This article is brought to you by WellSky. The article is based on a panel discussion that took place during the Home Health Care News Capital and Strategy event with Steve Morgan, Chief Operating Officer at WellSky, Kris Novak, Vice President, Mergers & Acquisitions at Amedisys Inc., Bruce Vanderlaan, Managing Director at Mertz Taggart, and Ross Sallade, shareholder at Polsinelli. The panel took place on March 29, 2022. This is an excerpt from the session, which has been edited for length and clarity.
Steve Morgan: For those of you not familiar with WellSky, we are the leading provider of technology services and solutions for post-acute home care and community-based service providers. We’re also very fortunate to have 1,100 hospitals that utilize our discharge planning software each and every day to coordinate care into those settings of care.
We serve 20,000 post-acute providers for care coordination and intelligent care management purposes. It’s a pretty compelling topic for us here at WellSky because a lot of consolidation activity is happening in and around our client base. We’re going to cover a number of different topics, not the least of which is COVID’s impact on volume.
Then [we’ll cover] private equity investment dollars and other venture investment dollars coming into this space; not only Humana but now Optum, part of the UnitedHealth Group, acquired LHC. We’ll talk about the legislation’s impact on consolidation most notably through things that were discussed this morning, like the Choose Home Care Act 2021 and other bills that are pretty germane at the current course and speed. We’ll talk about the administration’s stance on consolidation and how we all view that.
Also, the dichotomy of the need for innovation and change, and the role value-based care will play, at the same time, the administration thinks about consolidation more broadly. It’s probably germane also to talk about transaction volumes before we dive in. Unabashedly, stealing from one of our colleagues here on the panel in the most recent report by Mertz Taggart, a little north of 165 transactions took place in 2021, which was a record from 2020, even if it was just moderate in nature. The big jump actually happened in non-medical home care, where there was an 84% increase in transaction volume from ’20 to ’21.
In Q4 alone, nearly 50 transactions took place, which was certainly higher than the last five quarters’ rolling average. Without further ado, I’m going to ask each of these three leaders, of their respective spaces, to introduce themselves and their organizations, and the topics that they believe we’re going to cover in the context of our panel. Join me in welcoming all three of them. We’ll start with Kris Novak.
Kris Novak: Great. Thank you. I’ve been with Amedisys for about 12 years. We had the opportunity to deploy a little over $1.4 billion in capital in that time. Recently in the last six years, [we’ve invested] a little bit over a billion dollars of capital, completing a number of transactions, both in home health and hospice, personal care, and then the recent acquisition last year of Contessa as well, which opened up a new growth outlet for us. There’s certainly more on the innovation side of the house that we’ll get into today.
[We are at] an interesting point in time at an intersection around both regulatory reimbursement and where technology will play into that. I do think we are set at a point in time where we’ll continue to see some pretty aggressive consolidation in the space. I think that’s what CMS is trying to achieve. At the same time, we’ve got other pieces of regulatory compliance in other areas that sometimes can make that consolidation more difficult with a pretty extended statute of limitations around that tail risk that we acquire in this space.
Morgan: Bruce, how about you?
Bruce Vanderlaan: Mertz Taggart is a mergers and acquisitions advisory firm. We try to position ourselves as more of an investment banker, a more sophisticated system and try to leverage that ability to give our clients the maximum return or maximum value for their agencies. On the side, I’m also a practicing corporate and health care attorney. I’ve been practicing for almost 30 year now.
I would echo many of the things that Kris and Steve have said, that we’re seeing very active mergers and acquisitions in the industry right now, particularly in health care. The other branches of the federal government are talking about wanting to limit transactions, limiting consolidation, limiting mergers, and acquisitions, limiting private equity investment.
I think that I would echo some of the things that Bill [of NAHC] said earlier, that we need to be proactive. We need to let our governors, our representatives, and senators know the value of home-based care, and the fact that consolidation, this is not a Gordon Gekko type of situation where private equity is coming in and cutting staff. You can’t cut your way to profitability in the home-based care industry. I would also like to point out that for the vast majority of the home-based care agency owners, this is their one asset, this is their retirement.
