Last week brought the news that HCA Healthcare (NYSE: HCA) is paying $400 million for an 80% stake in the home health and hospice business of Brookdale Senior Living (NYSE: BKD). The move had long been rumored, with Brookdale’s need to shore up liquidity in the face of pandemic-related expenses adding urgency in recent months.
The deal will bring the Brentwood, Tennessee-based senior living giant $300 million in upfront net proceeds, but the transaction should not be seen merely as a cash windfall. This appears to be a well-structured deal that is a win for the management team led by CEO Cindy Baier, who has been methodically working to turn around the company since taking the helm in 2018.
Notably, the transaction creates closer ties between the nation’s largest senior living operator and its largest hospital system. Brookdale’s portfolio numbers more than 700 senior living communities, while HCA owns and operates 185 hospitals and approximately 2,000 sites of care, including surgery centers, urgent care centers and physician clinics in 21 states.
Brookdale and HCA are signaling that their partnership could grow in interesting directions. And, given the scale of the two companies, their alignment holds potentially significant implications for how senior living evolves in the coming years.
Inside the deal
The acquisition price implies a total valuation of $500 million for Brookdale’s health services division, which includes home health, hospice and outpatient therapy. This valuation represents roughly a 20x multiple on 2021 normalized EBITDA for the division, which was the sixth-largest U.S. home health provider last year, according to LexisNexis data.
On the face of it, the multiple on this transaction is lower than other recent deals in the red-hot home health and hospice M&A market, where valuations reached an all-time high of 29x in the first half of 2020. The high multiples stem from the fact that even before Covid-19, major health systems and payers were trying to move more care into the low-cost setting of people’s homes, and the pandemic only reinforced the importance of being able to serve people outside of hospitals and other institutional settings.
However, there are unique aspects of Brookdale’s home health business to consider. Most notably, about 50% of the home health patients are residents of Brookdale’s senior living communities, creating unique considerations — particularly given that Brookdale’s senior living occupancy sat at 71.5% to close 2020. That occupancy loss eroded the home health census, which was down 14.6% for the full year of 2020 compared with 2019, and the timeline to recovery is uncertain. Even when the occupancy does bounce back, serving such a large population of senior living residents demands close operational alignment with management at those communities.
In addition, Brookdale’s health services segment has seen its operating income margin steadily decline from about 16% in 2015 to just under 6% in 2019. Among other challenges, the shift to a new Medicare payment model for home health created headwinds, and in early 2020, Brookdale was floating a reorganization of the health services division.
In light of these facts, it’s conceivable that other large and expanding players in the home health space balked at the peculiarities of this deal. So, finding a buyer and achieving a 20x multiple on the sale is not bad, and in fact is exactly in line with the valuation that Jefferies analysts put forward in Dec. 2020.
A strategic play
Brookdale’s home health deal speaks to the value of having diversified business lines in turbulent times, and I’m sure that Baier and her colleagues are tipping their hats to the late Granger Cobb, who led Emeritus’ $102 million acquisition of Nurse on Call — the largest Medicare-certified home health agency in Florida at the time — in 2013. Brookdale inherited this business in its mega-merger with Emeritus, substantially beefing up its health services division.
Yet, while selling the division brings a much-needed cash windfall to Brookdale, now is arguably not a good time to jettison home health and hospice from a strategic vantage point.
Just this week, companies including Amazon Care and health system Ascension announced they have formed an alliance to bring even more care into people’s homes, including more services related to behavioral health and high-level care that in the past was provided in hospitals. This is just the latest signal that the home is the biggest frontier in health care, and an area for explosive growth in the years ahead.
So, the fact that Brookdale is retaining a 20% stake in the health services business seems to be just as critical as the payday that the company saw from the sale. Going forward, Brookdale will be able to benefit from growth in the home health, hospice and therapy service lines — and HCA plans to “aggressively” expand the platform, Baier said on Brookdale’s Q4 2020 earnings call.
