Private Equity Poised to Reshape Home Health Care Industry?
Examples of how private capital is making its presence known in the homecare market
by Greg Shulas

As the growing home health care market attracts the attention of major Wall Street and health care industry players alike, private equity (PE) firms are steadily increasing their presence in this fast-changing industry. 

Directly involved in many of the 84 M&A deals that have occurred in the market in 2018, according to M&A firm Mertz Taggart, PE investors are helping to reshape the winners and losers in the market as they accelerate consolidation and innovation.

“Private-equity owners…can make business decisions without worrying about near-term financial impact” largely because they are free from the quarterly financial reporting of publicly traded companies, said Bill Miller, CEO of WellSky, a health care software and business services company that tracks the PE sector’s influence in the home health care market. 

“Relative to privately-owned or nonprofit providers, they are generally much more aggressive with respect to growth, acquisitions, operating improvements, and management incentives,” Miller added. “Private equity firms are focused on operating and financial data, and make decisions quickly.”

And the current investment environment on Wall Street should empower PE firms to move more decisively in growing their stake in the home health care. According to research shop Preqin, PE firms are as of June 30 sitting on $1 trillion worth of so-called “dry powder” globally, a reference to money that these investors have available to allocate toward future initiatives.

“There is a lot of money that private-equity firms have raised that has yet to be deployed,” Miller said. “I expect continued investment in the growing home health care market.”

And without question, PE firms are well aware of the unique lifestyle qualities of aging baby boomers, when compared to other generations. This demographic is all the more likely to gravitate to home health care providers that help support their interest in flexible, independent living, experts say.

Moreover, when one combines the sheer size of the baby boomers, at 74 million in the U.S., one can understand why opportunistic private investors want to invest in new, more effective home health care services, says Linda Hoge, senior managing partner at 5 Star Consultants, based in central Missouri.

“Judging by the attitudes of baby boomers compared to previous generations, they are more likely to be active, retire later and maintain healthy lifestyles. They are also more likely to stay in their homes longer, which bodes well for post-acute home health,” Hoge said, adding that capital from private equity firms can help effective home health care firms provide services that bolster their market share.

Creating Challenges for Existing Providers

And some traditional home health care companies with scarcer resources than their Wall Street-backed peers may be caught off guard by PE’s increased penetration in the market. Indeed, PE money will help improve the quality of telehealth and monitoring services that top players can provide, Hoge said.

“We expect this trend [of PE investment] to continue, or accelerate, in spite of uncertainty in government and managed care reimbursement,” Hoge added. “We anticipate that improved information technology, using mobile devices and telehealth for example, will improve field staff productivity, while consolidation of ‘overhead’ functions will reduce fixed costs. Smaller agencies will struggle as lack of capital will not enable them to take advantage of available technology” in the way PE-backed firms can.

Likewise, Miller sees PE-supported firms getting an extra leg up on their smaller peers in this current environment.

“One risk is that smaller providers have a tougher time competing against consolidating competitors who have more resources and carry more influence with referral sources,” Miller noted. “All providers will need to use data and technology to sell their value to referrers versus just maintaining relationships with discharge planners.” 

Well-Positioned for Future Expansion

Globally, the value of private equity agreements in health care increased 17 percent from $36.4 billion in 2016 to $42.6 billion in 2017, according to a Bain & Co. report. Meanwhile, the number of deals between private equity firms and health care firms increased about 29 percent from 206 in 2016 to 265 in 2017.

And research shows 42 PE transactions have occurred between 2015 and 2017 in the home health care sector, with 19 investment events occurring in just 2016, according to The Braff Group, an M&A advisory firm. An outlook commentary posted on The Braff Group’s website identifies trends that will speed up future deal making and cites Medicare spending growth as contributing to deal flows.

Unique markets within the home health care sector like “hospice has been receiving increasing reimbursement every year,” said Braff Managing Director Mark Kulik in an M&A outlook published late last year. “Collectively, since 2009, it has cumulatively received about a 16 percent increase over time.”

Long attracted to the health care industry, PE has a long history of funding some of the sector’s biggest transactions, including the historic $33 billion leveraged buyout of industry giant HCA Healthcare of Nashville. And of no small note is the migration of private capital to more niche areas of health care, including specialists such as dermatology and ophthalmology. Therefore, it may hardly be surprising that PE firms are gaining a deeper appreciation of the near- and long-term value present in the home health care sector.

Private equity’s impact on the home health care industry is taking shape through many different forms. Below are some examples of how this private capital is making its presence known.

Traditional Buyouts

The most widely known of PE transactions, traditional leveraged buyouts include deals such as Thomas Lee Partners’ original 2014 deal to buy Curo Health Services with outside capital, to non-home health care deals in the broader health care industry such as KKR’s recent bid for Envision Healthcare and Apollo Global Management’s string of deals for U.S. health systems such as Capella Healthcare and LifePoint Health.

Niche Buyouts

In these less publicized deals, boutique PE shops will outright buy home health care providers that have exposure to unique sectors of the industry. This M&A acquisition model can be witnessed via transactions such as DW Healthcare Partners’ purchase of Aequor Healthcare Services.

Based in New Jersey, Aequor provides clinical staffing to homecare providers, along with other health care organizations. In buying Aequor, DW Healthcare Partners pointed to its “very strong and diversified staffing services platform” as well as its ability to fuel “growth across all verticals,” according to a company statement.

Strategic Partnerships in Deals

When private equity firms are not committed to full-fledged buyouts, they are likely to gain exposure to investment opportunities by participating as partners in deals.

A recent example of this approach can be seen in a $1.4 billion purchase of Curo Health Services from PE firm Thomas H. Lee Partners. In the transaction, health insurer Humana teamed up with PE firms TPG Capital and Welsh, Carson, Anderson & Stowe to pull off the transaction. The acquisition comes on the heels of another major M&A pact, in which the same PE-backed alliance acquired home health care giant Kindred Healthcare for $4 billion in cash. These major transactions fit into Humana’s plans to establish a top-tier industry firm with expansive marketshare. Currently, Humana is seeking to merge Curo and Kindred assets together to achieve this objective.

In Miller’s perspective, innovation in deal making will continue to be present as demographic shifts continue to empower the home health care movement. “The demographics of the aging population are attractive to investors and they generally like the fragmented nature of the market,” he said.