In December 2017, national health insurer Humana and two private equity firms, TPG Capital and Welsh, Carson, Anderson & Stowe (WCAS), announced the $4 billion acquisition of Kindred Healthcare, a national provider of post-acute services. This was not terribly surprising as it was rumored back in April that Kindred Healthcare was exploring sale options, with Humana and private equity firms as interested buyers.
This deal marks yet another sign of increasing convergence between payers and providers. Vertical integration continues to be a key strategy, as evidenced by UnitedHealth’s deal with DaVita and the pending Aetna and CVS merger.
In evaluating potential home health partners, Humana sought a platform that has the capability to move beyond Medicare FFS home care to robust data collection and sharing, as well as anticipatory actions that will “bend trend” for MA members.
Humana Acquiring Kindred at Home
This transaction involved three parties: Humana, TPG Capital, and WCAS.
- Humana is taking an initial 40% stake in Kindred’s home health, hospice and community care businesses (Kindred at Home) for $800 million on a valuation multiple of 11.5x EBITDA. (See Table 1.)
- Following the acquisition, Kindred at Home will operate as a standalone company with 40% owned by Humana and 60% by TPG Capital and WCAS.
- TPG Capital and WCAS will assume Kindred’s facilities assets, including the inpatient rehabilitation facilities (RehabCare) and the long-term acute care hospitals (Kindred Hospitals). These will operate as a separate specialty hospital company under the ‘Kindred Healthcare’ name.
- Humana has a call clause and TPG & WCAS have a put clause to ensure that Humana buys them out in a few years if either party wants.
- The “put/call” provisions would value the residual value in Kindred at Home at 10.5-11.5x EBITDA, with the valuation range determined by the future financial performance and performance on clinical metrics of the JV.
- The transaction is expected to close during the summer of 2018.
What Humana Wants in Home Health
Humana sought more than just cost-lowering levers for seniors in its 3.3 million member Medicare Advantage (MA) business. Instead, it was looking to actually purchase home health and hospice providers with a national presence for a few key reasons:
- Nature of Medicare Advantage. Humana has strong incentives to improve the health of its MA members. The company earns a fixed fee, adjusted for patient conditions, with guaranteed issuance. Many of these seniors already have chronic conditions. As such, Humana has incentives to focus on value, not maximize utilization. MA also incentivizes the buildout of capabilities to improve quality and leverage quality analytics through the STARS rating system.
- Reducing inpatient utilization. While medical cost trend benders now extend well beyond the acute care hospital, hospital bed days provide a quantifiable framework for illustration. Humana’s average bed days/1,000 is estimated to run in the 220-230 range for its MA business. This compares to 180 for best-in-class MA plans and 260 for lower-ranked plans. Each reduction in bed days/1,000 is worth $25 to 30 million annually across Humana’s MA members. If Humana can reduce its bed days/1000 to the best-in-class rate, it could save up to $1.5 billion annually.
- Extending their existing home health programs. Humana’s Home model, begun in 2007 and now serving about 800,000k members, focuses on the coordination of care rather than the delivery of healthcare services, since Humana does not directly operate licensed home health agencies. The Kindred acquisition gives Humana more direct control of home health providers.
- Reducing external home health spend. Approximately 10% of Humana’s individual members utilize home health, representing $750 million in annual spend. This presents an opportunity for Humana to reduce its annual home health spend if MA patients utilize Kindred at Home facilities and providers vs. other home health or community care businesses.
Why Select Kindred?
In evaluating potential home health partners/targets, Humana sought a platform that has the capability (systems, culture, training) to move beyond Medicare FFS home care to robust data collection and sharing, as well as anticipatory actions that will “bend trend” for MA members. The model needs to be clinically focused, proactively looking for other opportunities while in the home.
Humana reportedly evaluated a number of other larger home health companies with a nationwide presence, including Amedisys Inc., LHC Group Inc., and Encompass Health Corporation. Humana reportedly came close to acquiring Almost Family, Inc., but Humana wanted more sophisticated clinical capabilities that could be used to identify and act on care opportunities. Subsequently, Almost Family merged with LHC Group in November 2017 instead.
There are five key reasons why Humana purchased Kindred:
- Price and deal dynamics. Humana paid a fairly high price for Kindred Healthcare but mentioned that there is approximately 65% overlap with Humana’s Individual MA membership and the counties where Kindred at Home operates. Getting MA members to use the Kindred at Home services in meaningful numbers is another matter entirely, though.
- Technology. At the end of 2016, Kindred at Home completed the rollout out of DeVero’s forms-based point-of-care system to all its home health and hospice locations. This ensures that all field staff can document electronically and have mobile accessibility. Netsmart acquired DeVero in July 2017; this continues Netsmart’s expansion into the post-acute space, along with its recent JV with the Allscripts Homecare business (March 2016) and acquisition of HealthMEDX’s long-term care EMR and Vision home health/hospice solutions (October 2017). Netsmart’s expanded post-acute solution suite and national HIE present some interesting possibilities for Kindred moving ahead forward including data sharing among Kindred’s legacy IT solutions.
- Value-Based Care. Humana’s interest in Kindred rises from its long-term ability to provide care in a low-cost setting, identify health risks while in the home, and relay cost mitigation opportunities back to Humana’s central care coordination efforts. Humana will provide Kindred at Home with capabilities to transform the home health model to a value-based care platform though Humana’s Transcend and Transcend Insights solutions — even though Humana is going to scale back their Home model program in the interim.
- Data Sharing. Furthermore, the data sharing between the two companies will likely improve Humana’s analytics and predictive modeling capabilities, allowing the company to develop deeper insights in order to better care for its members. Humana also indicated that the deal provides a platform to further the development and adoption of technologies such as remote monitoring and telehealth.
- Reach. With Humana recognizing the value of Kindred at Home, it has wanted to add capacity to get in more member’s homes. UnitedHealth Group’s House Calls operation now executes 1.25 million house calls per year, for its own MA membership. Humana wanted this capability — and now has it through Kindred’s home health services.
This merger created a few interesting trends we are watching:
Integrated care as a core component of Humana’s strategy. Humana is attempting to bring together primary care, home-based care, behavioral health, and the drug benefit around members to manage their whole health and disease progression. The question is whether this investment, and others recent investments in clinical capabilities, will lead to a lower medical loss ratio and higher quality scores that generate values to its members and helps to build additional MA membership.
Netsmart taking aim at interoperability. Netsmart has aggressively expanded its post-acute capabilities over the past two years and supposedly has had talks with Kindred about wiring them into Netsmart’s national HIE network. With Netsmart’s extensive install base in the behavioral health market, it presents a very interesting strategy to build a coordinated communication system at a national scale with a large number of post-acute and behavioral health providers.
More acquisition of post-acute providers. This deal sets up a strong likelihood that other mid- and large-sized post-acute providers will be acquired over the next 12-18 months. Will it be other Medicare Advantage payers who are trying to replicate what Humana is doing? Will it be a new entrant with other significant non-hospital provider assets — even though Kindred ‘Integrated Care Markets’ strategy failed for several reasons (including debt burden and fiscal pressure on post-acute payers due to reimbursement?
Humana remains a likely acquisition target. After the failed proposed merger of Aetna and Humana last February, it was speculated that Humana was going to be acquired by another behemoth such as Wal-Mart, Walgreens, or Anthem. Despite some speculation that this Kindred acquisition makes an acquisition less likely in the interim, Humana still represents an attractive takeover target, especially for a firm that wants to aggressively enter the Medicare Advantage market to compete with United Healthcare on a national scale. Only a handful of companies, though, could possibly afford the M&A price.