Healthcare Mergers & Acquisitions: 2023 A Year in Review

Healthcare deals in 2023 were shaped by rising costs, labor shortages, and evolving regulations. SimiTree offers a unique perspective on the healthcare M&A landscape, having participated in more than 65 post-acute and behavioral health deals last year. In this 2023 year-in-review, Mark Romano, Associate Principal, and Nicole Hawthorne, Director, share their experiences and insights, with a focus on last year’s trends and their predictions for the coming year.

2023 Trends in the Marketplace

Behavioral health and post-acute care saw what Romano described as “a perfect storm” of complications in M&A. As a result, deal volume was down from prior (some record-breaking) years.

Not unique to healthcare, the rising cost of capital, labor shortages, and wage inflation played a significant role in the slowdown. Future changes in reimbursement and a valuation gap further contributed to the decline.

Rising Cost of Capital

Since March 2022, the Fed has raised interest rates 11 times. The current range of 5.25%-5.50% , set at the July 2023 Federal Open Market Committee (FOMC), is the highest since January 2001.

Labor Shortage

In June 2023, the National Institute for Health Care Management (NIHCM) reported that the U.S. is facing “a significant shortage of nurses and mental health professionals,” with 49% of Americans currently residing in areas that do not have a sufficient number of providers.

This is especially problematic at a time when demand for care has increased significantly as a result of the COVID-19 pandemic.

Wage Inflation

With more people seeking treatment and fewer qualified professionals available to provide that care, wages have risen. Although not unique to healthcare, unpredictability in this area remained a cause for concern among buyers in 2023.

Reimbursement Concerns

“Uncertainty in the industry will cause buyers to pause,” Romano said. “The Home Health industry continues to be the target of CMS rate cuts, and with value-based purchasing adjustments coming in 2025, revenue numbers remain fluid.”

Medicaid is also looking at reimbursement changes, specifically Home and Community Based Services (HCBS), where buyers had to account for the possible impact of CMS’s proposed 80/20 rule (which would require that 80% of reimbursable fees be spent on compensation for direct care workers).

“Once things are finalized, for better or worse, deal volume will pick-up.” Romano added.

Inflated Valuations

Agreeing on the value of a healthcare organization is never a simple endeavor. But the challenge became more difficult in 2023, especially in the hospice and behavioral health spaces.

Many sellers expected the continued growth in valuation that they’d experienced in the past few years. At the same time, economic and market conditions pushed buyer valuations far below those seller expectations. This disconnect created a stalemate in acquisitions and, in many cases, prevented buyers from coming to the table at all.

Areas of Growth

The behavioral health and post-acute markets may have slowed in 2023 but didn’t come to a complete standstill. The year saw increased activity in nonprofit mergers and smaller acquisitions:

  • Faced with significant threats to their continued survival, many nonprofit organizations sought to bring on partners to mitigate risk and maximize efficiencies. This was particularly notable among home health and hospice organizations.
  • With the increase in the cost of capital and a decrease in prime inventory, we saw an uptick in small to mid-market acquisitions.

2023 Trends in Diligence

For buyers who will be searching for opportunities in the upcoming year, and sellers positioning themselves to go to market, the SimiTree team emphasized the necessity of diligence in several key areas:

Cash vs. Accrual Accounting

Many smaller organizations continue to use cash-basis accounting. However, this approach can potentially hide red flags, such as inefficient billing and collections processes, as well as create a mismatch of revenue and expenses, which can distort monthly performance.

“A sophisticated buyer will want to look at a seller’s financial reports on an accrual basis,” Romano said. “Converting from cash-basis to accrual can help buyers better understand the seller’s operations. It can also identify problems that a buyer may not want to become involved with or that may devalue the deal.”

COVID-Related Revenue

Although the COVID-19 public health emergency officially ended May 11, 2023, many behavioral health organizations continued to receive supplemental government funding throughout the year. When reviewing historical financials, COVID-related loans and grants should not factor into operational revenue and EBITDA. Additionally, the sellers' use of that money could have long-term implications.

 “If a provider used any of that money for raises, as opposed to bonuses, that expense doesn’t go away,” Romano said. “That becomes an ongoing cost that the buyer will be responsible for.”

