppliers in
reducing claim denials and appeals. In practice, TPE audits target
providers who have been identified as high-risk based on data analysis by
Medicare administrative contractors due to their high claim-error rates or
unusual billing practices. Home health agencies and hospice providers have
been a primary focus due to the high national error rates and are a
financial risk to the Medicare program. Failure to pass TPE audits can lead
to increased scrutiny from CMS, and repeated failure to pass TPE audits can
ultimately result in deactivation or revocation of Medicare billing
- Medicare Hospice Item Set Rules. The Medicare program requires Medicare-enrolled hospices to submit to CMS
two hospice item sets (HIS) that contain patient-specific data — one within
30 days of admission to hospice and the other within 30 days of discharge
from hospice. To incentivize hospice providers to comply with the HIS data
submission requirements, Medicare penalizes hospice providers failing to
comply with the timely submission requirements with a 2 percent reduction
in payment for hospice services. Investors should monitor a
Medicare-enrolled hospice’s timely compliance with the Medicare HIS data
reporting requirements to ensure that a hospice is not subject to a
reduction in payment for hospice services.
- Relationships With Referral Sources. Home health agencies and hospices rely almost solely on referral
relationships with hospitals, physician practices, skilled nursing
facilities, hospitals and other provider types to sustain and grow their
business. As a result, a common risk for home health agencies and hospices
is financial relationships with referral sources. This inherently creates
increased risk under the federal and state fraud and abuse laws. Financial
relationships can include medical directorships, leases and other services
arrangements as well as meals, entertainment, the provision of continuing
education and other non-cash-based relationships used to help market the
services of the home health agency and hospice provider. Investors should
carefully diligence and scrutinize any financial relationship with a
referral source to determine whether such relationship violates any
- Sales and Marketing Teams. Home health agencies and hospices routinely utilize sales and marketing
teams to generate referrals and business — many of which include full-time
employed staff that receive commission based on business generated. The
government enforcement agencies are wary in general of sales and marketing
teams and the ways in which business is generated and employees are
compensated. For example, the OIG frowns upon hospice commission plans that
pay sales personnel additional amounts based on the length of time on which
a patient is on hospice. In home health, the OIG frowns upon commission
plans that specifically reward sales personnel for targeting Medicare
beneficiaries. Consequently, investors should analyze sales commission
plans, sales tactics and the use of any independent contractors when
determining whether the sales and marketing team of a home health agency or
hospice poses risk under federal and state fraud and abuse laws.
All investor types should be aware of the current boom in the post-acute
care space. Overall, the growth trajectories are significant, but investors
should consider the unique challenges in owning and operating these types