Home-based care’s buyers and sellers aren’t dealing with a bad market. It’s just a different market compared to a short time ago.
“All across the board, health care services are down from 2021, but pretty much slightly up from 2020,” Dexter Braff, president of the M&A advisory firm The Braff Group, said last week at Home Health Care News’ Capital + Strategy conference.
After seeing a major spike in 2021 — which is now considered an anomaly of a year — home health deals saw a 32% drop in 2022.
However, just looking at 2021 doesn’t tell the full story, according to Braff.
“There was a 32% drop off from 2021 to 2022, but if we look at 2020 versus 2022, you’ll see we’re basically flat, that’s a better measure of where we are directionally,” he said. “Business was down in 2022 but not relative to what we’d seen in the past, which is good. A good development, especially after that kind of volume in 2021.”
When looking at aggregate home health deal trends, deals involving Medicaid home-based care agencies saw a 63% drop in 2022 compared to 2021.
Deals involving private-duty agencies saw a 40% downturn in 2022 compared to 2021 and Medicare-certified agencies experienced a 21% dip in 2022.
Still, Medicare-certified home health is poised to see a turnaround.
“Most of the activity that we expect to see over the next 18 months is likely going to be in the Medicare-certified space, so if you’re in that space, you’re in the space where the market wants to be,” Braff said. “Last year, you wanted to be in hospice.”
Since private equity activity is often a precursor to what one can expect to see in the marketplace, this is another indication that deals involving Medicare-certified home health care will heat up.
“The PE activity in the Medicare-certified space is very attractive right now,” Braff said.
Market conditions
Despite a promising dealmaking outlook for the next 18 months, current market conditions could continue to be disruptive.
One of these factors is inflation, which peaked at 9.1% in June 2022, and has significantly bumped up costs and reduced earnings.
“It’s coming down a little bit, but inflation is high, which is doing two things,” Braff said. “It’s making the economy something that’s of concern, but it also is raising your cost. They taught me in business school that if costs go up, and revenues are flat, your earnings go down. Even if your multiple doesn’t go down, your earnings go down.”
Due to inflation, the cost of debt has gone up substantially.
“Last year, the fed interbank borrowing rate was like 0.25 and now it’s 4 ½ , 4.75,” Braff said. “What that’s done, obviously, is increase the cost of capital. When you increase the cost of capital, that changes the dynamic about how much a buyer can pay.”
Factors such as the war in Ukraine, the ongoing staffing crisis, the official end of the public health emergency, reimbursement uncertainty and valuation fatigue are also shaping the current market.
Ultimately, Braff believes that the reasons that buyers want to be in home health care still stand true.
“Home health and hospice is the linchpin to keeping, per member, per month, capitated costs low,” he said. “We are seeing a significant movement towards capitated contracts with insurance companies where physician groups are at the center of that.”
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