When we’re talking about limiting any transactions or limiting consolidation, we need to take those people into account as well. I think that’s an important consideration. I think as we get into this, we’ll talk about the data and we’ll talk about how important that is. John [Kunysz of Intrepid USA Healthcare] talked about this earlier today, and I’ll echo some of those things, and I think we can use that as an industry to help position ourselves stronger and gain some of the benefits from what we’re going to see in the legislation in the coming years.
Morgan: Last, certainly not least, Ross.
Ross Sallade: I’m Ross Sallade, I’m a shareholder with Polsinelli. I’m based out of Raleigh, North Carolina, as a health care attorney. I’ve been practicing for about 22 years, seven years with Polsinelli. Polsinelli is a Am Law 100 firm. We have 21 offices across the country, roughly 950 attorneys, probably 100 or more of us specialized within health care. I happen to be one of the regulatory nerds, so a lot of the deals that you guys are testing and kicking around, I get pulled in to find the skeletons nobody wants to find and figure out what to do with them.
I co-chair the Hospice Home Health, Home Care Practice Group with my colleague, Angelo Spinola, who’s also here with us, and look forward to the discussions today.
Morgan: Bruce, the industry is clearly changing. You and I, both touched on that as did Kris and Ross. It’s happening in an accelerated fashion. COVID certainly created a lot of tailwinds as has the legislation that was discussed earlier, the innovation, the speed of innovation. What does that change really mean, from your vantage point? What should buyers and sellers be looking at as they think about their next move?
Vanderlaan: I think that we are seeing change and I think we’re seeing quicker and quicker change. It’s almost like we used to see in technology with the microchips. It would get faster and faster every year and that timeline would be compressed. We’re now in a situation where we’re looking at value-based purchasing and we just had PDGM (Patient-Driven Groupings Model). The agency owners’ boots on the ground are getting inundated. I think one of the things it’s going to mean, and I’m hearing a lot of this, is burnout, a lot of stress, and operators who are tired of having to deal with those regulations.
It’s a difficult industry, and it’s really a mission-based industry, to begin with. The people who get into home-based care are in it because they want to do good things. When we pile that kind of regulation on top of it, it makes it more difficult. It is an exciting time because it’s a very busy time in the industry. I think that we’re going to continue to see that. I think that’ll accelerate. I think we’ll see more in the next year to two years, certainly.
Morgan: Can you put your finger on what buyers are specifically looking for?
Vanderlaan: Buyers are looking for cleanliness. It really all comes down to the data. For us, it’s primarily the financial data and then the compliance data. To some respect, when we’re looking at the P&Ls and the balance sheets, if there’s something amiss there, that can be overcome. If we’re looking at a compliance issue, it simply cannot be overcome. Buyers are looking for data. I want to echo that time and again, today, the data is the key.
If you have good data, and you understand it, you can leverage your support staff of your software providers, then I think you’re going to be a more valuable agency. It’s going to put more money in your pocket day-to-day, and it’s going to make you more valuable when the time comes to exit.
Morgan: I’m going to just flip one more on the seller side of the equation, especially in the context of value-based care, what might motivate a seller? You talked about owners and operators and this being their one asset. Could you just expand on that slightly?
Vanderlaan: I think there is a lot of burnout today. It’s a combination of COVID, PDGM, increased regulation, and seeing value-based purchasing coming down the road. I also think that there are a number of agency owners who see it as an opportunity because there really is opportunity today if you can understand where it’s going and how to get there. That’s what I think the support staff, in particular, for software providers can help them understand: what they can measure, and what difference it makes in their industry, or in their agency, rather. I think that there is a real opportunity for them.
Morgan: Great, Kris, did any of that resonate with you?
Novak: Sure. We talked about consolidation a little bit, and it’s come up in some of the other conversations today, too. It’s interesting because if you look back to 2018, there’s about 11,900 home health provider numbers that compressed down to like 11,100. That’s not a tremendous amount of consolidation. We’ve actually seen that number go back up to about 11,250 very recently. What happened? Why didn’t PDGM drive more of that change? I think the COVID stimulus funds and some of these other programs that got put in place just gave folks the cash flow to work through those changes.
