PErspective in Healthcare

February 2017

The Surge of the Global Home Healthcare Market

The global home healthcare market is expected to be worth nearly $350 billion by 2020, up from $227.5 billion in 2015 and representing a 9 percent compound annual growth rate over five years, according to research firm MarketsandMarkets.

A number of factors are driving this growth, including ageing populations, an increase in the prevalence of chronic illness, advancements in healthcare technology and devices, and the increasing need for—and regulatory requirement to seek—cost-effective healthcare delivery to limit spiraling costs.

The market is extremely fragmented, with several large players steadily growing their market share. According to the U.S. Census Bureau, in 2002, the 20 largest home health firms controlled approximately 16 percent of the market. By 2012, that number had risen to around 21 percent. Beyond these firms, the market includes many individual centers and a growing number of franchises, such as Right at Home and SYNERGY HomeCare. According to a recent Forbes article, the number of home healthcare franchises has risen from 13 companies in 2000 to 56 today, and the growing demand for home healthcare services, coupled with high potential revenues and the potential for international expansion, makes them attractive investment targets.

Shifting reimbursements particularly in the context of bundled payments are set to increase investor interest in the sector. The Centers for Medicare and Medicaid Services (CMS)’s recent introduction of bundled payments in both joint replacement and cardiac care—aimed at driving down costs and improving provider accountability over patient outcomes—will likely have a big impact on competition in the home healthcare field. Both CMS bundles include waivers for home health and telehealth services not previously covered. However, not all home health providers are equal, and delivery of the quality of care needs to be measured and validated.

Commercial insurers tend to follow CMS’ lead. While joint replacement patients tend to be older and covered by Medicare, cardiac patients skew younger. As commercial insurers expand their coverage of home health services to drive down overall treatment costs, home healthcare providers will have access to new demographics and have the opportunity to grow their market share.

In terms of impact on deal flow, after a relatively sluggish 2015, deal-making has been robust during 2016. Post-acute providers are looking to grow their home health and hospice services, and large, publicly traded players have grown increasingly active, according to Home Health Care News. The largest providers announced robust M&A pipelines at the beginning of the year: Amedisys said it planned to make 400 acquisitions, and LHC Group planned deals worth a total of almost $1 billion. New regulations such as CMS’ Pre-Claim Review Demonstration (PCRD) and a sudden drop in share prices in September have contributed to a slowdown in LHC’s plans.

Valuations are at all-time highs, driven in part by the larger players’ thirst for deals, meaning buyers must select their targets carefully. PE firms would do well to target providers with robust data collection and electronic health record (EHR) systems, enabling them to track patient outcomes and hospital readmission rates, and to compare their results against national and local averages. Buyers should also look at the quality of care delivered, the management team, the size and geography of the asset, and should seek out strong compliance programs, according to panelists on a Home Health Care News webinar.

Future PErspectives: What’s Next for Healthcare Investors

Signs show that healthcare technology firms may benefit from Silicon Valley’s desire to diversify away from B2C software vendors over fears the recent consumer tech bubble is about to pop—or that the unicorn-filled market will at least undergo a sustained correction. CB Insights reports that 80 technology firms have accepted lower valuations to raise additional funding since 2015, and Bloomberg Business Week suggests VC firms—which remain flush with capital—are increasingly looking to B2B startups, including security software, automotive and healthcare technologies, where they see more growth potential and stability.

Sources: Bloomberg, Forbes, Home Health Care News, MarketsandMarkets, Stoneridge Partners

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