Healthcare Consultant and Business Advisory CPA | HORNE

5 Factoids Impacting Home Health Agency Values

Written by Chrissy Leggett | December 10, 2015

Home healthcare enables many patients to receive appropriate medical attention from the comfort of home. Patients utilizing these services also enjoy considerable cost savings in comparison to a hospital setting, proven research of better health, and reduced stress for the patient and family. Home health agencies (HHAs) treat patients who may only require a short-term need for care, as well as patients who may need long-term treatment for illnesses such as diabetes, heart disease, and pulmonary disease.With recent industry developments, some small, regional, and privately-owned HHAs will merge with larger HHAs or be acquired by healthcare systems. Because of government regulations implicated by many of these transactions, determining the appropriate level of FMV of an HHA will be essential for regulatory and business risk management.

One of the three valuation approaches that can be applied to an HHA is the asset approach, which results in the application of the adjusted net asset method. This method adjusts the HHA’s tangible and identifiable intangible assets and its liabilities to FMV. This method is most appropriate for asset-intensive businesses but may be useful for an HHA with little to no earnings or cash flow.

The income approach draws on the premise that an equally desirable substitute for the business interest would be another investment producing equal economic income with similar risk. Application of the income approach involves establishing projected economic benefits, determining the appropriate relationship between income and value through the use of a discount or capitalization rate, and converting the income stream into an estimate of value. The discounted cash flow method is often used in the valuation of HHAs because of reimbursement fluctuation and the nature of the industry. The assessment of the discount rate in this method is significant because it quantifies the risk associated with the investment and converts the projected cash flows to an indication of value. In establishing the discount rate, an assessment of risk is one of the more substantial and challenging elements of the analysis. These five special considerations are essential to an accurate assessment of risk in the valuation of an HHA:

  1. During the past five years, home health industry revenue has grown at an annualized rate of 1.5%, fueled in part by an aging US population, the prevalence of chronic disease, growing physician acceptance of home care, medical advancements, and a movement toward cost-efficient treatment options.
  2. Government payers generate an estimated 80% of home health industry revenue. CMS announced the implementation of a four-year, 3.5% annual reduction to the Medicare base payment for home healthcare services beginning in January 2014.
  3. Spurred by a CMS announcement in 2013, the home health industry began aggressively cutting costs, which is expected to cause industry employment to drop an estimated 4.9% per year. Total spending on labor will likely also drop an annualized 2.2%.
  4. On November 5, 2015, CMS issued the Medicare Home Health Prospective Payment System (HH PPS) final rule to establish rates for calendar year 2016 (CY 2016), decrease the national standardized 60-day episode payment, and implement value-based purchasing for CY 2016. CMS estimates a net decrease of 1.4%, or $260 million in Medicare payments to home health agencies for CY 2016.
  5. Home health industry revenue is expected to decrease at an annualized 1.9% in the next 5 years, with losses across the industry at an annualized 5.1% rate.

The market approach incorporates representative public company stock values and private business transactions to arrive at an indication of value. Publicly-traded companies in the home health industry, with total revenues ranging from approximately $300 million to nearly $2 billion, trade on very different financial dynamics from small, regionally located, and privately owned agencies. This creates a need to analyze both public and private company data against the HHA being valued.

Summary

It is expected that some HHAs will be merging or selling to stay viable. Valuators will be unable to look at past performance as an indication of future revenues and must carefully scrutinize reimbursement changes and expenses, especially labor costs. Because risk assessment is such an important factor in the valuation process of HHAs, it is imperative that management and legal counsel are familiar with these considerations and how they affect the value of an HHA.

 

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