The next in our series of posts sharing key takeaways from panels at the Healthcare & Life Sciences Private Equity and Lending Conference is authored by our colleagues Trey Andrews and Jeff Alberg.

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What Investors Should Understand About Investments in Hospice, Home Health and the Broader Post-Acute Sector – 3 Key Points

By Trey Andrews and Jeff Alberg

The post-acute care sector, with a focus on home health and hospice, continues to attract high levels of interest from investors due to organic growth opportunities and consolidation drivers. This is the case despite recent reimbursement changes affecting home health agencies that have been brought on by value-based care models implemented by the Medicare program, according to experts who spoke on a panel at the 17th Annual Healthcare Private Equity & Finance Conference in Chicago on February 19, 2020. The experts’ discussion highlighted current market conditions and trends for acquisitions in the post-acute space, attractive subsectors and markets for investments, and preliminary reactions to the implementation of the Patient-Driven Groupings Model (PDGM), the newest government reimbursement scheme for home health agencies.

Experts included Jonny Miller, Vice President, Revelstoke Capital Partners LLC; Jim Moskal, Managing Director, Livingstone Partners; Aaron Osmundson, Managing Director, Quadriga Partners; Whit Polley, Chief Development Officer, Angels of Care Pediatric Home Health; and Pete Tedesco, Principal, Health Enterprise Partners. The panel was moderated by Trey Andrews, Attorney, McGuireWoods LLP.

Here are three (3) key points from the panel discussion that investors should understand about the state of the current post-acute care market:

1. Implementation of the Patient-Driven Groupings Model (PDGM). The implementation of PDGM, on January 1, 2020, marked the most significant change to the Medicare program’s payment methodology for home health services in nearly 20 years. Consistent with the trend seen across the health care industry, PDGM shifts the reimbursement model for home health agencies from volume-based care to value-based care. As a result, investors interested in home health agencies have recently adjusted their investment strategies to allow the changes stemming from PDGM to take effect. Investors are in a “wait and see” mode resulting in a pause in investment in the home health sector. However, investors are also being presented with attractive opportunities for investments in the home health sector at discounted multiples due to an uptick in home health sellers that are not in a position to weather the reimbursement changes of PDGM. In sum, investors may have hit pause on actively shopping for home health agencies to wait and see how PDGM plays out, but when presented with opportunities, investors are still very active in the home health space. The panel experts predict that any potential slowdown in the home health sector will likely only be temporary, as the industry observes the practical effects of PDGM.

2. The Continued Rise of Interest in Hospice. Although investors could be throttling back on investments in home health agencies during the first half of 2020, they are not abandoning the post-acute space as a whole. Panelists instead indicated that they have shifted their sights towards the hospice sector based on an investment strategy keen on U.S. population demographics and an increased focus on post-acute care in general. Panelists indicated that the hospice sector continues to be highly attractive due to its lack of consolidation and continued fragmentation in regional areas. They also mentioned that the increased need for providing palliative care services to patients, the shifts to value-based contracting, and an aging U.S. population, all play into the attractiveness of investing in hospices. While PDGM could have an impact on home health investments, it appears that investors seem to be shifting their interest to the hospice sector, which has already been extremely active over the last six to twelve months.

3. Post-Acute Sleeper Sectors. When discussing ancillary or sleeper sectors in the post-acute space, the panel experts indicated that other areas of the post-acute care sector, which have traditionally garnered less investment and attention, particularly such pediatric home health, non-medical home care, and palliative care, are increasingly attractive investments in non-traditional post-acute care providers. First, the panelists highlighted the significant consolidation opportunities for investments in pediatric home health providers. Panelists expressed interest in pediatric home health providers as a gateway for offering patients additional services, such as private duty nursing, therapy, and even hospice services in some instances. While value-based care has not yet been implemented in pediatric home health, panelists emphasized that pediatric home health providers are building important relationships with payors now in order to be ready for its eventual implementation in the market. Second, panelists found attractive opportunities in the non-medical home care sector, which, despite not being covered by Medicare, offers investors the upside of less regulation and more robust reimbursement rates than those seen throughout the rest of the post-acute sector. Non-medical home care, like home health care, has experienced rapid growth as an aging U.S. population base seeks new post-acute services to allow them to maintain significant independence in their own home. Panelists also noted that there is growing interest in palliative care providers who bridge the gap for healthcare services between home health and hospice—currently a significant gap in the post-acute care model. Although not currently a reimbursable service under Medicare, investors are continuing to look at palliative care as a service offering to patients that is necessary and in high demand.