How the proposed CMS home-health rule might affect PE, dealmakers

A recently proposed rule by the Centers for Medicare & Medicaid Services to overhaul the home-health-payment system could affect sponsors looking to unload providers over the next several months.

How the federal agency’s rule could affect different types of providers is highly uncertain, though industry sources expect clarity by year’s end. Still, it’s fair to say that prospective acquirers will have more diligence work to do about how projected earnings of these companies could be affected.

At the same time, formally launching a process before a final rule is in place could be a mistake, as potential buyers would likely bid on the worst-case scenario, one healthcare banker said. Proposed changes by the CMS are oftentimes worse than what is ultimately implemented, added a PE source.

Expected auctions

Anticipated home-health auctions over the next several quarters include those for Palladium Equity’s Jordan Health Services and Oak Hill Capital PartnersAccentCare. Already on the block is founder-run Premier Home Health, which is working with JP Morgan Securities on a process.

At the end of the day, the underlying fundamentals driving the sector aren’t going anywhere, so sources expect investor appetite won’t either. Still, the proposed changes to Medicare reimbursement have undoubtedly created significant noise in the industry.

Every public company with significant home-health exposure — Amedisys, HealthSouth, LHC Group, Almost Family and Kindred Healthcare — saw their stock plunge on July 25 following the agency’s announcement.

Specifically, the agency is proposing that Medicare pay for up to 30 days of home-health services for a unit of care, replacing the current 60-day episode-of-care payment model. CMS has estimated this could cut Medicare payments for home-health providers by $950 million in 2019.

While the proposal calls for the new payment structure to take effect on Jan. 1, 2019, the timing could be pushed back to 2020 or later, a regulatory source said. To implement the rule, CMS will likely need a lot of data reported that isn’t immediately available, this person said.

As far as 2018 goes, the agency projects that Medicare payments to home-health agencies will be reduced by 0.4 percent, or $80 million. This proposed cut aligns with industry projections and isn’t shocking, the source said.

Broadly speaking, the proposed payment reform is seeking to move home-health reimbursement to more of a value-based or outcome-based model. It also includes changes to the “case-mix methodology,” which basically implies that depending on a provider’s payer mix, patient mix and level of care required, the cuts to providers could vary significantly.

In fact, agencies serving more complex patients could actually benefit, whereas the cuts to smaller, stand-alone providers could be significantly greater, the regulatory source said.

Players to watch

As the marketplace continues to wrap its head around the proposed rule, one private-equity-backed player to keep tabs on is Palladium’s Jordan Health, which is projecting $65 million to $75 million in 2017 EBITDA.

The PE firm is in the midst of selecting a banker to run a sales process for Jordan, according to people familiar with the matter. Buyouts reported in June that Palladium would likely launch a formal process in Q1 2018 for Jordan, having failed twice before to sell the company.

There’s also talk of Oak Hill’s AccentCare returning to market in 2019 after Jordan comes out, though sources have said nothing is set in stone. AccentCare is widely viewed as a preeminent asset in the space and is said to be generating EBITDA in the $70 million range.

Meanwhile, first-round bids for Premier Home Health were recently submitted from about five parties at a multiple of EBITDA of around 7x to 8x , one source familiar with the matter told Buyouts. The provider of primarily non-medical senior-home-care services is projecting about $55 million in 2017 EBITDA.

Action Item: Read the CMS proposal here: https://s3.amazonaws.com/public-inspection.federalregister.gov/2017-15825.pdf

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