This article is a part of your HHCN+ Membership
LHC Group Inc. (Nasdaq: LHCG) began in 1994 as a single home health agency, co-founded by husband-and-wife duo Keith and Ginger Myers, the provider’s first nurse.
In the nearly three decades since, the family-founded company has gone public and grown into a $2.2 billion home health, hospice and personal care powerhouse with a footprint that stretches across the majority of the U.S. Now, if all goes according to plan, the next chapter in LHC Group’s story will be a blockbuster combination with UnitedHealth Group’s (NYSE: UNH) Optum.
“Working together as organizations committed to caring for the most vulnerable in society will help us more effectively and efficiently deliver high-quality and increasingly value-based care in the home,” Myers, LHC Group’s chairman and CEO, said earlier this week.
In a deal announced Tuesday, UnitedHealth Group is acquiring the Lafayette, Louisiana-based LHC Group for about $5.4 billion in cash. Including debt, the deal is valued at closer to $6 billion.
Moving forward, the plan is to combine LHC Group with the Eden Prairie, Minnesota-based Optum, the diversified health services company that serves tens of millions of consumers through its primary, speciality, surgical and urgent care arms. Optum, which generated about $54 billion in revenue in 2021, delivers care in brick-and-mortar settings as well as in the home, both in person and virtually.
Led by Dr. Wyatt Decker, Optum has about 180,000 employees worldwide.
“LHC Group’s sophisticated care coordination capabilities and its warm, human touch is so important for home care, and will greatly enhance the reach of Optum’s value-based capabilities along the full continuum of care,” Decker said in a statement.
The top executives from LHC Group and Optum aren’t saying much beyond Tuesday’s announcement, though that will likely change when UnitedHealth Group reports its first quarter financial results on April 14. The transaction itself is expected to close in the second half of the year.
Nonetheless, there’s still plenty to unpack, including what the combination means for the future of LHC Group, Optum and the recently embattled home health industry at large.
A new chapter
LHC Group may have started out small, but it’s no stranger to mega-mergers and transaction activity.
Nearly four years ago exactly, the in-home care giant completed a $2.4 billion all-stock combination with Almost Family, the personal care company previously led by industry veteran William Yarmuth. Strategically, the transaction was a key step toward making LHC Group a one-stop shop capable of offering a full continuum of in-home care services.
“It has been a deliberate strategy of LHC from our founding in the early 1990s,” Myers told Home Health Care News at the time. “And of Almost Family [as well].”
In the wake of that deal, LHC Group invested time and capital toward integrating Almost Family and bringing its legacy locations up to its quality standards. Once that integration process was near the finish line, the provider quickly ramped up on M&A once more, seeing opportunities to consolidate a home health industry struggling with sweeping regulatory and reimbursement changes.
Last year, in fact, marked a record for new acquisitions and acquired revenue for LHC Group. The company added about 79 new locations and over $299 million in annual revenue, with its largest transaction being the purchase of 47 home health, hospice and therapy locations from HCA Healthcare Inc. (NYSE: HCA) and Brookdale Senior Living Inc. (NYSE: BKD).
LHC Group itself has rarely, if ever, been the subject of takeover rumors. But that doesn’t really make its combination with Optum a shocker, according to Mark Kulik, managing director at The Braff Group, an M&A advisory firm.
“It’s kind of big news, but it’s not, right?” Kulik told HHCN. “I mean, it was big news, certainly. But it wasn’t surprising.”
Contextually, Kulik was referring to how all types of care are shifting into the home, with the COVID-19 pandemic accelerating the trend. Total cost of care also factors into the rise of home-based care, with the home often viewed as the lowest-cost setting.
“The current way of providing care – we’ve all said it – can’t cut it,” Kulik explained. “You can’t possibly provide care with the hospital being the epicenter of everything.”
After the combination with Optum is finalized, LHC Group’s home office operations will remain in Lafayette. Additionally, the company’s management team and its 30,000 employees will continue to provide services and support from its 964 locations across 37 states and the District of Columbia.
LHC Group’s leadership team will remain in place, according to background materials shared with HHCN.
