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Investor Interest: What’s Happening in Home Healthcare?
Episode 24th March 2022 • The Banker's Corner • McGuireWoods
00:00:00 00:19:26

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On this episode of The Banker's Corner, McGuireWoods' Geoff Cockrell invites Barry Freeman, Managing Director of Lincoln International’s U.S. healthcare industry team, to discuss trends and investing opportunities in home health, hospice, and palliative care.

Barry shares his in-depth knowledge of the home healthcare space including the key takeaways he learned at the recent Home Care 100 industry event.  

From labor shortages making it difficult to find trained professionals to an increase in demand as care at home becomes the future of the industry, there is currently a lot of attention on the home healthcare space. 

While the industry is not without its challenges, the increased focus on technological advancements has made it more attractive for investors — by providing better solutions within the industry, investors can more accurately predict risk.

Barry walks listeners through changes in the industry and where he believes the sector is headed. He also discusses opportunities for providers to get more involved in the space. It’s clear that the industry is shifting to more home-based care and Barry believes the trend isn’t going anywhere anytime soon. 

Meet Your Host

Name: Geoffrey Cockrell

What he does: Geoff is the Chair of McGuireWoods’ private equity group and serves on the firm's Board of Partners; he has extensive experience in mergers and acquisitions, especially in the healthcare space.

Organization: McGuireWoods

Connect: LinkedIn

Featured Guest

Name: Barry Freeman

What he does: Barry co-leads Lincoln’s U.S. healthcare industry team and provides M&A advisory services for healthcare payors, providers, and healthcare IT companies. He has over 25 years of experience in both investment banking and principal investing.

Organization: Lincoln International

Connect: LinkedIn

Notes From the Banker’s Corner

Top takeaways from this episode

★   Investors are interested in home healthcare. According to Barry, the recent Home Care 100 Conference had record-breaking attendance, which reflects the renewed interest the sector is seeing from investors.

★   Labor shortages in the industry are a long-term structural issue. The number one concern for companies in the home healthcare industry right now is the labor shortage. Barry believes this is a structural issue that will persist after the pandemic has ended. He predicts that we can expect to see state and federal support for the in-demand industry. 

★   Advances in technology have made it easier to predict and manage risk. Despite the labor challenges in the industry, increased demand for home healthcare services combined with technological advancements is making it easier to manage risk and keeps investors interested. 

 

Episode Insights

[02:22]: Industry trends: Barry recently attended the Home Care 100 Conference. He shares his learnings on the podcast. 

[03:22] A labor shortage crunch: Barry discusses the shortage of nurses and home care providers. He believes it is the current number one concern for businesses in the industry.

[05:22] Demand for in-home care: The stories of death and disruption throughout the pandemic have resulted in an increased demand for in-home care. 

 [08:49] Technology investment provides an opportunity: Barry has observed how the investment in technology is creating new opportunities for those in the industry. 

[11:18] Market opportunity for in-home care: Barry breaks down the different segments of the industry and reviews why he sees an opportunity for growth in the home care space over the traditional institutional providers. 

[13:27] Home-based models are in high demand: Barry shares that while there is market growth across the board in healthcare, he sees the greatest demand in the at-home care space. 

[13:59] Investor value: Investors can find value in the market by focusing on providers who are offering a continuum of care for patients as their needs progress through different stages. 

[15:49] Strong appetite for acquisitions: Barry talks about how acquisition has been one of the main catalysts for growth in the industry. He sees this trend continuing in 2022 with some investors looking to mix in organic growth alongside their acquisitions.

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This podcast was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this podcast, you acknowledge that McGuireWoods makes no warranty, guarantee, or representation as to the accuracy or sufficiency of the information featured in the podcast. The views, information, or opinions expressed during this podcast series are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This podcast should not be used as a substitute for competent legal advice from a licensed professional attorney in your state and should not be construed as an offer to make or consider any investment or course of action.

Transcripts

Voiceover (:

This is the Banker's Corner, a McGuireWoods Series exploring investment trends, solutions, and business issues relevant in today's private equity and finance industry. Tune in with McGuireWoods's partner, Geoff Cockrell, as he and specialists share real world insight to help enhance your knowledge.

