Home Health 360: Presented By AlayaCare

Top trends shaping M&A in home-based care: Insights from finance expert Mark Patterson

• Erin Vallier • Season 1 • Episode 69

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In this episode, healthcare finance expert Mark Patterson shares key insights into the ever-evolving world of mergers and acquisitions in home-based care. Drawing upon his time as CFO for home healthcare companies and more than 30 years of experience, Mark discusses top trends that are reshaping the market, including the growing demand for integrated care models that combine skilled and unskilled services and surging investor interest driving fierce competition among buyers. With interest rates stabilizing and regulatory changes on the horizon, agencies must focus on prioritizing and demonstrating streamlined processes, scalability, and high quality of care to attract potential buyers. Mark emphasizes how leveraging advanced technology and developing strong operational metrics will not only lead agencies to thrive but will also become key capabilities to attract potential buyers in the future.

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Speaker 1:

There's one more thing. You'll hear the term agency model thrown around these days. I've come from a company that specialized in high care where we had a lot of nurses and then unskilled care before that company. And now investors are looking for companies that can combine the two and that's called the agency model, and those type of companies are a first interest to investors.

Speaker 2:

Welcome to another episode of the Home Health 360 podcast, where we speak to home-based care professionals from around the globe. I'm your host, erin Valliere, and today I am joined by Mark Patterson, a CPA who brings over 35 years of financial expertise to the table. He's worked in a variety of settings, from startups to IPOs. His industry expertise includes fulfilling the role of Chief Financial Officer in healthcare technology, real estate and service companies, and as CFO, mark oversaw multiple departments in accounting, m&a which is our topic today human resources and IT. Welcome to the show Mark.

Speaker 1:

Thank you, Erin. I'd like to begin just a look back at 2023, just at the table for discussions of 2024. In 2023, there were over 95 significant material total home-based care transactions, a 14% decrease from 2022, and a significant drop from the robust market in 2021. Home-based care M&A volume finished strong, however, in 2023, with dealmaking led by over a dozen non-medical home care transactions projections the strong finish in 2024 to potentially be a more active year for buyers and sellers, assuming improved or steady macroeconomic level outlooks before we get too far into the weeds here.

Speaker 2:

I appreciate you setting the stage for what's going on today, but I want to know a little bit about you before we dive in. Can you share with me and the audience what you're up to these days, because I understand that you might be involved in a new project that involves a little bit of M&A action.

Speaker 1:

I'm on the board of two healthcare startups Home Healthcare and we are making our first acquisitions and we were very hungry. We want to do at least one acquisition a quarter for each specific company and it's exciting, I think. I'm glad that interest rates have leveled off, but it's fun to be on the board side instead of the CFO side where you have to jump and make all the charts and do the preparation.

Speaker 2:

Now you just get to read them and be the one giving the other person a hard time, instead of vice versa. I love it. I recently read an article where Merck's Taggart's new M&A survey was referenced, and they said that buyers this year are planning to be more acquisitive. I didn't know that was even a word until I read that article. Acquisitive, and there's several factors at play. I think you mentioned a couple of them in your prelude here. One of them is quality inventory. So I'm curious what other trends and patterns are you seeing personally, since you've got your sleeves rolled up and you're in it right now. So what are you seeing in terms of recent home care M&A transactions? And you're in it right now. So what are you seeing in?

Speaker 1:

terms of recent home care M&A transactions. I would say first, buyer competition is heating up.

Speaker 2:

It's kind of slowed the past couple years but the ever-increasing demand for home health services is creating a more robust buyer pool who are seeking acquisitions, and I guess I understand that there's not quite that many agencies going for sale this year. Is that kind of what you're experiencing as well? It's like buying a home now. It's going to be a seller's market.

