Private Equity Jeopardizes Service to Hospices

Although the hospice industry continues to grow in size and impact, the number of meaningful players in the industry has certainly decreased.  The past few years have seen a significant reduction in attendance at state and national hospice shows by both attendees and supporting vendors.  This lack of participation stems from a host of reasons, beginning with the increasing cost of show attendance for all participants and ending with the number of hospices in the US decreasing due to acquisitions and business failures. 

Although the times are tough and hospices are tightening their budgets to survive, one thing is painfully evident: big money is interested in our industry.

For those who do not keep an eye on “who buys and owns whom”, let me be clear about how financial experts see our industry.  The privately-owned acquisition companies (Private Equity Firms) who invest in healthcare services are very interested in hospice and the ability to profit from serving hospice clients.  We in the industry know that hospice is an extremely demanding industry filled with thousands of dedicated employees who desperately want to serve humanity.  Unfortunately, there are others who solely seek a huge profit from a primary hospice acquisition, then utilize a repeatable bolt-on strategy to build a profitable enterprise.  This is commonplace for private equity firms. 

Here is how it works:  Black Heart Capital buys a hospice service provider called Good Heart Services, LLC.  Using the acquired company (Good Heart) as a base, Black Heart continues to buy other service providers in the same or similar sector.  Merging the companies together means a reduction in service staff, account managers, nurses, pharmacists, and management. Reductions are all for the purpose of an increase in net income (profit). The proponents for these changes argue that the newly found economies of scale lead to lower operating expenses for the hospice and thereby result a stronger Good Heart Services Company. The facts don’t show these claims to be true. 

The fundamental goal of all private equity is to “build and hold” the acquisition for approximately five years; squeezing as much profit from the entity as possible and returning large returns to their investors.  It is impossible to imagine that a private equity acquired service company can look out for the best interests of the hospice when the primary reason for existence is to make the return for their investors as large as possible.  Even more alarming is the limited time they have to make the return.  During the final years of the life of the asset (Good Heart Services), private equity limits the entity’s ability to invest in new services and support due to the impact it will have on profit.  This means the hospice gets little or no new value from the involvement of private equity. 

On June 26th of 2015, I received a notice from a New York Private Equity group, Scott-Macon, announcing that they are currently experiencing as much as a 12.7X multiple of EBITDA for service business in the hospice sector.  This simply means that a service provider getting ready to sell can profit as much as $1,270,000 by reducing their expenses by $100,000 annually.   Those reductions negatively impact employees, patients, and the hospices they claim to serve.  This valuation and related strategies to increase value by shrinking operating expenses (service capacity) applies to hospices and those serving the hospice industry.

I am confident that a hospice in today’s market has to choose their partners wisely.  The strategically cautious hospice must:

  1. Choose partners that align philosophically with the standards of care for their patients
  2. Balance the need for immediate cost savings with the other elements of value the service provider offers
  3. Choose a partner that invests in services and support for the long-haul
  4. Ask to meet or get-to-know the owners of the entity in which they choose to partner

Cautious and wise hospice management looks to partner with people they can trust and with whom they can grow.  The avoidance of private equity owned companies in favor of closely held businesses should be a fundamental criteria in vendor selection.    

Mark Lewandowski, PhD, CMAA

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