In late February, HCA Healthcare (NYSE: HCA) announced it had entered into a definitive agreement to acquire a majority stake in Brookdale Senior Living’s (NYSE: BKD) home health and hospice business.
A for-profit operator of health care facilities like HCA wanting to ride home health tailwinds isn’t surprising. But HCA is a completely new — and large — entity diving into home health, so it’s naturally capturing the interest of many industry insiders.
“For HCA, the deal makes a lot of sense,” Mertz Taggart Managing Partner Cory Mertz told Home Health Care News. “I’ve wondered why they haven’t been more integrated with home-based care in some way. I suspect they were looking for the right opportunity at the right time.”
Fort Myers, Florida-based Mertz Taggart is a mergers-and-acquisitions firm specifically focused on behavioral health, home health and hospice.
As part of the deal, expected to close “mid-year,” Brookdale agreed to sell 80% of its equity in its home health and hospice segment to HCA Healthcare. The purchase price was $400 million, with the total implying a $500 million valuation for the segment, according to Brookdale.
Nashville, Tennessee-based HCA Healthcare’s network includes 185 hospitals, surgery centers, freestanding ERs, urgent care centers and physician clinics in 20 states and the U.K.
On its end, Brookdale Health Services operates 57 home health agencies and 22 hospice agencies across 26 states, along with 84 outpatient therapy locations. As part of its main line of business, the Brentwood, Tennessee-based Brookdale operates over 700 senior living communities and retirement communities in the U.S.
Brookdale is considered one of the top-five home health providers in the country, at least in terms of fee-for-service Medicare volumes.
The service area overlap between the two is part of the reason the deal was made, Mertz said. Additionally, Brookdale had been experiencing troubles with its home health business over time.
Executives even expressed their dismay with the company’s performance in that area in recent years.
“We were disappointed with the third-quarter revenue performance of the home health business, which declined by 1% compared to the prior year,” Cindy Baier, the president and CEO of Brookdale, said in November of 2019.
Its struggles seemed to be exacerbated by COVID-19 and the corresponding occupancy dips that nearly all senior living operators experienced. Because many of Brookdale’s home health patients are its senior living clients, its pool of potential home health clients naturally fell, too.
On top of that, the Patient-Driven Groupings Model (PDGM) also contributed to a decrease in home health revenue in 2020.
Still, maintaining 20% in the business would allow Brookdale to benefit from the segment if HCA Healthcare’s massive network helped turn it around.
“I thought it was a very, very challenged transaction going in,” Eugene Goldenberg, a managing director at Edgemont Partners, told HHCN. “It is one of the larger home health businesses that’s out there, but it was still operating at a loss under the Brookdale banner. And home care in general isn’t one of Brookdale’s strong points. Its core competencies are running facilities.”
New York City-based Edgemont Partners is a mergers-and-acquisitions advisory firm that works exclusively with health care companies.
In that sense, it was the perfect time for a major institutional-based provider to step in and acquire a big home health services provider. It made sense for Brookdale from a monetary perspective, but it was less clear why now was the time for a strategic jump for HCA Healthcare.
“For the past several years, we have seen hospitals and health systems divest their home-based care operations,” Mertz said. “They’ve not looked at it as part of their core business, and it was hard for them to compete, based on their cost structure. In more recent years, however, we’ve seen a number of health systems recognize the value of having expertise in home-based care and have transitioned to a joint-venture model. We’ve seen a lot of this with LHC Group over the past few years, for example.”
But until the pending acquisition was announced, HCA Healthcare had not been a rumored home-based care player.
In fact, it had not mentioned home-based care or aging in place in its strategic planning much at all, at least publicly. Dating back to 2019, its earnings calls did not include any aging-in-place discussion.
Instead, much of its 2020 focus was on returning hospital volumes to a pre-pandemic level and managing its current employees. In 2019, its focus remained on growing through acquisitions and in-house improvements, but executives did mention increasing “clinical capacity.”
It is possible, though, that HCA Healthcare CEO hinted at the Brookdale acquisition in the company’s Q3 2020 earnings call.
“I want to give you some [insight] on the strategic approach that we’re taking because we believe that there are significant opportunities inside of that approach, and we are executing on some of those as we speak,” CEO Sam Hazen said. “And we still have capacity in these initiatives as we push forward. But we have grown the organization over the last decade, I’ll call it, organically. And through that organic growth, it has yielded results that we think are very powerful for the company over the past decade and have positioned the company very well.”
The move could have been completely opportunity-based, though not everyone agrees that they pounced on the right one.
“I’m scratching my head a little bit from the HCA perspective because I think they paid a very hefty price for the asset, based on some of the financial metrics,” Goldenberg said. “That being said, what that business would look like with HCA as a partner — and with HCA having control and diverting a lot of discharges to this joint venture — obviously, the financial profile of the business looks drastically different.”
HCA Healthcare is the largest health system in the U.S. The amount of discharges it could provide for its potential joint venture with Brookdale cannot be understated. And it’s clear the company is betting on itself to make things work out.
In 2019 alone, it had about 35 million patient encounters and over 9 million emergency room visits.
The major question that remains is what this means overall for the home health sector — and more generally, home-based care — moving forward.
Just last week, Advocate Aurora Enterprises — the recently established subsidiary of Midwest-based Advocate Aurora Health — announced it acquired the home care provider Senior Helpers.
Advocate Aurora Health is one of the 12 largest not-for-profit, integrated health systems in the U.S.
Throughout the pandemic, institutional- and facility-based settings have become less desirable for patients given the risk of exposure to COVID-19. In order to continue to serve as many patients as possible, larger health systems may begin partnering with home-based care providers to meet patients outside their four walls.
“Now, HCA will be the first, significant health-system-based buyer of a home-based care provider in a long time,” Mertz said. “Is this part of the evolution of home-based care or a one-off transaction? I think it could depend on the ultimate success of this transaction and integration. I suspect we’ll continue to see an acceleration of joint venture models in the meantime, as it’s a more proven model.”