Speaker 1:

It's like sharks. If an agency puts itself for sale, there's going to be several sharks swimming around circling. Most of them are going to be bid up. You can't go out and just make a simple purchase, as you could several years ago. Most of them continue with multiple buyers and they have at least a 10 to 12 EBITDA percentage, and that's healthy. And there's a lot of dry capital on the side, so these investment companies have to put it to use or give it back. So it's going to be a much more aggressive exercise on the buyer's side.

Speaker 2:

And you mentioned something else in your prelude, which is interest rates. I'm curious how powerful do you think interest rates might be in the space this year? I know everybody's waiting to see if the Fed's adjust down, starting, I think, in June is what I heard the feds adjust down.

Speaker 1:

Starting, I think, in June is what I heard. The fed came out yesterday and said they're not planning on any more interest cuts at this time. Now they may turn around and change that in Q late Q3, q4. But I think the market was still glad that the feds have left it on the table and are still open to it. But the feds committed to nothing. No action, definitive action the next six or seven months.

Speaker 2:

Okay, so pretty stable, all right. Where are some of the primary drivers motivating companies in the home care space to pursue M&A activities these days?

Speaker 1:

One of them is buyers are seeking operational excellence and efficiency. In some of my conversation, it's apparent that buyers are prioritizing home health agencies demonstrating the operational excellence and efficiency. Other qualities that buyers are looking for are scalability while maintaining high quality of care, streamlined processes, well-defined protocols and optimized resource allocation. And then there's a strong preference for metrics in the areas such as regulatory compliance and cost. Efficiency is important, and technology integration and analytics have taken on great importance. It's increasingly apparent that home health care agencies investing in technology integration and analytics will stand out against the competition, such as remote patient monitoring, telehealth platforms, predictive analytics and artificial intelligence. Care coordination tools will enhance any agency's appeal. Also, continued care continuity and coordination are prioritized, and by that I mean the ability to achieve seamless transactions and strong communications between health care providers, the patient and other health care providers is becoming increasingly crucial for home health care agencies.

Speaker 2:

If I am an agency thinking about selling, I've got to have my ducks in a row. I've got to have the right people in place, the right processes, the right tools in order to not only just be excellent if I'm operating, but be excellent and attractive to a buyer. Did I get that right?

Speaker 1:

Correct. And there's one more thing. You'll hear the term agency model thrown around these days. I've come from a company that specialized in high care where we had a lot of nurses and then unskilled care before that company. And now investors are looking for companies that can combine the two and that's called the agency model, and those type of companies are a first interest to investors.

Speaker 2:

How have the recent regulatory changes affected M&A Dynamics and the healthcare sector?

Speaker 1:

In 2024,. The year comes with an estimated aggregate increase to 2024 home health payments of 0.8%, or $140 million. Compare this to the 2023 aggregate payments but it doesn't tell the entire story because there's rate cuts that are going to be finalized. So they give with one hand and they take away with another. $140 million increase, as mentioned in the estimated payments for 2024, reflects the effects of a home health payment update percentage of 3%, or $525 million, and an estimated 2.6% decrease that reflects upon the permanent behavioral assumption adjustment. And then there's a 4% increase in FDL, which is 70 million. But CMS is finalizing permanent prospective adjustment of minus almost 3% to home health payment rates, which was short of the 5.1 adjustment proposed in June. So it was more than that. But now they're going to cut back in certain home health specializations.

Speaker 2:

So it seems it's just as frustrating this year as it always is. They get you excited and say, oh, we're going to increase here, but then we're going to decrease way over here and it's going to be more of a decrease than an increase. That puts a lot of strain on providers. I just don't get it. You mentioned earlier, in the buyer's perspective, you're going to be looking for agencies that have really good processes and really good technology in place. Can you expand a little bit more on the technology piece? How is that playing a role in shaping M&A strategies?