I’m particularly interested in how the HCA partnership might lead to innovations and advancements in how care is provided within the walls of Brookdale’s senior living communities, and in whether Brookdale and HCA will deepen their integration in the years ahead.
Baier certainly seems open to moving in this direction. In the past, she’s said that closer alignment with health systems is a goal, and a potential way to boost senior living penetration rates. And on the recent earnings call, she noted that the HCA relationship will “create opportunities to improve the health care service offerings within our communities to enhance our residents’ experience and health outcomes.” She singled out telehealth as one area of potential collaboration, and said that an analyst’s question about opportunities to “cross-sell” senior living with HCA was “very insightful.”
HCA has been more tight-lipped about the deal, declining to comment beyond the press release. But the health system is looking to deploy capital to expand its upstream and downstream service lines, and sees opportunities in post-acute, CEO Sam Hazen said on the company’s Q4 2020 earnings call in early February.
Steve Kastner, CEO of Trinity Health Senior Communities, believes that HCA and Brookdale are thinking big picture. Kastner is in a good position to speak on this, given that his organization is part of Livonia, Michigan-based Trinity Health, the fourth-largest health system in the United States.
He explained that the Trinity system no longer sees people as patients but as members of the health network, and is seeking to provide appropriate services for them anywhere along the spectrum of care — a population health approach that helps manage costs and improve outcomes.
HCA is pursuing a similar model and the Brookdale deal is a step in that direction, Kastner believes.
“At the end of the day, it’s about cost of care across the whole spectrum of services,” Kastner told me. “Hospitals are very interested in that, because they’re the highest cost center. Any way that they can have easy, integrated access, it helps reduce the overall cost of care, and HCA has gotten that.”
It may seem wildly theoretical to suggest that the health services acquisition could pave the way for HCA to acquire Brookdale as a whole. But the senior living industry is moving toward health system tie-ups, with examples including ProMedica acquiring HCR ManorCare and Sanford Health merging with the Evangelical Lutheran Good Samaritan Society. And of the five largest health systems in the United States, three of them — Ascension, CommonSpirit and Trinity — have sizable senior living divisions.
Covid-19 might only further propel integrations, given that Kastner and other senior living leaders affiliated with health systems have touted the benefits they saw during the pandemic, including easier access to PPE, more robust telehealth capabilities, and routine access to top epidemiologists and other experts to inform best care practices.
A full HCA acquisition of Brookdale is obviously just a thought experiment at this point. However, the two companies can almost certainly find creative ways to work together to advance models of care within senior living at significant scale, given how well their footprints align.
Each company is based in the Nashville area. Brookdale’s largest markets include Texas, California and Florida, and HCA has the No. 1 or No. 2 market share in about a dozen of the largest metros across those three states, including Southern California, Houston and South Florida.
It’s easy to envision, say, on-site and virtual primary care delivered to Brookdale residents by HCA clinicians; easier access to a variety of medical services; and more data-driven care within Brookdale communities, if residents become “members” of the HCA system. HCA already is collecting data from its 35 million annual patient encounters to drive innovations in care, and during Covid-19 teamed up with Google on a data portal initiative.
In other words, the transaction with HCA is a defensive maneuver on Brookdale’s part, necessitated by the pandemic, to gain liquidity and cover revenue losses. But it also could end up being a building block in creating the Brookdale of the future — and in fact, the company may come out of the pandemic in a position of strength, given its performance during the crisis.
Among other moves and accomplishments during Covid-19, the provider restructured its master lease with landlord Ventas (NYSE: VTR); refinanced most of its near-term debt; won plaudits for how it has leveraged social media and other channels to communicate during Covid-19; and tied for No. 1 in customer satisfaction for assisted living/memory care communities in J.D. Power surveys conducted last summer. Investors also seem like the HCA deal and the general direction of the company, with BKD shares trading slightly higher than they were one year ago, on the precipice of the pandemic.
Never let a good crisis go to waste, Winston Churchill famously observed. It seems to me that Brookdale’s leaders may have taken that approach to heart over the last year — although, with occupancy so low and the pandemic ongoing, they still have their work cut out for them going forward.
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