By Don Cummins, Stoneridge Partners
We believe that certain macro trends and events are shaping up to make this year, 2010, perhaps the ideal time to make a sale of a home health agency.
Current capital gains tax rates of a maximum of 15% on long-term gains run through 2010. Current thinking is that this administration will leave rates alone through 2010. At that point they can then just let the Bush rates “sunset” back to the old rate of 20%, or, due to pressure from our huge national indebtedness, that rate may be pushed even higher.
We believe that the recent strength in home health M&A has been due, in large part, to the easing of credit. This has brought private equity firms back into the mix of buyers and significantly assisted strategic buyers in their acquisition activities. This easing of credit is in part a result of government intervention.
Anyone who has been on this planet for more that a couple of decades is well aware that this will be a temporary phenomenon.
Our growing national debt may already be having an effect on how the strength of the U.S. Dollar is being perceived, which may very well result in our having to pay higher interest rates in order to sell bonds to foreign investors….something our government has little or no control over. Available financing (liquidity) is the life-blood of mergers & acquisitions.
Headline from a recent Wall Street Journal: “Debt Fears Send Rates Up….Unease at Deficit Hurts Demand for Treasuries: Mortgage Costs on the Rise.”
Like it or not President Obama’s health care bill is the law of the land and the odds of repealing it appear to be highly unlikely. This new law is certainly going to impact the profitability of Medicare reimbursed home health agencies.
According to informed sources the result will be a $39.4 billion cut in Medicare reimbursement to home care agencies over the next ten years. Among many changes, the market basket update is reduced by 1% over the next three years, and there will be a rebasing of PPS rates over four years starting in 2014 (limited to a maximum reduction of 3.5% per year).
Already an analyst for Stifel Nicolaus has downgraded Amedisys stock from a buy to a hold stating that the new health care legislation will cut the company’s reimbursement rates and profits more that expected.
We believe that these three issues are creating a perfect storm for acquisition activity in home health. If you have been considering the sale of your agency now may be the time to act. Valuations remain surprisingly high, and soon, beginning in the year 2011, that favorable 15% capital gain tax rate may be history.