Home-based care providers are seeking to balance breadth, market penetration and risk when growing their businesses, whether via M&A or de novo.
If operators grow too large without proper strategies and cultural alignment in place, they risk harming their bottom lines, degrading operational integrity and even causing the closure of the acquired businesses.
At New Day Healthcare, company leaders calculate expansion opportunities versus risks at least monthly or quarterly, Matt Griffith, chief strategy officer of New Day, said at Home Health Care News’ Capital+Strategy conference.
“We’re constantly calculating the pressures between multi-state expansion versus risk,” Griffith said. “Bigger isn’t always better, and the bigger you get, the harder you fall.”
New Day provides hospice, home health, pediatric and personal care to approximately 120,000 patients annually in Texas, Illinois, Kansas, Missouri, New Mexico and Indiana. The company is currently in a phase of “settling down” following expansion into two new states, Griffith said, and will not likely enter another state for about six months.
Growth risks
If providers make a misstep when growing their businesses, the consequences can be severe. Dangers include a cultural mismatch, reimbursement volatility and overextension.
In prior roles at large home health and hospice providers, Mark Hunt, the president of Elevate Home Health, said he ultimately shut down eight agencies in Utah due to cultural misalignment following acquisitions.
“Both [companies] had operations in Utah,” Hunt said. “In both of those, we had bought [agencies] from the owner operators, and five, six years later, we ended up selling them back to the owner operators for like 10 cents on the dollar. It was a cultural thing, not the religious issue. We were the interlopers coming in there trying to put our big box mentality in the pioneer state, trying to run things our way, and we completely destroyed a very good business.”
Elevate, owned by Covenant Care, offers home health and home care services from six branches across California. Hunt was appointed president in 2015 to aid with the company’s acquisition of another home health provider, Focus Home Health.
Changes in reimbursement tides have totally reshaped the operating and growth landscape for home-based care – and created extensive risk for growing providers.
“The reimbursement environment is the number one contributor to expansion shutdown,” Griffith said. “It’s that powerful. A few years ago, when the 80/20 rule came out on personal care, it shut down the market. When the 6.4% rate proposal for skilled care came out, it shut down the market. Now, when you have that lingering risk of Medicaid negative reimbursement rates, it just slows down the market. If this is going to be the future of home care, I think it contributes to a more disciplined conservative market expansion strategy versus 10 years ago, where you could just buy and go.”
Risk tolerance varies greatly among providers. For self-funded Heart, Body & Mind Home Care, it is essential to make sure a new market has enough referral sources, that its population includes the company’s ideal client profile and that these clients can afford the company’s private pay services.
“We can’t afford failure,” Laughton said.
Fort Myers, Florida-based Heart, Body & Mind Home Care offers personal care, companion care and hospital discharge services throughout Florida.
“If you’re a founder like Ralph, he’s not going to take the same financial exposure as a New Day,” Griffith said. “We can do a multi-million dollar expansion, and shut it down if we have to.”
De-risking strategies
Growth in contiguous markets limits the risk of failure, Laughton said. Caregivers in one county can travel to a nearby county, he said, giving the company a base from which to grow.
“Leapfrogging” into contiguous markets was also a tremendous aid to Elevate’s growth process, Hunt said. Elevate was licensed throughout most of California, so the provider expanded market by market. While expanding with this method, Elevate has to carefully consider reimbursement pressures, Hunt said.
While capable of shutting down a large investment, New Day’s growth strategy is calculated and disciplined, Griffith said.
Ultimately, Griffith argued that many providers overlook a critical step: mastering growth in their existing markets before expanding geographically.
“Oftentimes, because you’re not growing in your current market, you want to grow, so you take the risk of growing in a new market. Now you have two problems,” Griffith said. “I think the M&A growth often overshadows organic growth, and I think it’s important for this industry to get to master the organic growth question.”