Investment Thesis: In-Home Elder Care
This week, I took a break from ranting about sports, media and vertical commerce to do a deep dive into an oft-overlooked healthcare space that will host many important companies and technologies in the next decade.
Situation Overview
The growth of the population age 65 and older is one of the most significant demographic shifts in the history of the United States. Baby boomers, those born between 1946 and 1964, are driving much of that trend with the number of Americans age 65+ is projected to more than double from 46 million today to over 98 million by 2060, and the 65-and-older age group’s share of the total population will rise to nearly 24% from 15%. Between 2020 and 2030 alone, the number of older persons is projected to increase by almost 18 million as the last of the large baby boom cohorts will reach 65 and make up 21% of US population by 2030. The rapidly aging US population represents a tremendous challenge for healthcare providers in the coming decades but also presents interesting investment opportunities in new technology that will better enable care givers to give lower cost, more efficient quality care while offer family members and loved ones a greater peace of mind.
Home-Care Becoming Increasingly Popular Among Aging Population
While historically, elder care was relegated to hospital or nursing facilities, baby boomers in particular have expressed a strong interest in maintaining their independence and remaining in their homes to “age in place”.
According to the AARP Public Policy institute, over 89% of Americans ages 50 and over expressed interest in remaining in their homes as long as possible. In addition, home health services have been proven to be a cost-effective alternative to facility-based care that provide quality, personalized care with equal efficacy.
In-Home or Longer-Term Care (LTC) is often used interchangeably with Post-Acute Care (PAC) although they are not entirely the same thing. PAC is provided for discrete time periods with medical treatment as the main goal while LTC is provided on an ongoing basis focused on helping patients cope with disease in their daily lives. For the purposes of market sizing, “Home-Care” here specifically refers to the medical care aspects of Long-Term Care as well as including the in-home aspects of PAC which traditionally includes Home health, skilled nursing, outpatient rehab and at-home palliative care.
There are two major caregiving segments, the first of which being family members and loved ones. An estimated 43.5 million adults in the United States provided unpaid care to a family member in 2015. These individuals initiate care and are key decision makers when choosing professional care.
Most professional care in the US is carried out by the second segment: Medicare-certified Home Health Agencies (HHAs) that employ skilled nurse and licensed healthcare practitioners of which there are over 400K in the US. HHAs are highly fragmented as the three largest firms will generate less than 10% of industry revenue for 2016 while over 50% of HHAs generating less than $3 million in annual revenue, although larger agencies are working on consolidating. Reimbursement pressures will reinforce the consolidation trend driven by the need for scale and better operating leverage to maintain and increase profits.
Home-Care Market Size & Opportunity
This narrower “Home-Care” segment outlined above represents 66% of the nearly $89 billion US home-care services revenue in 2016 (as estimated by IBIS World) with the remaining third consisting of home therapy and companionship as well as personal (transportation, grocery, etc.) services.
70% of home health patients are senior citizens and they average 3 or more impairments with daily living activities meaning that the in-home elder healthcare market specifically accounts for a $40 billion revenue opportunity, projected to grow 11% per year.
This puts it in line with most analyst estimates of the home-care services market, including those from RBC Capital, NAHC, Harris Williams, and IBIS World.
The exact size of the technology tools and services opportunity for better home-care has been harder to gauge given the lack of solutions or adoption at scale and thus few data points on size. However we can extrapolate the size based on key insights regarding industry dynamics:
- Staffing wages, travel and training costs for home-care professionals account for 51% — 55% of industry revenue — which are only expected to increase with new regulation around minimum wage levels for care providers.
- Technology purchases accounts for somewhere between 20% to 30% of segment revenue per the 2015 Global MNA report which includes the purchase of medical devices and enabling technologies that are typically pass-through costs from the home health agencies to the customer.
- While providers view technology as increasingly integral to in-home-care giving, the changing regulatory environment around Medicare reimbursement means this segment could be subject to drastic cost-cutting measures which would likely keep technology spending’s share of total industry revenue steady during the next five years or more.
Based on this analysis, we can safely estimate the potential addressable market for home-care provider technology solutions somewhere between $8 billion and $12 billion with moderate growth expectations as the topline growth driven by US elder population will likely be offset with smaller margins in a more cost-sensitive environment.
Home-Care Market Landscape
- On Demand Services segment address some of the key problems with HHAs head on by providing alternative on demand discovery, booking and transaction management. Key concerns with HHAs have been lack of transparency, both in discovery of quality carers and regarding billing for services rendered. On demand startups aim to create an open marketplace with qualified caretakers independent of HHAs, reducing the bloat with traditional staffed models. As a result, this segment has had the most VC interest of late.
- Treatment Management services include medication delivery, tracking and administration. Two primary concerns being addressed in this segment are convenience for elders as well as feedback and accountability for caregivers and pharmacists to avoid over medication.