Geoff Cockrell (:

This is Geoff Cockrell from McGuireWoods. Thank you for joining another installment of our Corner Series. The Corner Series is a multifaceted podcast series featuring conversations with deal makers in the healthcare private equity community. The Corner Series is broken up into four sections. There's a Bankers Series featuring conversations with healthcare private equity investment bankers. There's a Professor Series where we focus on technical aspects of deal making. There's a Capital Corner where we feature interesting conversations with private equity professionals and Company Corner, where we feature conversations with executives.

Geoff Cockrell (:

On this installment of the Banker's Corner, I'm thrilled to be joined by my good friend, Barry Freeman, Managing Director at Lincoln International, one of the best investment bankers in the healthcare space that I know. Barry and I are going to be talking about a more narrow subject of investing in home health, hospice, and palliative care and some similar sub sectors that are connected. Barry, maybe give yourself an introduction, and we can jump right into some of the topics.

Barry Freeman (:

Great. Thanks, Geoff. I appreciate having the opportunity to participate with you here today. I'm a Managing Director and Co-Head of the Healthcare Group at Lincoln International. I've been doing healthcare investment banking and private equity work for about 28 years. Over the course of that career, I've been pretty heavily involved and steeped in the home healthcare area broadly speaking, between myself and my partner, Michael Weber, who is part of the team and Nick Constantino. The three of us have done over 90 transactions in the home and community based care sector, spanning skilled, unskilled, hospice, pediatric, home medical supplies, home respiratory, and even getting into some of the home care IT and technologies around the home healthcare space. So it's a really significant power rally for us and one that we're extremely active in and appreciate having the opportunity to share some perspectives.

Geoff Cockrell (:

You recently were at the Home Care 100, which is one of the leading kind of industry events in home care and related sectors. What were some key takeaways from that event?

Barry Freeman (:

Well, it was a really interesting conference and I think maybe right off the bat, the most impressive thing was that it was probably the largest turnout in terms of attendees registered in the history of the event. This was the 20th year that the Home Care 100 has been going on. And there were probably about 400 people registered, which is easily 2X over sort of the normal turnout. And I think that's a reflection of just all the increased attention the sector is getting from investors, as well as with some of the regulatory evolutions that have been going on.

Barry Freeman (:

So big, big turnout is probably the most notable issue, but, really the number one item that was discussed in all of the content and the conversations going on around the conference was about sort of the workforce and availability of workforce. As people know, there's a tremendous nurse and sort of caregiver shortage going on in the marketplace right now, coupled with a lot of wage inflation and so issues surrounding recruitment and retention strategies and being able to grow your business in the face of these very significant challenges is really... That was probably the A number one issue that people were focused on at the conference and-

Geoff Cockrell (:

That's super interesting, Barry. Is there a sense that, that's going to be a long lived dynamic or is that a blip or is that going to put a lot of pressure on obviously wages? Is it going to kind of upend the business or is it going to be more navigable?

Barry Freeman (:

It's making things very challenging right now in the short term for home health and hospice agencies, to be able to staff shifts and continue to grow their visit volumes. I believe most observers believe that this is maybe a structural item that's going to persist for some time. So it's not necessarily something that's going to immediately start abating the moment that COVID cases start trending down the way that they are right now. I think this is more of a structural issue that will face the industry. And I think that right now, we're at the very early innings of governments recognizing the impact that this is having on the ability to kind of meet the demand and care for patients. And so we're going to see some incremental supports coming in from state and federal sources to help agencies, I think, deal with the wage inflation. But right now, the there's a lot of margin compression that's taking place as well as just inability to staff cases. So it's something that I think will be with us for a while.

Geoff Cockrell (:

So with those headwinds, at least from where I sit and I think from where you sit as well, there's still a lot of interest in these different sectors. What do you think are the drivers of that increased investor interest?

Barry Freeman (:

Well, I think that coming out of COVID or coming through the COVID era, the demand for care in one's home has really never been stronger. The stories of institutional based settings and how COVID caused a lot of death and disruption in those kind of venues is really driving the recognition of people to try to move as much care as possible into the home, whether that's a payer, whether that's a provider, whether that's the patient or their family, people just want to be in the home. And it seems like there's pretty unanimous consent around all the different stakeholders that, that's the best care, both in terms of cost, in terms of comfort, in terms of safety. So, everybody right now really seems to think that care at home is the future. And so we're seeing unprecedented levels of demand occur, across skilled and unskilled care services and trying to find more ways to surround people in their home with kind of home based primary care, home based telehealth and other kind of models that are emerging.

