As private equity investors seek out hospice and other health care transactions, they should retrain their sights on potential benefits for patients in addition to financial metrics.
Driving this is a changing regulatory environment as scrutiny heats up for both hospices and the private equity firms themselves. Tightened regulation in the hospice space has led to longer, more stringent diligence processes when it comes to buying and selling provider companies. This means that potential buyers are looking hard at compliance and quality metrics before completing a deal, along with the seller’s financials.
This could signal the start of a paradigm shift in health care dealmaking, Arindam Kar, shareholder at the law firm Polsinelli said during a recent virtual media roundtable.
“For private equity to succeed in health care, it cannot be limited to those traditional deal dynamics. It cannot be necessarily as myopic,” Kar said. “Just as the government has expanded their approach, private equity needs to expand its approach in view of those fields. A private equity transaction needs to be able to succinctly answer, ‘How does this transaction help the patient?’ Because that is the core question that the government is asking.”
The U.S. Centers for Medicare & Medicaid Services (CMS) has honed in on hospice quality and program integrity through a number of new regulations, including some in the agency’s 2024 hospice final rule. The regulations focused on Medicare enrollment in an effort to stifle unethical or illegal activity in the space. Other provisions appeared in the 2024 home health final rule, which among other things prohibits the sale of a new hospice within 36 months.
Even though a similar rule already exists in home health, the fact that the hospice requirement is new for this year could lead to some disruption. The home health version of the rule has been in place for more than a decade.
CMS has also implemented a Special Focus Program (SFP) in an effort to drive improvement in hospice quality, though some have questioned the agency’s methods. Key considerations in the SFP are performance on quality metrics and surveys, as well as instruments to measure patient and family satisfaction like the Consumer Assessment of Healthcare Providers and Services (CAHPS) scores.
Likewise, scrutiny of private equity’s role in health care has heated up throughout a number of federal agencies, as well as among congressional lawmakers.
The Biden Administration has worked to strengthen antitrust enforcement. Other executive branch agencies have also taken steps to improve transparency in private equity dealings, including some actions that are health care-specific, according to Bobby Guy, shareholder at Polsinelli. These include CMS, other U.S. Department of Health and Human Services (HHS) sub agencies and the Federal Trade Commission (FTC).
“A set of new rules are coming from all different agencies that are approaching health care … FTC is looking at health care transactions specifically, really tightening up the way that they’re monitoring this,” Guy said at the roundtable event. “You’ve got [CMS] looking at this also for private equity investments in health care and requiring a lot more disclosure about ownership. Then you’ve got the states all looking at it and there are 13 states with laws now.”
The ramped up regulatory activity is also giving some investors pause when it comes to entering or expanding into the hospice and health care space, contributing to an extended slump in dealmaking.
The first quarter of 2024 saw four hospice transactions take place, according to recent data The Braff Group shared with Hospice News. If the trend continues, a projected 16 total hospice deals will occur by the year’s end, fewer than the 23 hospice deals that occurred last year. Only two of the hospice deals that have taken place to date in 2024 were private equity-related, The Braff Group indicated.
To navigate transactions in this environment, investors need to hone in on the patient experience and how it factors into quality metrics, as well as payer and referral partner relationships, Jonathan Henderson, health care mergers & acquisitions co-chair at Polsinelli, said at the roundtable.
“There are six primary trends that are influencing consolidation and professional practices: regulatory complexity. technology and integration, private equity ownership, demographics, economies of scale and consumer expectations,” Henderson said. “So many of these things that we see that are influencing health care consolidation need to be pointing toward the patient.”