Private equity firms and large home care companies could soon be going head to head to buy smaller personal care operators expected to exit the industry because of a new regulation.
The potential for industry consolidation stems from the Centers for Medicare and Medicaid Services’ Ensuring Access to Medicaid Services rule that will require home care companies to spend 80% of Medicaid reimbursements on caregiver wages. Mergers and acquisitions advisers predict the so-called 80/20 rule, finalized April 22, could prompt many smaller operators to sell.
Related: Will home care's wage violations spark closures—or more workers?
Despite the regulation' potential costs, home care remains a top area of interest in healthcare. Demographics are part of the reason, given more than 70 million Americans will be age 65 or older by 2040, and many will choose to age at home. President Joe Biden is seeking $150 billion in funding over a decade to support home- and community-based services in his proposed 2025 budget.
Home care and personal care companies provide services such as bathing, toileting and other activities of daily living. Some home health companies offer personal care services along with medical services, such as physical therapy, speech therapy and wound care. About half of Medicare Advantage plans now offer supplemental benefits that pay for some in-home personal care, according to ATI Advisory, a healthcare research and consulting firm.
Acquisitions of home care companies took off during the COVID-19 pandemic as more healthcare moved into the home and as some healthcare providers shed non-medical services. The industry tallied 153 deals between 2020 and 2023, according to Mertz Taggart, a healthcare M&A advisory firm. However, acquisitions slowed to seven in this year's first quarter compared with 10 during the same quarter in 2023, partly due to concerns over the 80/20 rule, according to a Mertz Taggart research report.
While the regulation does not go into effect for another six years and could face legal challenges, some large home care companies are betting small operators will exit the industry over the next year to avoid potentially higher costs, providing an opportunity to expand their footprint.
Addus HomeCare is one of them. Chair and CEO Dirk Allison told analysts during a first-quarter earnings call last week the Frisco, Texas-based company is looking to acquire operations in 22 states where it already has locations and in other states where it does not. Allison said home care companies will need to have scale to stay profitable when a larger percentage of Medicaid reimbursements will go toward staff wages.
“This will not only allow the largest providers to spread their costs over a bigger revenue base, but will also provide more opportunity for meaningful advocacy [on reimbursements] with states in which they operate,” Allison said.
Private equity companies are also jockeying for deals in the space. In March, Waud Capital Partners purchased Senior Helpers, which has locations in 44 states, from Charlotte, North Carolina-based Advocate Health for an undisclosed sum. Capital Alignment Partners bought Dallas-based Avenues Home Care, which has operations in three states, for an undisclosed amount in March.
Analysts said home care remains attractive to private equity buyers because Medicaid is a lucrative payer in many states, while some people who need in-home support, but don’t qualify for Medicaid, will pay out of pocket for care.
“You can set your rates at a level that is reflective of your labor costs given the market dynamics,” said PitchBook analyst Rebecca Springer, who tracks private equity investment in healthcare.
Home care is a highly fragmented industry with an estimated 26,000 providers nationally, according to the Home Care Association of America. That could make the pool of potential sellers large if the new regulation prompts many small operators to exit the industry. But given the strong demand for home care, those providers may not sell at cut-rate prices, according to one mergers and acquisitions consultant who is representing home care operators seeking buyers.
“We will avoid anyone who tries to use this as a way to try to dismantle the valuation of the companies that we are bringing to market,” said Mike Moran, partner at M&A Healthcare Advisors.