Geoff Cockrell (:

Those kind of tailwinds on the industry have been present for probably 15 years with all the things you mentioned, plus the desire kind of structurally in healthcare to move care to a lower cost setting. However, the home care industry has been plagued by some headwinds as well, whether that's kind of reimbursement uncertainty, it's been an area where at the smaller end, there's been lots of fraudy things. The vertical integration and hospital systems have pulled some of those sectors back into themselves and other factors have made it a challenging investment area. Why do you think it's going to be different now? are there other factors that are making it more attractive to investors now?

Barry Freeman (:

Well, there's been a tremendous amount of increased investment in technology and monitoring and analytics. I think that for a long time, the home healthcare industry as a general statement, had a very well ingrained fee for service mindset. And one of the other big themes at the Home Care 100 Conference was this emergence of an interest in value-based care and capitated models as the home healthcare arena really morphs from this fee for service legacy, into a fully integrated component of medical care, tightly aligned with acute care, as well as closely aligned with payers who are monitoring overall health and status and have a variety of technologies to monitor their members. So the regulatory changes I think will continue to evolve. I know that there was a lot of concern at the beginning of 2021, that the PDGM was going to be this sort of massive shakeout in the industry.

Barry Freeman (:

And it really never materialized despite all the sort of speculation at the outset, that it was going to cause a lot of dislocation and disruption to the industry. It actually ended up being, I think, a lot of people benefited from that regulatory evolution. And then, with all the different sort of technology plays and investment that's been going into technology, whether you're talking about systems like the home care, home base technology, which just bought the cell track business, which is more on the personal care side of home health. So kind of linking skilled with the unskilled. There are a lot of analytics based technologies, Vistria just made an investment last year in Metalogix and Muse. So there are a variety of technologies and other tools that providers now have access to that really enable them to better manage populations, better predict risk and manage that. So the industry is really kind of moving into a new generation that is much more technology enabled and less sort of focused on just reacting with more visits.

Geoff Cockrell (:

The kind of home health, kind of sector is comprised of a number of different segments. You mentioned skilled and unskilled, hospice is different than home care, obviously, palliative care, different technologies surrounding that. How would you kind of segment that industry? Are there parts of it that you think are better positioned for investments than others, but how would you segment the industry?

Barry Freeman (:

Yeah. As we think about the post-acute and home-based services spectrum, there are the kind of senior living sectors like skilled nursing facilities, assisted-living facilities, things of that nature that are more facility based, high-fixed cost, residential arrangements. And this end of the spectrum has not done as well in the COVID environment. And these facilities also have sort of inherent cost disadvantages versus home health-based, home-based care. The SNF market, the skilled nursing facility market is probably $150 billion market that's characterized by pretty slow growth. Assisted-living facilities, I think, is about an $80 billion market. Again, these are kind of high to medium cost venues. When you move down the spectrum into home health, home health, it encompasses skilled nursing visits, physical rehabilitation, other kind of episodic care that generally accompanies some kind of acute episode, or there's some chronic management and going on here as well.

Barry Freeman (:

This is a $50 billion market, but rapidly growing and the place where demand is extremely strong. Home care, which is sort of a close cousin, this is more of a unskilled service with particular attention around social determinants of health. So this is a non-medical level of care, but designed to allow people to age in place with comfort and with access to important services like companionship and dressing, bathing, nutritional services, et cetera. This is also probably a $50 billion marketplace. And this is the sector that I think is taking a lot of volume away from some of the traditional institutional settings, particularly around these exciting programs of consumer directed benefits, where Medicaid programs in certain states allow for the beneficiary to designate their caregiver. Now, this also gives rise to some of the things you were talking about earlier about kind of fraud, waste and abuse.

Barry Freeman (:

And I think that technology is also serving to try to diffuse and minimize some of those issues. And then finally we get to end of life care and hospice, and palliative care as well, in terms of managing the comfort of patients who are dealing with chronic and ultimately kind of end of life issues. And these are areas where there's a tremendous amount of interest right now. We track it as about a $20 billion industry, but growing extremely quickly due to both new entrants coming in and really increasing just the penetration of these services relative to the addressable market, as well as, just trying to introduce new service models that incorporate the notion of chronic condition management with pain and providing comfort.

