Opportunities for Hospitals to Grow and Profit through Home Care Partnerships
Home health typically accounts for less than 2 percent of a hospital's revenue stream, Doise says. Because hospitals have so many service lines to worry about and home care accounts for such a small percentage of revenue, it often gets lost in the shuffle. Most hospital-owned home care agencies are not exactly profit-making machines for the hospitals that manage and own them, according to Mr. Myers. "The vast majority — at least 90 percent — are either breaking even or losing money," he says. "But still they have value."
If nurtured with the outside capital, expertise and economies of scale that a corporate partner can contribute, home health services can provide growth opportunities for a hospital, Mr. Myers says.
While many independent or hospital-based home health operators experienced a difficult period adjusting from the cost-based reimbursement of the 1990s to a prospective payment system, LHC has seen an opportunity to leverage its expertise and ramp up economies of scale, in part through its joint ventures with nonprofit hospitals. As consolidation within the industry continues, LHC foresees greater opportunities for these partnerships and for the hospitals that are willing to trade majority ownership of their home care agencies for more efficient management and a source of capital, without giving up control over critical care decisions.
"What we bring to the table that the hospital doesn't have is capital, operating know-how, back office functions," Mr. Doise says. Compared with going it alone, bringing in a corporate partner like LHC can help expand market share and grow the business significantly, he says.
For example, when Mississippi Baptist Health System in Jackson, Miss., partnered with LHC the system's annual revenue from its home care agency was $7.5 million, Mr. Doise says. Within five years, LHC helped Mississippi Baptist grow its home care business to seven locations that bring in $30 million in annual revenue. Not only has revenue increased, but the hospital has also benefited from the increased presence it has in nearby communities that formerly sent patients to other area facilities.
The joint ventures LHC creates are structured so that the company owns 75 percent of the home health agency and the hospital owns 25 percent. If LHC is purchasing an interest in a hospital's existing agency, it will obtain a valuation — generally around 1X the home health revenue — and will pay the hospital 75 percent of the fair market value. The assets are moved into a new limited liability company, and the hospital receives a 25 percent interest in the new venture and LHC provides the working capital going forward, while the hospital shares in the future profits or losses. In certificate-of-need states, LHC targets existing home health agencies, but in states where there are no CON requirements or other barriers to entry, LHC can also develop a new agency in partnership with a hospital.
Given the potential complications of partnering with a nonprofit hospital, one might imagine that LHC would prefer to fly solo, but that is not the case, according to Mr. Myers. "Sometimes I'm asked to give my preference between wholly owned or a partnership, and it's assumed that we would prefer to have the wholly owned location," he says. "It's actually not the case. When we look to a new community, our preference is always to look for a not-for-profit hospital to partner with."
The hospital partner, even though it owns a minority share of the agency, has supermajority voting rights over important issues such as moving a home care agency or ceasing to provide a certain service that is currently offered, Mr. Myers says.
The hospital also has a say in determining the levels of charity care provided by the agency. "We're the majority owner, but the way we structure the ventures is we can't do anything to violate their tax-exempt status," Mr. Doise says.
"Our industry is very fragmented," Mr. Doise explains. Of the 9,500 Medicare-certified home health agencies in the U.S., 1,500 are hospital-based, he says. "I think for us, we're going to have significant volume growth over the next five years through consolidation, and it will come from a combination of M&A activity where we acquire small, freestanding home-care agencies that can't survive, where we partner with hospitals — that would be our preference in every community — and then the other piece is in our existing locations, we have a number of competitors in every market, and a lot of them were hanging on for their life at current reimbursement rates," he says. "As they fail, we'll pick up market share in those markets."
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