“We will welcome LHC Group’s team members to Optum Health under the leadership of Dr. Wyatt Decker,” the materials noted. “LHC Group’s leadership team will remain in place and help shepherd in a new era for both Optum and LHC Group – and those we serve.”
Keith and Ginger Myers will personally invest $10 million in UnitedHealth Group stock following the close of the combination.
Setting a valuation floor
Joining forces with Optum gives LHC Group access to a treasure-trove of health care data and Optum’s existing clinical infrastructure. The move also helps LHC Group advance its value-based care strategy, as Optum already works with over 100 health plans.
“As demand for value-based care increases, we will elevate the home health care experience, prioritizing quality and seamless coordination that reduces fragmentation and complexity,” the background materials continued.
LHC Group has already made substantial progress expanding beyond fee-for-service Medicare. The company, for example, grew its non-Medicare episodic admissions by 21.9% in 2021 compared to 2020.
It’s also important to remember that when LHC Group took on Almost Family in 2018, it added a number of other assets, including Imperium Health Management, one of the country’s largest accountable care organization (ACO) management companies.
“We did not even hesitate to embrace the ACO segment of the business,” Bruce Greenstein, LHC Group’s chief strategy and innovation officer, previously told HHCN. “Instead, we made investments, and we’re growing it like crazy.”
UnitedHealth Group acquiring LHC Group and pairing it with Optum doesn’t just mark a new chapter for LHC Group. It also gives clarity to where the home health market currently stands, from a dollars-and-cents perspective.
Tuesday’s announcement states that Optum will acquire LHC Group for $170 per share. That figure represents an 8.1% premium to the company’s current trading price, though a much higher premium compared to what LHC Group was trading at toward the end of last year.
“In a vacuum” that premium feels like “it’s on the lower end,” relative to historical take-out premiums of between 20% and 30%, Edgemont Partners Managing Partner Eugene Goldenberg told HHCN.
“But I think this also goes to show that the [home health] sector has really been, in my opinion, not overvalued, but the multiples have been sitting at all-time highs prior to the correction that we’ve seen over the last five to six months,” Goldenberg added.
Indeed, multiples for home health and hospice companies alike have been sky-high in recent years. But worsening staffing shortages have limited growth for providers and their ability to boost their census numbers.
That has contributed to a period of market depression for most of the publicly traded home health companies.
Based on LHC Group’s 2022 EBITDA guidance of $270 million to $290 million, the company is valued at upwards of 22.2 times EV/EBITDA, an analyst note from investment banking company Stifel points out. In comparison, current valuations for other publicly traded home health organizations range from 7 times to 21 times.
“In our opinion, the deal puts a floor under the group and helps mitigate recent volatility,” the note states.
‘It’s a chess move’
Some may view the UnitedHealth Group-Optum-LHC Group deal as a response to Humana Inc.’s (NYSE: HUM) takeover of Kindred at Home, another giant home health business. The Louisville, Kentucky-based health care firm acquired the outstanding stake in Kindred for $5.7 billion from TPG Capital and Welsh, Carson, Anderson & Stowe last year.
Similarly, that play has been described as a way for Humana to move further into the home, while bringing home health care more into the value-based care world.
“I think those big players, they keep an eye on each other,” Kulik said. “‘What is my competition doing?’”
Kulik sees the Optum-LHC Group combination as “a shrewd move” by the fifth-largest company in the U.S.
“I think it’s a chess move that they’re making, to go ahead and lock up one of the premier, largest providers of home care and hospice in the country,” he said.
Additionally, some may view the deal as a way for UnitedHealth Group to redeploy capital and rebound as regulators look to put the kibosh on its $13 billion acquisition of Change Healthcare (Nasdaq: CHNG), a health care technology company.
Broadly, the U.S. Department of Justice believes that deal would give UnitedHealth Group access to too much sensitive data on health care costs and pricing.
“The government’s case rests entirely on speculation and theories unsupported by any past conduct, i.e. that Optum will somehow exploit Change Healthcare’s products and services to secure an unfair advantage for UnitedHealthcare’s health insurance business,” the company said in a public response.
A deal for LHC Group likely has better odds of clearing regulatory review, considering Humana’s success and the highly fragmented nature of the home health industry.
Additional reporting by Andrew Donlan
Companies featured in this article:
