Humana Inc. (NYSE: HUM) believes it can deliver home health services better than traditional providers do today.
More than any other reason, that’s fundamentally why it’s accelerating its in-home care strategy by acquiring 100% of home health giant Kindred at Home for a “bargain” purchase price of $5.7 billion — the company’s largest acquisition ever. The Louisville, Kentucky-based Humana outlined the acquisition plan on Tuesday, with top executives offering their rationale behind the move during a first-quarter earnings call Wednesday.
“We’ve recognized for some time that the current volume-based, fee-for-service model has limited the innovation in home health,” Humana President and CEO Bruce Broussard said on the call.
Humana jumped into the home health and hospice market in a big way back in 2018, when it acquired a 40% stake in Kindred at Home following a larger $4.1 billion deal for Kindred Healthcare executed with private equity sponsors TPG Capital and Welsh, Carson, Anderson & Stowe (WCAS). As part of that transaction, Humana maintained a put/call option, where it could purchase the rest of Kindred at Home from TPG and WCAS at a later date.
Although the insurer already had Humana At Home and other home-based care assets, it always knew it would take up that option when the time was right. Originally, company leadership thought they would exercise that option around mid-2022, but plans changed due to the unexpected COVID-19 pandemic, emerging dealmaking trends and the ongoing shift of health care into the home.
“Buying Kindred has long been a part of our financial-planning process,” CFO Brian Kane said on the call, his last with Humana before stepping down from his role.
While there are certainly exceptions among the most forward-thinking home health companies, most providers typically get the majority of their revenue from fee-for-service Medicare. Many home health operators have tried to expand deeper into the managed care world, but meager reimbursement, strict service rationing and short-sighted network adequacy rules often prove difficult to overcome.
As a payer-provider hybrid and one of the largest Medicare Advantage (MA) players in the nation, Humana can work around all of that, fast-tracking Kindred at Home’s participation in risk-sharing arrangements and value-based care.
“Fully integrating Kindred at Home will enable us to more closely align incentives to focus on improving patient outcomes and reducing the total cost of care,” Broussard said. “This is critical to deploying, at scale, a value-based, advanced home health model that makes it easier for patients and providers to benefit from our full continuum of home-based capabilities.”
Home health utilizers are five times more likely to have an in-patient admission within 120 days of the start of their home health episode, as compared to an individual Medicare Advantage member that does not utilize home health, according to Broussard.
“This speaks to the significant opportunity we have to continue to improve outcomes and lower costs for this population,” he added.
The cost of Kindred
Humana has other reasons for believing it can do home health better, too.
In addition to inherent value-based care advantages, Humana can pair Kindred at Home’s capabilities with its in-house pharmacy and primary care operations, as well as its existing partnerships with the likes of DispatchHealth, Heal, Papa and others.
“In recent years, we have significantly expanded our health care service capabilities, from primary care, to pharmacy, to home care and more, in order to better serve our medical members and significantly strengthen our payer-agnostic care offerings,” Broussard said.
If a Kindred patient needs acute care for an exacerbation of COPD, Humana could bring in DispatchHealth for hospital-at-home services to prevent a costly hospitalization. If a Kindred nurse notices a patient is socially isolated, she could help arrange a visit from a Papa Pal for companionship.
Kindred at Home has locations in 40 states, employing roughly 43,000 caregivers who deliver home health, hospice and community-based services to more than 550,000 patients annually.
“These services help deliver on the promise of better quality and health outcomes, lower costs, and a simpler, more personalized experience for the people they touch,” Broussard continued.
On top of the clinical benefits, acquiring 100% of Kindred at Home makes financial sense.
Per its agreement with TPG Capital and WCAS, Humana is buying 100% of Kindred at Home for an enterprise value of $8.1 billion. Its “all-in” financial commitment is about $7.1 billion, which includes a $5.7 billion purchase price for the remaining 60% of Kindred at Home plus $1.4 billion in weighted initial investment.
When using a normalized full-year 2021 estimated EBITDA for Kindred at Home, taking into account its hospice and personal care operations, the transaction EBITDA multiple is about 11 times, according to Kane. If Humana is able to separate hospice and personal care through a sale or spinoff, something the company plans to do, the implied transaction EBITDA multiple would be in the “mid-to-high single digits.”
In other words, Humana is buying Kindred at Home for “a multiple meaningfully lower than where comparable public companies are trading today,” Kane noted.
“Additionally, we expect that we will be able to capitalize on a robust market for hospice assets by divesting a majority stake in that portion of the business in what we anticipate will be an attractive valuation,” he added.
Humana posted revenues of about $20.67 billion in Q1 2021, a more than 9% increase compared to $18.94 billion in the first quarter of last year.
Introducing ‘CenterWell Home Health’
Humana’s takeover of Kindred at Home is expected to close during the third quarter.
At that point, Humana will rebrand the business under its payer-agnostic health care services brand, “CenterWell,” with Kindred at Home becoming “CenterWell Home Health.” Partners in Primary Care and Family Physicians Group were already rebranded to “CenterWell Senior Primary Care” in March.
“The CenterWell brand speaks to how we put our members and patients at the center of everything we do,” Broussard said.
While Kindred brings plenty of name recognition, a new identity helps Humana market its provider services to people outside of its current members.
“In some ways, I think Humana is trying to build out an Optum-like payer-agnostic model, hence the rebranding to CenterWell, which they can sell to members outside of their respective MA membership base,” Eugene Goldenberg, a managing director at Edgemont Partners, told Home Health Care News.
As for Kindred’s hospice and personal care operations, Humana is in the early stages of a spinoff. That could mean a future IPO, Broussard explained.
“But there’s a long ways between here and there,” he said. “And we understand that this is a great asset.”
Humana’s decision to eventually separate hospice and personal care from the future CenterWell Home Health isn’t a knock on those services, the CEO emphasized. Rather, Humana feels confident in its ability to deliver those modalities by working with its provider partners.
“I think it is going to be an asset that is going to have a lot of interest from multiple different buyers, so to speak,” Broussard said.
Despite those reasons, some still found the decision somewhat surprising.
“What did surprise me a little is the decision to not keep hospice and personal care services (PCS) as part of the continuum of care, but then again, payers have been fairly consistent in the past that they don’t necessarily need to own these type of assets and can get the clinical and quality outcomes they’re looking for via strategic partnerships,” Goldenberg said. “Keeping home health makes sense, but I would have thought PCS, given the longer-term care duration for its patients, would also have be a valuable service offering and a tool for payers to better manage their high-cost, chronically ill population, whereas Humana’s approach seems to be more focused on its Medicare Advantage population.”
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