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The fiscal cliff deal relieved some uncertainty for providers, but sequestration remains as a potential margin pincher and the debt ceiling debate looms as another opportunity for policy makers to reduce federal spending. Healthcare spending growth is down for the third year in a row (and is now the lowest it has been in 50 years), yet healthcare job growth continues as the economy slowly recovers. Chad Mulvaney of the Healthcare Financial Management Association sees “a continued push toward linking reimbursement to cost and quality,” giving home and community based providers an opportunity to capitalize on the need for efficiency. Irving Levin Associates reported that, although the overall dollar amount of healthcare M&A transactions shrank last year, the number of transactions was flat which indicates an increase in the number of smaller transactions. In fact, they noted a 20% increase in home health and hospice transactions and they predict increased activity in 2013 due to less uncertainty regarding legislative, regulatory, and economic conditions. Carsten Beith of Cain Brothers concurred that “home healthcare will see robust M&A activity this year.” Medicare Demand for home health services continues to increase…and so do costs of compliance with a blizzard of program integrity and efficiency measures. MedPAC has been unsympathetic to the plight of providers, recommending the elimination of the market basket update and an accelerated rebasing schedule based on the assumption that beneficiary access to care and provider access to capital is more than adequate. NAHC has countered that, if the proposed rate cuts were fully implemented then over 50% of Medicare certified home health agencies would be operating with negative margins. Additionally, policy advocates from the Simpson-Bowles Commission to the Business Roundtable have proposed further burdens on providers such as co-pays, means testing, and increasing the eligibility age of beneficiaries, meaning the pressure on providers to do more with less will not relent. Although success requires as much effort as ever right now, the Robert Wood Johnson “Care About Your Care” initiative determined that not enough progress has been made on reducing hospital readmissions, indicating that home health agencies will continue to be attractive acquisition candidates as larger, multi-discipline providers seek greater efficiencies and better outcomes for their patients. We’re seeing many large buyers searching for strategic home health acquisitions, but not enough qualified sellers to meet demand. Hospice When a prominent Republican like Bill Frist and a prominent Democrat like John Breaux both publish op-ed pieces supporting growth of your industry, you know that hospice occupies a special place in the healthcare economy right now. The Journal of the American Medical Association estimates that hospice services have grown over 100% since 2009 and the ACA promotes further growth as a way to simultaneously reduce costs and increase the quality of life for terminally ill patients. This steep growth trajectory has rightfully raised program integrity concerns and Donald Schumacher, CEO of the National Hospice and Palliative Care Organization says members have experienced an “increased level of scrutiny” from regulatory authorities. CMS is cracking down on generous admission practices by using PEPPER and MACs to look for patterns of utilization that might indicate fraud. MedPAC recommends more of the same, including increased focused medical reviews in addition to an elimination of the market basket update and the introduction of the U-shaped payment model. Providers from just about every discipline view hospice as a newly strategic link in the continuum of care and buyers are willing to pay premium prices for acquisition opportunities of all sizes. Medicaid Although certainly included in the overall discussion regarding the need for financial efficiency, Medicaid providers were spared any direct impact from the fiscal cliff deal: no rate cuts and no sequestration (which is especially good news considering the already slim margins providers are surviving on to date). Unfortunately, the repeal of the CLASS Act eliminates the emergence of a new payer for non-medical home care providers (at least for now), but the ACA guarantees more than enough growth within the Medicaid program to keep providers busy. Several Republican governors have reversed their positions as AZ, MI, NM, OH, NJ, and most recently FL have agreed to allow expansion of Medicaid within their states. Buyers are incentivized to grow and consolidate in order to make a profit on such slim margins, but are being very strategic – especially about in which states to invest and which states to avoid. Private Duty While the fiscal cliff wasn’t necessarily a direct threat to private duty providers, the negative impact on the economy that surely would have followed would have contributed to the headwinds created by the painfully slow economic recovery. If Congress insists on governing by crisis as the debt ceiling debate unfolds, the promise of a truly improved economy will probably be delayed yet again and private duty providers will just have to keep waiting for that tide to lift all boats. In the meantime, the last chance to defeat the elimination of the companionship exemption is upon us as the White House cleared the new rule and sent it to the OMB for final review. NAHC has registered a protest pointing out the potential harm to consumers and caregivers (not to mention providers). Increased labor costs from the combination of the elimination of the companionship exemption and the implementation of the ACA employer mandate could wipe out profit margins for smaller providers, forcing survivors to grow and consolidate in order to remain successful. Buyers are looking for opportunities to increase revenue and decrease administrative costs, but qualified acquisition candidates seem pretty scarce. Conclusions Now that it looks like the ACA is here to stay, providers are implementing strategies to capitalize. One theme that applies equally to all providers is the need to become more efficient. As costs go up while rates go down, consolidation is a necessity that has drawn more buyers into the market – but with such difficult operating conditions, good deals are hard to find. If you’d like to discuss how all of this affects you, feel free to contact us any time. We are always happy to discuss market conditions, valuations, and the process we undertake to effect a successful transaction. |
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