- Wearables & Internet of Things devices have become increasingly important to give family members and loved ones greater peace of mind and offer professional carers valuable insights into the patient’s health and caregiving process. These also include wrist worn and pendant devices that can send emergency services at the touch of a button as well as beacon trackers for analytics on elders’ activity
- Digital Media / Telehealth provide family members and elders access to better information, advice and counseling direct from certified professionals. They also are creating novel ways to address mental health and are proving to be valuable tools for slowing cognitive and memory impairment caused by ailments like Alzhiemer’s and other dementias
- Caregiver Communications and Support Software are valuable tools designed for HHAs to better manage their practices and maintain high quality levels of service to elders and their families. They help address issues around transparency of care and pricing by creating better communication channels with families and offer caregivers community portals to share challenges and receive advice.
Key Considerations for Investment
At present in-home care remains highly-fragmented, faces state and federal financial policy challenges, is personnel and training cost intensive but offers low wages and generally lacks transparency about costs to consumer. And yet, despite this industry has seen little technological innovation over the last decade.
While the opportunity for innovation remains large, home health care is a challenging market to sell into for a few reasons and I would like to make sure any potential investments understand how to navigate these dynamics or have built solutions to alleviate some of these challenges:
1. Home health reimbursement is complicated and can vary widely from state to state, with major regulatory and fiscal policy challenges ahead
Industry revenue primarily comes from government reimbursement programs such as Medicare and Medicaid. Medicare, a federal healthcare program for those aged 65 years and older or with qualifying disabilities, is the largest single payer of home healthcare services. Medicaid is a state-run healthcare program for individuals with qualifying low incomes.
Medicare pays for home health services for about 3.5 million beneficiaries at a cost of $17.9 billion, according to the Centers for Medicare and Medicaid (CMS). Recently, the Medicare Payment Advisory Commission (MedPAC) proposed an overhaul of the current payment system for post-acute care settings, which would affect how much providers are paid each year from the CMS.
Much of the proposed new system is aimed at reducing health care costs, improving care management and shifting toward value-based purchasing and as a result has recommended deeper cuts for home health reimbursements, citing that Medicare has overpaid for home health care since the prospective payment system was created in 2000. Additionally most elders that pay for services out of pocket do so from Social Security or personal savings, they are very price conscious and as a result HHAs won’t have much room for covering the gap by charging for non-Medicare, out-of-pocket services — including new technology solutions. Thus, I would want to really understand the unit economics (CAC, LTV) for any consumer facing home-care startups selling directly to elders or family members given this level of price sensitivity and fewer targeted, direct digital marketing channels.
2. Home health agencies are highly fragmented and typically slow to adopt new technologies
As hospitalization costs have increased and more aging consumers have embraced the home-care trend, the total number of HHAs has grown at a 4% CAGR over the last five years. However as these firms are highly fragmented and are becoming increasingly scrutinized for their once lucrative margins, selling software and technology services will require deep sector expertise and a clear value proposition for delivering better care at lower cost.
With the changing regulatory environment, the need for greater scale, operational efficiency and comprehensive care delivery capabilities is driving market consolidation. However, consolidation provides its own set of sales challenges with new sales cycles, chains of decision makers and in this particular industry, a renewed focus on tighter budgetary control. This will be particularly critical for segments that cannot become pass-through costs for HHAs the way certain Wearable/IoT tools have become.
3. Standards of home-care at risk with high turnover in and shortages for skilled home-care professionals
The ratio of potential family caregivers to elderly is expected to decline from 7 in 1 (2010) to 4 in 1 by 2010. According to the Bureau of Labor Statistics, More than 1.3 million new paid caregivers will be needed to meet demand over the next decade. While typically, big demand and a limited supply would drive up prices in the labor market, in this case, because over 75% of services provided by home-care agencies are paid by Medicaid and Medicare, financial pressures on both programs are enormous making it unlikely that significant wage increases are in store.
Another reason wages will likely remain relatively stagnant: Most middle-class families simply can’t afford to pay for these services and will do without if needed (making inexpensive, helpful tools for family caregivers ever more valuable). Nationally, agencies charge a median $19/hour for home health aides, according to Genworth Financial but the aides take home only half that amount. Tools that address or alleviate these staffing pressures have the most to gain but telehealth/digital media solutions can help be stopgaps in care for families that can’t afford quality, in-person help.
Final Thoughts
Despite there being immense financial pressure on the key drivers in this market, I believe the sheer size of the revenue opportunity created by the fundamental demographic shift will overcome most issues and create an environment for new Elders’ Home-Care focused startups. While rigorous diligence on unit economics, understanding of sales cycles for HHAs and overall capital efficiency are crucial in assessing an investment in this specific industry, I remain cautiously optimistic that technology solutions will help alleviate the challenges of caring for America’s aging population.
Please leave me a comment below and let me know your thoughts or if you have more companies I should add to my landscape. More importantly, please like and follow my blog for more actively researched investment theses (like this one)!
