Hospice Valuations in a High Multiple Comparable Sales Environment

Transactions for large hospice providers are yielding historically high multiples of EBITDA and revenue. In this environment, however, the valuator should use caution in uniformly applying comparable sales metrics to the subject hospice provider. Certain factors and milestones should be analyzed to determine how to apply and weight the comparable transactions method under the market approach in the valuation analysis.

Yes, But…

  • Length of stay across the hospice industry has decreased over the past year. This is due to surging deaths related to COVID-19 and late-in-life admissions to hospice due to pandemic-related delays. Medicare reimburses hospice providers on a per day basis. Because decreased length of stay will have a negative effect on revenue over time, the valuator should analyze current data and determine whether length of stay returns to pre-pandemic levels. If not, there may be fundamental flaws in referral source dynamics or unfavorable local demographics.
  • Clinical staffing has historically been, and will continue to be, a challenge. Hospice nurses and techs have a very specialized skill set and temperament. The pandemic has exacerbated recruitment and retention issues which will likely outlast the pandemic. Hospice providers with chronic and enduring labor issues may not be able to accommodate new patients, even at historical profit margins.
  • It is clear based on historical transaction data that size matters. Empirical evidence exists that multiples paid for hospice transactions are correlated with size. Annual revenue is the most common metric, but revenue will correlate closely with patient census and geographical reach.

By the Numbers

  • According to Irving Levin Associates, LLC, deal volume in the home health and hospice sector accelerated in the second quarter of 2021, up 48% from the 1st quarter and up over 300% from the 2nd quarter 2020. This deal volume clearly reflects favorable industry trends and patient demographics for hospice providers.
  • Based on a study by Scope Research of nine years’ worth of hospice transactions, there appears to be a real correlation between size and deal multiple. Scope Research’s results are based on publicly available data between 2010 and 2019.

*Click to enlarge the image below.

Scope Research - Size v. EBITDA Multiple

Source: Scope Research

  • While there is significant variation in the multiples due to company and deal specific factors, the resulting regression equation (represented visually by the line running through the dataset) indicates a strong relationship between size and multiple paid for hospice providers.

Health Care Valuation Takeaways

  • Health care valuators should understand the subject company’s exposure to decreased length of stay issues and ensure key revenue metrics, like census data and length of stay will normalize.
  • Valuators should understand and consider the provider’s ability to attract and retain hospice staff and how staff recruitment and retention efforts will impact profit margins.
  • Health care valuators should understand the relationship between size and valuation multiple and adjust accordingly. With all other factors being equal, significantly smaller hospice providers will command a lower multiple and larger hospice providers will yield higher multiples (compared to industry averages).

Dig Deeper

For more detailed, up-to-date data and insights, visit Scope Research.

Weaver’s Health Care Valuation team is available to assist with your hospice provider valuation. Contact us for information about health care valuation, tax, audit and advisory needs.

© 2021

This is one in a series of related health care valuation posts: