Hospitals are increasingly being enticed to sell their home health divisions for lofty prices, despite appearances that they may not be fulfilling their mission to the community in doing so.
The increase in home health sales comes amid favorable reimbursements from federal health programs.
Just last week, 274-bed not-for-profit Flagler Hospital in St. Augustine, Fla., sold its home-health unit to Almost Family, a publicly traded home health company. A spokesman for Flagler said the sale was made because home health is not part of its core services. Terms of the deal weren't disclosed but Almost Family said the home health division's revenue was about $2 million.
Mission aside, industry experts say it's sensible for a hospital to sell its home health unit because demand for the agencies has driven up acquisition costs. Among the parties that have shown increasing interest in expanding their home health reach are private-equity firms; large national post-acute companies, including Beverly Enterprises, HealthSouth Corp. and Manor Care; and home health companies Amedisys and LHC Group.
There has been evidence around the industry that the price of home health agency deals has soared beyond the inflation rate in recent years, according to Dexter Braff, president of Braff Group, a merger-and-acquisition firm. His company estimates valuations rose 30% from 2001 to 2005.
Historically, a home health division's acquisition price would be about two or three times the agency's earnings, but that has grown to four or five times, according to a research note written by Michael Wiederhorn, an analyst with investment bank CIBC World Markets. "With private-equity money, nursing homes and large national operators all in the market for new acquisitions, there is a risk that prices will increase and that companies will overpay for acquisitions," according to the note.
But it's likely that hospitals will continue to divest their home health units. Unless hospitals have a large revenue-producing home health division, they will continue to exit the market, said Balaji Gandhi, an analyst with investment bank Pacific Growth Equities.
Most hospitals' home health agencies produce only a small portion of their overall revenue and home health requires different reimbursement software and staffing, said Greg Browne, chief financial officer of Amedisys, a large publicly traded home health agency. For example, home health nurses are usually paid on a per-visit basis while hospital nurses are paid on a shift basis.
The demand for home health agencies has increased because, after years of regulatory hardship, payments have stabilized. The more favorable government reimbursement environment leaves the fragmented industry prime for consolidation, industry observers said.
The latest spate of good news came earlier this month when the CMS approved a 2.8% increase in the annual prospective payment update, up from the 2.5% rise the agency had proposed. Despite the better reimbursements, a hospital's home health division hasn't traditionally yielded solid returns because it's not part of its core business and hospitals don't usually invest much money in the division, analysts said.
Because of the favorable environment, some hospitals are selling. Northwestern Memorial Hospital, Chicago, recently sold its home health division to TLC Health Care Services, Lake Success, N.Y., but didn't disclose the sale price. A hospital spokeswoman said the sale fulfilled the hospital's mission to better serve the community. "Home health has become even more specialized ... and evolved into its own industry," said Kelly Sullivan, director of public relations. "This was an opportunity to offer patients new and expanded services provided by experts who deliver home health."
And some hospitals are keeping their home health units as a means to improve overall care. Sentara Healthcare, a six-hospital not-for-profit system in Norfolk, Va., doesn't have any interest in selling its home health division soon. Home health brings in about $75 million, or 3.8%, of the system's $2 billion in revenue, according to Ray Darcey, vice president of Sentara Enterprises, which includes Sentara's home-care division.
Darcey said the system recently completed its strategic plan for 2010 and expects home health revenue to reach $150 million by then. Along with bringing in revenue, the division can also make the system's hospitals more efficient by turning over beds and discharging patients.
Sentara's home-care division is increasingly trying to identify patients who could go from the emergency room into a home health program without being admitted to the hospital. Darcey said patients who are good candidates for this are those whose conditions regularly put them in the emergency room.
For example, patients who often show up at the ER because of chronic heart failure can be put into a home-care program, or patients suffering from sickle cell anemia can be put into a pain-management program instead of being readmitted to the hospital, Darcey said. "There's a lot of value home health can add to an integrated health system," he said.
And if done correctly, it can bolster a system's bottom line.
"You can actually make some money in home health these days," Darcey said. "If you run your business efficiently, you can be profitable."
That wasn't the case before the switch to a home health prospective payment system, which started to be put in place in 2000. When home health was on a cost-based system, hospitals used their home health divisions to absorb some of their cost of overall operations. With that in mind, hospitals put little money into the services and the divisions became inefficiently run with high costs, analysts and other home health industry experts said.
"The PPS system made it challenging for larger hospital systems with internal home health agencies to compete effectively in the home nursing business," Wiederhorn's note said.
The challenges were evident in the decline of Medicare home health providers' licenses after the Balanced Budget Act of 1997 called for a home health PPS and put in place an interim payment system, which decreased per-visit rates. In 1997, there were 10,570 Medicare provider home health agencies and now it has steadied around 7,000, down about 33%, according to CMS data.
Another reason for the merger and acquisition activity is because the $33 billion industry is largely fragmented with 33% of home health agencies owned by hospitals, according to Wiederhorn. His research note added the industry is mostly made up of small local agencies and the largest for-profit companies operate about 15% of the agencies.
"You can imagine the opportunity to consolidate," said Keith Myers, chief executive officer and chairman of LHC Group, which in June became the first home health nursing provider to make an initial public offering in about 10 years. As of June 30, LHC operated 64 home health agencies and the company, which concentrates on rural areas in the Southeast, hopes to add 10 to 15 per year, Myers said.
Myers said a joint venture can allow a hospital to keep the operation under its umbrella while bringing in outside management help.
Joint venture or not, now is a good time for hospitals to realize a nice return on the sale of their home health division, Braff said. "It's a very attractive window."