Post-Acute Sector M&A: Currently Under a Yellow Flag

Nothing kills the momentum and excitement of race day more than the yellow flag and deployed safety car. Unsafe track conditions, usually caused by an accident, debris on the track or a stopped
vehicle, can cause the marshals to slow down the race. Momentum moderates and
adrenaline wanes. Drivers are forbidden from overtaking, and victory is temporarily out of
sight for all but the lead car. As I watched the Indy 500, 24 Hours at Le Mans and a
handful of Formula One grand prix over the last several weeks, it struck me that postacute sector M&A (home health, hospice, Medicaid PCS, pediatric PDN/therapy) is currently racing under yellow flag conditions. Temporary, but nonetheless frustrating for all constituents involved.

The post-acute sector’s two record setting years in terms of transaction activity, valuation
multiples and quality of companies acquired, 2020 and 2021, now appear to be in the
rearview mirror. In their stead is a sluggish 2022, with companies staying in their lanes,
focused inwardly on operations and trying to regain levels of growth and profitability of
prior years. It should come as no surprise that sector activity has slowed: (i) the supply of
actionable platforms is materially lower than in the prior two years; (ii) the COVID spawned labor market continues to create one of the most challenging operating
environments in recent memory; (iii) home health reimbursement faces a potentially
challenging outlook when the CY 2023 HH PPS rule is finalized in the Fall; and (iv) buyers
are less willing to give credit for COVID-related EBITDA adjustments.

Lower Inventory of Actionable Platforms
Many of the most actionable privately-held and sponsor-owned platforms transacted at a
kinetic pace in 2019, 2020 and 2021. As a result, the number of available platforms is
relatively low, and the sector is currently in a holding pattern, where businesses are (i)
focused on operating in a challenging environment, (ii) too early in their hold period, or (iii)
waiting for financial performance to improve, before coming to market. There is a large
and growing backlog of businesses that we expect to come to market when overall
conditions improve, potentially as early as Q4 2022. But in the meantime, the market is
generally in wait and see mode.

Labor Market’s Impact on Performance
Q4 2021 was one of the most challenging quarters for post-acute operators, particularly
hospice, as the Omicron variant wreaked havoc on staffing and admissions volumes.
Despite strong referral volumes and demand for post-acute services, the inability to

sufficiently hire and retain clinical staff has had a material impact on monthly sequential growth and TTM performance. For many, Q1 2022 was only marginally better, and for some, Q2 2022 continues to present challenges, although, anecdotally, the clinical labor market appears to be improving and may even accelerate due to the looming recession. As a result, companies are deciding, or being forced, to delay sale processes as they attempt to replace poor financial performance in Q4 2021 and Q1 2022 with improved 2H 2022 growth and profitability.

Pending CY 2023 Home Health PPS Rule
Based on the proposed rule released last week, CMS estimates that Medicare payments to home health agencies in CY 2023 would decrease in the aggregate by -4.2%, or -$810 million compared to CY 2022. Without getting too technical and comprehensive, this decrease 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). Prospective home health sellers will most likely wait for better clarity on the final rule before coming to market.

Market Push Back on COVID-Related EBITDA Adjustments
Buyers and lenders have materially increased their scrutiny of COVID-related volume adjustments to EBITDA. Early in the pandemic, the market was quite willing to pay sellers for normalized volumes and financial performance, as if “COVID had not happened.” 27 months later, the market is taking a harder line. “What if” earnings credit is no longer being given wholesale. The market has taken the position that labor staffing challenges and higher labor wage expense are here to stay (for now), and, unless a seller has clearly demonstrated a trend to the contrary, little to no valuation / leverage credit
will be given for such adjustments. As a result, prospective sellers must increasingly rely on actual earnings to ensure the achievement of valuation expectations.

Returning to our racing analogy, post-acute sector M&A is currently under a yellow flag. And while yellow flag conditions produce little to no racing action, and can last for many laps, they are still only temporary. Drivers and their teams can use the time to their advantage – to “box” or “pit” in order to change tires, refuel or tweak the car – so that they are ready to drop the hammer once the yellow flag is lifted. This is exactly what the higher quality post-acute platforms are doing. Some of the most exciting action in a race comes once the safety car exits the track and green flag racing resumes. Given the strong near- and long-term demographic and sector trends supporting the post-acute sector, and the almost unlimited demand for high quality post-acute platforms, there is little doubt that M&A activity will resume with a vengeance.

