University of Pittsburgh Medical Center joins in hospice, home-care consolidation

Tuesday, March 24, 2015

The cost and regulatory pressures that are forcing consolidation within the larger health care industry are also causing consolidation in the highly fragmented hospice and home-care industries — a phenomenon now playing out in Pittsburgh.

Last week, UPMC announced it would be bringing Mt. Lebanon’s Family Hospice & Palliative Care fully into its fold, to be part of the UPMC Community Provider Services division and a complementary piece to the UPMC Home Nursing Agency.

UPMC was already, by far, the largest hospice and home-health operator in the region, and the acquisition tightens the Pittsburgh health system’s grip on that service market.

The announcement came just three months after rival Allegheny Health Network reported it would be joining forces with home health and hospice specialist Celtic Healthcare, creating a joint venture with Celtic’s Western Pennsylvania operations. AHN owns a majority stake in the local Celtic venture and the new company will serve about 1,800 patients initially, with 375 employees.

Combined, UPMC’s nurses and the nurses at Family Hospice & Palliative Care serve about 8,500 patients; Family Hospice has 250 employees and UPMC’s in-house association has more than 600 nurses serving multiple states.

Nationally, an aging America and growing numbers of baby boomers entering their Medicare years has driven dramatic growth in the number of hospice and home-care companies over the last decade — from 4,850 hospice providers in 2008 to about 6,000 now. When home health providers are included, the number rises to 33,000.

Now, following a season of a blockbuster deals, the industry is at an inflection point.

“Economies of scale are something that can help a hospice,” said Jon Radulovic, a spokesman for the National Hospice and Palliative Care Organization, a trade group in Washington, D.C. “We’re seeing consolidations, we’re seeing acquisitions.”

Sometimes, as has been the case in Pittsburgh, it is hospitals leading the way in those consolidations — seeking to bring more providers under one roof and further integrating the health care continuum.

“This is just in keeping with what’s going on,” said Lisa Phillips, editor at Health Care M&A News. “Inpatient rates are declining. UPMC just cut 400 beds” and hospitals are trying to plug the leaks in the in-patient dam with a broader suite of community services, she said.

The acquisitions also give hospitals more control over what happens to a patient when he or she leaves the hospital, which is a growing financial concern now that Medicare is penalizing hospitals for high readmission rates and moving toward a system of “value-based” payments and accountable care alliances.

Rehab centers want that level of control, too. In January, HealthSouth Corp., the nation’s operator of inpatient rehab hospitals, completed its acquisition of Encompass Home Health and Hospice, the fifth-largest home-health service company in the U.S., with 5,000 nurses and support workers.

And in February, Kentucky’s Kindred Healthcare, a home health and nursing care company, completed its $1.8 billion acquisition of Gentiva Health Services, which also specialize in post-acute nursing and home care.

While the moves make sense for big acute care and rehab groups, and the larger home-care and hospice networks being absorbed, they also can be a smart business decision for smaller home-care and hospice organizations further down the food chain. Margins are always thin, and absent a full merger, stronger alliances with hospitals mean more referrals.

“A lot of the little mom-and-pops want to get out of the business,” Ms. Phillips said. They’ll often sell to private equity firms, which will bundle the hospice and home-care companies and then sell them to a larger operator, such as Ensign Group in California, or Kindred.

Smaller home and hospice care agencies are attractive from a private equity standpoint because while Medicare reimbursements are tight, the payment structure is predictable, at least for the next several years, said Dexter W. Braff, president and founder of The Braff Group, a Pittsburgh merger and acquisition advisory firm specializing in home-health and hospice care deals.

That revenue predictability, combined with an increasing demand for at-home services, is what’s driving the investment.

“You can see a segment that’s clearly growing,” Mr. Braff said. That’s why, despite mergers large and small, the consolidation activity isn’t enough to absorb the startup entrants to the home-health and hospice care markets, he said.

In 2014, according to The Braff Group, merger and acquisitions in the home-health market — a category that includes hospice care and home nursing, as well as behavioral health, home medical equipment and pharmacy services — were up 9 percent over 2013.

Other blockbuster deals included the Thomas H. Lee Partners’ purchased of hospice provider Curo Health Services for $730 million, and Wellspring Capital Partners’ purchase of Great Lakes Caring, which provides home and hospice care in Michigan, Indiana and Ohio.