The proposed 4.2% Medicare payment cut to home health providers next year could slam the brakes on an already slow year for mergers and acquisitions, according to Kris Novak, senior vice president of M&A at home care giant Amedisys.
“The proposed rule will certainly throw water on things for the next couple of months,” Novak said at the Home Care Innovation and Investment Conference in Chicago on Tuesday. “We’ll have to see what happens when the final rule comes out, but I think it’s going to be a slow go [for deals].”
Amedisys is already feeling the repercussions from the proposed rule. On Tuesday, the company’s stock plummeted after Bank of America downgraded it to Underperform.
The proposed 2023 payment cut released last Friday by the Centers for Medicare & Medicaid Services would cost the home health industry approximately $810 million in Medicare payments. In a statement, CMS said the cut “reflects the effects of the proposed 2.9% home health payment update percentage ($560 million increase), an estimated 6.9% decrease that reflects the effects of the proposed prospective, permanent behavioral assumption adjustment of -7.69% ($1.33 billion decrease), and an estimated 0.2% decrease that reflects the effects of a proposed update to the fixed-dollar loss ratio (FDL) used in determining outlier payments ($40 million decrease).”
News of the cut rattled many at the conference at a time when inflation, rising interest rates and talk of a possible recession were already stoking concern in the industry. In a report last week, M&A advisory firm Mertz Taggart warned the Federal Reserve’s recent 0.75 percentage interest rate hike not only increases borrowing costs, but also lowers asset values.
“We are not ringing the alarm bells here by any means, as the demand for quality home care, home health and hospice agencies remains extremely strong, but you can’t enjoy historically high values forever,” Mertz Taggart Managing Partner Cory Mertz said in the report. “There ultimately will be some softening.”
Dexter Braff, president of M&A advisory firm the Braff Group, agreed with that assessment during a session on growth in the home care industry. Braff said demand for home care, home health and hospice is still robust, but new economic headwinds could disappoint those providers hoping to sell at the top of the market.
“We often find there is a bit of jockeying for position when the market shifts,” Braff explained. “The sellers don’t react because they remember where the market was three months ago. People just don’t absorb and accept that their valuations dropped.”
Braff thinks some deals could get tabled for a year or more until sellers can get the price that they want for their businesses. Novak believes deals will get done, they just might not be as big.
“I don’t think we’re going to see the big headline-grabbing transactions that we saw over the last couple of years,” Novak said.