The team at M&A Healthcare Advisors foresee a resurgence in healthcare mergers and acquisitions in 2024, anticipating increased interest from investors. With fewer sellers in 2023 and concerns about declining multiples, the stage is set for a potentially significant year in home health and hospice M&A activity.
In a recent interview with Levin & Associates, Andre Ulloa and Mark Thomas, co-founders at M&A Healthcare Advisors, took a comprehensive look at the intricate dynamics shaping the home health and hospice market. They explored the factors driving the shifts in acquisitions, investor preferences, emerging trends, and the future landscape of this ever-evolving sector.
Understanding Acquisition Trends
The reported decrease in acquisitions from 2022 to 2023 can be attributed to several key factors. According to Ulloa and Thomas, the increased cost of capital and the insolvency of regional banks have kept financial buyers on the sidelines. Moreover, a slight decrease in the supply of home health agencies for sale has been observed, as many prospective clients are choosing to await a more opportune time for their exit.
Corporate Entrants and Their Approach
Large corporations like Humana have made forays into the home health and hospice market. However, their approach may not align with the preferences of lower-middle market sellers. M&A Healthcare Advisors’ experience reflects that these corporations often have a standardized approach, potentially undermining their rapport with sellers who seek personalized advice. This approach has impacted their transactional success and market reputation.
Appeal for Strategic Investors
Smaller investors find the economically defensive nature of healthcare services appealing. The highly fragmented nature of the home health industry presents an opportunity for significant returns on investment. Strategic acquirers focus on increasing their pool of caregivers, leveraging the operational benefits that smaller agencies offer in mitigating shortages of nurses and therapists.
Dominating Investor Types and Market Dynamics
The market has witnessed a transformation in investor preferences in recent years. Initially dominated by strategic operators, the entry of mid-market private equity groups around 2016 marked a pivotal shift. Financial firms, including independent sponsors, drove acquisition activity from 2018 through 2022. However, in 2023, this pace slowed due to increased capital costs and a focus on stabilizing existing portfolios.
Regional Dynamics and Emerging Markets
Thomas and Ulloa elaborated on geographic factors, which, while impactful, don’t necessarily dictate the viability of healthcare services companies. Emerging markets often encompass second-tier cities or areas adjacent to larger population hubs. Large urban centers like New York or Los Angeles aren’t primary targets for home health acquisition due to challenging growth conditions and questionable marketing practices.
Evolving Trends in Home Healthcare
Interestingly, there’s continued interest in adjunct services and products within home health operations, especially those generating revenue from cash payors. Ancillary services like home mobility and modification are flourishing, reflecting patients’ increasing preference to heal in their own homes, supplementing Medicare with personal investments in equipment.
Challenges and Opportunities Ahead
The persistent challenge of caregiver shortages continues to drive acquisitions by strategic operators. Looking ahead to 2024, the emphasis on deploying capital in uncertain times positions healthcare as a defensible investment avenue. However, addressing the continuing caregiver shortage remains a critical challenge for the near future.
Forecasting Acquisition Trends For 2024
These industry experts foresee a resurgence in healthcare mergers and acquisitions in 2024, anticipating increased interest from investors. With fewer sellers in 2023 and concerns about declining multiples, the stage is set for a potentially significant year in home health and hospice M&A activity.
In conclusion, the home health and hospice market remains a focal point for investors despite continuing operational challenges. With changing dynamics and emerging trends, the industry is poised for growth and adaptation, providing opportunities and challenges alike in the coming years.
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Source: Levin & Associates, November 2023