Bloomberg Law
Feb. 21, 2020, 10:02 AM

Hospice Deals Remain Hot Amid Heightened Industry Scrutiny

Tony Pugh
Tony Pugh

Government efforts to improve quality, fight fraud, and stop profiteering in the hospice industry are partly responsible for a record wave of mergers and acquisitions that hedge against a new Medicare payment system.

From a handful of small nonprofit organizations in the 1970s, hospice end-of-life care has grown into a thriving $19 billion a year industry led mainly by for-profit, investor-owned companies.

Medicare is the nation’s largest payer for hospice care, covering more than 90% of patient stays in 2018 on behalf of more than 1.5 million beneficiaries. Use of the Medicare hospice benefit will grow as millions of aging baby boomers require end-of-life care in the coming years.

In 2019, there were a record 42 hospice-related mergers and acquisitions, and the pace isn’t likely to cool in 2020, said Cory Mertz, managing partner at Mertz Taggart, a mergers and acquisitions advisory firm that specializes in home health and hospice transactions.

That’s because the hospice industry’s strong projected growth and stable reimbursements can offset shortfalls or disruptions that some home health providers will experience this year a new Medicare payment system. Many home health providers also offer hospice care. Mergers are expected to continue even though hospice is facing its own cut.

The new home health reimbursement system is designed to reduce taxpayer dollars for unnecessary therapies by basing payments on patients’ health conditions rather than on services provided. The payment cuts, which began on Jan. 1, will put a financial squeeze on some providers and could put others out of business.

For hospices, the Medicare Payment Advisory Commission is expected to recommend trimming their annual per-patient payment limit from about $30,000 to $24,000 in 2021. The move is designed to discourage longer, more profitable patient stays among for-profit hospices.

Hospice Payments

Medicare’s hospice benefit provides specialized care and support services for patients with terminal illnesses and a life expectancy of less than six months.

For-profit hospices, on average, have longer patient stays—about 110 days—compared with nonprofits, which average 68 days, the commission reported. That’s because for-profits enroll more patients with ailments that are more likely to have long stays, such as dementia and other neurological problems.

But all patients, regardless of their diagnoses, typically have longer stays at for-profits, the commission found.

That helps explain why for-profit hospices had an average positive margin of roughly 20% on Medicare beneficiaries in 2017, compared with 2.5% for nonprofits, the commission found. Reducing the payment cap by 20% would have saved nearly $573 million in 2017.

If the recommended cut goes into effect, “I would expect buyers to remain interested in hospice, but at a lower valuation across the board,” Mertz said.

The commission’s recommendations usually carry considerable weight with Congress.

A reduced payment cap could slow hospice-related transactions for a while. But dual home health and hospice providers are expected to continue to expand their hospice footprint while assessing the financial effect of the new Medicare payment model on their home health operations.

New Home Health Model

Rather than setting home health rates on the amount of care provided, the new model bases payments on patients’ clinical characteristics, including the type and severity of their ailments. It also reduces the percentage of up-front payments from 50% to 60% of a final Medicare claim to 20%.

Larger, for-profit and urban home health agencies are expected to see lower reimbursements under the new payment model, according to the Centers for Medicare & Medicaid Services. So will those that provide more therapy-related services.

“That scenario is causing the industry to look more intensively at hospice,” said Mark Kulik, managing director for home health and hospice at the Braff Group, an M&A consulting firm focused on companies that provide post-acute care.

Home health providers are buying up hospices to soften the financial impact of the payment model and to position themselves for the millions of baby boomers yet to come, said Jake Vesely, an analyst with Provident.

“Investors are predicting a higher utilization of the services in the future, which has led to larger investor interest and increased demand,” he said.

A Fragmented Industry

Vesely said the hospice industry is also attractive because it’s so fragmented among small regional and local providers. “The majority of players in the space don’t have a significant market share,” he said.

Some of the nation’s largest hospice providers include Vitas Healthcare, Kindred Healthcare, HCR ManorCare, and Amedisys Inc.

“Just about every one of these large operators are enjoying healthy balance sheets, access to debt, strong valuations, and have the infrastructure to do transactions,” Mertz said.

“Most have hit ‘pause’ on any significant home health acquisitions until the dust settles a bit,” he added. “So they are turning their development efforts towards hospice deals for now.”

On Jan. 28, Hospice Care of South Carolina, a portfolio company of The Vistria Group, announced it had acquired Agapé Hospice, to become the state’s leading hospice provider. Bristol Hospice, a portfolio company of Webster Capital, announced Jan. 21 that it had acquired New Dawn Hospice in the Dallas area.

And on Jan. 2, Amedisys announced the completed acquisition of Asana Hospice. Amedisys now has 146 hospice care operations in 33 states. The company also purchased Compassionate Care Hospice in February 2019 and RoseRock Healthcare, an Oklahoma hospice provider, in April of last year.

Keith Myers, chairman and CEO of LHC Group, a large home health provider, wants to double LHC’s 110 hospice locations in the next 12 to 18 months.

And within five years, he wants at least 75% of the company’s home health provider locations to also offer hospice care. “We’re that committed to it,” Myers said at the J.P. Morgan Healthcare Conference in San Francisco last month.

To contact the reporter on this story: Tony Pugh in Washington at

To contact the editors responsible for this story: Fawn Johnson at; Brent Bierman at