Coming off a record-breaking 2021, mergers and acquisitions (M&A) deal activity in healthcare sustained strong levels of activity in 2022, and certain healthcare sectors set new records for deal volumes. Post-acute and human services remained two of the most active M&A areas of healthcare services, although there was a drop in the number of deals in these two sectors compared to 2021’s prolific volumes. For example, home health and hospice experienced a 29% decline in transaction volume compared to 2021, dropping from 155 announced in 2021 to 110 announced in 20221. Historically, these transaction numbers are still high when compared to most years other than 2021. Similarly, human services saw a decrease in transaction volume, although 2022 is expected to be the second most active M&A year ever, trailing only 20212.
Despite some slowdown in the M&A market in general, in 2022 McBee partnered with clients on a total of 28 announced buy-side and sell-side healthcare transactions, representing an aggregate deal value of approximately $1.5B+. McBee’s experts provided guidance to our clients in M&A transactions in all of the following service types:
- Home health
- Personal care
- Human services (behavioral health, I/DD, Autism, SUD, mental health)
- Pediatric private duty nursing
- Durable medical equipment (DME)
- Physician practice
- Primary care services
McBee is an industry leader in M&A advisory solutions with expertise in the post-acute, DME, physician practice, primary care and human services markets. Our expertise in sell-side and buy-side healthcare M&A advisory includes clinical, operational and corporate compliance diligence reviews. We partner with clients including private equity (PE) firms, publicly traded healthcare companies, privately owned providers and their attorneys to support their healthcare M&A activity. Learn more about McBee’s wide range of M&A advisory services and sector knowledge.
M&A Macroenvironment in 2022
Certain challenges and opportunities in 2022 weighed into dealmakers’ M&A decision-making processes, including:
- Costs increased across the industry while reimbursement rates decreased or remained relatively flat
- Care settings moved more into the home across healthcare services
- Widespread staffing shortages
- Value-based care and alternative payment models made care continuums and data more important which opened doors for innovation in care delivery and partnerships
- Higher interest rates that led to increased cost of debt
- Large retailers and insurers including CVS, UHC and Humana continued to move into healthcare services via acquisition
- An increased percentage of Medicare-eligible patients aged 65+ due to aging population
- A societal shift toward recognizing the importance of mental and behavioral health
These factors influenced M&A activity across all sectors of healthcare. The section below provides a summary of, and commentary on, trends and factors specific to the post-acute and human services sectors in 2022.
Post-acute care has been hit hard by staffing shortages. This has led to a rise in the cost of labor and agencies getting creative with their recruitment efforts. Many post-acute providers have been forced to turn down a larger than normal percentage of referrals due to difficulties in hiring. This, along with reimbursement uncertainty in home health driven by the 2023 Home Health rule, added to some hesitation among dealmakers in 2022. The time between the proposed rule announcement in June and the final announcement in October drove more question marks and lack of clarity.
On the non-medical home care and personal care side, inflation and staffing difficulties led to a reduction in the hours per week that patients can afford to pay for, particularly for agencies that rely on private pay3. Based on this, agencies that operate a consumer-directed model may become more attractive to buyers in the near term as patients supply their own caregivers , which in turn removes some staffing pressure from the agency itself. For Medicaid home health providers, including skilled and non-medical providers, electronic visit verification (EVV) is now required for all applicable personal care services (PCS) and home health care services (HHCS) in all 50 states. Certain states requested and received good faith extensions to delay EVV rollout by a year for HHCS. Whether a state received a one-year extension or not, EVV adds a new layer of compliance obligations for home health agencies that serve Medicaid patients. EVV is seen as a burden by some and an opportunity by others, and as always, we expect agencies who are able to adapt to thrive.
Despite near term uncertainty, regulation changes and economic headwinds, M&A activity in post-acute remained strong in 2022 when compared to most other years. Key investment drivers and opportunities in post-acute care include the general shift away from facility-based care toward the home, an aging U.S. population, along with the increased importance of providing services along the full continuum of care to succeed in the shift to value-based care. Examples of current value-based models in post-acute care include:
- HHVBP: For home health providers in all 50 states, the first full performance year for the expanded home health value-based purchasing (HHVBP) model began on January 1, 2023. Calendar Year 2025 is the first payment year, with payment adjustment amounts determined by CY 2023 performance.
