Less than two weeks after Option Care Health announced a proposed $3.6 billion acquisition of home health provider Amedisys, Addus HomeCare Chair and CEO Dirk Allison said his company is on the hunt for home health firms.
“We are looking at strategic acquisitions in states like Tennessee, Pennsylvania, Ohio and Georgia where we already have a personal care platform that we can add clinical services on top of,” Allison told investors at the RBC Global Healthcare Conference in New York on Tuesday. Addus Home Care, based in Frisco, Texas, provides home health, hospice and personal care services in 22 states.
In the highly fragmented home health care industry, the name of the game these days is eat or be eaten. One day after Option Care announced the Amedisys deal, Eagle, Idaho-based Pennant Group, which operates in 14 states, announced plans to buy Colorado Springs, Colorado-based Benefit Home Health Care and Benefit By Your Side for an undisclosed sum.
Medicare Advantage leads the way
The rapid growth of Medicare Advantage, which now covers more than half of Medicare beneficiaries, is one of the biggest drivers of home health consolidation. In the past three years, the largest Medicare Advantage plans have swallowed up the largest home health firms.
In 2021, Humana purchased the remaining 60% interest in Kindred at Home for $8.1 billion and folded it into its CenterWell brand. In January, UnitedHealth Group closed its purchase of LHC Group for $5.4 billion. In March, Aetna parent company CVS Health finalized its acquisition of technology-based home care provider Signify Health for $8 billion.
All three insurers are building out clinical platforms, and see home health as a means to provide better access, improve outcomes and save money. Access to care at home can also boost patient satisfaction scores and help insurers retain members for up to seven years if they provide them with “successful services,” said Scott Fidel, a healthcare analyst at the investment bank Stephens Inc.
While many Medicare Advantage plans are increasing access to home health, they are also putting the squeeze on the more than 11,500 independent home health firms in operation. In order to negotiate lucrative rates with Medicare Advantage carriers, home health agencies need staff and scale. They also need to have systems in place that can produce data on outcomes and hospital readmissions. Many smaller home health agencies don’t have the capital or the infrastructure to build out those capabilities, Fidel said.
Moreover, home health providers are contending with lower Medicare reimbursements. In January, the Centers for Medicare and Medicaid Services implemented a 3.9% behavioral cut, a decrease of $635 million, to home health firms for 2023. CMS may impose another round of cuts next year as it continues to implement the Patient-Driven Groupings Model, a payment policy the agency initiated in 2020.
Continued uncertainty over Medicare reimbursements has temporarily taken the steam out of what had been red-hot mergers and acquisitions activity in home health. From 2020 through 2022, home health companies accounted for 170 deals. Only three such transactions took place during the first quarter of this year, according to mergers and acquisitions advisory firm Mertz Taggart.
Still, Managing Partner Cory Mertz wrote last month that “home health M&A is unlikely to remain quiet for long ... and its value is becoming more pronounced by the day” as demand for in-home care increases.
Executives from both Addus HomeCare and Pennant Group told Wall Street analysts during first quarter earnings calls that they intend to remain independent and are seeking home health acquisition targets. But they could end up being on the other end of future transactions. Health insurance companies are still striving to extend services into the home, said Morningstar healthcare analyst Julie Utterback.