In our most recent Law360 article, co-authored with our McGuireWoods colleagues Jason Greis and Melesa Freerks, we discussed the post-acute industry.

Over the past several years, the health care industry has experienced a significant increase in private equity and alternative investment and industry consolidation. These trends have only accelerated with implementation of pay-for-performance initiatives, payment reductions that favor lower-cost care settings and integrated care-delivery models (i.e., accountable care organizations, medical homes and bundled care) that promise to aggregate care and reduce costs across multiple sites of service. In 2012, industry experts estimate that private equity firms invested approximately $4 billion in health or medical services and the number and value of private equity deals throughout the health care industry accounted for roughly 11 percent of all deals consummated worldwide.

Although the health care industry at large experienced a significant decrease in deal activity in the first quarter of 2013, investors seeking opportunities have increasingly focused their attention on the post-acute care continuum, consisting of skilled nursing facilities, long-term care hospitals, inpatient rehabilitation facilities, home health and hospice care providers as vertical and horizontal consolidation within these highly fragmented sub-industries accelerates. Most industry participants believe that community hospitals and small hospital systems will continue to align with larger health systems in order to benefit from cost reductions and physician alignment strategies.

As this occurs, a growing number of acute care providers are increasingly divesting noncore post-acute assets, either directly or through management relationships, to providers of post-acute care services with greater experience managing costs and preventing readmissions to acute care hospitals. Additionally, in an effort to both expand the scope of services available to patients as they transition from the hospital to home, many traditional providers of a single type of post-acute care services (e.g., skilled nursing) have rapidly been acquiring assets and operations in other post-acute silos (e.g., long-term care hospitals, inpatient rehabilitation, and home health) and even into the assisted living and independent living markets. Notable deals in the post-acute space in 2013 evidencing these trends include the following:

Skilled Nursing and Long-Term Care Hospitals

According to PricewaterhouseCoopers LLP (PWC), the second quarter of 2013 saw an increase in deal volumes relating to the skilled nursing sector with the dollar value of deals nearly doubling in the second quarter of 2013 compared to the second quarter of 2012. The increased dollar value, however, primarily related to health care REIT’s (HCR) acquisition of 47 Canadian properties. In May, HCR, an S&P 500 real estate investment trust that invests in seniors housing and health care real estate, bought a 75 percent stake in a group of Canadian senior housing communities in a deal valued at more than $1 billion. The 47 properties were wholly owned by Revera Inc., a portfolio company of Canadian-based investment firm Public Sector Pension Investment Board (PSP Investments) and the second-largest operator of senior housing and long-term care facilities in Canada. According to transaction details, HCR will spend about $697 million in cash and assume about $313 million in debt to complete the acquisition.

In June, Kindred Healthcare Inc., the nation’s largest diversified provider of post-acute care services, signed a definitive agreement to sell eight nonstrategic nursing centers to affiliates of Signature Healthcare LLC for approximately $49 million. Kindred will use the net proceeds of the Signature transaction to pay the outstanding balance on its revolving credit facility. The facilities Kindred is slated to sell to Signature contain 996 licensed nursing center beds. Also in June, Kindred announced it purchased the previously leased real estate of 73-bed Kindred Hospital Bay Area Tampa for approximately $25 million.

And even more recently, in early September, Kindred completed the sale of a number of post-acute care facilities to an affiliate of Vibra Healthcare LLC, a national provider of long-term care hospital and inpatient rehabilitation facilities, for roughly $165.8 million. The purchased facilities, in addition to two facilities still under contract for sale, consist of 14 transitional care hospitals certified as long-term care hospitals containing 1,002 licensed beds, one inpatient rehabilitation facility containing 44 licensed beds and one skilled nursing facility containing 135 licensed beds. Together, in 2012, the facilities generated revenues of approximately $272 million and pre-EBITDA earnings of approximately $20 million.

This most recent transaction also almost doubles the size of Vibra’s operational platform and, according to Brad Hollinger, Vibra’s founder, chairman and CEO, strategically expands Vibra’s “… specialty hospital and post-acute continuum of care operations in several new markets while adding crucial services in key markets that Vibra already serves."
According to Jason Greis, a health care attorney with McGuireWoods LLP, “In addition to acquisitions of existing long-term acute care hospitals, the post-acute care industry may also witness the re-emergence of private equity backing in the long-term acute care hospital space partially as a result of the Dec. 28, 2012, sunsetting of the Medicare, Medicaid and SCHIP Extension Act of 2007’s (MMSEA) moratorium on the expansion of existing long-term acute care hospitals and the development of new long-term acute care hospitals and satellites.”

In August, Oxford Finance LLC, a specialty finance firm that provides senior debt to life sciences and health care service companies, closed a $7.2 million senior secured term loan with Pritok Capital, a private equity group that specializes in senior housing investment. Pritok purchases skilled nursing facilities, leases facilities to regional operators, and enters into sale-leaseback transactions to give operators access to capital. The proceeds of the loan with Oxford were used to acquire Nentwick Care Center, a 100-bed skilled nursing facility located in East Liverpool, Ohio.

Home Health and Hospice

Compared to the second quarter of 2012, the home health and hospice sectors witnessed an increase in both deal volume and dollar amounts in the second quarter of 2013. In May, LHC Group Inc., a provider of home health, hospice, long-term care hospital and private duty services, entered into a purchase agreement to acquire assets of AseraCare Home Health. The transaction will expand LHC Group’s geographical stretch across 26 states and to more than 300 locations. AseraCare, along with its parent Golden Living, was a portfolio company of San Francisco-based private equity firm Fillmore Capital Partners. In addition to acquiring the assets of AseraCare, in April, LHC Group also acquired the assets of Infirmary Hospice Care, located in Alabama, which continues LHC Group’s strategy of acquiring hospice facilities located within the company’s current markets.

As post-acute care providers continue to align with hospitals to meet the health care reform goals of lowering costs, improving quality of care, improving coordination of care across multiple sites of service and reducing hospital readmissions, it is becoming increasingly evident that smaller providers and providers of a single type of post-acute care are having more difficulty competing for preferred provider network agreements with large health systems and health insurers alike, thereby further driving the growing deal volume and industry consolidation through the end of 2013 and beyond.

Amber Walsh and Geoff Cockrell are both partners with McGuireWoods in the firm’s Chicago office. Melesa Freerks is an associate in the firm’s Chicago office.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.