- VBID Expansion: For hospice providers, the value-based insurance design (VBID) model was recently launched with the goal to improve patient experience and create better continuity for patients entering end of life care. Historically, when a Medicare Advantage (MA) enrollee elected hospice, Fee-For-Service (FFS) Medicare became responsible for hospice services. Under VBID, participating Medicare Advantage Organizations (MAO) can include the Medicare hospice benefit in their benefits package. In 2023, 15 MAOs will participate in the Model across 25 states.
The importance of interoperability, quality data and analytics to demonstrate value to partners, such as MA plans, is also a driver which will lead to innovation, more technology adoption and investment. Additionally, post-acute care is a highly fragmented market with many ‘mom-and-pop’ agencies which may struggle with the increased costs, flattening reimbursement and shift away from traditional Medicare toward MA. This presents a lot of opportunities for PE firms, investors and growth-minded providers to buy and roll up multiple agencies. There appears to be a long runway for continued growth, consolidation and innovation in post-acute care that will hold the interest of investors for the foreseeable future.
While the number of completed post-acute transactions fell in 2022 vs. 2021, the aggregate value of completed transactions increased compared to 2021, driven in large part by several notable billion dollar deals in the industry, including:
- UHC’s announced acquisition of LHC Group for $5.4 billion
- CVS Health’s acquisition of Signify Health for roughly $8 billion
- Kindred at Home’s change in name and ownership:
- PE firm Clayton, Dubilier & Rice acquired from Humana 60% of Kindred at Home’s hospice and personal care arms, now to be called Gentiva, for about $2.8 billion.
- Humana transitioned Kindred at Home’s home health services to its CenterWell brand
These industry shaping deals highlight the fact that, despite some near-term headwinds, many of the most prominent players in U.S. healthcare and PE view post-acute care as an important piece of their overall strategy.
M&A activity in human services and behavioral health remained robust. The favorable shift in reimbursement models in conjunction with a supply-demand imbalance in human services driven by the pandemic among other factors, continues to fuel interest in M&A activity. This sector includes inpatient and outpatient addiction treatment, mental health, autism services and services for those with intellectual and developmental disabilities (I/DD) providers. There has been a societal shift in the U.S. toward recognizing behavioral health as an important dimension of overall health and wellness, which has driven increased investor interest.
PE M&A activity continues to soar in this sector; in the first three quarters of 2022, more than 60% of behavioral health deals included PE firms4. The demand for behavioral health services, such as treatment for addiction, mental health and autism, continues to increase in the U.S. Additionally, behavioral health patients tend to have very long lengths of stay compared to other healthcare services, which presents an attractive business model to some PE investors5. Some strategic investors in home health and hospice have recently made behavioral health acquisitions with the intent of diversifying their service lines to better provide whole-person care to their patient populations6. Additionally, increased federal funding and payment parity initiatives are driving a positive future outlook for behavioral health providers. Interest, investment and innovation by PE and strategic investors in the coming years is expected to remain strong, as there is opportunity for market consolidation, advancement in tech-enabled access to care and care coordination innovations, as well as the importance of quality data.
Expectations for 2023
As we look to the rest of 2023, we anticipate another active year of transactions across post-acute and human services. PE firms and strategic buyers alike appear poised to continue to buy, build and innovate in a space which has a long runway for growth. McBee is honored to be a trusted advisor and to provide insights to our clients in these markets. Our services have helped get deals done efficiently, and we look to 2023 as another year of partnership with our clients including healthcare service providers, PE firms, law firms and individual investors. Contact us today to discuss how we can help with your growth and success in 2023.
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1 LevinPro HC – Home Health & Hospice 2023 Outlook: Large Transactions and Innovation Fuel Optimism