A lot of the PDGM changes, which we found to be more material, were really going to be on that collection side, and the DSO side, and folks not having access to capital. We saw less impact around the ultimate reimbursement. We’ll continue to work through reviewing behavioral changes and other things like that. I do think value-based purchasing, on the other hand, is probably a more significant consolidation activity or catalyst, I suppose, just given that we’re going to reward quality, that’s the way it probably should be.
There should be winners and losers in that regard. I think the larger more sophisticated providers leveraging technology, leveraging their information, their data, clinical programming, other pieces of that holistic approach to the care model are going to win, and they’re ultimately going to be the consolidators. There’s also, frankly, some upside there. Folks are being penalized on the reimbursement side for not performing in value-based purchasing.
Others know that they’ve got a model based on the technology, their clinical programming, and there are other pieces, there could be some arbitrage there, too. You’re buying at one level of margin, and ultimately, you’re going to find some synergies from a reimbursement perspective. I don’t know that we’ve ever talked about that in the 12 years that I’ve been around the industry. It’s always been, “How are we going to offset costs based on reimbursement rates being compressed over time?”
I think that’s an exciting opportunity from a buyer and a consolidator perspective. Again, it takes pieces from leveraging technology, proving your quality, and being able to tell that story because that’s one side of the house. Then the Medicare Advantage side of the house is going to continue to probably be a little bit more of a rate compression until we can all really prove the value to the payers.
Morgan: I assume you’ll, as a buyer, yourself, will focus on those proof points.
Novak: We do, and it always boils down to the fundamentals as well around regulatory and clinical compliance. We are working with our clinical leaders day in and day out from a diligence perspective to make sure we understand what the acquisition target looks like. We think about our performance over the next 12, 18, 24 months. I have to stand in front of our board 12 or 24 months later, and talk about where we hit on our model for this investment. It’s great on our side to have the expertise on the clinical side, operational side, show us where some of those levers are, and partner with us to make sure we’re making smart investments.
Morgan: Do you find it in your seat, in particular, with your board responsibilities, is it easier or more synergistic to have somebody who’s at the same level from a quality perspective or somebody that you know can get more improved inside of the Amedisys model?
Novak: I guess it comes down to the price in that regard. Anything at scale and regionally, I think that quality alignment, cultural alignments are going to outweigh the upside opportunity or the turnaround. At the same time, if we find something at the right price, and we know that this isn’t a regulatory compliance issue, it’s a quality issue, or even a financial issue that we know we can improve, then we like those opportunities, too. Opportunistically, we’ll take a look, and then on the larger side of the house, we’re going to want to see more culture and quality alignment.
Morgan: Makes sense. Ross, let’s turn to you on the legal and regulatory side. We talked about the money being poured into the space. The latest example is, obviously, the UnitedHealth Group announcement from this morning hitting us in the face. What should organizations be prepared to do to ensure that they’re tidied up on the regulatory side?
Sallade: Last couple of years have been regulatory light with the pandemic, with public health emergency, more focus and attention last couple of years, and the last few payment rules have come out had been less on the regulatory development side, have been more on waivers or various regulations to get services delivered in the home, to break down the barriers, to get patients out of facilities. It’s been what I would say is a regulatory light couple of years. You heard Bill talk this morning about how that’s likely to continue. There’s been more development on this side of the equation on the hospice home health home care side, on the reimbursement side of the equation.
When you look at the regulatory side, and you’re looking at these deals, it’s really getting back to basics, getting back to fundamentals. Some of the points Kris was making about things where we see deals stumble, where we see impacts on deals, or failures of sellers on what I would call basic compliance, basic regulatory. We see failures on certification. We see failures on billing and coding documentation. Picking those up and working them in and trying to get your clients to a position where they want to be to get the deal closed has also been a challenge in this market because this market is very seller-friendly.
We all know, on the regulatory side and dealing with our corporate M&A colleagues, the more we raise our hand, the more noise we make, the less likely a seller is wanting to get that deal to close with us because if we prove to be a problematic buyer, and we’re going to be difficult to get to close. We know there are two, three, four, five buyers behind us waiting in the queue. That has put us in an interesting dynamic trying to help clients discover these issues, trying to help them mitigate them, trying to work through them, trying to help think through what risk is palatable, what risk is not palatable, at the same token not losing the deal.
