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Death comes to us all. In some cases it may come to our investment portfolios too. Kinderhook Industries, a US private equity firm, on Monday signed a deal to acquire Enhabit, a provider of home health and hospice care for $1.1bn. The buyer may find this a challenging deal given the delicate subject matter and the difficulties of post-pandemic life.
On the face of it, the acquisition looks modestly priced. Even including Kinderhook’s 25 per cent premium to Enhabit’s pre-deal trading price, the company’s equity value is only about half what it was in 2022, after it was spun off from Encompass Health, which separately runs rehabilitation hospitals. The acquisition multiple of 10 times Enhabit’s 2025 ebitda also looks reasonable.
Yet Kinderhook is taking on a company whose health has deteriorated over time. High labour costs and operating expenses have taken their toll on the industry. The company’s operating cash flow has nearly halved since 2021. Moreover, Enhabit is already fairly indebted, so there is limited room to add more leverage.
Its chances of pushing up prices are slim. Insurance companies have come under pressure to contain healthcare spending that the Peter G Peterson Foundation has estimated could account for one-fifth of the US economy within a decade. They have had some success in “bending the cost curve” — their lingo for dampening the rise in prices — unhappily for the providers of care.
Recent academic research has been almost universally negative about the impact on patient outcomes when financial buyers get involved. Patient deaths have risen in hospitals, emergency rooms and nursing home chains associated with private equity. Hospitals acquired by real estate investment trusts went bankrupt at higher rates. A corporate lawyer, writing under cover of anonymity for the University of Chicago, recently lamented how “short‑term profit pressure degrades quality of patient care”.
Some states such as California and Massachusetts have already expressed the intention of probing private equity hospital deals. Hospices, whose business is also life and death, may attract similar scrutiny. Private equity is an unsentimental business. A former Enhabit executive was recently ordered to pay a settlement after being found to have improperly created a competitor backed by buyout firms, even as she still owed fiduciary duties to her former employer.
Ultimately there is little point being squeamish about private equity’s arrival in hospice care. The US has chosen a for-profit healthcare system, after all. And it may be that Enhabit can, away from the strictures of public market reporting, generate better financial returns while still looking after patients. For its part, Kinderhook says its plan for Enhabit is more about growth than cutting. It is to be hoped those are not famous last words.