High price tags deter Addus from acquiring hospices

The high valuations prompted Addus HomeCare (NASDAQ: ADUS) to switch to personal care and home health deals rather than acquiring hospices.

The number of hospices broke records in 2020, 2021 and 2022, reaching a 29-fold increase. And while last year’s figures were somewhat skewed by large deals, overall price tags remain high.

These costs are causing some buyers to think twice before taking on hospices, Addus CEO Dirk Ellison said at the Raymond James investor conference.

“Hospice is still very expensive. Most hospice owners don’t know that we no longer trade 30 times. We’ve come to a more normalized number,” Allison said. “So trying to close a hospice deal at a rate that generates revenue for our shareholders is difficult today.”

Addus’ last major hospice deal came early last year when it bought Illinois-based nonprofit JourneyCare Inc. for $85 million.

Ellison indicated that in its business segments, the company plans to grow by 10% annually through acquisitions. This is in addition to expected organic growth.

Addus started as a personal care provider in 1979. About six years ago, it began developing its healthcare segment, which includes home care services and hospices. Today, the company operates in more than 200 markets in 22 states, with about 75% of its revenue coming from the personal care business. Combined, home health care and hospice make up the remaining 25%.

But hospices make up the lion’s share of Addus’ revenue from medical services.

Her hospice business generated $50.6 million in the fourth quarter of 2022, about 20.5% of the company’s $247 million in consolidated earnings for the period. Home health care generated 5.3% of fourth-quarter revenue of $13.1 million.

Looking ahead, one question the company is worried about is whether the growth in its hospices indicates a long-term upward trend, rather than a temporary spike due to an increase in deaths caused by the pandemic.

“Hospice has probably been the most efficient home care service I know of during the pandemic. One of the things you take into account when you talk about a hospice patient is that the elderly patient is a part of their life where they are now in care and you are helping them at that stage of life.” Allison said. “And what we saw during the pandemic is that the number of deaths among this population in the last couple of years has been much higher than ever. So the question is: is this just a general change in hospice?”

Only time can answer this question, but current trends may leave some clues.

According to the Medicare Payments Advisory Commission (MedPAC), in 2020, the national hospice utilization rate did drop sharply to 47.8% among Medicare descendants. This is less than 51.6% in 2019. The commission attributed some of the decline to disruptions due to the pandemic, such as limited access to patients and slower referral flows from hospitals and other facilities.

Another sobering reality behind these numbers is that people were dying faster than they could reap the benefits. Thus, a mathematically higher percentage of these patients did not register.

However, according to the U.S. Centers for Medicare and Medicaid Services (CMS), more people chose hospices in 2020, at 1.72 million, compared to 1.61 million the previous year.

“Some of the people who normally would not have died yet have died because of the pandemic,” Allison said. “So we, as a company, believe that hospices have another year or so. But even so, we think it’s a great service and very complementary to what we’ve always done.”

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