Bad Debt

Some level of bad debt is an unavoidable reality for all providers. However, too much bad debt could suggest fundamental deficiencies within the organization. And understating bad debt could have a significant impact on adjusted EBITDA.

Identifying collection trends and validating how sellers have accounted for bad debt is a vital part of financial diligence.

Hospice Cap

Hospice cap liabilities result from gaps in operations and are more frequent in areas with higher reimbursement rates. Consistent year-over-year liability, Romano noted, can signify a considerable risk for would-be buyers. With potential Cap reform on the horizon, this will continue to be a focus in diligence.  

In July 2023, the Centers for Medicare and Medicaid Services (CMS) issued a final rule to update payments and the aggregate cap for fiscal year 2024.

Clinical Documentation

While this may seem like an obvious area of risk, it is still one that has a significant impact on a deal’s success. “It is the goal of clinical due diligence to determine whether the clinical documentation supports eligibility criteria and technical billing requirements,” explained SimiTree Director Nicole Hawthorne. “These could have an impact on the future census and revenue stream, as well as a potential risk to the provider during a payer audit.”

The Centers for Medicare & Medicaid Services (CMS) requires that home health and hospice patients meet eligibility criteria that support skilled and medically necessary care and that the patient is homebound.

“A provider might have a patient that meets these criteria. However, if the clinical documentation is not sufficient to support, the claim could be denied,” Hawthorne said.

Technical billing requirements can include a broad scope of payer expectations beyond documenting a patient’s eligibility, such as:

  • Physician and non-physician practitioner orders for services
  • Payer authorization of services
  • Proper ICD-10 and CPT coding
  • Face-to-face encounter documentation, where applicable
  • Appropriate visit documentation
  • Timely claim submission

“Insufficient face-to-face encounter documentation is the most common area of technical billing risk we observe,” Hawthorne said. “It also remains one of the top reasons for Medicare payer audit denials for home health.”

2024 Predictions

Looking toward the rest of 2024, the SimiTree team anticipates the following five trends:

Hospice Increases

Hospice providers have been enticing targets for buyers in the past, though activity was lower in 2023. This space should see a rebound in the year ahead.

“In 2024, I think we’re going to see a leveling and a rebalancing in the hospice market,” Romano said. “As buyer and seller valuations realign, activity should increase.”

Continued Apprehension in Home Health M&A

Between continued rate reductions and looming value-based purchasing adjustments, buyers will remain wary of the home health market.

Recently, the Medicare Payment Advisory Commission (MedPAC) offered initial recommendations for Congress to cut home health reimbursement by 7%. Starting in 2025, providers will begin to see rate adjustments based on their performance in CMS’s Home Health Value-Based Purchasing (HHVBP) Model. Depending on their quality scores — based on 2023 data — home health providers may get as much as a 5% increase or a 5% decrease in reimbursement rates.

“There could be considerable uncertainty before the release of 2025 HHVBP adjustments in August, and the Home Health Final Rule around the same time,” Romano added. “This could cause buyers to pause, as they may want to wait until they can see the full impact on a seller’s revenue.”

Continued Interest in Home- and Community-Based Services (HCBS)

“Even with the apprehension in home health, this care setting remains the future of healthcare,” Romano said. “Home is where the patients want to be, and it’s the lowest cost setting.” Though they are not immune to future rate and regulatory changes, HCBS appears to be where buyers are turning their attention.

Increased Interest from Private Equity

Having kept their proverbial powder dry while waiting for the uncertainties of 2023 to settle, private equity is well prepared to be active in behavioral health, hospice, and related spaces in 2024.

Continued Payer Scrutiny

“Regulatory compliance will be a key focus area in 2024,” Hawthorne predicted.

"During the early part of the COVID-19 national emergency, CMS paused some of the payer audits,” she noted.  “In 2023, the home health and hospice industry observed CMS Program Integrity audits have resumed to pre-pandemic levels and anticipate these efforts to continue in 2024.”

Find Success in the Year Ahead

If you have been thinking about entering or expanding your presence in the behavioral health, home health, or hospice industries in 2024, the SimiTree Mergers and Acquisitions team can help you gain a distinct strategic advantage. Contact us today to speak with an M&A expert.