It’s been a challenging market on the buy-side, sell-side, I would say, obviously, seller-friendly. They’ve been getting more issues through on a lot of deals that I’m somewhat surprised about. Things again, that I go back to basic failures, things that you’d be surprised that you would see, and it’s not always just a small local provider. It’s sometimes eye-raising.
Morgan: Kris, after these transactions take place, there’s a lot of operational work that then sets in integration, so on and so forth. I would assume regulatorily if there are any issues, it boils to the top of the list, but what other aspects go into your integration efforts?
Novak: Sure. We really bifurcate integration into technical and then cultural integration. We’ve got to rely a lot on our human resources team, our operations team, our communications team on that cultural side. I’ll spend a little bit of time there because I think it’s supercritical. There’s always pieces that we have to get in there based on diligence findings or other pieces from mitigates to the risk or because we know we’ve got the ability to improve some piece of the operation.
Bruce said it well, “It’s mission-driven work for these employees,” and that’s our greatest asset, is the employees of these organizations providing excellent care to our patients. We’ve got to prove to them to some extent that we’re going to give them the tools, and the opportunities to do even better things from a career development perspective, or ways to provide better care to our patients moving forward because of our technology, clinical program, and the other investments we’ve made in our organization. We try to tell that story. We also try to listen to them. We spend a lot of time doing culture interviews, a cross-section of the organization.
We’d like to do those between sign and close, certainly after close as well. Then we send out surveys, and we elicit their feedback around what are key cultural dynamics? How do you feel about your team? How do you feel about patient care? Where have the gaps been for you recently? We’re trying to learn and understand because it’s really hard to do due diligence culture prior to the signing. Again, it’s a people-based business.
It’s just super critical that we understand that and we align that. We can say, “Look guys, here’s what we share in common. We want you to take great care of your patient. We want to help you have better tools to do that. Here’s some things that they’re going to change, but they’re changing for a reason. There’s a why, behind it, as we set up our technology infrastructure and get into the technical change.” That’s where the other side of the house, our team, project managers, that technical integration as well, taking the diligence we’ve learned, taking the corporate leaders that have been in that diligence.
The operators have said, “Yes, we like this company. We want to acquire this organization and operate it moving forward.” We try to tie all that together in technical integration, in our mind is people, the processes, and the systems. Integrating on, particularly, as a consolidator of home health and hospice, it is critical for us to be on our systems as quickly as we can. One, because we need that visibility from a regulatory compliance perspective. Two, we know we’ve got a proven operating model. We want to leverage our vendors, our contracts, our partners to elevate the operation of the business. That can be clinical and quality-driven, and that can be financial-driven as well.
Pairing those two together, running through that whole change curve with the acquired organization is really where the heavy-lift comes in. I think the diligence side and the negotiation side sometimes gets the attention, but at the end of the day, a deal is successful because of those integration. You have to have a robust resource plan and stay flexible. We’ve learned a lot of things from acquired organizations over the years that we’ve then applied to our business as well. There’s some non-starters we talked about on the technology side, but we’ve learned a lot from some of our acquired organizations too, and tried to marry those two families together.
Morgan: We’ve been fairly acquisitive ourselves. I would say one of the things that we often talk about internally is if you’ve seen one acquisition and one integration, you’ve seen one acquisition and one integration. Each of them need to be treated with respect to the organization, the culture that comes along with it. Bruce, maybe from an advisor standpoint, how would you answer the same question, and how would you advise organizations to get ready for that integration step?
Vanderlaan: Really, there are three things that I would want to talk about there. One is to map that out so that you’re talking about it to both seller and buyer. You understand what the expectations are after the integration. I would also want to echo two of the things that Kris said, “Culture is key.” Wyatt Decker, CEO of Optum this morning talked about culture, and why that was important? Culture is key in the negotiations and in the integration. Both buyer and seller have to get comfortable with each other. It’s really not just about the dollars and cents.
It is true in almost every case that the agency owner really cares about what happens to their employees as well, so they want to know that. In the case of acquisitive buyers, very often, they will have more opportunities for those employees. As Kris said, that’s a story that needs to be told. If you can tell a good story, then you’re going to make that transaction or transition much more smooth.
