Home Health & Hospice Week

Buyers expect to scoop up struggling agencies later.

COVID-19 has throttled back mergers and acquisitions activity in the home health market — but maybe not for the reason you’d first think.

Big, publicly traded home health companies were expecting a number of smaller providers to be hit hard by cash flow problems in early to mid-2020. Between the reduction or elimination of Requests for Anticipated Payment and the paradigm shift of the Patient-Driven Groupings Model, “public companies were expecting numerous small to medium agencies to come to market because of cash flow issues towards the end of quarter one,” explains Rich Tinsley, CEO of home health M&A advisory firm Stoneridge Partners in Louisville, Kentucky. And buyers were expecting to see good pricing on the for-sale agencies.

Instead: COVID-19 turned all those expec­tations upside down. With pandemic funding available through the CARES Act Provider Relief Fund and Paycheck Protection Program, plus the accelerated payment expansion, the government “threw ev­eryone a lifeline,” noted Amedisys Inc. CFO Scott Ginn in a May 8 earnings call with analysts.

“The industry has artificially been propped up,” added Amedisys CEO Paul Kusserow in the Baton Rouge, Louisiana-based company’s call.

The CARES Act and accelerated payment funding “created a bridge for those small agencies who are struggling from a PDGM perspective to kind of live through it,” said April Anthony, CEO of Home Health & Hospice for Encompass Health Corp., in the Birmingham, Alabama-based chain’s April 29 earnings call.“Those three federal support programs [are] the reason that things have sort of slowed down on that front,” Anthony said.

“The relief funding could not have come at a better time for many operators,” observes Cory Mertz with M&A firm Mertz Taggart in Fort Myers, Florida.

Struggling agencies are also benefiting from two more COVID-19 relief measures — the temporary lift of the 2 percent sequestration reduction and payroll tax relief, Kusserow pointed out.

“The expected financial impact of PDGM on the smaller mom-and-pop agencies has been camouflaged by the coronavirus pandemic and the government’s response to it, early on,” agrees Lisa Phillips with Irving Levin Associates and Health­careMandA.com.

The number of publicly disclosed deals was down only moderately in the first quarter, mostly because the pandemic’s impact didn’t really start hitting until mid-March. Deal volume was down 10 percent with 19 publicly announced transactions, compared with 21 acquisitions in the fourth quarter of 2019, Irving Levin notes in a release.

The big M&A slowdown will really show in the second quarter, April to June, experts predict.“We’ve heard that some deals scheduled to close in April have been pulled until conditions return to ‘normal,’ if that ever happens,” Phillips says.

M&A in general is down due to more typical coronavirus-related reasons too.“The overall deal process has slowed down due to travel restrictions, etc.,” Tinsley says.

The inability of buyers and sellers to meet face-to-face and “suddenly fuzzy financials due to buying PPE” and other factors also contributed to delayed deals, Phillips tells Eli.

Exceptions: “The medium and larger deal flow and valuation remains active and strong,” Tin-sley reports. For example, Stoneridge just helped with a $10 million sale in the Southeast, he said.

And “hospice deals are still being done because their reimbursement schedules haven’t changed and Medicare Advantage is covering more end-of-life services,” Phillips says.

Private equity firms seem particularly interested in the hospice sector (see industry notes).