Barry Freeman (:

And then ultimately once the determination with clinicians is made that the therapeutic phase is ending and we're moving to end of life kind of care, then kind of quickly moving into that hospice mode and being able to support the physical, emotional, and spiritual needs of people in that phase. So there's a lot of different sectors, but they're all experiencing pretty dramatic growth and they're all more or less shifting in the favor of home-based models across the board.

Geoff Cockrell (:

From an investor value perspective, do you see greater value in a more pure play within those kind of sub sectors where you kind of take one component of it and grow just that, or do you see more value in the more expansive approach of both combining several of these sub sectors into one platform?

Barry Freeman (:

That's a great question, Geoff. This is something that I like to call a pendulum, the pendulum has been swinging. There was a point in time where the prevailing view in the industry was that people were going to just specialize in one of these sectors. However, I think the pendulum has swung back again and more and more, we're seeing operators in the sector diversifying and building out continuum's of care that spanned across skilled and unskilled and hospice, and trying to effectively create an organization with sufficient service diversity, that they can kind of move with a patient over that lifetime from when they move to lesser levels of acuity to higher levels of acuity to ultimately to end of life. And so, that seems to be the prevailing trend right now is for people to be aggregating continuum's of care, to go after larger referral sources, whether those are health systems or payers or other big aggregators of lives and being able to offer all those services to a potential base of members.

Geoff Cockrell (:

As far as kind of growth once an investor owns a platform, how do you see kind of the growth pathways in this sector? Is it more acquisition driven? Is it organic? Is it joint venturing with health systems or other participants? What are some of the best growth models that you've seen?

Barry Freeman (:

Yeah, it's really in all of the above. So at the Home Care 100, we had literally dozens of conversations with both strategic operators, as well as the private equity funds that have portfolio companies in these areas. And there continues to be very strong appetite for acquisitions. I think that still remains the sort of number one growth vehicle for all the participants in the space. We are starting to hear a little bit of, particularly from the strategics, that acquisitions are getting pretty frothy. And so, we did hear some of the strategics mentioned that they're probably going to take 2022 and focus on integrating what they've already acquired, as well as maybe pivoting to more organic sources of growth with Denovis, with some geographic expansion into new markets. And so, we expect that there will continue to be sort of both organic and inorganic activity in 2022.

Barry Freeman (:

And you also mentioned joint ventures, which is increasingly becoming a very significant piece of growth strategies for larger scale providers that have a strong market share position in a particular geography to be able to joint venture with large health systems or to joint venture with payers in certain instances, to be able to develop programs and any unique relationships or clinical approaches to care. I think that there are a multitude of different avenues, I'd say as well, that the technology barrier is another one that I think, we'll expect to continue to see larger providers buying different technologies or new ways of delivering care, new models. Last year, Amedisys, one of the large publicly traded players in the space, acquired Contessa, which was a hospital and home type of business, leveraged technology to deliver a higher level of acuity care in the home.

Barry Freeman (:

There are other models out there like Dispatch Health and others who are seeking to, again, kind of bring more technology-based, higher acuity care directly to people in their home. And I think that a lot of the traditional participants aren't necessarily going to innovate that internally, that will be sort of where a lot of MNA activity goes on from a growth perspective is to capture and create novel technologies to form a basis for differentiation.

Geoff Cockrell (:

For a sector that has had periods of relatively low activity, it's certainly exciting to see it coming back with a lot of activity. Barry, I want to thank you for spending some time with us. You always have a keen insights and always fun to chat with.

Barry Freeman (:

Thanks, Geoff, appreciate the opportunity to talk with you today and enjoyed participating.

voiceover (:

Thank you for joining us on this installment of the Banker's Corner. To learn more about today's discussion, please email host Geoff Cockrell at gcockrell@mcguirewoods.com. We look forward to hearing from you.

voiceover (:

This series was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this series, you acknowledge that McGuireWoods makes no warranty, guarantee or representation as to the accuracy or sufficiency of the information featured in this installment. The views, information or opinions expressed are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This series should not be used as a substitute for competent legal advice from a licensed professional attorney in your state, and should not be construed as an offer to make or consider any investment or course of action.

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