Home Care Sector Update – March 2024

Non-Skilled Home Care Services Drive M&A Activity in the Home Care Sector

Capstone’s latest Home Care Sector Update reports that strong investor interest in non-skilled home care has been driving merger & acquisition (M&A) activity as a result of robust unmet demand, increased government Medicaid spending, and the growing use of technology to optimize care delivery.

With M&A transaction volume up 4.1% year-over-year (YOY) at the end of 2023, the Non-Skilled Home Care segment has been a bright spot for the broader Home Care sector (including Home Health Care and Hospice), which recorded a total of 92 transactions in the shadow of macroeconomic headwinds. Increasing government support and strong long-term demand has bolstered Non-Skilled Home Care segment M&A, both by new entrants and sponsor-backed platforms pursuing add-on acquisitions. M&A deals led by private strategic buyers accounted for 43.5% of total transactions in 2023, while private equity add-on deals accounted for 38%. Although the interest rate environment is projected to remain consistent through the first half of 2024, any reductions in borrowing costs are likely to encourage more direct investment in the segment from sponsors.

The Non-Skilled Home Care segment, also known as Personal Home Care or Non-Medical Home Care, has become a leading area of growth in the Home Care sector and the primary area of focus for investors. Non-skilled home care involves the provision of non-medical care or support for individuals in their homes. This type of care has been designed to help individuals, especially seniors, maintain their independence by assisting with daily tasks that they may struggle with due to age, disability, or other conditions. Non-skilled home care providers typically employ caregivers who provide individualized assistance with activities of daily living (ADL), housekeeping, meal preparation, and safety management. Robust demand and increased government spending have fueled strong investor interest in non-skilled home care businesses. However, like the broader Home Care sector, the Non-Skilled Home Care segment has been dealing with challenges resulting from the pervasive workforce shortage. The workforce crisis threatens the availability and quality of care, as a sufficient supply of Direct Care Workers (DCWs) is paramount to the process of transitioning individuals out of acute institutional settings. Providers and industry stakeholders are deploying varying strategies to address workforce challenges. While some providers are increasing DCW compensation or leveraging advanced technology, others are placing an emphasis on culture and benefits to counter burn-out and drive loyalty. Another provider strategy that has grown in popularity has been to employ family caregivers to take care of their loved ones under a self-directed care (SDC) model. Family certified nursing assistants (CNA), a variation of this model in which providers train family members to become certified nursing assistants prior to employment, has seen a notable surge in popularity as more states begin to offer the program.

In April 2023, the Center for Medicare and Medicaid Services (CMS) set forth its own solution to the DCW shortage through a dramatic rule proposal (“Ensuring Access to Medicaid Services”). If finalized as written, the rule would establish a federal minimum standard for DCW compensation for homemaker, home health aide, and personal care services. The proposal would require providers to pass through at least 80% of all Medicaid payments to compensate DCWs, essentially placing a federally mandated 20% ceiling on gross profit for Home and Community Based Services (HCBS) providers. While the months following the proposal saw a chilling effect on investor interest towards potentially effected businesses, this proved short-lived as doubt has been cast that the rule will be finalized as proposed.

Also included in this report:

• Key dynamics that are driving the Non-Skilled Home Care segment.
• Other regulations that Home Care providers should keep an eye on.
• Valuation multiples and recent notable Non-Skilled Home Care segment M&A activity.

Capstone Partners’ Healthcare Investment Banking Team provides M&A, capital formation, and financial advisory services to the owners of middle market businesses in the healthcare industries. Our team partners with leading mid-to-large sized Home Care businesses that serve growing end-markets. For more information on the Home Care market trends featured in this report or to speak with one of our Healthcare Investment Banking Team members about how to grow, value, and/or sell your company, contact us today to start a conversation.