Two more hospital mergers scrapped after federal antitrust scrutiny

Steward Health Care is abandoning its proposal to sell five Utah hospitals to HCA Healthcare, and New Jersey-based RWJBarnabas Health dropped its plan to purchase New Brunswick, NJ-based Saint Peter’s Healthcare System. These pivots come just weeks after the Federal Trade Commission (FTC) filed suits to block the transactions, saying they would reduce market competition. The FTC said in a statement that these deals “should never have been proposed in the first place,” and “…the FTC will not hesitate to take action in enforcing the antitrust laws to protect healthcare consumers who are faced with unlawful hospital consolidation.” 

The Gist: These latest mergers follow the fate of the proposed Lifespan and Care New England merger in Rhode Island, and the New Jersey-based Hackensack Meridian Health and Englewood Health merger, which were both abandoned after FTC challenges earlier this year.

Antitrust observers find these recent challenges unsurprising, as all were horizontal, intra-market deals of the kind that commonly raise antitrust concerns. What will be more telling is whether antitrust regulators can successfully mount challenges of cross-market mergers, or vertical mergers between hospitals, physicians, and insurers. 

Study finds Medicare could save billions buying generic drugs from Mark Cuban’s pharmacy

 An analysis published in the Annals of Internal Medicine finds that if Medicare had purchased 77 common generic drugs from Mark Cuban’s Cost-Plus Pharmacy in 2020, it would have saved $3.6B dollars. That translates to more than a third of the $9.6B Medicare spent on generic drugs that year. 

In January, Dallas Mavericks owner and billionaire Cuban launched the generic drug company as a transparency play, cutting out pharmacy benefit managers (PBMs), negotiating directly with manufacturers, and selling drugs at a flat 15 percent markup.

The Gist: This isn’t the first study to find that Medicare overpays for generic drugs, as it’s unable to negotiate drug prices under current law. Another recent analysis found that Costco can offer consumers lower prices than Medicare drug plans for half of the most common generic drugs.

The fact that both Costco’s and Cuban’s pharmacies, neither of which accepts health insurance, can offer consumers cheaper generics is another indication of how PBMs’ perverse incentives and opaque pricing and rebate models lead to consumers being steered to higher priced drugs. We’re hopeful that the FTC’s new investigation into PBMs will shed light on their pricing practices, and create a path for lawmakers to finally address unsustainably high prescription drug prices.  

Podcast: All Healthcare Is Politics?

Does Your Vote Affect Your Healthcare?

What role should the federal government play in addressing major healthcare issues? And does the way you vote affect your prospects for a long and healthy life? We talked about it on today’s episode of the 4sight Friday Roundup podcast.

  • David Johnson is CEO of 4sight Health.
  • Julie Vaughan Murchinson is Partner of Transformation Capital and former CEO of Health Evolution.
  • David Burda is News Editor and Columnist of 4sight Health.

Subscribe on Apple PodcastsSpotify, and other services.

Supreme Court reverses 340B Medicare rate cut

In a unanimous decision, the Justices found that the Department of Health and Human Services (HHS) exceeded its legal authority when it cut Medicare reimbursement rates for outpatient drugs by 28.5 percent at 340B-eligible hospitals in 2018. The justices wrote that the Centers for Medicare and Medicaid Services (CMS) shouldn’t have cut payments to these hospitals without first surveying their average drug acquisition costs, as required by statute.

CMS must now figure out how to repay 340B hospitals the difference in reimbursement for 2018 and 2019, the two years the unlawful cuts were in effect, during which time it redistributed those savings to all hospitals in the form of higher reimbursement for outpatient services. (For an explainer on the mechanics of the 340B program, see our overview here, and for more details on this Supreme Court case, see our summary here.)

The Gist: This decision was a narrow ruling on administrative grounds, and did not touch on the larger policy debates concerning the 340B program. While 340B-eligible health systems can breathe a momentary sigh of relief, they are still facing significant, ongoing revenue disruptions as at least 17 pharmaceutical manufacturers are restricting discounted drug sales to contract pharmacies. 

Scrutiny of the 340B program, which has grown to include over 40 percent of US hospitals, will continue to raise questions about whether there are better ways to subsidize the operations of hospitals serving low-income patients, and to ensure that underserved patients have access to lifesaving treatments.

Philanthropist backs antitrust lawsuits against large health systems

 Consumers and employers recently filed lawsuits against Hartford HealthCare, HCA Healthcare, and Advocate Aurora Health, accusing the health systems of using their market power to increase prices through anticompetitive contracting practices. New reporting from the Wall Street Journal finds that all three suits are receiving funding from billionaire John Arnold, through his charitable foundation Arnold Ventures, which has sponsored several efforts to reduce healthcare spending. While the health systems say that the claims are baseless, the law firm leading the suits, Fairmark Partners, says that it’s attempting to enforce antitrust laws through the courts.

The Gist: Amid the Biden administration’s increased scrutiny of health system anticompetitive behavior, state governments and philanthropic groups are also taking a more active role in challenging hospital deals and contracting practices. 

