Home health M&A market slows significantly in FY99
By MEREDITH BONNER
HHBR Editor
The amount of mergers and acquisitions that have taken place in the home health sector has slowed significantly since the Balanced Budget Act of 1997 (BBA) was passed. In fact, merger and acquisition (M&A) activity in the entire healthcare services industry in FY99 so far has been at its lowest since FY95, according to Irving Levin Associates (New Canaan, CT).
The BBA’s affect on the M&A market can be traced to two primary things, said Dexter Braff of The Braff Group (Pittsburgh), adding that both have had an immediate impact on the industry. Braff blames the decreased interest in merging and acquiring to the establishment of the interim payment system (IPS) and the prospective payment system (PPS).
According to Irving Levin’s latest Health Care Merger & Acquisition Report, there were 20 transactions publicly announced in the home health sector in 2Q99, which is a 33% increase from those reported in 1Q99, but down 29% from 2Q98. In the healthcare services industry overall, there were 190 deals publicly announced in 2Q99, down 5% from 1Q99 and down 42% compared to the 325 deals reported in 2Q98.
According to a further Irving Levin study, which covers transactions in the home healthcare, contract rehabilitation therapy, and institutional pharmacy markets, as the demand for post acute care services grew in the 1990s, the volume of acquisitions, as well as the pricing, increased dramatically. Providing home healthcare, rehabilitation therapy, and medication management services all were viewed as essential to the future success of post acute care providers, especially as acuity levels rose, the study said.
"The BBA, however, has practically destroyed many of the service areas," said Stephen Monroe, a partner at Irving Levin. "As an example, one of the largest contract therapy companies in the country closed down after being unable to find a buyer, and another sold its $100 million-plus business for a nominal amount.
"Some home healthcare company consolidators have questioned the rationale for buying a home health company when they could pick up the customers for free if the seller goes out of business, which has frequently been the case," Monroe said. "Although presumably not intentional, the changes in Medicare reimbursement that came with the BBA have caused extreme financial hardship to many providers."
Braff told HHBR that at his firm, the BBA is looked at "as kind of an interesting line of demarcation before BBA and after BBA. And we can see how the market has changed dramatically in those times.
"IPS changed reimbursement for Medicare patients in such a complicated manner that it substantially wiped out a lot of the value of the companies that provided special services," Braff said. "Companies continue to struggle under the guidelines of IPS, and buyers are looking at the market and saying, We are afraid.’ They are staying away from it."
Braff said Medshares’ (Memphis, TN) recent announcement that it had filed for Chapter 11 protection was a function of IPS. Many of the buyers who rushed to buy agencies at discount pricing, like Medshares did, found there isn’t the market for the sale of Medicare-certified agencies right now, he told HHBR.
But Braff said the home health sector will rebound some, although not to what it was like before BBA.
"People will learn how to deal with IPS and will have rejiggered their business," he said. "Furthermore, PPS is supposed to be implemented in October, and companies will figure out how to make it work."
A lot of agencies will close, and that will continue to happen, he said, but over some period of time, the industry will be left with agencies that have refigured themselves so they can provide services adequately. Once that happens, and the risk has been taken away from the buyers, they will understand these are the companies that have survived, and without that concern, the buyers will buy, Braff said.
Some other sectors included in Irving Levin’s M&A report were hospitals, which reported 41 transactions in 2Q99, down 15% from 2Q98; HMOs, which reported 14 deals in 2Q99, up 7% from 2Q98; rehabilitation, which reported 11 transactions in 2Q99, down 27% from the number in 2Q98; and long term care, which reported 10 deals, down 76% from those deals reported in 2Q98.
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