LHC Group, Almost Family merger highlights growth of post-acute market

LHC Group and Almost Family agreed to a merger that would create the second-largest home health provider in the country with 781 locations in 36 states, more than 31,000 employees and revenue of $1.8 billion.

The deal highlights the growing stature of the post-acute and home health space as many organizations aim to capitalize on population health and payment initiatives that emphasize reducing unnecessary care, shift care to lower-cost care delivery settings, improving patient satisfaction and outcomes.

The home health sector is also growing at a rapid pace, projected to add 425,600 home health aides from 2016 to 2026, an increase of 46.7%, according to the Bureau of Labor Statistics. Over that 10-year span, home health and personal care aides will expand by 1.2 million more jobs, making up a significant share of all new job creation. But they also account for some of the lowest-paying jobs in the industry—home health aides' median wage is $22,600, which likely contributes to the lack of qualified home care providers available to fulfill that growing demand.

While home care provides a lower-cost delivery setting that patients often prefer, it nets lower margins than hospital and outpatient operations and has an evolving payment model.

The CMS canceled its overhaul of Medicare home health payment that would have been based on patient characteristics rather than the number of visits, amounting to a $950 million cut. But further changes to the reimbursement model are looming.

Still, there is opportunity to acquire valuable assets with attractive multiples, said Thad Kresho, U.S. health services deals leader for PricewaterhouseCoopers.

"These can be wise divestitures to make, partly driven by a nice valuation and a lot of people interested in them," he said. There has been a little chatter around reimbursement cuts but not as dire or catastrophic of cuts like skilled nursing has experienced, he added.

Many health systems are shedding their home health businesses and forming joint ventures with national for-profit operators.

Catholic-sponsored Christus Health of Irving, Texas, formed a joint venture in early August with LHC Group, which will manage its 21 home health, hospice and long-term hospitals. In June, Dallas-based Baylor, Scott & White of Dallas formed a new home health group through a joint venture with AccentCare. Tenet Healthcare sold its home health and hospice business to Amedisys.

"Systems are looking to coordinate the post-acute space so they can compete in that market in addition to opening ambulatory surgery centers and other points of care to control costs," said Kenya Woodruff, chair of the healthcare practice group at the law firm Haynes and Boone.

Joint ventures have regulatory hurdles to clear in safe harbors, governance, credit and liquidity limits, but they provide quicker access to local markets and avenues to alternative payment models, said Christopher Donovan, partner at Foley & Lardner who focuses on post-acute transactions.

"Most providers will find that both acquisition and joint venture models work, but it is dependent on the market," he said. "It's important to deploy the correct strategy in the correct market."

The LHC Group and Almost Family all-stock deal will combine two major players in that segment of the industry that is expected to grow along with the aging baby-boom population, longer life expectancies, growing rates of chronic conditions and the shift to move care from the hospital.

Under the agreement, Almost Family shareholders will receive 0.9150 shares of LHC Group for each existing Almost Family share. Upon closing of the transaction expected in the first half of next year, LHC Group shareholders will own 58.5% of the combined company and Almost Family shareholders will own 41.5%.

The deal would put the combined entity behind Kindred Healthcare and its $2.5 billion in annual home health revenue, according to Modern Healthcare data. The transaction would produce about $25 million in cost savings that will allow them to pursue other partnerships and acquisitions and expand their geographic footprint and service portfolio, executives said. Its combined gross leverage is expected to be 1.5 times based on 12-month adjusted earnings before interest, tax, depreciation and amortization of $145 million.

It will position both firms as logistical partners to other providers, Donovan said.

"The push to value-based care, which requires care coordination, cost tracking and outcomes management across the continuum, in many cases requires significant resources and investment in technology and personnel," he said. "Most of the time, this can only be accessed with a large scale and size."

An edited version of this story can also be found in Modern Healthcare's Nov. 27 print edition.