Speaker 1:

Yes, If I say one thing, if the listeners remember one thing from this podcast, remember the words AI and digital healthcare tech growth In 2023,. Universal Health Services announced that it was a founding partner in Hippocratic AI3. This is a tech company building the first language learning model AI which can safely deal with administrative applications unrelated to patient diagnosis. Investors may benefit from looking at these new technologies arising in mental health care, such Safety First language learning model tools, as a set for considerable growth. Growth in the telehealth industry, as well as AI-powered drug discovery platforms, are also set to become attractive, and probably the ones you hear most about are the hospital mergers and acquisitions and their investment in AI monitoring tools.

Speaker 2:

Yeah, you hear a lot about AI for predicting adverse events in home care, like with the clients and stuff. I'm curious to see how that's going to apply to the more administrative tasks. I've seen a little bit of that in play, where they were able to take the intake process and make that a lot more streamlined by using some AI tools, but it's definitely going to be interesting to see how that evolves and how attractive that makes a particular organization who's utilizing some of those tools to the buyers. What challenges do you see companies typically facing when navigating M&A transactions in the home care space?

Speaker 1:

I can speak from personal experience on this. No-transcript. Due to macroeconomic challenges like the increasing cost of capital, margin compression from inflation, this caused sellers to hold off during the first half of 2023. Because of this, there's now somewhat a pent-up demand, leading to the return of deal activity in 2024.

Speaker 2:

Can you expand a little bit on the lag time? So there was a delay in people wanting to go into the market. And now how is that hanging up the M&A activity this year?

Speaker 1:

As mentioned, there's a pent-up demand. All the horses are at the starting gate waiting for the bell to sound and there's a lot of dry powder Investment companies. Private equity has a lot of dry capital, so they're doing a lot more research. They're much more selective in the companies they want to invest in. One of the things that I didn't mention is those companies that have taken care of their EBITDA, that have the ad backs, that have the adjusted EBITDA, that are ready to be presented to a buyer, have a unique advantage because there's less time up front spent on due diligence and the buyers can have more modeling done, which provides a quicker turn to closing.

Speaker 2:

So it's up to the selling or the person who's wanting to sell their business to have their own due diligence ready and to have a really attractive package so that you guys who want to buy can pounce and spend that money that you have to spend. Or you said something earlier that I didn't know is that you have to get that investment money back if you're not able to use the capital. So listen out, there, guys, there's people that has money in their pockets, it's burning a hole in their pockets and they're ready to spend it. Let's shift just a little bit. Are there any examples of M&A transactions leading to improvements or changes in the quality of care?

Speaker 1:

Well, I refer back to AI. There's the larger companies. The larger home health providers are investing in the AI and you'll hear about some next month, but most of them are going to come out around June or July. Some of these are on the QT and I'm not allowed to disclose them. But again, with AI, with new regulations, with mitigating risk, there are companies that will make it known in the next few months.

Speaker 2:

Oh cool, very cool. So there's some insider information that we got to wait. We gotta wait. I won't ask you then directly. So, in terms of what I'm going to go down this rabbit hole for just a second, in terms of improved outcomes, are you suggesting that, say, if I'm selling my agency, I need to have some of these tools in place? Or, as a buyer, am I willing to invest in a company that doesn't necessarily have some of these advanced tools in place, but they have an environment in which the people there are eager and willing to adopt, in an integration process, some of those tools? What does that look like?

Speaker 1:

The companies that already have it as part of their operating model will be the girl taken to the prom and those that are interested. You may be interested but you may know nothing about it and therefore the investor or private capital has to understand your business, work with management on what type of tools would fit best, what their budgets are, where to go with their investments. So those that are already up and running probably have a six-month advantage a five to six-month advantage over those that already have it in place.

Speaker 2:

So it really is to the advantage of owners who are wanting to sell to maybe go ahead and invest in some advanced technology to make yourself more marketable. Are there any best practices that companies should follow to ensure a smooth transition and integration process?

