Effects of Hospice Legislation on Business Opportunities
By Ralph Santos, Broker – Healthcare Biz Brokers
In of May of 2021 the California legislature closed the door on the creation of new hospice agencies commencing in January 1, 2022 with a six-year moratorium that shook up the day to day business model of the hospice industry. This legislation stems from fraud and abuse that has been reported in the industry and with the stoppage of new agencies, it would allow for the policing of any existing fraudulent behavior within the hospice community as well as to allow for the business market to recalibrate as to the market price.
The market for years has priced the hospice agencies based on various factors to include the agency’s location, the age of the agency, the financial valuation of the existing agency, the agencies goodwill to include a zero aggregate CAP, existing contracted insurance providers, existing clinical staff, existence of consistent referral sources, existence of a healthy billing infrastructure free from additional development requests (ADRs), a robust agency database, an up to date operational framework that would include an up to date Policy and Procedures, Emergency Plan, Quality Assessment and Performance Improvement (QAPI) and more.
The valuation for the hospice agencies has traditionally been approached by one of two manners: (1) market price versus (2) a valuation based on the agency historical and current financial standing. The market price will vary based on the geographic area which include the per capita of existing agencies in a given area. The legislative changes that will commence on January 1, 2022 will impact the market significantly. First, there will be a supply and demand issue where due to the fact that no new agencies will be available, those existing hospices in the market will command a higher market price as long as the aforementioned variables are healthy and regardless of the financial valuation since in essence the buyer will be acquiring a commodity, in this case a highly sought after license and or an accreditation to operate as a hospice agency. Secondly, the focus of the state and federal law enforcement in policing the industry to remove those agencies that are creating havoc and potentially fraud will further decrease the supply. Finally, the legislation will create a mandate for those that are operating within the hospice community to abide by the rules, thereby deterring further fraud.
Our brokerage’s opinion based on our experience in the hospice industry is that we will feel the immediate effects of the hospice agency valuation will increase the market valuation by $100,000.00 -$200,000.00 and possibly more as we get closer to the January 1, 2022 deadline. We further believe that the newer agencies, the agencies with a historically low census, the agencies that have focused more so on the Medi-Cal community, the agencies with a zero aggregate CAP will fare the best in this new hospice environment when it comes to valuation.