Technology, Media & Healthcare

How to Underwrite a Home Health or Home Care Agency

Underwrite a home health or home care agency by separating skilled Medicare home health from personal care paid by Medicaid or private pay, then testing the spread between billing rates and caregiver wages. Key metrics are gross margin per hour or episode, payer mix, caregiver turnover, hours or admissions per month, and survey compliance.

What makes home health / home care underwriting different

Home-based care splits into two businesses. Home health provides skilled nursing and therapy under physician orders, mainly paid by Medicare episodes. Home care provides non-medical personal care such as bathing and companionship, paid by Medicaid waiver programs, long-term care insurance or private pay by the hour. Value comes from aging demographics, referral relationships with hospitals and physicians, and licenses or Medicare certifications that are hard to obtain in some states. Risk comes from caregiver shortages, wage increases that outpace reimbursement, Medicare and Medicaid rate changes, and compliance with documentation and survey requirements.

Lenders focus on payer mix, receivables quality and the spread between billing rates and wages. They prefer agencies with stable referral sources, low caregiver turnover and clean surveys, and they lend against EBITDA with moderate leverage, often with receivables-backed revolvers. Equity investors underwrite growth in hours or admissions, expansion into new territories, and consolidation of fragmented local agencies. They value private pay home care for pricing power and Medicare home health for scale, and they focus on recruiting systems that can supply caregivers for growth.

Key metrics

Gross margin per hour or episode

The spread between billing rates and caregiver cost is the core economic driver.

Payer mix

Medicare, Medicaid, long-term care insurance and private pay differ in rates and policy risk.

Caregiver turnover

High turnover raises recruiting costs, limits growth and affects care quality.

Billable hours or admissions per month

Volume trends show demand and the agency's ability to staff it.

Referral source concentration

Hospitals, physicians and case managers often drive most admissions.

Survey and quality ratings

Survey findings and star ratings affect referrals and Medicare certification.

How to underwrite it, step by step

Separate revenue by service type and payer, and analyze volume trends by location.
Calculate gross margin per hour or episode, including wages, payroll taxes and overtime.
Review state licenses, Medicare certification and survey results.
Analyze caregiver recruiting, retention, wages and scheduling efficiency.
Review referral sources and their concentration.
Audit documentation and billing compliance, including visit verification requirements.
Assess minimum wage and overtime rules and pending Medicaid rate changes.
Normalize EBITDA and stress for wage inflation and reimbursement changes.

Due diligence checklist

Revenue and hours by payer and location
Medicare cost reports and episode data for home health
Medicaid contracts and rate schedules
State licenses and Medicare certification documents
Survey reports and corrective action plans
Caregiver roster, wages and turnover data
Referral source reports
Electronic visit verification and billing compliance audits
Workers compensation and liability insurance
Franchise agreement if the agency is a franchisee

Key risks and mitigants

Wage inflation outpacing reimbursement

Stress margins for wage increases and review pricing power in private pay segments.

Caregiver shortage limits growth

Analyze recruiting pipeline and retention programs, and avoid underwriting growth beyond staffing capacity.

Medicare or Medicaid rate changes

Model rate scenarios and diversify payer mix.

Survey or compliance findings

Review survey history and documentation practices, and require compliance reporting.

Referral source loss

Analyze referral concentration and relationship depth, and include transition support from the seller.

Typical financing and deal structure

Smaller home care agencies, including franchise units, are frequently acquired with SBA 7(a) loans and seller notes, with lenders focusing on cash flow, licensure transfer and payer contracts. Larger agencies and platforms use senior term loans or unitranche facilities sized on EBITDA, revolvers secured by receivables, and delayed draw tranches for add-on acquisitions. Medicare-certified home health agencies require change of ownership filings, and certain ownership changes can trigger additional requirements, so deal timing and structure must account for them. Earnouts may be used where volume depends on referral relationships. Covenants commonly include leverage and fixed charge coverage tests.

Red flags

Gross margin per hour shrinking as wages rise without rate increases
Caregiver turnover rising with unfilled hours growing
Recent survey deficiencies affecting certification
A large share of admissions from one hospital system
Billing practices that fail visit verification requirements

Frequently asked questions

What is the difference between home health and home care?

Home health provides skilled medical services such as nursing and therapy under physician orders, mostly paid by Medicare. Home care provides non-medical help with daily activities, paid by Medicaid programs, long-term care insurance or private pay. The two have different regulations, margins and risks, so underwriters analyze them separately.

How are home care agencies valued?

Home care agencies are typically valued on multiples of EBITDA or seller discretionary earnings. Multiples depend on size, payer mix, growth, caregiver retention and market position. Private pay agencies with strong referral networks often command better multiples, while Medicaid-dependent agencies face more rate risk. Caregiver retention is often the deciding factor.

Can you get an SBA loan to buy a home care agency?

Yes. SBA 7(a) loans are commonly used for home care acquisitions, including franchise resales. Lenders review cash flow, licensure transfer, payer contracts and caregiver stability. A seller note and transition period are usually required, and buyers must show they can manage regulatory compliance and staffing.

What drives profitability in home care?

Profitability depends on the spread between hourly billing rates and caregiver wages, plus scheduling efficiency, overtime control and administrative overhead. Recruiting and retaining caregivers is critical because unfilled hours mean lost revenue. Agencies with strong referral sources and private pay clients often achieve better margins.

Underwrite a home health / home care deal in minutes

Drop a deck or data room. Underridge returns a verdict, investment memo, term sheet and a live model, with every headline figure traced to a page, a formula or a labeled assumption. Ten underwrites free.

Try Underridge free

Educational content, not investment, credit, legal or tax advice. Benchmarks are common practitioner rules of thumb and vary by lender, market and cycle.