COVID-19 has not affected M&A activity in behavioral health to any significant degree, according to Mertz-Taggart, a health care services M&A firm in their quarterly update.
Patient Driven Groupings Model Impact
The firm says that Q2 transactions have been predictably impacted by the Patient Driven Groupings Model.
Reports show that home-based care—including Medicare-certified home health, hospice and non-medical home care—saw just nine transactions quarter-to-date, compared to 25 deals in Q2 2019 and 27 deals in Q1 2020. This is a drop of approximately 30% to 35%.
Mertz Taggart’s Cory Mertz said that there have been a few behavioral health deals delayed or canceled because of the coronavirus pandemic. However, he says that most of this drop-off is a predictable result of PDGM (The Patient-Driven Groupings Model). “Buyers want to wait until the dust has settled on PDGM and see how potential targets perform under the new model, which requires at least a few months of financial and patient data,” Mertz remarked.
Mertz and other observers think that they will see more home behavioral health companies come to market in the second half of 2020. The fall-out from PDGM hasn’t been as serious as many had predicted, with many home health agencies performing better under the new system.
The Patient-Driven Groupings Model and Behavioral Health
PDGM uses 30-day periods as a basis for payment. These 30-day periods are categorized into 432 case-mix groups for the purposes of adjusting payment in the PDGM. In particular, 30-day periods are placed into different subgroups for each of the following broad behavioral health categories:
Admission Source (two subgroups)
Institutional admission source;
Timing of the 30-day Period (two subgroups)
Clinical Grouping (12 subgroups)
MMYA (Medication management, teaching, and assessment) – surgical aftercare;
MMTA – cardiac and circulatory;
MMTA – endocrine;
MMTA – gastrointestinal tract and genitourinary system;
MMTA – infectious disease, neoplasms, and blood-forming diseases;
MMTA – respiratory;
MMTA- other; behavioral health; or complex nursing interventions
Functional Impairment Level (three subgroups): low, medium, or high; and
Comorbidity Adjustment (three subgroups)
High based on secondary diagnoses.
Hospice M&A is Still Strong
Hospice had a strong M&A performance in 2019. The dollar amounts for hospice transactions was greater than those in similar markets such as behavioral health care, even though fewer deals happened in 2019 in the hospice, home health care, and home care spaces than in 2018, according to Mertz Taggart’s new quarterly M&A report.
Just over 100 transactions occurred in those sectors combined during 2019, which is a 20% drop from the 127 that happened during 2018. Of those, 42 involved hospice, compared to 36 for home care and 42 for home health deals.
But there were more transactions in the space than ever before in the first quarter of 2020. This continues a two-year surge (nearly 35). This shows a strategy many buyers have adopted amid pausing behavioral health transactions.
Hospice has had to shoulder some business challenges in the coronavirus pandemic, but those have been less disruptive than those in home health.
Uncovering Buyer Motivations During COVID-19
Mertz Taggart’s M&A report shows that although buyers are still pursing M&A, many are busy with COVID-19. As a result, mergers and acquisitions are being delayed, the report says.
Private equity companies are also re-positioning some of their funds to keep holdings in harder hit industries afloat. Also, travel for due diligence is tough right now, and banks—which usually provide new funding for deals—are being cautious, as they’re writing off significant amounts of debt for troubled industries. The bodes poorly for behavioral health M&A.
“Banks’ focus right now is on salvaging what they can from those investments, so their ability to lend will change, as will their standards,” Mertz said. “They will mostly likely not be able to be as aggressive as they were in 2019, but for essential health care companies we believe the lenders will come back in Q3 or Q4 of 2020.”
Looking Forward: Behavioral Health M&A
In the short term, deal activity will probably increase at a steady pace in home-based care, especially in hospice. But in 2020, many of those deals will be smaller transactions with EBITDA below $5 million.
Valuations will likely remain stagnant for larger behavioral health deals and down modestly for smaller companies.
“Valuations almost definitely will not be going up, but for well-run companies we don’t expect them to go down much, if at all, either,” said Mertz Taggart Managing Partner Kevin Taggart. “For individual companies that are considering a sale, valuations will depend on where you are in your COVID-19 recovery. Those companies that haven’t yet fully recovered, but expect to, may still be able to command ‘as-if’ pricing, but the buyer will likely want the seller to take on some of that recovery risk in the form of an earnout or other structure.”
Ultimately, well-run home-based behavioral health care companies have a bright future ahead on the other side of COVID-19, the report predicts.
“All said, we expect we’ll continue to inch back toward normalcy,” Mertz said. “We expect deal volume to get back to near-normal levels by mid-2021. It seems like a long time, but companies that are recovering and going to market today likely won’t close until Q4 2020 or Q1 2021.”