Bass, Berry & Sims attorney David Cox spoke with Global Healthcare Advisors (GHA) for a Q&A article about trends in the home health, hospice and personal care sectors. As part of the discussion, David answered questions about the large shifts in the delivery of care within these sectors, the transition to value-based care, and M&A trends and challenges in these sectors.

The Q&A was distributed to GHA subscribers as part of the Daily Note series on November 2 and is available below.

GHA Q&A on Home Health, Hospice and the Personal Care Sector with Bass, Berry & Sims Attorney David Cox

The Healthcare Private Equity Team at Bass, Berry & Sims has advised in over 150 private equity transactions in the healthcare industry over the past two years, including The M&A Advisor’s Healthcare & Life Sciences Deal of the Year (Over $1B) and Corporate/Strategic Deal of the Year (Over $1B) in 2020.

Here, David Cox, Attorney at Bass, Berry & Sims, talks with GHA Managing Director JC Lupis about trends in home health, hospice and the personal care sector (PCS).

GHA: Hi David. The healthcare industry is undergoing large shifts in the delivery of care and the way it’s paid for, and a big part of this change is the diffusion of sites of care, increasingly to the home. Can you comment on how much further the home health/hospice/personal care sector (PCS) has to grow?

David: Healthcare is driven by ways to decrease costs and improve outcomes and patient satisfaction. Multiple factors favor and will continue to favor a shift of care to the patient’s home, so I see a lot of runway for ongoing growth in the sector.

COVID-19 highlighted what we already knew: People prefer to be at home, it’s a cheaper delivery model, and it works. Now we also know it’s potentially safer for both patient and caregiver. The pandemic has heightened awareness for policymakers at federal and state levels of the importance of these sectors and, I believe, a desire to expand in-home services. That greater awareness bodes well for Medicare and Medicaid reimbursement for these services.

Even before COVID-19, developments in technology allowed more services to be provided to patients in their homes. Technological advancements also provide more confidence in service integrity, such as through electronic visit verification, and open new opportunities to monitor health and impact outcomes.

These factors mutually reinforce each other, too. As the infrastructure of home health and personal care services increases, more individuals will be able to age in their homes, and that will translate into a bigger market for home-based services.

GHA: Another monumental change for the industry is the transition to value-based care. We’ve seen this play out in various contracting models for home health and hospice and in Medicare Advantage coverage of home-based care. With the obvious factor of an aging population, how much will these new models drive or affect growth in the home health sector?

David: We believe this will be a transformational change for the industry—it is just a matter of time. Payors and providers are trying to figure it out, and some are further along than others. For Medicare Advantage coverage of home-based care, it has the opportunity to drive significant volume as plans increasingly understand the clinical value of personal care services. It’s a service that can improve outcomes and generate significant savings in overall cost per patient, eliminating, for example, emergency room visits, hospital admissions and readmissions. We also are seeing an increased awareness of social determinants of health and the real opportunity for home health and personal care services to improve determinants meaningfully.

GHA: What are the biggest challenges that you see limiting growth in these areas?

David: Like many areas of the economy, labor shortages could be a significant issue. Fundamentally, wages in these sectors depend on reimbursement, and labor availability will be tied to wage opportunities. Greater awareness on the part of the federal and state governments of these services must translate into action to support the growth of these sectors with funding. At the same time, provider organizations need to be nimble in recruitment, training and retention to participate in the growth.

GHA: Turning to M&A, have you witnessed any divergence in trends between home health and hospice agencies? It seems to us that hospice has been in more demand of late.

David: It certainly seemed like there was a bit of a pause in home health related to PDGM but it was more short-lived than almost anyone predicted. The demand for hospice certainly accelerated and has been reflected in valuations. Different companies have different approaches to how they are assembling scale in these sectors. Some focus on only one or two of the three sectors versus all three, some want concentrated positions in key states while others are moving for a national presence, and some pursue JV strategies more heavily than others. Regardless of your views on which of those is the optimal approach, they all seem geared toward the central philosophy that scale will allow you to take advantage of the changing dynamics in the industry.

GHA: Are there any emerging challenges or trends in M&A?

David: Representation and warranties insurance (RWI) always has been modestly more challenging to obtain in healthcare, with fewer carriers willing to write policies in the space. In the last five months, however, the RWI market has tightened up considerably, with carriers turning away more transactions and insurance being completely unavailable for some transactions. This has been particularly true in hospice, where recent large transactions have taken up a lot of the appetite for carriers in this space.

For context, RWI emerged over the past five years as an important tool that allowed buyers in any industry to address risks around indemnification in M&A very differently than they had traditionally been handled. RWI has greatly enhanced deal speed and certainty, and one can argue valuation. It is a major development not to have this tool available. It remains to be seen how long this trend lasts and whether it impacts only pricing or actual availability of coverage. A continued lack of coverage could certainly impact the market and the structure of transactions in a pretty fundamental way.

GHA: Thanks for your insights, David! Lastly, do you have any bold predictions for the home health and hospice industry in the short- to medium-term, whether on an M&A, regulatory, compliance or another front?

David: I’ll stick with some trends identified above and predict the RWI market will re-emerge in 2022, albeit with higher premiums and careful underwriting. Meanwhile, I anticipate we will see consolidation in the industry at an even larger scale.

To learn more about the healthcare practice at Bass, Berry & Sims, please contact David Cox.