I would say that and then the communication. It’s not just communication in the transition, but communication is a key factor when we talk about value-based care as well. They need to understand the how and the why. Why are we doing this? Why are we doing these things in this? What’s coming in value-based care? If they [the caregivers] understand it, then they’ll buy-in, and then you’re going to improve the agency overall.
Morgan: Great. We have a couple questions for the panel here that have come through. Maybe I’ll start this one specifically for you, Kris. What parameters or sweet spots are you looking for in your acquisition targets, geography size, threshold skill, referral relationships?
Novak: We’re going to continue to stay focused primarily on home health, but we’ll continue to look for hospice acquisitions as well. I think another great aspect of what we do is that it’s pretty capital light. We would try to take our cash flow on an annual basis and reinvest that for our shareholders through acquisitions. Roughly speaking, we’ll try to do about $300 million a year in acquisitions in one form or another. I think in order to get there in this fragmented industry, we’ve got to do a couple of bigger deals on an annual basis. It’s always the seller’s prerogative around timing as well.
Does that mean we can’t do more than $300 million in a 12-month period? No, but roughly speaking, we think over the next three to five years, that accelerates growth for our shareholders, gets us into the geographies that we do need to be in. That’s always a critical component of our mandate. Again, building that continuum of care is really what’s driving the rest of our mandate. We like to have home health and hospice in every market that we serve, and continue to partner with our personal care network across the country, so that we have the ability to provide the right level of care at the right time to patients in every community that we serve.
Morgan: Are there any final words of advice? We’ll start with you Ross.
Sallade: If you’re on sell-side clean up before you go to market, find those low-hanging fruit, find those things that people like myself, Kris, Bruce, are going to find right out of the gates, deal with them. We see a lot of folks who see basic failures. The 36-month rule comes up time and time again, which is amazing because it’s been around forever. I know I’d mentioned to you guys before, we’re starting to even see on the hospice side of the market, some of the certificate mills that generated the 36-month rule issue. We’re starting to see that pop up.
Whether CMS will do a thing about it, who knows? On the sell-side, it’s important to clean-up, bring your counsel in early. On the buy-side, I would say get your counsel in early, get your consultants in early, find your major roadblock side of the gates, find your billing and coding documentation errors, find your basic licensure. Enrollment certification failures are going to cause roadblocks that folks like Kris and Bruce can’t get through or will be a challenge to get through. Get them in early, get those out of the way, and then get your deal moving.
Morgan: Great, Bruce.
Vanderlaan: I would say to understand what your key performance indicators are. You’re going to focus on what you measure, so measure those things that make a difference. I would say that it is a very good idea to involve attorneys early in the process to get CPAs early in the process as well. Involve some consultants who can spot-check your compliance before you even go to market so that you know where you are. It’ll make it much more smooth to get from here to a close to a transition.
Morgan: Great. Last but not least, Kris.
Novak: Yes, I agree with all those points. I would highly encourage every provider to do a pre-bill audit process just as part of their process on a day-to-day basis. I think every deal that we’ve diligence that did have some level, even if it’s not a 100% of a pre-bill review, has passed with flying colors. A lot of that risk that we’re talking about is technical in nature and can be caught before you ever bill, would reiterate all of those points and stress those points. Putting my buyer hat on, I encourage sellers too to get organized on some of the other fundamentals.
Know where your contracts are. Just get organized generally speaking, because we’re going to ask those questions and it’ll make your life easier. If you take the time on the front end to get organized so that you’re not in the middle of discovering the issue out and trying to hit that while you’re trying to organize contracts, or we’re going to do something from a CPA and financials perspective.
It’s always a seller’s prerogative on when the right time is, but it really does serve you well to maybe spend, 30 or 60 days getting ready and getting a good understanding of what may come-up so that you can help set the right expectations around what may occur through the diligence process and the legal negotiation.
Morgan: Obviously, good advice all the way around three leaders in their respective spaces with respect to consolidation and M&A in a part of the market that is accelerating. Thank you all for your time. It’s an exciting time with the announcement this morning, much less the record set last year and what we expect 2022 to be. Kris, Bruce, and Ross, let’s give them a hand.
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