While these groups have targeted hospital prices because they’re a significant source of increased healthcare spending, these lawsuits do little to address the perverse underlying incentives that push hospitals to seek higher prices from commercial patients, to cross-subsidize what they view as insufficient pricing from public payers.

US Supreme Court overturns $1.6B 340B payment cut

The U.S. Supreme Court sided with hospital groups June 15 in a case challenging HHS’ 340B payment cuts. 

The case centered around whether CMS has the authority to make cuts to the program under its  Medicare Outpatient Prospective Payment System. Under the payment rule, HHS cut the reimbursement rate for covered drugs by 28.5 percent in 2018, but it later lowered the reimbursement rate cut to 22.5 percent. 

Under the 340B program, eligible hospitals can buy outpatient drugs at a discount. A hospital typically pays 20 percent to 50 percent below the average sales price for the drugs through the program. 

The Supreme Court reversed a federal appeals court’s 2020 ruling that HHS had the authority to make the $1.6 billion annual reimbursement cut.  

Justice Brett Kavanaugh, writing the opinion for the court’s unanimous decision, said that absent a survey of hospitals’ acquisition costs, HHS may not vary the reimbursement rate for 340B hospitals. 

“HHS’s 2018 and 2019 reimbursement rates for 340B hospitals were therefore contrary to the statute and unlawful,” he wrote. 
The American Hospital Association, Association of American Medical Colleges and America’s Essential Hospitals said in a joint statement emailed to Becker’s following the decision that they look forward to working with HHS and the courts to develop a plan to reimburse 340B hospitals affected by the cuts while ensuring other hospitals are not disadvantaged as they also continue to serve their communities.

Focusing on the impacts of social determinants among the Medicare Advantage population is good – but it might be too late

Social factors impact a person’s health and their potential health outcomes. While this has long been discussed (especially by folks of color, individuals with lived experiences, and those in public health), it is finally now getting deserved mainstream attention, including by health insurers.

Medicare Advantage (MA) — a program that offers private plan alternatives to traditional Medicare — is one key player looking at social determinants of health. It’s a good thing, too; an estimated 42% of the Medicare population are enrolled in MA plans, and that share grows each year. MA plans have more flexibility in offering supplemental benefits and services, some of which can address social determinants of health.

In 2018, the Creating High-Quality Results and Outcomes Necessary to Improve Chronic (CHRONIC) Care Act passed with bipartisan support and marked a substantial shift in MA policy by including acknowledgment of the role of social determinants of health. It allows even greater flexibility for MA plans to help with the very conditions that impact how a person lives, such as providing financial assistance for nutritional needs, transportation to appointments, caregiver support, and even home construction projects. Interestingly, it does not mandate coverage, so it is still dependent on what plans an individual has access to and how health plans are choosing to move forward with this freedom.

The problem is, however, that most individuals aren’t eligible for Medicare until age 65 (there are some exceptions). If we wait until Medicare eligibility to act on social determinants of health, are we waiting too long?

The short answer is yes. Although addressing social determinants of health in the Medicare-eligible population is important, what we know suggests that more could be done earlier.

Why are social determinants important in Medicare Advantage?

Chronic disease is a significant issue among Medicare-eligible individuals, and one that’s exacerbated by social determinants of health. There are substantial implications for both beneficiaries and MA plans. For beneficiaries, chronic disease affects not only their quality of life, but also their wallet. From the plans’ perspectives, the presence of comorbid chronic diseases is a significant differentiator between so called “high cost” beneficiaries and those who are not.

Current MA enrollment trends also point to the need to sharpen the focus on social determinants of health. Although they make up a minority of MA enrollees, persons of color are enrolling in MA plans at a breakneck pace: especially among Black people, dual enrollees, and people living in disadvantaged neighborhoods.

Historically, these are folks most negatively impacted by social determinants of health, and the likelihood of poor health outcomes is only compounded when enrollees reside in disadvantaged neighborhoods. These are neighborhoods commonly characterized by high concentrations of poverty, crime, and harmful environmental exposures compounded by limited resources to support economic and social well-being, and research has consistently found strong associations between neighborhood disadvantage and health risks and outcomes.

Health systems must do more about social determinants earlier in life

Social determinants of health affect us all — regardless of age. Until recently, they have received relatively little attention from insurers.

However, that’s changed in recent years. Insurers are making investments in affordable housingfunding research into food insecurity, and some are even willing to help their members pick up the tab on their internet bill.

It is difficult though to discern the extent that these actions are altruistic or opportunistic, especially when they can technically be both. While that might not be the worst thing, it does matter if it leaves out the very people it should be helping.