Speaker 1:

Yes, and this focuses around due diligence and integration, focuses around due diligence and integration. For the companies that I've been associated with, we have our own due diligence checklist. Of course, there's going to be outside partners like lawyers, bankers, advisors, accountants and it's important that the process is smooth as possible. So we have the skilled talent in-house to do much of the due diligence up front, and you can get some of these checklists online Just Google due diligence, home health care and there should be programs out there for you to follow.

Speaker 1:

The second part is I've found companies are all eager and they're all ready to go to make the purchase, but they don't really have an integration plan on the back end after the completion of the transaction. This is important. This is burning money if you just build it after the transaction. Consider creating a post-merger checklist which looks at a timeline for public-facing challenges, human resource requirements, it systems and then also accounting systems, compliance reporting and banking systems and I know that's where your company shines, aaron Senior leadership dynamics, organizational structure, manager-employee relationships and that comes from the org chart, redesigning the org chart, team dynamics and communicating company and brand culture. And communicating company and brand culture the culture. Not many people know about this, but 60% of integrations and acquisitions fail because of the lack to integrate culture.

Speaker 2:

That's a big number. So what do you think is a good strategy to apply to help integrate that culture?

Speaker 1:

I know in a merger companies go in as equals. But I have found out, if you meet beforehand, you understand what the policies, procedures and benefits are of the company being acquired. You can actually choose between the two companies' benefits and maybe choose the most optimal one. If not, you don't want to take away benefits without giving other benefits in their place. So it's like a swap to the personnel of the acquired company company. So don't immediately go in and press down, but there really needs to be a leader or at least an agreed upon program before equals merge so that the employees don't get screwed and they can look forward to something from a bigger company and more assets something from a bigger company and more assets.

Speaker 2:

I think it's important for both sides to take a really good look at. Is it a good culture fit? What do the benefits look like? Is it caregiver centric? What are the tools that are going to be introduced? Is it going to make their lives easier? Basically, as an owner selling my business, I need to make sure that when I sell my business, not all my people are going to quit because they don't like who's taking over. That makes a lot of sense. I just have one more question for you, because I know we're running up close to time. I want to talk about the future. Now let's just leave it on a note. Looking into the future of M&A, are there any specific factors or developments that you believe is going to shape the trajectory of M&A in the industry over the next couple of years?

Speaker 1:

I think technology God are the days you can just issue an accounting report financials at the end of the month and that meets management needs. They want to know where we're going, and that's the FP&A process. What are the factors that can influence that? What advantages are there to implementing AI or finding a vendor that will provide the AI to help you promote operational efficiencies and improve the overall healthcare delivery service to the patient? I also think that it's going to require more evidence of this efficiency in their cost payment model. So when regulations come up, then there are going to be more this year and more next year. So probably for the next 12, 18 months, you'll hear more coming out. Those companies that have focused, that have in their planning FP&A, ai, digital will be the ones that are the favorites, and the others who straggle, may get left behind quicker than it did in the past.

Speaker 2:

Gotcha. So I wasn't expecting that answer, but coming from a person who works with a technology company, I like to hear that you think technology is going to continue to influence the M&A market and also care delivery in the home influence the M&A market and also care delivery in the home. So for all you folks who are still on paper I know there's a percentage of you out there I hope that struck home. It's time to rethink how you're doing things, because if you want to survive and thrive in the coming years, you got to get the right technology in place Drive efficiencies, do more with less all the stuff you know Well. Mark, this has been a really lovely conversation and very informative. I know I've learned a lot and I'm sure the listeners have learned a lot as well, so really appreciate your time this morning. Thank you for coming on the show.

Speaker 1:

My pleasure. Thank you, Erin.

Speaker 2:

You're very welcome. Home Health 360 is presented by Alaya Care and hosted by Aaron Valliere. First, we want to thank our amazing guests and listeners. Second, new episodes air every month, so be sure to subscribe today so you don't miss an episode. And, last but not least, if you like this episode and want to learn more about all things home-based care, you can explore all of our episodes at aliacarecom, slash homehealth360 or visit us on your favorite podcast platform.