Home healthcare includes a wide range of healthcare services that can be provided at a patient’s home for an illness or injury. This form of healthcare provides for a less expensive, more convenient and equally effective form of care that can be received in a hospital or inpatient facility. Given the ongoing push to reduce hospital born infections and healthcare costs, while increasing the quality of care, home healthcare remains an attractive sector for investment from a diverse group of investors. We’ve highlighted 7 trends that are attracting investors to the home healthcare sector.
1. An Aging Population’s Impact on Home Healthcare
According to the Population Reference Bureau (PRB), the number of Americans ages 65-and-older is projected to more than double from 46 million today to over 98 million by 2060. The 65-and-older age groups’ share of the total population will also rise to nearly 24 percent, from 15 percent. In addition to most aging patients’ preference to remain in their homes as long as possible, in-home services can provide care and supervision at a lower cost. As a result, home healthcare will continue to be a focus area for healthcare providers looking for an outlet for cost-effective healthcare in an environment of an aging population.
2. Cost of Acute vs. Home Healthcare
According to IBIS World’s latest homecare providers report1, home healthcare costs in the U.S. are anticipated to reach approximately $175 billion by 2026, up from approximately $100 billion in 2018. Despite this large increase in spending, home healthcare continues to save providers, insurers and patients billions of dollars each year by treating them in their own homes, rather than hospitals and other acute care settings. Home healthcare also eliminates hospital born infections and reduces readmission rates, which often result in reduced or non-reimbursed admissions. The aging population and its increasing preference for home healthcare over hospital stays are strong factors that make home care a growing part of the healthcare sector.
3. Government Payors “Make the Market” for Home Healthcare and Hospice
Medicare and Medicaid made up nearly 78.0% of industry revenue in 2018. The congressional budget office projects funding for these programs is expected to rise by an average growth rate of 7.0% through 2028. Although federal funding for Medicare and Medicaid is growing, reimbursement for home healthcare agencies has declined each year since 2014, as increased regulation has brought added scrutiny on providers to maintain care for patients in a more efficient manner. Despite declining reimbursement for home healthcare, hospice has been experiencing a more stable reimbursement environment, with slight increases each year. Home healthcare providers that offer hospice services are able leverage these complementary services to provide a continuum of care through end of life, while offsetting some reimbursement pressures weighing on less diversified home healthcare providers.
4. The Impact of PDGM on Home Healthcare Providers
The Patient-Driven Groupings Model (PDGM) has been proposed by the Centers for Medicare and Medicaid Services (CMS) to begin on or after January 1, 2020. The proposal would eliminate the current Medicare reimbursement system for home health agencies, with a focus on patient needs, rather than therapy thresholds to determine Medicare reimbursement. The federal agency would determine payments using clinical characteristics, along with other patient information and episodic criteria, including the reduction of days in a care episode in half from 60 days to 30 days per episode. The newly proposed changes also include plans to allow the cost of remote patient monitoring to be reported by home health agencies as allowable costs on the Medicare cost report form. Well-prepared home healthcare providers will look for opportunities to mitigate the impact of PDGM, including aligning service offerings (including total visits) without reducing quality of care, reviewing patient acceptance policies to support compliance, patient care and advocacy, limiting the number of therapy episodes to comply with clinical recommendations and increasing billing and compliance staff to accommodate changes in reimbursement and utilization metrics.
5. CMS Quality Metrics Drive Healthcare Consumerism
Healthcare consumerism is here to stay, with high-quality home healthcare providers being direct beneficiaries of this trend. CMS provides for five key quality measures, made publicly available on its website, in order to help primary care providers, patients and their advocates decide on a home healthcare provider. Those five measures are: (1) Care of Patients, (2) Communications between Providers and Patients, (3) Specific Care Issues, (4) Overall Rating of Care, and (5) Patient willingness to recommend the home health agency to family and friends. Outcome measures assess the results of health care that are experienced by patients, and will ultimately drive better practices, patient advocacy and higher quality of care into home healthcare, leaving bad actors and undercapitalized groups on the sidelines.
6. Barbell-Shaped Competitive Landscape
The home healthcare industry is highly fragmented, with approximately 400,000 unique home healthcare providers in 2018 in the U.S alone. Although there are many large players which have emerged, including Addus, Amedisys, Encompass and LHC Group, a majority of home healthcare remains to be a localized business model for most providers. The fragmentation of the home healthcare market in the U.S., combined with the pressures of providers to increase the quality of care, while reducing costs, will likely continue to drive consolidation in the sector for the foreseeable future.
7. Consolidation in Home Healthcare and Hospice Will Continue
Reimbursement pressures under the PDGM model, the ongoing cost of compliance requirements and the need for diversification of services will reinforce the consolidation trend driven by the need for scale and better operating leverage to maintain and increase profits. New agencies will be limited in states which employ the Certificate of Need (CON) model, driving more established providers to make acquisitions in order to gain access to those states. Non-CON states also have a high number of smaller and/or undercapitalized providers which will attract opportunities for consolidation. Diversification into hospice care and other ancillary services will be a focus area for M&A activity for existing home healthcare providers; while large regional and national hospital systems, large insurance companies and private equity investors round-out the field of potential consolidators in home healthcare.