Let’s consider internet access, for example. If a patient isn’t connected to the web, they can’t participate in a telehealth visit, leaving in-person care as the only option. In a world where telehealth visits are reimbursed at a fraction of the in-person rate, there are substantial cost savings (read: profit) associated with facilitating and promoting virtual care. Critics have also pointed out that most of these steps can be attributed to insurers’ philanthropic apparatuses as opposed to any substantive change or innovation in member benefits.

What is also becoming readily apparent, is that while telehealth use is increasing, it does not make care accessible for everyone. It could even serve to increase disparities if it is not done properly.

Beyond insurance, there are several existing programs that aim to address social determinants of health and are accessible earlier in a person’s life cycle. Programs such as the Supplemental Nutrition Assistance ProgramEarly InterventionTemporary Assistance for Needy Families, or even the Low-Income Home Energy Assistance Program can be a lifeline for those most in need.

However, administrative hurdles and societal stigma can challenge people’s willingness to participate in these programs no matter how beneficial they might be. We should all be asking what more the health system — providers, payers, and government — should be doing to improve social determinants of health earlier in life.

The CHRONIC Care Act has the potential to mitigate some of these harmful impacts of long-standing structural inequities by providing greater flexibility for plans to cover non-medical needs. The law illustrates that policymakers believe that health insurers should do more to address social determinants of health. Perhaps they should also focus on how plans can address these social factors earlier in the life cycle as well.

H.R.7995 – To amend title XVIII of the Social Security Act to exempt qualifying physicians from prior authorization requirements under Medicare Advantage plans, and for other purposes

Currently there is a resolution HR 7995 in the U.S. House of Representatives, introduced late last week, that will decrease prior authorization delays for patients awaiting care.

The very manual, time-consuming processes, for prior authorization, burden physicians, physician practices, and hospitals while diverting valuable resources away from direct patient care. HR 7995 was referred to the Committee on Ways and Means in addition to the Committee on Energy and Commerce. 

Now that the framework of this bill is still being worked, it is crucial to get in front of legislators and let them know that you support this legislation that will decrease prior authorization delays ensuring continuity of care to patients because it:

  • Exempts qualifying physicians from prior authorization requirements under Medicare Advantage (MA) (providing for a “Gold Card” status for physicians that consistently meet prior authorization requirements). 
  • Allows physicians to appeal “Gold Card” revocation from insurers that are wrongly decided.
  • Requires Secretary of HHS to issue rules on MA plans.


Digging Into the Growth in 340B Contract Pharmacies

This week’s contributor is Paula Chatterjee, a physician and assistant professor at the Perelman School of Medicine at the University of Pennsylvania. Her research focuses on improving the health of low-income patients and evaluating policies related to safety-net health care delivery and financing.

Low-income patients face many barriers to care, one of which is the high cost of prescription medications. The 340B program lets certain hospitals and clinics (like federally qualified health centers) receive discounts on outpatient medications. They can then use those savings to provide medication and additional care for little to no charge to low-income patients. However, policymakers and other stakeholders have raised concerns that the 340B program might not be reaching the patients it was designed to support.

A recent paper in the American Journal of Managed Care by Sayeh Nikpay*, Gabriela Garcia, Hannah Geressu and Rena Conti sheds light on one of the latest examples of 340B mistargeting: so-called contract pharmacies. These are retail pharmacies that fill 340B prescriptions and split the savings with the hospital or clinic. These relationships have been on the rise, with hospitals and clinics arguing they make it more convenient for patients to get their prescriptions. Given their growth, the authors looked at whether contract pharmacies were more likely to open up in areas where low-income and uninsured people live.

They found the pattern was different for pharmacies contracting with 340B clinics vs. 340B hospitals:

  • The number of counties with a pharmacy contracted with a 340B clinic grew from 20.8% to 64.8% over the past decade. Counties with higher poverty rates were more likely to gain a clinic-contracted pharmacy.
  • The number of counties with hospital-contracted pharmacies grew much more (from 3.2% to 76.3%), but those counties had fewer uninsured residents and were less likely to be medically underserved.

The researchers acknowledge that counties may be an imperfect geographical area to represent a pharmacy’s market and that they were unable to collect information on how many (if any) 340B prescriptions a pharmacy actually filled.

Nonetheless, their results reveal a mismatch between where the 340B program is growing and where low-income patients live, especially for pharmacies contracting with 340B hospitals. The authors argue that any 340B policy changes should take these differences between hospitals and clinics into account.

Despite decades of policies designed to bolster the safety-net, it remains perennially reliant on a patchwork of subsidies that are often mistargeted.

This study adds to a growing body of work highlighting the opportunity to improve the 340B program so that it achieves its intended goal of improving access for low-income patients.