Barry Freeman, Managing Director and co-head of Lincoln’s Healthcare Group, discussed M&A and valuations trends on Farragut Square Group’s Home Health, Hospice and Personal Care webinar.

Investors: Despite the decrease in M&A activity, private equity (PE) maintains a strong, ongoing interest in high-quality home health, home care and hospice assets and has plenty of equity capital to deploy.  The last couple years have seen several large-scale provider, payer and retail strategic buyers (including non-traditional strategics) demonstrating greater interest in the home health and home care sectors.  This interest is a complex function of many sustainable factors including: alternative payment models, more home-based care delivery enabled by COVID-19, advances in technology and consumer preferences and the imbalance in supply and demand for senior care services.

Staffing Shortages: Staffing shortages remain a key focus for operators and investors, which has weighed on fill rates, organic growth and margins, and was exacerbated by the travel nurse industry hiring nurses away from home health to care for COVID-19 patients in hospitals by offering better pay and benefits.  The resulting burnout has resulted in many experienced nurses leaving the profession and inadequate enrollments in nursing programs. On the personal care services side, home health aides and attendants have similarly been adversely impacted by The Great Resignation. As a result of surge in demand, openings for home healthcare workers are expected to increase approximately 37% by 2028.

Valuations: Valuations continue to vary by size, sector and specific circumstances such as growth rate, profit margins, quality of earnings, level of investment technology, etc. PE is under pressure with new platform valuations given higher interest rates and lender focus on fixed charge coverage ratios. Reimbursement rate uncertainty and labor market shortages are calling margin sustainability into question, multiples are still down from the highs of 2021 and pricing is very situation dependent. Right now, double-digit multiples are still available for high-quality, larger scale assets across skilled home health, personal care services, hospice and pediatric private duty nursing.

2023 M&A is expected to continue at 2022 levels, down from a banner year in 2021.

There are a record number of PE investments in home health areas and growing investments by large strategics. Lincoln is currently tracking more than 140 unique home healthcare platforms owned by PE.

Diversification and continuum-of-care plays are increasing. While there are multiple “pure-play” platforms focused on just hospice, or just home care, we are seeing continued interest in bolting together a continuum of capabilities (e.g., home health and hospice, or home care and home health).

There is a great prevalence of and interest in value-based care and capitation models.

Home-based primary care and telehealth services continue to rise in need. There is an increasing number of home-focused primary care businesses.

Consumer-directed home care is gaining popularity.

There is an increased investment in technology, monitoring and analytics. Platforms must demonstrate a credible level of technology deployment across the business. This would include not just the back-office, but also point-of-care and patient engagement.

Medicare Advantage (MA) benefits and growth are top of mind for investors. Many companies pursue M&A volume, but often the volume comes at lower profitability than original Medicare case rates.

Social determinants of health and the role of non-medical home care remain important to address. Widespread recognition of the integration between nutrition, mental health, community engagement and medical outcomes.

Staffing, nurse and caretaker shortages continue to be a key issue.