Investors are increasingly drawn to health care services provided in a patient's own home - the setting that provides the lowest cost structure. James Clark, a managing director with Harris Williams & Co.'s health care and life sciences group, has worked on several recent deals involving home health care services, including advising Encompass Home Health & Hospice on its sale to HealthSouth, and SunCrest Healthcare on its sale to Almost Family.

What are the dominant trends in home health care?

The biggest two themes are the ongoing consolidation in the market and the merging of different types of post-acute health care companies. The market is still so fragmented, with more than 12,000 providers in the home health care space, leaving lots of room for consolidation. A provider with just $5 million in revenue is a top 5 percent company in the space today because the market is so fragmented. Compounding the challenge of competing in a fragmented market, Medicare has cut payments to home health care companies, and the cuts will continue through 2017. This is creating margin pressure, and smaller companies will need to be acquired by larger companies to survive.

The other big theme is the merging of different types of post-acute businesses. This is why Kindred Healthcare (NYSE: KND) initiated a hostile takeover of Gentiva Health Services. Kindred was looking to bolster its capabilities, and Gentiva represented an attractive platform that matched well with Kindred's geographic footprint. The same strategy drove HealthSouth (NYSE: HLS) to acquire Encompass Home Health.

What's going on in the home health care space is emblematic of the broader health care space: A lot of people are getting older, they need care, and costs are going up. All health care companies are looking to lower the costs and manage care better. Home health care is strategically important because it's the least-costly setting to provide health care.

What types of home health care deals are getting done today and why?

Investors are pursuing deals in personal care services, which includes skilled home health care, hospice, and unskilled home care. One theme that we are seeing emerge is investors pursuing personal care services companies that use home health aides to enable individuals to stay in their homes versus institutional settings. Companies like Addus HomeCare are attractive because they provide the opportunity to monitor individuals with the absolute lowest cost employee, an unskilled home health aide, and potentially avert more acute, costly and dangerous episodes for the patient. These aides are minimum-wage type workers who can help patients with everyday tasks such as bathing, cooking and cleaning, but who are capable of noticing changes in how a patient is feeling. If the patient experiences shortness of breath or isn't taking their medication, for example, the aide can notify a care manager to pull in skilled health care providers without the issue turning into an emergency situation, which is a catastrophic outcome, like an emergency room visit costing thousands of dollars.

What role does technology play?

Most home health care providers have numerous locations and are managing hundreds or even thousands of caregivers working in the field. Providers need a system to manage the scheduling and provision of care, clinical protocols, workflow, medical records, billing and compliance. Providers need a system that uses data, analytics and real-time reporting. Without a centralized system, it is difficult to monitor that clinical protocols are being followed and to provide consistent quality patient care. Providers also need measure the outcomes. Technology can help with all these measures, and investors are more actively looking at investments in these types of companies.

What impact is the Affordable Care Act having?

There is no direct linkage, because once you hit 65 you are covered under Medicare. But indirectly there's an impact because approximately 10 million people have been given coverage and millions more are expected to gain coverage in the next few years. They will need to see a primary care doctor, and there aren't enough primary care doctors available to handle the incoming supply of patients. This is forcing everyone to leverage lower-cost solutions and putting care management around the patient. The lower-cost solutions will be important overall, and they will help free up physicians to do things that are more valuable for their patients.

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