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With the uncertainty surrounding the U.S. Centers for Medicare & Medicaid Services’ (CMS) new proposed payment rule, buyers and sellers in the home health industry will be proceeding with caution.
Home health insiders told Home Health Care News that while the proposed rule is sure to create some pause in overall activity, it shouldn’t be considered a doom-and-gloom scenario.
“It was not welcomed by anyone in the home care industry,” Les Levinson, co-chair of the transactional health care practice Robinson & Cole LLP, told HHCN. “You can’t ignore it, even though it’s only a proposed rule. The general feeling is that the number proposed probably won’t be the final number. But it’s a fair assessment to say that this will have an impact on buyers and sellers coming to market.”
Dealmakers will likely pause and evaluate potential acquisitions in the works and use a wait-and-see approach until the magnitude of the cut is finalized later this year.
The proposed rule from CMS comes with a decrease to payment rates by 4.2%, or $810 million less compared to 2022 rates.
In the time between now and when the final rule is established, providers will likely argue that the proposal does not take into account factors that are currently hindering operations. Those include raised labor costs, a severely high inflation rate and other ongoing heightened expenses related to COVID-19.
And that’s not considering the overall savings that more home-based care can achieve for the health system, a fact the former CMS Administrator Seema Verma pointed out last week.
The home-based care industry had proved itself valuable throughout the COVID-19 pandemic, Mark Kulik, managing director at the M&A advisory firm The Braff Group, told HHCN. The proposal was seen as shocking to many because of that.
“The industry as a whole has proved its worth to the health care system, certainly helping out hospitals and facilities by caring for patients at home versus for those facilities,” Kulik said. “Here we are with CMS forgetting about [that] value.”
The 4.2% reduction is just the beginning, Kulik said. The proposed number will surely increase labor costs, he said, and there are other factors to consider in 2022.
High gas and transportation prices, reimbursement rates and the trickle-down effect for so many other socioeconomic factors should have played a role in CMS’ initial proposal, Kulik said.
“Then there’s other regulatory things like changes to telehealth and home health value-based purchasing [that’s coming] at the first of the year as well,” Kulik said. “It’s almost like they’re in a bubble and CMS is coming up with this rate change while ignoring the true impact to the industry.”
Even though the initial numbers shocked some in the industry, Cory Mertz – a managing partner at the M&A firm Mertz Taggart – said the rule will have an impact on dealmaking until the final rule is established.
“After the final rule is established, we will have a clearer path forward,” Mertz said in an email to HHCN. “Sellers that were prepared to go to market over the next four to five months, expecting to take advantage of all-time-high Medicare home health valuations, may now decide to wait and see what the final rule brings. Many home health deals that are currently in the works will be impacted, though every deal has its own dynamics.”
Potential positives
Even though most in the home-based care industry were upset with the proposal, there could be some silver linings when it comes to future M&A.
A potential pause on deals could benefit both buyers and sellers, Kulik said.
“The seller will not want to sell for something less than he or she feels was appropriate,” he said. “The buyer is probably going to say, ‘Wait a minute, if the rates change and they go forward with this proposed rule, that impacts the revenue stream, the future income and valuation.’”
The proposed rule creates challenges, but it also gives sellers time to “kick their own tires a little bit harder,” Levinson said.
“It’s obviously a huge hit,” Kulik said. “[There are] these agencies that operate at a level of 4% or less in profitability. If it stands, we’re looking at agencies that will make no money, at minimum, and even some at risk of going out of business.”
This is especially troubling, Kulik said, considering these closures could come in areas that can’t afford to have those agencies out of business because of the lack of other options for patients.
Looking ahead
Even though the new proposed rule comes with challenges and confusion, Levinson said this time could be used wisely.
“This is probably a good time for sellers to take a closer look at their business and answer some of those unanswered questions,” Levinson said. “Sellers should probably take a step back and make sure their deals are really tight.”
On the other side, Levinson expects some initial caution from buyers.
“If you are a buyer, you are probably going to take a more conservative outlook now,” he said. “That being said, there is still a lot of capital available. Interest rates are going up, but I don’t think by any means we should use this proposed rule as a be all, end all for the current M&A market.”
Zooming out, Levinson and other experts don’t think this is a time to hit the panic button.
Kulik also believes a tsunami of reaction and response will come CMS’ way and the government agency should be prepared to be overwhelmed, especially considering what the industry has already endured over the past few years.
“I do believe people continue to feel [home-based care] is a vibrant sector of health care,” Levinson said. “If anything, the pandemic enlightened the fact that people want to have managed care at home. When you match that macro thinking against a potential rate cut, there’s certainly a lot to sort through. This industry has weathered rate cuts before. It’s not welcome, but they’ve navigated this before.”
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