By Mike Moran
As inflation has continued to raise the cost of everyday purchases, it is having the biggest impact on those working at or close to the minimum wage. This is true across many industries including caregivers and other essential workers in the healthcare industry. This poses a significant issue to some healthcare agencies, especially Medicaid reimbursed, given that service rates for these agencies remain static. Yet, the cost of labor is continuing to increase, further cutting into already-thin profit margins. As those employees face the squeeze from inflation, they may elect to look elsewhere for higher paying work, leaving providers in the position of having to raise wages while facing no increase in reimbursements.
As Medicaid rates vary from state to state, there are certain geographies where efforts are being made to increase those reimbursements. In Louisiana, for example, an I/DD provider for medically fragile children I’ve recently gotten to know, is anticipating a rate increase which he’ll use to increase the wage of their direct care staff and others. Similarly, the APA (Alternative Payment Arrangement) in Pennsylvania through CBH (Community Behavioral Health) has expanded their funding through the end of the year, a program now that has been in effect since the onset of COVID. Contrarily, a large Home Care agency we represented in Texas, which sold in Q1 of 2021, has increased their direct-care staff rates to remain competitive. However, in this case the state has so far been reluctant to increase reimbursements.
The Beneficial Role of Acquisitions
The behavior of some in private equity have helped to paint healthcare industry acquisitions in an inaccurate shade. We have helped numerous businesses sell to larger strategic businesses & private equity groups who have no intention of cutting costs, staff, or jeopardizing patient care. What is more common is that the larger company inevitably has more resources and added benefits for their employees.
In addition to new benefits and potentially higher salaries, employees of acquired companies often find increased upward mobility under new ownership. When a company acquires another business, it is imperative to retain the staff not only to ensure a smooth transition process, but also longer-term to maintain the important aspects of why it was acquired in the first place. Additionally, incumbent staff are familiar with their roles, how the company functions, and in most cases have helped propel the business to where it is, so keeping them employed and content makes the most sense. Retained employees also have the ability to move up in a company that inevitably has a larger corporate structure. In one situation, we represented an owner and COO of an LTC Pharmacy company who was promoted to Director of Operations of the Pharmacy division of the multi-billion dollar corporation that acquired his company only a few years after the sale. In addition, he reported that the customers of his original company received the same level of service and in some aspects, service improved, all while maintaining 100% of the original, local pharmacy staff post-acquisition.
Acquiring companies can often provide staffing support to the smaller companies they buy, easing the workload on overworked employees.
One interesting outcome of the ‘Great Resignation’ has been that healthcare acquisitions have become one of the few remaining avenues to acquire top talent in an increasingly competitive labor market. Companies are looking to hire, but can’t get enough staff through traditional methods. Acquiring smaller companies can bring in their staff and often benefits all parties involved.
An Opportunity for Investment
In a moment when long-time winners such as tech stocks have taken a dive, interest rates continue to rise, and real estate value has leveled off, investors have been looking for industries that could be more stable. The healthcare industry has taken less impact in comparison. Businesses in healthcare have had significant returns when compared to the market. A company we just sold had approximately 30% profitability. While not the average in the industry, many sectors of healthcare, like hospice care and behavioral health have consistently high margins.
Part of the reason for the increase in investment is thanks to the events of the last two years. As the country’s attention was turned to the medical personnel that keep us healthy, so too was attention turned to the policies impacting the industry. There is robust acquisition interest in the healthcare industry; consequently, there is a renewed focus on making sure it works. From a Federal standpoint, there is still more grant money coming into healthcare businesses from programs such as the American Rescue Plan (ARPA). The financial world has taken notice of this and has provided even more capital in the form of investments.
Healthcare is also a service that is in everlasting demand; it goes without saying that it will always be a necessity. As smaller providers look for buyers who will help them expand their services to more patients, their values often grow. In a volatile market where long-standing companies are facing unprecedented swings in their valuation, healthcare remains steadfast.
Conclusion
Mergers and acquisitions currently play an important role in maintaining consistent care across the country. Through acquisitions, larger institutions can ensure that high levels of inflation don’t squeeze small healthcare providers out of business. Those owning healthcare businesses deserve to make a healthy profit and those working to take care of us deserve equitable wages and have the opportunity to grow throughout their careers. By providing a path to a high-quality acquisition by a company that plans to continue to expand and improve the care they provide, the abused notion of M&A in the healthcare industry as the realm of private equity looking to ‘strip hospitals for parts’ can be reversed. Healthcare M&A can serve positive purposes by providing resources to smaller healthcare providers, increasing employee’s headroom for promotion, and creating non-volatile investment value in the market.
The Founders and Executive Team at M&A Healthcare Advisors (MAHA) consist of Mike Moran, Andre Ulloa, and Mark Thomas. With over 50 healthcare transactions in the past five years, they have successfully sold companies in a variety of healthcare segments including Hospice, Home Health, Home Care, Private Duty, Behavioral Health, Autism, Intellectual/Development Disability, Staffing/Medical Recruiting, Physician Services, Long-Term Care Facilities, Physical Therapy, Not-for-Profits, and all types of Pharmacy.
